[Federal Register Volume 79, Number 135 (Tuesday, July 15, 2014)]
[Notices]
[Pages 41335-41337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-16502]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72576; File No. SR-DTC-2014-06]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving Proposed Rule Change To Modify the Receiver Authorized
Deliver and Reclaim Processing Value Limits by Transaction
July 9, 2014.
I. Introduction
On May 30, 2014, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') proposed rule
change SR-DTC-2014-06 (``Proposed Rule Change'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934
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(``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule Change
was published for comment in the Federal Register on June 5, 2014.\3\
The Commission did not receive any comments on the Proposed Rule
Change. This order approves the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 72283 (May 30, 2014), 79
FR 32599 (June 5, 2014).
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II. Description
DTC filed the Proposed Rule Change to modify its Rules, By-Laws,
and Organization Certificate (``Rules'') to lower limits against which
valued Deliver Orders (``DOs'') and Payment Orders (``POs'') \4\ will
be required to be accepted for receipt (i.e., ``matched'' for
settlement) via DTC's Receiver Authorized Delivery (``RAD'') process.
With the Proposed Rule Change, DTC seeks to reduce the intraday
uncertainty that may arise from reclaim transactions linked to DOs and
POs and any potential credit and liquidity risk from such transactions.
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\4\ A DO is a book-entry movement of a particular security
between two DTC participants (``Participants''). A PO is a method
for settling funds related to transactions and payments not
associated with a DO. For purposes of this Proposed Rule Change, the
defined term ``DOs'' includes all valued DOs except for DOs of: (i)
Money Market Instruments (``MMI'') and (ii) institutional delivery
(``ID'') transactions affirmed through Omgeo, both of which are not
impacted by the Proposed Rule Change.
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Currently, as set forth in the DTC Settlement Service Guide
(``Guide''), valued DOs and POs, excluding DOs of MMIs and ID
transactions, in amounts above $7.5 million and $500,000, respectively,
are subject to the RAD process, which allows a receiver of DOs and/or
POs (``Receiver'') to review and reject transactions that it does not
recognize prior to DTC's processing of the transaction.\5\ In contrast,
lower valued DOs and POs do not require the Receiver's acceptance prior
to processing. Instead, if the Receiver does not recognize a DO or PO
it has received, the DO or PO may be returned by the Receiver to the
original deliverer of the DO or PO (``Deliverer'') in a reclaim
transaction (``Reclaim''). While both the Reclaim and RAD
functionalities allow a Receiver to exercise control over which
transactions to accept, Reclaims tend to create uncertainty because
transactions may be returned late in the day, when the Deliverer may
have limited options to respond. Because Reclaims are permitted without
regard to DTC's risk management controls, a Deliverer that is subject
to a Reclaim may incur a greater settlement obligation than otherwise
anticipated, increasing credit and liquidity risk to the Deliverer and
to DTC.\6\
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\5\ In 2013, DTC took an initial step to address this
uncertainty by lowering the RAD threshold over which transactions
must be matched for DOs and POs from $15 million and $1 million,
respectively, to the current limits mentioned above. Securities
Exchange Act Release No. 69985 (July 12, 2013); 78 FR 42991 (July
18, 2013) (SR-DTC-2013-04).
\6\ DTC's risk management controls, including Collateral Monitor
and Net Debit Cap, are designed so that DTC can effect system-wide
settlement notwithstanding the failure to settle of the largest DTC
Participant or affiliated family of Participants. The Collateral
Monitor tests that a Participant has adequate collateral to secure
the amount of its net debit balance so that DTC may borrow funds to
cover that amount for system-wide settlement if the Participant
defaults. See DTC Rules, http://dtcc.com/~/media/Files/Downloads/
legal/rules/dtc--rules.ashx. The Net Debit Cap limits the net debit
balance a Participant can incur so that the unpaid settlement
obligation of the Participant, if any, cannot exceed available DTC
liquidity resources. Id.
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Pursuant to the Proposed Rule Change, DTC will revise the Guide to
reflect that: (i) With respect to valued DOs, DTC will lower the RAD
threshold to $.01 via a three-phase reduction as described below, and
(ii) with respect to POs, DTC will reduce the RAD threshold to zero
immediately upon implementation of the Proposed Rule Change. As such,
in the first phase of implementation of the Proposed Rule Change, DTC
will reduce the RAD threshold for DOs to $100,000. In the second phase,
the RAD threshold for valued DOs will be reduced to $20,000. In the
third phase, the RAD threshold for DOs will be reduced to $.01. In
addition, to further promote finality of settlement, new issues will no
longer be exempt from RAD.
Also, the Guide will be updated to reflect that certain DO and PO
functions will no longer be accessible through DTC's Participant
Terminal System. Instead, such functions will be accessible through a
DTC web application known as ``Settlement Web.'' Further, the Guide
will be updated via a technical change to clarify that the RAD
threshold for institutional transactions remains at $15 million, rather
than at the $7.5 million amount currently in effect for non-
institutional transactions. Finally, the Guide will be revised to
remove a provision that overvalued deliveries are automatically routed
to RAD, as this section will become redundant upon implementation of
the Proposed Rule Change since all DOs will be subject to RAD.
The effective date of the Proposed Rule Change, including the dates
of the implementation phases described above, will be announced via a
DTC Important Notice.\7\
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\7\ For purposes of taking into account the incremental
implementation of the Proposed Rule Change as described above,
beginning on an implementation date that shall be announced via DTC
Important Notice (``Initial Implementation Date'') DTC will lower
the RAD limit for non-institutional DOs to $100,000 and POs to zero.
From a date that is approximately two weeks following the Initial
Implementation Date and that shall be announced by Important Notice,
until a date that is approximately six weeks following the Initial
Implementation Date and that shall be announced by Important Notice,
DTC will lower the RAD limit for non-institutional DOs to $20,000.
From a date that is approximately six weeks following the Initial
Implementation Date and that shall be announced by Important Notice,
DTC will lower the RAD limit for non-institutional DOs to $.01.
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III. Discussion
Section 19(b)(2)(C) of the Act \8\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. Section 17A(b)(3)(F) of the Act requires, among
other things, that the rules of a clearing agency be designed to
promote the prompt and accurate clearance and settlement of securities
transactions.\9\ In addition, Rule 17Ad-22(d)(12) of the Act requires
that a clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to ensure that
final settlement occurs no later than the end of the settlement day and
require that intraday or real-time finality be provided where necessary
to reduce risks.\10\
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\8\ 15 U.S.C. 78s(b)(2)(C).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ 17 CFR 240.17Ad-22(d)(12).
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The Commission finds the Proposed Rule Change is consistent with
the Act. More specifically, as the Proposed Rule Change pertains to the
lower RAD threshold for non-institutional transactions, the resulting
limit on Reclaim transactions, and the removal of the new issue
exemption, the Commission finds that the Proposed Rule Change is
consistent with Section 17A(b)(3)(F) of the Act \11\ because it will
increase the number of deliveries that will require Receiver approval
prior to DTC processing, which reduces the intraday uncertainty and
associated risks that may arise from Reclaims, thus facilitating the
prompt and accurate clearance and settlement of securities
transactions. The Commission also finds these aspects of the Proposed
Rule Change consistent with Rule 17Ad-22(d)(12) of the Act \12\ because
more
[[Page 41337]]
transactions will be subject to DTC's risk management controls, which
helps ensure that final settlement occurs no later than the end of the
settlement day.
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 17 CFR 240.17Ad-22(d)(12).
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Additionally, the Commission finds the Proposed Rule Change, as it
pertains to changes to DTC's Participant Terminal System and Settlement
Web services, the RAD threshold for institutional transactions, and
overvalued deliveries, consistent with both Section 17A(b)(3)(F) of the
Act \13\ and Rule 17Ad-22(d)(12) of the Act \14\ because specifying the
application through which Participants may access certain settlement
functions, clarifying the RAD threshold of institutional transactions,
and eliminating redundant provisions promotes the prompt and accurate
clearance and settlement of securities transactions and improves DTC's
written policies and procedures that are designed to ensure final
settlement no later than the end of the settlement day.
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ 17 CFR 240.17Ad-22(d)(12).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \15\ and
the rules and regulations thereunder.
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\15\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule change SR-DTC-2014-06 be, and hereby is,
approved.\16\
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\16\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16502 Filed 7-14-14; 8:45 am]
BILLING CODE 8011-01-P