Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”) /1/ and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 (“Act”), /2/ notice is hereby given that on
FOOTNOTE 1 12 U.S.C. 5465(e)(1). END FOOTNOTE
FOOTNOTE 2 17 CFR 240.19b-4(n)(1)(i). END FOOTNOTE
FOOTNOTE 3 On
I. Clearing Agency’s Statement of the Terms of Substance of the Advance Notice
This Advance Notice consists of proposed modifications to DTC’s Rules, By-Laws and Organization Certificate (“Rules”). /4/ The proposed rule change would amend Rules 1 and 2 in order to (i) address and update DTC’s practices and policies with respect to the existing matrix (hereinafter referred to as the “Credit Risk Rating Matrix” or “CRRM”), which was, as described in an earlier DTC rule filing, /5/ developed by DTC to assign a credit rating to certain Participants (“CRRM-Rated Participants”) by evaluating the risks posed by CRRM-Rated Participants to DTC and its Participants from providing services to these CRRM-Rated Participants and (ii) make other amendments to the Rules to provide more transparency and clarity regarding DTC’s current ongoing membership monitoring process.
FOOTNOTE 4 Capitalized terms not defined herein are defined in the Rules, available at www.dtcc.com/ [approx.] /media/Files/Downloads/legal/rules/dtc_rules.pdf. END FOOTNOTE
FOOTNOTE 5 See Securities Exchange Act Release No. 53655 (
II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Advance Notice
In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the Advance Notice and discussed any comments it received on the Advance Notice. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A and B below, of the most significant aspects of such statements.
Written comments relating to this proposal have not been solicited or received. DTC will notify the Commission of any written comments received by DTC.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment, Clearing and Settlement Supervision Act
Nature of the Proposed Change
The proposed rule change would amend Rules 1 and 2 in order to (i) address and update DTC’s practices and policies with respect to the CRRM and (ii) provide more transparency and clarity regarding DTC’s current membership monitoring process. In this regard, the proposed rule change would (i) add proposed definitions for the terms “Credit Risk Rating Matrix” and “
DTC occupies an important role in the securities settlement system by, among other things, providing services for the settlement of book-entry transfer and pledge of interests in eligible deposited securities and net funds settlement, in connection with which Participants may incur net funds settlement obligations to DTC. DTC uses the CRRM, the Watch List and the enhanced surveillance to manage and monitor default risks of Participants on an ongoing basis, as discussed below. The level and frequency of such monitoring for a Participant is determined by the Participant’s risk of default as assessed by DTC. Participants that are deemed by DTC to pose a heightened risk to DTC and its Participants are subject to closer and more frequent monitoring.
Existing Credit Risk Rating Matrix
Pursuant to the 2006 Rule Change, all Participants that are either
FOOTNOTE 6 See 2006 Rule Change, SR-DTC-2006-03, 71 FR 20428, which explained that the ratings assigned by the CRRM were generated using financial data extracted from standard regulatory reports of
FOOTNOTE 7 In the 2006 Rule Change, DTC noted that these Participants would be monitored by credit risk staff by reviewing similar criteria as those reviewed for Participants included on the matrix but such review would occur outside of the matrix process. Id. END FOOTNOTE
The 2006 Rule Change explained that credit risk staff could downgrade a particular Participant’s credit rating based on various qualitative factors. An example of such qualitative factors might be that the Participant in question received a qualified audit opinion on its annual audit. DTC noted in the 2006 Rule Change that in order to protect DTC and its other Participants, it was important that credit risk staff maintain the discretion to downgrade a Participant’s credit rating on the CRRM and thus subject the Participant to closer monitoring.
The current CRRM is comprised of two credit rating models–one for the
Over time, the current CRRM has not kept pace with DTC’s evolving Participant membership base and heightened expectations from regulators and stakeholders for robustness of financial models. Specifically, the current CRRM only generates credit ratings for those Participants that are
FOOTNOTE 8 As of
–This is a summary of a
Citation: “82 FR 17901”
Document Number: “Release No. 34-80394; File No. SR-DTC-2017-801”
Federal Register Page Number: “17901”