[Federal Register Volume 75, Number 42 (Thursday, March 4, 2010)]
[Notices]
[Pages 9987-9988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4457]
[[Page 9987]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61593; File No. SR-DTC-2009-17]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving Proposed Rule Change To Allow The Depository Trust
Company To Provide Settlement Services to European Central Counterparty
Limited for U.S. Securities Traded on European Trading Venues
February 25, 2010.
I. Introduction
On December 17, 2009, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2009-17 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change
was published for comment in the Federal Register on January 5,
2010.\2\ No comment letters were received on the proposal. This order
approves the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 61249 (December 29,
2009), 75 FR 0947.
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II. Description
European Central Counterparty Limited (``EuroCCP'') is a clearing
house recognized by the United Kingdom and regulated by the Financial
Services Authority (``FSA''). It provides central counterparty
clearance and settlement services to its participants for their
securities transactions executed on or through European trading venues.
Several of the trading platforms EuroCCP services asked EuroCCP to
clear and settle trades in U.S. equities, Exchange Traded Funds
(``ETFs''), and American Depositary Receipts (``ADRs'')(collectively,
``U.S. Securities'') that are executed on or through them.\3\ Trades in
these securities will be routed to EuroCCP through existing interfaces
with the trading platforms and will be novated and netted in accordance
with EuroCCP's Rules and Procedures. DTC will notify Participants by
Important Notice of the effective date of the service. EuroCCP will
employ its current trade day netting methodology to produce each day
for each of its participants in the EuroCCP U.S. Program a single
settlement obligation for each U.S. Security.\4\
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\3\ The trading platforms will support trading activity of U.S.
issues in U.S. dollars. The platforms currently operate from 8 a.m.
to 4:30 p.m. London time.
\4\ Each single settlement obligation calculated by EuroCCP will
settle at DTC on T+3.
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Under the EuroCCP U.S. Program, EuroCCP will use DTC's settlement
services for these netted securities obligations by opening and
operating an account at DTC. Each EuroCCP participant in the EuroCCP
U.S. Program will be required to appoint a DTC participant U.S.
settlement agent to settle obligations on its behalf.\5\ EuroCCP will
be subject to the same net debit cap \6\ and collateral monitor (``Risk
Management Controls'') \7\ as any other DTC participant.
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\5\ EuroCCP will be given a reason code for the transactions it
processes through its DTC account. As part of this filing, DTC
proposes updating its Settlement Service Guide to reflect this
reason code. In addition, DTC will update the language in the Memo
Segregation section of the Settlement Service Guide and the reason
codes that receive Memo Segregation treatment to reflect this reason
code and to reflect certain other technical, non-substantive changes
to the reason codes.
\6\ Before completing a transaction in which a participant is
the receiver, DTC calculates the resulting effect the transaction
would have on the participant's account to determine whether the
resulting net settlement balance would exceed the participant's
assigned net debit cap. Any transaction that would cause the
participant's net settlement debit to exceed its net debit cap is
placed in a pending queue that recycles until another transaction or
payment creates credits in the participant's account such that the
participant's net settlement debit is below its net debit cap.
\7\ DTC tracks collateral in a participant's account through its
collateral monitor. At all times, the collateral monitor reflects
the amount by which the collateral in the account exceeds the net
debit in the account. When processing a transaction, DTC verifies
that the deliverer's and receiver's collateral monitors will not
become negative when the transaction completes. If the transaction
would cause either party to have a negative collateral monitor, the
transaction will recycle until the deficient account has sufficient
collateral.
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DTC is modifying its Settlement Service Guide in three ways to
maximize settlement efficiencies for DTC participants acting as U.S.
settlement agents in the EuroCCP U.S. Program. First, reclaims to
EuroCCP's account will not be ``matched''. A reclaim is an instruction
from a participant to DTC to return a delivery. It is generally used in
the event of an error where a participant does not recognize the
delivery. DTC's systems attempt to identify a corresponding original
transaction for every reclaim presented for processing. If DTC's
systems identify a corresponding original transaction, the reclaim is
processed.\8\
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\8\ The following seven elements must be consistent for the
system to process a reclaim as matched: Receiver, deliverer, CUSIP,
quantity, dollar amount, shares, and settlement date.
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Under DTC's existing Settlement Service Guide procedures, a matched
reclaim for less than $15 million is not subject to DTC's risk
management controls. As a result a matched reclaim to EuroCCP for less
than $15 million would not be subject to DTC's risk management controls
for EuroCCP's account and could create a debit in the EuroCCP account
that could exceed EuroCCP's liquidity resources and cause EuroCCP to be
unable to complete settlement with DTC. To avoid this outcome, DTC is
changing its procedures so that all reclaims to the EuroCCP account,
including matched reclaims under $15 million, will be subject to DTC's
risk management controls. Consequently, all reclaims violating
EuroCCP's net debit cap or collateral monitor will recycle until the
reclaim can settle without violating the risk management controls or
until the reclaim drops at the recycle cutoff.\9\ This is how DTC
currently treats reclaims that are over $15 million dollars.
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\9\ If the reclaim drops at the recycle cutoff, then the
receiving participant will retain the securities and the debit for
the delivery it received from EuroCCP.
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Second, DTC is modifying its Settlement Service Guide so that
pending valued transactions and pending free transactions to or from
the EuroCCP account will fail to settle or ``drop'' \10\ at 3:10
p.m.\11\ This cutoff time will allow EuroCCP to close its business day.
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\10\ Items that will drop will include deliveries to EuroCCP
failing due to lack of position by the delivering participant and
items failing DTC's risk management controls.
\11\ DTC's current cutoff time for pending valued transactions
is 3:10 p.m. and for pending free transactions is 6:35 p.m.
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Third, the Receiver Authorized Delivery (``RAD'') cutoff time will
be 3:30 p.m. for both valued transactions and free delivery
transactions.\12\ DTC's current RAD deadline for valued transactions is
3:30 p.m., and the RAD deadline for free delivery transactions is 6:30
p.m. To allow EuroCCP to halt transaction processing in the EuroCCP
account and end its processing day, DTC will require a synchronized RAD
cutoff time of 3:30 p.m.
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\12\ RAD is a control mechanism which allows a participant to
review transactions prior to completion of processing. It limits the
exposure from misdirected or erroneously entered deliver orders,
payment orders, and pledges.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act \13\ and the rules and regulations
thereunder applicable to DTC. In particular, the Commission believes
that the amendments DTC is making to its rules in connection to it
providing settlement services to EuroCCP for U.S. Securities traded on
European trading venues are consistent with DTC's obligations under
[[Page 9988]]
Section 17A(b)(3)(F),\14\ which requires, among other things, that the
rules of a clearing agency are designed to provide for the safekeeping
of securities and funds under its possession or control or for which it
is responsible.
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\13\ 15 U.S.C. 78q-1.
\14\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal 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,\16\ that the proposed rule change (File No. SR-DTC-2009-17) be,
and hereby is, approved.\17\
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\16\ 15 U.S.C. 78s(b)(2).
\17\ 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.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-4457 Filed 3-3-10; 8:45 am]
BILLING CODE 8011-01-P