[Federal Register Volume 83, Number 139 (Thursday, July 19, 2018)]
[Notices]
[Pages 34246-34263]
[FR Doc No: 2018-15364]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83629; File No. SR-DTC-2017-022]

Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Amend
the Loss Allocation Rules and Make Other Changes

July 13, 2018.
    On December 18, 2017, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')
and Rule 19b-4 thereunder, proposed rule change SR-DTC-2017-022
(``Proposed Rule Change'') to amend the loss allocation rules and make
other changes; the Proposed Rule Change was published for comment in
the Federal Register on January 8, 2018.\1\ On February 8, 2018, the
Commission designated a longer period within which to approve,
disapprove, or institute proceedings to determine whether to approve or
disapprove the Proposed Rule Change.\2\ On March 20, 2018, the
Commission instituted proceedings to determine whether to approve or
disapprove the Proposed Rule Change; on June 25, 2018, the Commission
designated a longer period for Commission action on the proceedings to
determine whether to approve or disapprove the Proposed Rule Change.\3\
On June 28, 2018, DTC filed Amendment No. 1 to the Proposed Rule Change
to amend and replace in its entirety the Proposed Rule Change as
originally submitted on December 18, 2017.\4\ As of the date of this
release, the Commission has not received any comments on the Proposed
Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively.
Securities Exchange Act Release No. 82426 (January 2, 2018), 83 FR
913 (January 8, 2018) (SR-DTC-2017-022). On December 18, 2017, DTC
filed the Proposed Rule Change as advance notice SR-DTC-2017-804
(``Advance Notice'') with the Commission 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'')
and Rule 19b-4(n)(1)(i) of the Act. (12 U.S.C. 5465(e)(1) and 17 CFR
240.19b-4(n)(1)(i), respectively.) On January 30, 2018, the
Commission published in the Federal Register notice of filing of the
Advance Notice. The notice also extended the review period for the
Advance Notice pursuant to Section 806(e)(1)(H) of the Clearing
Supervision Act. (12 U.S.C. 5465(e)(1)(H).) See Securities Exchange
Act Release No. 82582 (January 24, 2018), 83 FR 4297 (January 30,
2018) (SR-DTC-2017-804). On April 10, 2018, the Commission required
additional information for consideration of the Advance Notice,
pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act,
which provided the Commission with an additional 60-days in the
review period beginning on the date that the information requested
is received by the Commission. (12 U.S.C. 5465(e)(1)(D).) See
Memorandum from the Office of Clearance and Settlement Supervision,
Division of Trading and Markets, titled ``Commission's Request for
Additional Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml. On June 28, 2018, DTC filed Amendment No. 1 to the
Advance Notice. To promote the public availability and transparency
of its post-notice amendment, DTC submitted a copy of Amendment No.
1 through the Commission's electronic public comment letter
mechanism. Accordingly, Amendment No. 1 to the Advance Notice has
been posted on the Commission's website at https://www.sec.gov/rules/sro/dtc-an.htm and thus been publicly available since June 29,
2018. On July 6, 2018, the Commission received the information
requested, which added an additional 60-days to the review period
pursuant to Sections 806(e)(1)(E) and (G) of the Clearing
Supervision Act. (12 U.S.C. 5465(e)(1)(E) and (G).) See Memorandum
from the Office of Clearance and Settlement Supervision, Division of
Trading and Markets, titled ``Response to the Commission's Request
for Additional Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml. The proposal, as set forth in both the Advance
Notice and the Proposed Rule Change, shall not take effect until all
required regulatory actions are completed.
    \2\ Securities Exchange Act Release No. 82670 (February 8,
2018), 83 FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC-
2017-022; SR-NSCC-2017-018).
    \3\ Securities Exchange Act Release No. 82914 (March 20, 2018),
83 FR 12978 (March 26, 2018) (SR-DTC-2017-022); Securities Exchange
Act Release No. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018)
(SR-DTC-2017-022; SR-FICC-2017-022; SR-NSCC-2017-018).
    \4\ To promote the public availability and transparency of its
post-notice amendment, DTC submitted a copy of Amendment No. 1
through the Commission's electronic public comment letter mechanism.
Accordingly, Amendment No. 1 to the Proposed Rule Change has been
posted on the Commission's website at https://www.sec.gov/rules/sro/dtc.htm and thus been publicly available since June 29, 2018.
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    The Proposed Rule Change, as amended by Amendment No. 1, is
described in Items I and II below, which Items have been prepared by
DTC. The Commission is publishing this notice to solicit comments on
the Proposed Rule Change, as amended by Amendment No. 1, from
interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The proposed rule change would revise Rule 4 (Participants Fund and
Participants Investment) to (i) provide separate sections for (x) the
use of the Participants Fund \5\ as a liquidity resource for settlement
and (y) loss allocation among Participants of losses and liabilities
arising out of Participant defaults or due to non-default events; and
(ii) enhance the resiliency of DTC's loss allocation process so that
DTC can take timely action to contain multiple loss events that occur
in succession during a short period of time. In connection therewith,
the proposed rule change would (i) align the loss allocation rules of
the three clearing agencies of The Depository Trust & Clearing
Corporation (``DTCC''), namely DTC, National Securities Clearing
Corporation (``NSCC''), and Fixed Income Clearing Corporation
(``FICC'') (collectively, the ``DTCC Clearing Agencies''), so as to
provide consistent treatment, to the extent practicable and
appropriate, especially for firms that are participants of two or more
DTCC Clearing Agencies, (ii) increase transparency and accessibility of
the provisions relating to the use of the Participants Fund as a
liquidity resource for settlement and the loss allocation provisions,
by enhancing their readability and clarity, (iii) require a defined
corporate contribution to losses and liabilities that are incurred by
DTC prior to any allocation among Participants, whether such losses and
liabilities arise out of Participant defaults or due to non-default
events, (iv) reduce the time within which DTC is required to return a
former Participant's Actual Participants Fund Deposit, and (v) make
conforming and technical changes. In addition, the proposed rule change
would amend Section 6 of Rule 4 to clarify the requirements for a
Participant that wants to voluntarily terminate its business with DTC,
and to align, where appropriate, with the proposed voluntary
termination provisions of the NSCC and FICC rules. The proposed rule
change would also amend Rule 1 (Definitions; Governing Law) to add
cross-references to terms that would be defined in proposed Rule 4, and
would amend Rule 2 (Participants and Pledgees), in relevant part, to
align with proposed Section 6 of Rule 4, as discussed below.
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    \5\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in the Rules, By-Laws and
Organization Certificate of DTC (``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item III below. The clearing agency has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

1. Purpose
Description of the Amendment
    This filing constitutes Amendment No. 1 (``Amendment'') to rule
filing SR-DTC-2017-022 (``Rule Filing'') previously filed by DTC on
December 18, 2017.\6\ This Amendment amends and replaces the Rule
Filing in its entirety. DTC submits this Amendment in order to further
clarify the operation of the proposed rule changes on loss allocation
by providing additional information and examples. This Amendment would
also clarify the requirements for a Participant that wants to
voluntarily terminate its business with DTC. In particular, this
Amendment would:
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    \6\ See Securities Exchange Act Release No. 82426 (January 2,
2018), 83 FR 913 (January 8, 2018) (SR-DTC-2017-022).
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    (i) Clarify that the term ``Participant Default,'' referring to the
failure of a Participant to satisfy any obligation to DTC, includes the
failure of a Defaulting Participant to satisfy its obligations as
provided in Rule 9(B).\7\
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    \7\ Although Rule 4 is being amended to align with NSCC and
FICC, where appropriate, a ``Defaulting Participant'' is not
analogous to a ``Defaulting Member'' under the proposed NSCC and
FICC rules. This is because the term ``Defaulting Participant''
already has a specific meaning pursuant to Rule 9(B) which is
necessary and appropriate to that Rule. Instead, the proposed new
term ``CTA Participant'' would be analogous to the NSCC and FICC
proposed term ``Defaulting Member.''
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    (ii) Add the defined term ``CTA Participant,'' which would be
defined as a Participant for which the Corporation has ceased to act
pursuant to Rule 10 (Discretionary Termination), Rule 11 (Voluntary
Termination) or Rule 12 (Insolvency).
    (iii) Clarify which Participants would be subject to loss
allocation with respect to Default Loss Events (defined below) and
Declared Non-Default Loss Events (defined below) occurring during an
Event Period (defined below). Specifically, pursuant to the Amendment,
proposed Section 5 of Rule 4 would provide that each Participant that
is a Participant on the first day of an Event Period would be obligated
to pay its pro rata share of losses and liabilities arising out of or
relating to each Default Loss Event (other than a Default Loss Event
with respect to which it is the CTA Participant) and each Declared Non-
Default Loss Event occurring during the Event Period. In addition,
proposed Section 5 of Rule 4 would make it clear that any CTA
Participant for which DTC ceases to act on a non-Business Day,
triggering an Event Period that commences on the next Business Day,
would be deemed to be a Participant on the first day of that Event
Period.
    (iv) Clarify the obligations and Loss Allocation Cap (defined
below) of a Participant that terminates its business with DTC in
respect of a loss allocation round. Specifically, pursuant to the
Amendment, the Participant would nevertheless remain obligated for its
pro rata share of losses and liabilities with respect to any Event
Period for which it is otherwise obligated under Rule 4; however, its
aggregate obligation would be limited to the amount of its Loss
Allocation Cap, as fixed in the loss allocation round for which it
withdrew.
    (v) Clarify that each CTA Participant would be obligated to DTC for
the entire amount of any loss or liability incurred by DTC arising out
of or relating to any Default Loss Event with respect to such CTA
Participant. To the extent that such loss or liability is not satisfied
pursuant to proposed Section 3 of Rule 4, DTC would apply a Corporate
Contribution and charge the remaining amount of such loss or liability
as provided in proposed Section 5 of Rule 4.
    (vi) Clarify that, although a CTA Participant would not be
allocated a ratable share of losses and liabilities arising out of or
relating to its own Default Loss Event, it would remain obligated to
DTC for such losses and liabilities. More particularly, pursuant to the
Amendment, the proposed rule change would provide that no loss
allocation under proposed Rule 4 would constitute a waiver of any claim
DTC may have against a Participant for any losses or liabilities to
which the Participant is subject under DTC Rules and Procedures,
including, without limitation, any loss or liability to which it may be
subject under proposed Rule 4.
    (vii) For enhanced transparency and to align, where appropriate,
with the rules of NSCC and FICC, clarify the process for the Voluntary
Retirement (defined below) of a Participant.
    In addition, pursuant to the Amendment, DTC is making other
clarifying and technical changes to the proposed rule change, as
proposed herein.
Nature of the Proposed Change
    The proposed rule change would revise Rule 4 (Participants Fund and
Participants Investment) to (i) provide separate sections for (x) the
use of the Participants Fund as a liquidity resource for settlement and
(y) loss allocation among Participants of losses and liabilities
arising out of Participant defaults or due to non-default events; and
(ii) enhance the resiliency of DTC's loss allocation process so that
DTC can take timely action to contain multiple loss events that occur
in succession during a short period of time. In connection therewith,
the proposed rule change would (i) align the loss allocation rules of
the DTCC Clearing Agencies, so as to provide consistent treatment, to
the extent practicable and appropriate, especially for firms that are
participants of two or more DTCC Clearing Agencies,\8\ (ii) increase
transparency and accessibility of the provisions relating to the use of
the Participants Fund as a liquidity resource for settlement and the
loss allocation provisions, by enhancing their readability and clarity,
(iii) require a defined corporate contribution to losses and
liabilities that are incurred by DTC prior to any allocation among
Participants, whether such losses and liabilities arise out of
Participant defaults or due to non-default events, (iv) reduce the time
within which DTC is required to return a former Participant's Actual
Participants Fund Deposit, and (v) make conforming and technical
changes. In addition, the proposed rule change would amend Section 6 of
Rule 4 to clarify the requirements for a Participant that wants to
voluntarily terminate its business with DTC, and to align, where
appropriate, with the proposed voluntary termination provisions of the
NSCC and FICC rules. The proposed rule change would also amend Rule 1
(Definitions; Governing Law) to add cross-references to terms that
would be defined in proposed Rule 4, and would amend Rule 2
(Participants and Pledgees), in relevant part, to align with proposed
Section 6 of Rule 4, as discussed below.
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    \8\ On December 18, 2017, NSCC and FICC submitted proposed rule
changes and advance notices to enhance their rules regarding
allocation of losses. Securities Exchange Act Release Nos. 82428
(January 2, 2018), 83 FR 897 (January 8, 2018) (SR-NSCC-2017-018),
and 82584 (January 24, 2018), 83 FR 4377 (January 30, 2018) (SR-
NSCC-2017-806); Securities Exchange Act Release Nos. 82427 (January
2, 2018), 83 FR 854 (January 8, 2018) (SR-FICC-2017-022) and 82583
(January 24, 2018), 83 FR 4358 (January 30, 2018) (SR-FICC-2017-
806). On June 28, 2018, NSCC and FICC filed proposed amendments to
the proposed rule changes and advance notices with the Commission
and the Board of Governors of the Federal Reserve System,
respectively, available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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(i) Background
    Current Rule 4 provides a single set of tools and a common process
for the use of the Participants Fund for both liquidity purposes to
complete settlement among non-defaulting Participants, if one or more
Participants

fails to settle,\9\ and for the satisfaction of losses and liabilities
due to Participant defaults \10\ or certain other losses or liabilities
incident to the business of DTC.\11\ The proposed rule change would
amend and add provisions to separate use of the Participants Fund as a
liquidity resource to complete settlement, reflected in proposed
Section 4 of Rule 4, and for loss allocation, reflected in proposed
Section 5 of Rule 4. There wouldn't be any substantive change to the
rights and obligations of Participants under proposed Sections 4 and 5
of Rule 4.\12\ The proposed rule changes reinforce the distinction,
conceptual and sequential, between the mechanisms to complete
settlement on a Business Day and to mutualize losses that may result
from a failure to settle, or other loss-generating events. The change
is also proposed so that the loss allocation provisions of proposed
Section 5 of Rule 4 more closely align to similar provisions of the
NSCC and FICC rules, to the extent appropriate.
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    \9\ DTC is a central securities depository providing key
services that are structured to support daily settlement of book-
entry transfers of securities, in accordance with its Rules and
Procedures. In particular, Rule 9(A) (Transactions in Securities and
Money Payments), Rule 9(B) (Transactions in Eligible Securities),
Rule 9(C) (Transactions in MMI Securities), Rule 9(D) (Settling
Banks), and Rule 9(E) (Clearing Agency Agreements) provide the
mechanism to achieve a ``DVP Model 2 Deferred Net Settlement
System'' (as defined in Annex D of the Principles for Financial
Market Infrastructures issued by The Committee on Payments and
Market Infrastructures and the Technical Committee of the
International Organization of Securities Commissions (April 2012),
available at https://www.bis.org/cpmi/publ/d101a.pdf. Briefly, in
relevant part, Rule 9(B) provides that ``[e]ach Participant and the
Corporation shall settle the balance of the Settlement Account of
the Participant on a daily basis in accordance with these Rules and
the Procedures. Except as provided in the Procedures, the
Corporation shall not be obligated to make any settlement payments
to any Participants until the Corporation has received all of the
settlement payments that Settling Banks and Participants are
required to make to the Corporation.'' Supra note 5. Pursuant to
these provisions of Rule 9(B), securities will be delivered to
Participants that satisfy their settlement obligations in the end-
of-day net settlement process.
    \10\ The failure of a Participant to satisfy its settlement
obligation constitutes a liability to DTC. Insofar as DTC undertakes
to complete settlement among Participants other than the Participant
that failed to settle, that liability may give rise to losses as
well. DTC is designed to provide settlement finality at the end of
the day and notwithstanding the failure to settle of a Participant
or Affiliated Family of Participants with the largest net settlement
obligation, a ``cover 1'' standard. There are no reversals of
deliveries; a Participant that fails to settle will not receive
securities that were intended to be delivered to it, because it has
not paid for them. These securities, among others, serve as
collateral for DTC to use to secure a borrowing of funds in order,
in accordance with its Rules and Procedures, to settle with non-
defaulting Participants (including those delivering Participants
that delivered to the non-settling Participant). To this end,
delivery versus payment transactions (``DVP'') will not be processed
intraday to a receiving Participant that will incur a related
payment obligation unless that Participant satisfies risk management
controls. The two risk management controls are the Collateral
Monitor and Net Debit Cap. Net Debit Caps limit the potential
settlement obligation of any Participant to an amount for which DTC
has sufficient liquidity resources to cover this risk. The
Collateral Monitor tests whether a Participant has sufficient
collateral for DTC to pledge or liquidate if that Participant were
to fail to meet its settlement obligation. To process a DVP, the
value of the delivery that is debited to the receiving Participant
cannot cause the net debit balance of the Participant to exceed its
Net Debit Cap, and the amount of the net debit balance after giving
effect to the debit must be fully collateralized. Accordingly, DTC
may incur a liability or loss whenever it completes settlement
despite the failure to settle of a Participant, or Affiliated Family
of Participants, because it is either using the Participants Fund
deposits of other Participants in the manner specified in existing
and proposed Rule 4 and/or borrowing the necessary funds. DTC
obligations under the line of credit include the obligation to pay
interest on loans outstanding and to repay the loan; the
Participants Fund is designed as not only a direct liquidity
resource but as a back-up liquidity resource to satisfy these
liabilities. As to the Participants Fund itself, DTC undertakes in
Section 9 of existing and proposed Rule 4, to restore funds to
Participants whose deposits may have been charged if there is
ultimately any excess recovery. It should be noted that the
Defaulting Participant remains principally obligated for all losses,
costs and expenses associated with its Participant Default and, so,
a recovery out of the estate of a Defaulting Participant is at least
a hypothetical possibility.
    \11\ Section 1(f) of Rule 4 defines the term ``business'' with
respect to DTC as ``the doing of all things in connection with or
relating to the Corporation's performance of the services specified
in the first and second paragraphs of Rule 6 or the cessation of
such services.'' Supra note 5.
    \12\ It may be noted that absent extreme circumstances, DTC
believes that it is unlikely that DTC would need to act under
proposed Sections 4 or 5 of Rule 4.
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    The proposed rule change would retain the core principles of
current Rule 4 for both application of the Participants Fund as a
liquidity resource to complete settlement and for loss allocation,
while clarifying or refining certain provisions and introducing certain
new concepts relating to loss allocation. In connection with the use of
the Participants Fund as a liquidity resource to complete settlement
when a Participant fails to settle, the proposed rule would introduce
the term ``pro rata settlement charge,'' for the use of the
Participants Fund to complete settlement as apportioned among non-
defaulting Participants. The existing term generically applied to such
a use or to a loss allocation is simply a ``pro rata charge''.\13\
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    \13\ See Rule 4, Section 5, supra note 5.
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    For loss allocation, the proposed rule change, like current Rule 4,
would continue to apply to both default and non-default losses and
liabilities, and, to the extent allocated among Participants, would be
charged ratably in accordance with their Required Participants Fund
Deposits.\14\ A new provision would require DTC to contribute to a loss
or liability, either arising from a Participant default or non-default
event, prior to any allocation among Participants. The proposed rule
change would also introduce the new concepts of an ``Event Period'' and
a ``round'' to address the allocation of losses arising from multiple
events that occur in succession during a short period of time. These
proposed rule changes would be substantially similar in these respects
to analogous proposed rule changes for NSCC and FICC.
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    \14\ It may be noted that for NSCC and FICC, the proposed rule
changes for loss allocation include a ``look-back'' period to
calculate a member's pro rata share and cap. The concept of a look-
back or average is already built into DTC's calculation of
Participants Fund requirements, which are based on a rolling sixty
(60) day average of a Participant's six highest intraday net debit
peaks.
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Current Rule 4 Provides for Application of the Participants Fund
Through Pro Rata Charges
    Current Rule 4 addresses the Participants Fund and Participants
Investment requirements and, among other things, the permitted uses of
the Participants Fund and Participants Investment.\15\ Pursuant to
current Rule 4, DTC maintains a cash Participants Fund. The Required
Participants Fund Deposit for any Participant is based on the liquidity
risk it poses to DTC relative to other Participants.
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    \15\ Each Participant is required to invest in DTC Series A
Preferred Stock, ratably on a basis calculated in substantially the
same manner as the Required Participants Fund Deposit. The Preferred
Stock constitutes capital of DTC and is also available for use as
provided in current and proposed Section 3 of Rule 4. This proposed
rule change does not alter the Required Preferred Stock Investment.
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    Default of a Participant. Under current Section 3 of Rule 4, if a
Participant is obligated to DTC and fails to satisfy any obligation,
DTC may, in such order and in such amounts as DTC shall determine in
its sole discretion: (a) Apply some or all of the Actual Participants
Fund Deposit of such Participant to such obligation; (b) Pledge some or
all of the shares of Preferred Stock of such Participant to its lenders
as collateral security for a loan under the End-of-Day Credit Facility;
\16\ and/or (c) sell some or all of the shares of Preferred Stock of
such Participant to other Participants (who shall be

required to purchase such shares pro rata their Required Preferred
Stock Investments at the time of such purchase), and apply the proceeds
of such sale to satisfy such obligation.
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    \16\ As part of its liquidity risk management regime, DTC
maintains a 364-day committed revolving line of credit with a
syndicate of commercial lenders, renewed every year. The committed
aggregate amount of the End-of-Day Credit Facility (currently $1.9
billion) together with the Participants Fund constitute DTC's
liquidity resources for settlement. Based on these amounts, DTC sets
Net Debit Caps that limit settlement obligations.
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    Application of the Participants Fund. Current Section 4 of Rule 4
addresses the application of the Participants Fund if DTC incurs a loss
or liability, which would include application of the Participants Fund
to complete settlement \17\ or the allocation of losses once
determined, including non-default losses. For both liquidity and loss
scenarios, current Section 4 of Rule 4 provides that an application of
the Participants Fund would be apportioned among Participants ratably
in accordance with their Required Participants Fund Deposits, less any
additional amount that a Participant was required to Deposit to the
Participants Fund pursuant to Section 2 of Rule 9(A).\18\ It also
provides for the optional use of an amount of DTC's retained earnings
and undivided profits.
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    \17\ In contrast to NSCC and FICC, DTC is not a central
counterparty and does not guarantee obligations of its membership.
The Participants Fund is a mutualized pre-funded liquidity and loss
resource. As such, in contrast to NSCC and FICC, DTC does not have
an obligation to ``repay'' the Participants Fund, and the
application of the Participants Fund does not convert to a loss. See
supra note 10.
    \18\ Section 2 of Rule 9(A) provides, in part, ``At the request
of the Corporation, a Participant or Pledgee shall immediately
furnish the Corporation with such assurances as the Corporation
shall require of the financial ability of the Participant or Pledgee
to fulfill its commitments and shall conform to any conditions which
the Corporation deems necessary for the protection of the
Corporation, other Participants or Pledgees, including deposits to
the Participants Fund . . .'' Supra note 5. Pursuant to the proposed
rule change, the additional amount that a Participant is required to
Deposit to the Participants Fund pursuant to Section 2 of Rule 9(A)
would be defined as an ``Additional Participants Fund Deposit.''
This is not a new concept, only the addition of a defined term for
greater clarity.
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    After the Participants Fund is applied pursuant to current Section
4, DTC must promptly notify each Participant and the Commission of the
amount applied and the reasons therefor.
    Current Rule 4 further requires Participants whose Actual
Participants Fund Deposits have been ratably charged to restore their
Required Participants Fund Deposits, if such charges create a
deficiency. Such payments are due upon demand. Iterative pro rata
charges relating to the same loss or liability are permitted in order
to satisfy the loss or liability.
    Rule 4 currently provides that a Participant may, within ten (10)
Business Days after receipt of notice of any pro rata charge, notify
DTC of its election to terminate its business with DTC, and the
exposure of the terminating Participant for pro rata charges would be
capped at the greater of (a) the amount of its Aggregate Required
Deposit and Investment, as fixed immediately prior to the time of the
first pro rata charge, plus 100% of the amount thereof, or (b) the
amount of all prior pro rata charges attributable to the same loss or
liability with respect to which the Participant has not timely
exercised its right to terminate.
Overview of the Proposed Rule Changes
A. Application of Participants Fund to Participant Default and for
Settlement
    Proposed Section 3 of Rule 4 would retain the concept that when a
Participant is obligated to DTC and fails to satisfy such obligation,
which would be defined as a ``Participant Default,'' DTC may apply the
Actual Participants Fund Deposit of the Participant to such obligation
to satisfy the Participant Default. The proposed rule change would
reflect that the defined term ``Participant Default,'' referring to the
failure of a Participant to satisfy any obligation to DTC, includes the
failure of a Defaulting Participant to satisfy its obligations as
provided in Rule 9(B) (where ``Defaulting Participant'' is defined).
The proposed definition of ``Participant Default'' is for drafting
clarity and use in related provisions of proposed Rule 4.
    Proposed Section 4 would address the situation of a Defaulting
Participant failure to settle (which is one type of Participant
Default) if the application of the Actual Participants Fund Deposit of
that Defaulting Participant, pursuant to proposed Section 3, is not
sufficient to complete settlement among Participants other than the
Defaulting Participant (each, a ``non-defaulting Participant'').\19\
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    \19\ As described above, proposed Rule 4 splits the liquidity
and loss provisions to more closely align to similar loss allocation
provisions in NSCC and FICC rules. Pursuant to the proposed rule
change, DTC would also align, where appropriate, the liquidity and
loss provisions within proposed Rule 4. DTC would retain the
existing Rule 4 concepts of calculating the ratable share of a
Participant, charging each non-defaulting Participant a pro rata
share of an application of the Participants Fund to complete
settlement, providing notice to Participants of such charge, and
providing each Participant the option to cap its liability for such
charges by electing to terminate its business with DTC. However,
pursuant to the proposed rule change, DTC would modify these
concepts and certain associated processes to more closely align with
the analogous proposed loss allocation provisions in proposed Rule 4
(e.g., Loss Allocation Notice, Loss Allocation Termination
Notification Period, and Loss Allocation Cap).
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    Proposed Section 4 would expressly state that the Participants Fund
shall constitute a liquidity resource which may be applied by DTC, in
such amounts as it may determine, in its sole discretion, to fund
settlement among non-defaulting Participants in the event of the
failure of a Defaulting Participant to satisfy its settlement
obligation on any Business Day. Such an application of the Participants
Fund would be charged ratably to the Actual Participants Fund Deposits
of the non-defaulting Participants on that Business Day. The pro rata
charge per non-defaulting Participant would be based on the ratio of
its Required Participants Fund Deposit to the sum of the Required
Participants Fund Deposits of all such Participants on that Business
Day (excluding any Additional Participants Fund Deposits in both the
numerator and denominator of such ratio). The proposed rule change
would identify this as a ``pro rata settlement charge,'' in order to
distinguish application of the Participants Fund to fund settlement
from pro rata loss allocation charges that would be established in
proposed Section 5 of Rule 4.
    The calculation of each non-defaulting Participant's pro rata
settlement charge would be similar to the current Section 4 calculation
of a pro rata charge except that, for greater simplicity, it would not
include the current distinction for common members of another clearing
agency pursuant to a Clearing Agency Agreement.\20\ For enhanced
clarity as to the date of determination of the ratio, it would be based
on the Required Participants Fund Deposits as fixed on the Business Day
of the application of the Participants Fund, as opposed to the current
language ``at the time the loss or liability was discovered.'' \21\
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    \20\ Rule 4, Section 4(a)(1), supra note 5. DTC has determined
that this option is unnecessary because, in practice, DTC would
never have liability under a Clearing Agency Agreement that exceeds
the excess assets of the Participant that defaulted.
    \21\ DTC believes that this change would provide an objective
date that is more appropriate for the application of the
Participants Fund to complete settlement, because the ``time the
loss or liability was discovered'' would necessarily have to be the
day the Participants Fund was applied to complete settlement.
---------------------------------------------------------------------------

    The proposed rule change would retain the concept that requires
DTC, following the application of the Participants Fund to complete
settlement, to notify each Participant and the Commission of the charge
and the reasons therefor (``Settlement Charge Notice'').
    The proposed rule change also would retain the concept of providing
each non-defaulting Participant an opportunity to elect to terminate
its business with DTC and thereby cap its exposure to further pro rata
settlement charges. The proposed rule change would shorten the
notification period

for the election to terminate from ten (10) Business Days to five (5)
Business Days,\22\ and would also change the beginning date of such
notification period from the receipt of the notice to the date of the
issuance of the Settlement Charge Notice.\23\ A Participant that elects
to terminate its business with DTC would, subject to its cap, remain
responsible for (i) its pro rata settlement charge that was the subject
of the Settlement Charge Notice and (ii) all other pro rata settlement
charges until the Participant Termination Date (as defined below and in
the proposed rule change). The proposed cap on pro rata settlement
charges of a Participant that has timely notified DTC of its election
to terminate its business with DTC would be the amount of its Aggregate
Required Deposit and Investment, as fixed on the day of the pro rata
settlement charge that was the subject of the Settlement Charge Notice,
plus 100% of the amount thereof (``Settlement Charge Cap''). The
proposed Settlement Charge Cap would be no greater than the current
cap.\24\
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    \22\ DTC believes this shorter period would be sufficient for a
Participant to decide whether to give notice to terminate its
business with DTC in response to a settlement charge. In addition, a
five (5) Business Day pro rata settlement charge notification period
would conform to the proposed loss allocation notification period in
this proposed rule change and in the proposed rule changes for NSCC
and FICC. See infra note 37.
    \23\ DTC believes that setting the start date of the
notification period to an objective date would enhance transparency
and provide a common timeframe to all affected Participants.
    \24\ Current Section 8 of Rule 4 provides for a cap that is
equal to the greater of (a) the amount of its Aggregate Required
Deposit and Investment, as fixed immediately prior to the time of
the first pro rata charge, plus 100% of the amount thereof, or (b)
the amount of all prior pro rata charges attributable to the same
loss or liability with respect to which the Participant has not
timely exercised its right to limit its obligation as provided
above. Supra note 5. The alternative limit in clause (b) would be
eliminated in proposed Section 8(a) in favor of a single defined
standard.
---------------------------------------------------------------------------

    The pro rata application of the Actual Participants Fund Deposits
of non-defaulting Participants to complete settlement when there is a
Participant Default is not the allocation of a loss. A pro rata
settlement charge would relate solely to the completion of settlement.
New proposed loss allocation concepts described below, including, but
not limited to, a ``round,'' ``Event Period,'' and ``Corporate
Contribution,'' would not apply to pro rata settlement charges.\25\
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    \25\ Proposed Sections 3, 4 and 5 of Rule 4 together relate, in
whole or in part, to what may happen when there is a Participant
Default. Proposed Section 3 is the basic provision of remedies if a
Participant fails to satisfy an obligation to DTC. Proposed Section
4 is a specific remedy for a failure to settle by a Defaulting
Participant, i.e., a specific type of Participant Default. Proposed
Section 5 is also a remedial provision for a Participant Default
when, additionally, DTC ceases to act for the Participant and there
are remaining losses or liabilities. If a Participant Default
occurs, the application of proposed Section 3 would be required, the
application of proposed Section 4 would be at the discretion of DTC.
Whether or not proposed Section 4 has been applied, once there is a
loss due to a Participant Default and DTC ceases to act for the
Participant, proposed Section 5 would apply. See supra note 10.
    A principal type of Participant Default is a failure to settle.
A Participant's obligation to pay any amount due in settlement is
secured by Collateral of the Participant. When the Defaulting
Participant fails to pay its settlement obligation, under Rule 9(B),
Section 2, DTC has the right to Pledge or sell such Collateral to
satisfy the obligation. Supra note 5. (It is more likely that DTC
would borrow against the Collateral to complete settlement on the
Business Day, because it is unlikely to be able to liquidate
Collateral for same day funds in time to settle on that Business
Day.) If DTC Pledges the Collateral to secure a loan to fund
settlement (e.g., under the End-of-Day Credit Facility), the
Collateral would have to be sold to obtain funds to repay the loan.
In any such sale of the Collateral, there is a risk, heightened in
times of market stress, that the proceeds of the sale would be
insufficient to repay the loan. That deficiency would be a liability
or loss to which proposed Section 5 of Rule 4 would apply, i.e., a
Default Loss Event.
---------------------------------------------------------------------------

B. Changes To Enhance Resiliency of DTC's Loss Allocation Process
    In order to enhance the resiliency of DTC's loss allocation process
and to align, to the extent practicable and appropriate, its loss
allocation approach to that of the other DTCC Clearing Agencies, DTC
proposes to introduce certain new concepts and to modify other aspects
of its loss allocation waterfall. The proposed rule change would adopt
an enhanced allocation approach for losses, whether arising from
Default Loss Events or Declared Non-Default Loss Events (as defined
below and in the proposed rule change). In addition, the proposed rule
change would clarify the loss allocation process as it relates to
losses arising from or relating to multiple default or non-default
events in a short period of time.
    Accordingly, DTC is proposing four (4) key changes to enhance DTC's
loss allocation process:
(1) Mandatory Corporate Contribution
    Current Section 4 of Rule 4 provides that if there is an
unsatisfied loss or liability, DTC may, in its sole discretion and in
such amount as DTC would determine, ``charge the existing retained
earnings and undivided profits'' of DTC.
    Under the proposed rule change, DTC would replace the discretionary
application of an unspecified amount of retained earnings and undivided
profits with a mandatory, defined Corporate Contribution (as defined
below and in the proposed rule change). The Corporate Contribution
would be used for losses and liabilities that are incurred by DTC with
respect to an Event Period (as defined below and in the proposed rule
change), whether arising from a Default Loss Event or Declared Non-
Default Loss Event, before the allocation of losses to Participants.
    The proposed ``Corporate Contribution'' would be defined to be an
amount equal to fifty percent (50%) of DTC's General Business Risk
Capital Requirement.\26\ DTC's General Business Risk Capital
Requirement, as defined in DTC's Clearing Agency Policy on Capital
Requirements,\27\ is, at a minimum, equal to the regulatory capital
that DTC is required to maintain in compliance with Rule 17Ad-22(e)(15)
under the Securities Exchange Act of 1934, as amended (the
``Act'').\28\ The proposed Corporate Contribution would be held in
addition to DTC's General Business Risk Capital Requirement.
---------------------------------------------------------------------------

    \26\ DTC calculates its General Business Risk Capital
Requirement as the amount equal to the greatest of (i) an amount
determined based on its general business profile, (ii) an amount
determined based on the time estimated to execute a recovery or
orderly wind-down of DTC's critical operations, and (iii) an amount
determined based on an analysis of DTC's estimated operating
expenses for a six (6) month period.
    \27\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003).
    \28\ 17 CFR 240.17Ad-22(e)(15).
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    The proposed Corporate Contribution would apply to losses arising
from Default Loss Events and Declared Non-Default Loss Events, and
would be a mandatory contribution of DTC prior to any allocation among
Participants.\29\ As proposed, if the proposed Corporate Contribution
is fully or partially used against a loss or liability relating to an
Event Period, the Corporate Contribution would be reduced to the
remaining unused amount, if any, during the following two hundred fifty
(250) Business Days in order to permit DTC to replenish the Corporate
Contribution.\30\ To ensure transparency, Participants would receive
notice of any such reduction to the Corporate Contribution.
---------------------------------------------------------------------------

    \29\ The proposed rule change would not require a Corporate
Contribution with respect to a pro rata settlement charge. However,
as discussed above, if, after a Participant Default, the proceeds of
the sale of the Collateral of the Participant are insufficient to
repay the lenders under the End-of-Day Credit Facility, and DTC has
ceased to act for the Participant, the shortfall would be a loss
arising from a Default Loss Event, subject to the Corporate
Contribution.
    \30\ DTC believes that two hundred fifty (250) Business Days
would be a reasonable estimate of the time frame that DTC would
require to replenish the Corporate Contribution by equity in
accordance with DTC's Clearing Agency Policy on Capital
Requirements, including a conservative additional period to account
for any potential delays and/or unknown exigencies in times of
distress.
---------------------------------------------------------------------------

    By requiring a defined contribution of DTC corporate funds towards
losses and

liabilities arising from Default Loss Events and Declared Non-Default
Loss Events, the proposed rule change would limit Participant
obligations to the extent of such Corporate Contribution and thereby
provide greater clarity and transparency to Participants as to the
calculation of their exposure to losses and liabilities.
    Proposed Rule 4 would also further clarify that DTC can voluntarily
apply amounts greater than the Corporate Contribution against any loss
or liability (including non-default losses) of DTC, if the Board of
Directors, in its sole discretion, believes such to be appropriate
under the factual situation existing at the time.
    The proposed rule changes relating to the calculation and mandatory
application of the Corporate Contribution are set forth in proposed
Section 5 of Rule 4.
(2) Introducing an Event Period
    The proposed rule change would clearly define the obligations of
DTC and its Participants regarding the allocation of losses or
liabilities relating to or arising out of a Default Loss Event or a
Declared Non-Default Loss Event. The proposed rule change would define
``Default Loss Event'' as the determination by DTC to cease to act for
a Participant pursuant to Rule 10, Rule 11, or Rule 12 (such
Participant, a ``CTA Participant''). ``Declared Non-Default Loss
Event'' would be defined as the determination by the Board of Directors
that a loss or liability incident to the clearance and settlement
business of DTC may be a significant and substantial loss or liability
that may materially impair the ability of DTC to provide clearance and
settlement services in an orderly manner and will potentially generate
losses to be mutualized among Participants in order to ensure that DTC
may continue to offer clearance and settlement services in an orderly
manner. In order to balance the need to manage the risk of sequential
loss events against Participants' need for certainty concerning maximum
loss allocation exposures, DTC is proposing to introduce the concept of
an ``Event Period'' to address the losses and liabilities that may
arise from or relate to multiple Default Loss Events and/or Declared
Non-Default Loss Events that arise in quick succession. Specifically,
the proposal would group Default Loss Events and Declared Non-Default
Loss Events occurring in a period of ten (10) Business Days (``Event
Period'') for purposes of allocating losses to Participants in one or
more rounds, subject to the limits of loss allocation set forth in the
proposed rule change and as explained below.\31\ In the case of a loss
or liability arising from or relating to a Default Loss Event, an Event
Period would begin on the day on which DTC notifies Participants that
it has ceased to act for a Participant (or the next Business Day, if
such day is not a Business Day). In the case of a Declared Non-Default
Loss Event, the Event Period would begin on the day that DTC notifies
Participants of the Declared Non-Default Loss Event (or the next
Business Day, if such day is not a Business Day). If a subsequent
Default Loss Event or Declared Non-Default Loss Event occurs within the
Event Period, any losses or liabilities arising out of or relating to
any such subsequent event would be resolved as losses or liabilities
that are part of the same Event Period, without extending the duration
of such Event Period. An Event Period may include both Default Loss
Events and Declared Non-Default Loss Events, and there would not be
separate Event Periods for Default Loss Events or Declared Non-Default
Loss Events occurring within overlapping ten (10) Business Day periods.
---------------------------------------------------------------------------

    \31\ DTC believes that having a ten (10) Business Day Event
Period would provide a reasonable period of time to encompass
potential sequential Default Loss Events and/or Declared Non-Default
Loss Events that are likely to be closely linked to an initial event
and/or a severe market dislocation episode, while still providing
appropriate certainty for Participants concerning their maximum
exposure to allocated losses with respect to such events.
---------------------------------------------------------------------------

    The amount of losses that may be allocated by DTC, subject to the
required Corporate Contribution, and to which a Loss Allocation Cap
would apply for any Participant that elects to terminate its business
with DTC in respect of a loss allocation round, would include any and
all losses from any Default Loss Events and any Declared Non-Default
Loss Events during the Event Period, regardless of the amount of time,
during or after the Event Period, required for such losses to be
crystallized and allocated.\32\
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    \32\ As discussed below, each Participant that is a Participant
on the first day of an Event Period would be obligated to pay its
pro rata share of losses and liabilities arising out of or relating
to each Default Loss Event (other than a Default Loss Event with
respect to which it is the CTA Participant) and each Declared Non-
Default Loss Event occurring during the Event Period.
---------------------------------------------------------------------------

    The proposed rule changes relating to the implementation of an
Event Period are set forth in proposed Section 5 of Rule 4.
(3) Introducing the Concept of ``Rounds'' and Loss Allocation Notice
    Pursuant to the proposed rule change, a loss allocation ``round''
would mean a series of loss allocations relating to an Event Period,
the aggregate amount of which is limited by the sum of the Loss
Allocation Caps of affected Participants (a ``round cap''). When the
aggregate amount of losses allocated in a round equals the round cap,
any additional losses relating to the applicable Event Period would be
allocated in one or more subsequent rounds, in each case subject to a
round cap for that round. DTC would continue the loss allocation
process in successive rounds until all losses from the Event Period are
allocated among Participants that have not submitted a Termination
Notice (as defined below and in the proposed rule change) in accordance
with proposed Section 6(b) of Rule 4.
    Each loss allocation would be communicated to Participants by the
issuance of a notice that advises each Participant of the amount being
allocated to it (each, a ``Loss Allocation Notice''). The calculation
of each Participant's pro rata allocation charge would be similar to
the current Section 4 calculation of a pro rata charge except that, for
greater simplicity, it would not include the current distinction for
common members of another clearing agency pursuant to a Clearing Agency
Agreement.\33\ In addition, for enhanced clarity as to the date of
determination of the ratio, it would be based on the Required
Participants Fund Deposits as fixed on the first day of the Event
Period, as opposed to the current language ``at the time the loss or
liability was discovered.'' \34\
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    \33\ See supra note 20.
    \34\ DTC believes that this change would provide an objective
date that is appropriate for the new proposed loss allocation
process, which would be designed to allocate aggregate losses
relating to an Event Period, rather than one loss at a time.
---------------------------------------------------------------------------

    Each Loss Allocation Notice would specify the relevant Event Period
and the round to which it relates. Participants would receive two (2)
Business Days' notice of a loss allocation,\35\ and Participants would
be required to pay the requisite amount no later than the second
Business Day following the issuance of such notice.\36\

Multiple Loss Allocation Notices may be issued with respect to each
round, up to the round cap.
---------------------------------------------------------------------------

    \35\ DTC believes allowing Participants two (2) Business Days to
satisfy their loss allocation obligations would provide Participants
sufficient notice to arrange funding, if necessary, while allowing
DTC to address losses in a timely manner.
    \36\ Current Section 4 of Rule 4 provides that if the
Participants Fund is applied to a loss or liability, DTC must notify
each Participant of the charge and the reasons therefor. Proposed
Section 5 would modify this process to (i) require DTC to give prior
notice; and (ii) require Participants to pay loss allocation
charges, rather than directly charging their Required Participants
Fund Deposits. DTC believes that shifting from the two-step
methodology of applying the Participants Fund and then requiring
Participants to immediately replenish it to requiring direct payment
would increase efficiency, while preserving the right to charge the
Settlement Account of the Participant in the event the Participant
doesn't timely pay. Such a failure to pay would be, self-evidently,
a Participant Default, triggering recourse to the Actual
Participants Fund Deposit of the Participant under proposed Section
3 of Rule 4. In addition, this change would provide greater
stability for DTC in times of stress by allowing DTC to retain the
Participants Fund, its critical pre-funded resource, while charging
loss allocations. DTC believes doing so would allow DTC to retain
the Participants Fund as a liquidity resource which may be applied
to fund settlement among non-defaulting Participants, if a
Defaulting Participant fails to settle. By being able to manage its
liquidity resources throughout the loss allocation process, DTC
would be able to continue to provide its critical operations and
services during what would be expected to be a stressful period.
---------------------------------------------------------------------------

    The first Loss Allocation Notice in any first, second, or
subsequent round would expressly state that such Loss Allocation Notice
reflects the beginning of the first, second, or subsequent round, as
the case may be, and that each Participant in that round has five (5)
Business Days \37\ from the issuance \38\ of such first Loss Allocation
Notice for the round (such period, a ``Loss Allocation Termination
Notification Period'') to notify DTC of its election to terminate its
business with DTC (such notification, whether with respect to a
Settlement Charge Notice or Loss Allocation Notice, a ``Termination
Notice'') pursuant to proposed Section 8(b) of Rule 4 and thereby
benefit from its Loss Allocation Cap.
---------------------------------------------------------------------------

    \37\ Current Section 8 of Rule 4 provides that the time period
for a Participant to give notice of its election to terminate its
business with DTC in respect of a pro rata charge is ten (10)
Business Days after receiving notice of a pro rata charge. DTC
believes that it is appropriate to shorten such time period from ten
(10) Business Days to five (5) Business Days because DTC needs
timely notice of which Participants would not be terminating their
business with DTC for the purpose of calculating the loss allocation
for any subsequent round. DTC believes that five (5) Business Days
would provide Participants with sufficient time to decide whether to
cap their loss allocation obligations by terminating their business
with DTC.
    \38\ See supra note 23.
---------------------------------------------------------------------------

    The round cap of any second or subsequent round may differ from the
first or preceding round cap because there may be fewer Participants in
a second or subsequent round if Participants elect to terminate their
business with DTC as provided in proposed Section 8(b) of Rule 4
following the first Loss Allocation Notice in any round.
    For example, for illustrative purposes only, after the required
Corporate Contribution, if DTC has a $4 billion loss determined with
respect to an Event Period and the sum of Loss Allocation Caps for all
Participants subject to the loss allocation is $3 billion, the first
round would begin when DTC issues the first Loss Allocation Notice for
that Event Period. DTC could issue one or more Loss Allocation Notices
for the first round until the sum of losses allocated equals $3
billion. Once the $3 billion is allocated, the first round would end
and DTC would need a second round in order to allocate the remaining $1
billion of loss. DTC would then issue a Loss Allocation Notice for the
$1 billion and this notice would be the first Loss Allocation Notice
for the second round. The issuance of the Loss Allocation Notice for
the $1 billion would begin the second round.
    The proposed rule change would link the Loss Allocation Cap to a
round in order to provide Participants the option to limit their loss
allocation exposure at the beginning of each round. As proposed, a
Participant could limit its loss allocation exposure to its Loss
Allocation Cap by providing notice of its election to terminate its
business with DTC within five (5) Business Days after the issuance of
the first Loss Allocation Notice in any round.
    The proposed rule changes relating to the implementation of
``rounds'' and Loss Allocation Notices are set forth in proposed
Section 5 of Rule 4.
(4) Capping Terminating Participants' Loss Allocation Exposure and
Related Changes
    As discussed above, the proposed rule change would continue to
provide Participants the opportunity to limit their loss allocation
exposure by offering a termination option; however, the associated
termination process would be modified.
    As proposed, if a Participant timely provides notice of its
election to terminate its business with DTC as provided in proposed
Section 8(b) of Rule 4, its maximum payment obligation with respect to
any loss allocation round would be the amount of its Aggregate Required
Deposit and Investment, as fixed on the first day of the Event Period,
plus 100% of the amount thereof (``Loss Allocation Cap''),\39\ provided
that the Participant complies with the requirements of the termination
process in proposed Section 6(b) of Rule 4. DTC may retain the entire
Actual Participants Fund Deposit of a Participant subject to loss
allocation, up to the Participant's Loss Allocation Cap. If a
Participant's Loss Allocation Cap exceeds the Participant's then-
current Required Participants Fund Deposit, it must still pay the
excess amount.
---------------------------------------------------------------------------

    \39\ The alternative limit in clause (b) would be eliminated in
proposed Section 8(b) in favor of a single defined standard. See
supra note 24.
---------------------------------------------------------------------------

    As proposed, Participants would have five (5) Business Days from
the issuance of the first Loss Allocation Notice in any round to decide
whether to terminate its business with DTC, and thereby benefit from
its Loss Allocation Cap. The start of each round \40\ would allow a
Participant the opportunity to notify DTC of its election to terminate
its business with DTC after satisfaction of the losses allocated in
such round.
---------------------------------------------------------------------------

    \40\ i.e., a Participant will only have the opportunity to
terminate after the first Loss Allocation Notice in any round, and
not after each Loss Allocation Notice in any round.
---------------------------------------------------------------------------

    Specifically, the first round and each subsequent round of loss
allocation would allocate losses up to a round cap of the aggregate of
all Loss Allocation Caps of those Participants included in the round.
If a Participant provides notice of its election to terminate its
business with DTC, it would be subject to loss allocation in that
round, up to its Loss Allocation Cap. If the first round of loss
allocation does not fully cover DTC's losses, a second round will be
noticed to those Participants that did not elect to terminate in the
previous round. As noted above, the amount of any second or subsequent
round cap may differ from the first or preceding round cap because
there may be fewer Participants in a second or subsequent round if
Participants elect to terminate their business with DTC as provided in
proposed Section 8(b) of Rule 4 following the first Loss Allocation
Notice in any round.
    Pursuant to the proposed rule change, in order to avail itself of
its Loss Allocation Cap, the Participant would need to follow the
requirements in proposed Section 6(b) of Rule 4. In addition to
retaining the substance of the existing requirements for any
termination that are set forth in current Section 6 of Rule 4, proposed
Section 6 also would provide that a Participant that provides a
Termination Notice in connection with a loss allocation must: (1)
Specify in the Termination Notice an effective date of termination
(``Participant Termination Date''), which date shall be no later than
ten (10) Business Days following the last day of the applicable Loss
Allocation Termination Notification Period; (2) cease all activities
and use of the Corporation's services other than activities and
services necessary to terminate the business of the Participant with
DTC; and (3) ensure that all activities and use of DTC services by such
Participant cease on or prior to the Participant Termination Date.

    The proposed rule changes are designed to enable DTC to continue
the loss allocation process in successive rounds until all of DTC's
losses are allocated. Until all losses related to an Event Period are
allocated and paid, DTC may retain the entire Actual Participants Fund
Deposit of a Participant subject to loss allocation, up to the
Participant's Loss Allocation Cap.
    The proposed rule changes relating to capping terminating
Participants' loss allocation exposure and related changes to the
termination process are set forth in proposed Sections 5, 6, and 8 of
Rule 4.
C. Clarifying Changes Relating to Loss Allocation for Non-Default
Events
    The proposed rule changes are intended to make the provisions in
the Rules governing loss allocation more transparent and accessible to
Participants. In particular, DTC is proposing the following change
relating to loss allocation to provide clarity around the governance
for the allocation of losses arising from a non-default event.\41\
---------------------------------------------------------------------------

    \41\ Non-default losses may arise from events such as damage to
physical assets, a cyber-attack, or custody and investment losses.
---------------------------------------------------------------------------

    Currently, DTC can use the Participants Fund to satisfy losses and
liabilities arising from a Participant Default or arising from an event
that is not due to a Participant Default (i.e., a non-default loss),
provided that such loss or liability is incident to the business of
DTC.\42\
---------------------------------------------------------------------------

    \42\ See supra note 11.
---------------------------------------------------------------------------

    DTC is proposing to clarify the governance around non-default
losses that would trigger loss allocation to Participants by specifying
that the Board of Directors would have to determine that there is a
non-default loss that may be a significant and substantial loss or
liability that may materially impair the ability of DTC to provide
clearance and settlement services in an orderly manner and will
potentially generate losses to be mutualized among the Participants in
order to ensure that DTC may continue to offer clearance and settlement
services in an orderly manner. The proposed rule change would provide
that DTC would then be required to promptly notify Participants of this
determination, which is referred to in the proposed rule as a Declared
Non-Default Loss Event, as discussed above.
    Finally, as previously discussed, pursuant to the proposed rule
change, proposed Rule 4 would include language to clarify that (i) the
Corporate Contribution would apply to losses or liabilities arising
from a Default Loss Event or a Declared Non-Default Loss Event, and
(ii) the loss allocation waterfall would be applied in the same manner
regardless of whether a loss arises from a Default Loss Event or a
Declared Non-Default Loss Event.
    The proposed rule changes relating to Declared Non-Default Loss
Events and Participants' obligations for such events are set forth in
proposed Section 5 of Rule 4.
D. Loss Allocation Waterfall Comparison
    The following example illustrates the differences between the
current and proposed loss allocation provisions:
    Assumptions:
    (i) Participant A defaults on a Business Day (Day 1). On the same
day, DTC ceases to act for Participant A, and notifies Participants of
the cease to act. After applying Participant A's Participants Fund and
liquidating Participant A's Collateral, DTC has a loss of $350 million.
    (ii) Participant X voluntarily retires from membership five
Business Days after DTC ceases to act for Participant A (Day 6).
    (iii) Participant B defaults seven Business Days after DTC ceases
to act for Participant A (Day 8). On the same day, DTC ceases to act
for Participant B, and notifies Participants of the cease to act. After
applying Participant B's Participants Fund and liquidating Participant
B's Collateral, DTC has a loss of $350 million.
    (iv) The current DTC loss allocation provisions do not require a
corporate contribution. DTC may, in its sole discretion and in such
amounts as DTC may determine, charge the existing retained earnings and
undivided profits of DTC. For the purposes of this example, it is
assumed that DTC has determined, in its discretion, that DTC will
contribute 25% of its retained earnings and undivided profits. The
amount of DTC's retained earnings and undivided profits is $364
million.
    (v) DTC's General Business Risk Capital Requirement is $158
million.
    Current Loss Allocation:
    Under the current loss allocation provisions, with respect to the
losses arising out of Participant A's default, DTC will contribute $91
million ($364 million * 25%) from retained earnings and undivided
profits, and then allocate the remaining loss of $259 million ($350
million - $91 million) to Participants.
    With respect to the losses arising out of Participant B's default,
DTC will contribute $68 million (($364 million - $91 million) * 25%)
from the balance of its retained earnings and undivided profits, and
then allocate the remaining loss of $282 million ($350 million - $68
million) to Participants. Because Participant X voluntarily retired
before DTC ceased to act for Participant B, Participant X is not
subject to loss allocation with respect to losses arising out of
Participant B's default.
    Altogether, with respect to the losses arising out of defaults of
Participant A and Participant B, DTC will contribute $159 million of
retained earnings and undivided profits, and will allocate losses of
$541 million to Participants.
    Proposed Loss Allocation:
    Under the proposed loss allocation provisions, a Default Loss Event
with respect to Participant A's default would have occurred on Day 1,
and a Default Loss Event with respect to Participant B's default would
have occurred on Day 8. Because the Default Loss Events occurred during
a 10-Business Day period they would be grouped together into an Event
Period for purposes of allocating losses to Participants. The Event
Period would begin on the 1st Business Day and end on the 10th Business
Day.
    With respect to losses arising out of Participant A's default, DTC
would apply a Corporate Contribution of $79 million ($158 million *
50%) and then allocate the remaining loss of $271 million ($350 million
- $79 million) to Participants. With respect to losses arising out of
Participant B's default, DTC would not apply a Corporate Contribution
since it would have already contributed the maximum Corporate
Contribution of 50% of its General Business Risk Capital Requirement.
DTC would allocate the loss of $350 million arising out of Participant
B's default to Participants. Because Participant X was a Participant on
the first day of the Event Period, it would be subject to loss
allocation with respect to all events occurring during the Event
Period, even if the event occurred after its retirement. Therefore,
Participant X would be subject to loss allocation with respect to
Participant B's default.
    Altogether, with respect to the losses arising out of defaults of
Participant A and Participant B, DTC would apply a Corporate
Contribution of $79 million and allocate losses of $621 million to
Participants.
    The principal differences in the above example are due to: (i) The
proposed changes to the calculation and application of Corporate
Contribution, and (ii) the proposed introduction of an Event Period.

E. Clarifying Changes Regarding Voluntary Retirement
    Section 1 of Rule 2 provides that a Participant may terminate its
business with DTC by notifying DTC in the appropriate manner.\43\ To
provide additional transparency to Participants with respect to the
voluntary retirement of a Participant, and to align, where appropriate,
with the proposed rule changes of NSCC and FICC with respect to
voluntary termination, DTC is proposing to add proposed Section 6(a) to
Rule 4, which would be titled, ``Upon Any Voluntary Retirement.''
Proposed Section 6(a) of Rule 4 would (i) clarify the requirements \44\
for a Participant that wants to voluntarily terminate its business with
DTC, and (ii) address the situation where a Participant submits a
Voluntary Retirement Notice (defined below) and subsequently receives a
Settlement Charge Notice or the first Loss Allocation Notice in a round
on or prior to the Voluntary Retirement Date (defined below).
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    \43\ Section 1 of Rule 2 provides, in relevant part, that ``[a]
Participant may terminate its business with the Corporation by
notifying the Corporation as provided in Sections 7 or 8 of Rule 4
or, if for a reason other than those specified in said Sections 7
and 8, by notifying the Corporation thereof; the Participant shall,
upon receipt of such notice by the Corporation, cease to be a
Participant. In the event that a Participant shall cease to be a
Participant, the Corporation shall thereupon cease to make its
services available to the Participant, except that the Corporation
may perform services on behalf of the Participant or its successor
in interest necessary to terminate the business of the Participant
or its successor with the Corporation, and the Participant or its
successor shall pay to the Corporation the fees and charges provided
by these Rules with respect to services performed by the Corporation
subsequent to the time when the Participant ceases to be a
Participant.'' Supra note 5. DTC is proposing to modify the
provision to clarify that the termination would be subject to
proposed Section 6 of Rule 4.
    \44\ The requirements would reflect current practice.
---------------------------------------------------------------------------

    Specifically, DTC is proposing that if a Participant elects to
terminate its business with DTC pursuant to Section 1 of Rule 2 for
reasons other than those specified in proposed Section 8 (a ``Voluntary
Retirement''), the Participant would be required to:
    (1) Provide a written notice of such termination to DTC
(``Voluntary Retirement Notice''), as provided for in Section 1 of Rule
2;
    (2) specify in the Voluntary Retirement Notice a desired date for
the termination of its business with DTC (``Voluntary Retirement
Date'');
    (3) cease all activities and use of DTC services other than
activities and services necessary to terminate the business of the
Participant with DTC; and
    (4) ensure that all activities and use of DTC services by the
Participant cease on or prior to the Voluntary Retirement Date.\45\
---------------------------------------------------------------------------

    \45\ Typically, a Participant would ultimately submit a notice
after having ceased its transactions and transferred all securities
out of its Account.
---------------------------------------------------------------------------

    Proposed Section 6(a) of Rule 4 would provide that if the
Participant fails to comply with the requirements of proposed Section
6(a), its Voluntary Retirement Notice would be deemed void.\46\
---------------------------------------------------------------------------

    \46\ The purpose of this proposed provision is to clarify that a
failure of a Participant to comply with proposed Section 6(a) of
Rule 4 would mean that the Participant would continue to be a
Participant, as if the Voluntary Retirement Notice had not been
received by DTC. For example, Participant A submits a Voluntary
Retirement Notice to DTC on April 1st and indicates a Voluntary
Retirement Date of April 15th, but fails to comply with the
requirements of proposed Section 6(a) of Rule 4 by the Voluntary
Retirement Date. The Participant would continue to be a Participant
after the Voluntary Retirement Date. If an Event Period subsequently
occurs before the Participant submits a new Voluntary Retirement
Notice and voluntarily retires in compliance with proposed Section
6(a), such Participant would be obligated to pay its pro rata shares
of losses and liabilities arising from that Event Period.
---------------------------------------------------------------------------

    Further, proposed Section 6(a) of Rule 4 would provide that if a
Participant submits a Voluntary Retirement Notice and subsequently
receives a Settlement Charge Notice or the first Loss Allocation Notice
in a round on or prior to the Voluntary Retirement Date, such
Participant must timely submit a Termination Notice in order to benefit
from its Settlement Charge Cap or Loss Allocation Cap, as the case may
be. In such a case, the Termination Notice would supersede and void the
pending Voluntary Retirement Notice submitted by the Participant.
F. Changes to the Retention Time for the Actual Participants Fund
Deposit of a Former Participant
    Current Rule 4 provides that after three months from when a Person
has ceased to be a Participant, DTC shall return to such Person (or its
successor in interest or legal representative) the amount of the Actual
Participants Fund Deposit of the former Participant plus accrued and
unpaid interest to the date of such payment (including any amount added
to the Actual Participants Fund Deposit of the former Participant
through the sale of the Participant's Preferred Stock), provided that
DTC receives such indemnities and guarantees as DTC deems satisfactory
with respect to the matured and contingent obligations of the former
Participant to DTC. Otherwise, within four years after a Person has
ceased to be a Participant, DTC shall return to such Person (or its
successor in interest or legal representative) the amount of the Actual
Participants Fund Deposit of the former Participant plus accrued and
unpaid interest to the date of such payment, except that DTC may offset
against such payment the amount of any known loss or liability to DTC
arising out of or related to the obligations of the former Participant
to DTC.
    DTC is proposing to reduce the time, after a Participant ceases to
be a Participant, at which DTC would be required to return the amount
of the Actual Participants Fund Deposit of the former Participant plus
accrued and unpaid interest, whether the Participant ceases to be such
because it elected to terminate its business with DTC in response to a
Settlement Charge Notice or Loss Allocation Notice or otherwise.
Pursuant to the proposed rule change, the time period would be reduced
from four (4) years to two (2) years. All other requirements relating
to the return of the Actual Participants Fund Deposit would remain the
same.
    The four (4) year retention period was implemented at a time when
there were more deposits and processing of physical certificates, as
well as added risks related to manual processing, and related claims
could surface many years after an alleged event. DTC believes that the
change to two (2) years is appropriate because, currently, as DTC and
the industry continue to move toward automation and dematerialization,
claims typically surface more quickly. Therefore, DTC believes that a
shorter retention period of two (2) years would be sufficient to
maintain a reasonable level of coverage for possible claims arising in
connection with the activities of a former Participant, while allowing
DTC to provide some relief to former Participants by returning their
Actual Participants Fund Deposits more quickly.
(ii) Proposed Rule Changes
    The foregoing changes as well as other changes (including a number
of technical and conforming changes) that DTC is proposing in order to
improve the transparency and accessibility of Rule 4 are described in
detail below.
A. Changes Relating to Participant Default, Pro Rata Settlement Charges
and Loss Allocation
Section 3
    As discussed above, current Section 3 of Rule 4 provides that, if a
Participant fails to satisfy an obligation to DTC, DTC may, in such
order and in such amounts as DTC determines, apply the Actual
Participants Fund Deposit of the defaulting Participant, Pledge the
shares of Preferred Stock of the defaulting

Participant to its lenders as collateral security for a loan, and/or
sell the shares of Preferred Stock of the defaulting Participant to
other Participants. Pursuant to the proposed rule change, Section 3
would retain most of these provisions, with the following
modifications:
    DTC proposes to add the term ``Participant Default'' in proposed
Section 3 as a defined term for the failure of a Participant to satisfy
an obligation to DTC, for drafting clarity and use in related
provisions. The proposed rule change would reflect that the defined
term ``Participant Default,'' referring to the failure of a Participant
to satisfy any obligation to DTC, includes the failure of a Defaulting
Participant to satisfy its obligations as provided in Rule 9(B). In
addition, the proposed rule change clarifies that, in the case of a
Participant Default, DTC would first apply the Actual Participants Fund
Deposit of the Participant to any unsatisfied obligations, before
taking any other actions. This proposed clarification would reflect the
current practice of DTC, and would provide Participants with enhanced
transparency into the actions DTC would take with respect to the
Participants Fund deposits and Participants Investment of a Participant
that has failed to satisfy its obligations to DTC.
    DTC proposes to correct the term ``End-of-Day Facility,'' to the
existing defined term ``End-of-Day Credit Facility.'' DTC further
proposes to clarify that, if DTC Pledges some or all of the shares of
Preferred Stock of a Participant to its lenders as collateral security
for a loan under the End-of-Day Credit Facility, DTC would apply the
proceeds of such loan to the obligation the Participant had failed to
satisfy, which is not expressly stated in current Section 3 of Rule 4.
    In addition, DTC is proposing to make three ministerial changes to
enhance readability by: (i) Removing the duplicative ``in,'' in the
phrase ``in such order and in such amounts,'' (ii) replacing the word
``eliminate'' with ``satisfy,'' and (iii) to conform to proposed
changes, renumbering the list of actions that DTC may take when there
is a Participant Default.
    DTC is also proposing to add the heading ``Application of
Participants Fund Deposits and Preferred Stock Investments to
Participant Default'' to Section 3.
Section 4 and Section 5
    As noted above, current Section 4 of Rule 4 provides that if DTC
incurs a loss or liability which is not satisfied by charging the
Participant responsible for the loss pursuant to Section 3 of Rule 4,
then DTC may, in any order and in any amount as DTC may determine, in
its sole discretion, to the extent necessary to satisfy such loss or
liability, ratably apply some or all of the Actual Participants Fund
Deposits of all other Participants to such loss or liability and/or
charge the existing retained earnings and undivided profits of DTC.
This provision relates to losses and liabilities that may be due to the
failure of a Participant to satisfy obligations to DTC, if the Actual
Participants Fund Deposit of that Participant does not fully satisfy
the obligation, or to losses and liabilities for which no single
Participant is obligated, i.e., a ``non-default loss.''
    As discussed above, current Rule 4 currently provides a single set
of tools and common processes for using the Participants Fund as both a
liquidity resource and for the satisfaction of other losses and
liabilities. The proposed rule change would provide separate liquidity
and loss allocation provisions. More specifically, proposed Section 4
of Rule 4 would reflect the process for a ``pro rata settlement
charge,'' the application of the Actual Participants Fund Deposits of
non-defaulting Participants for liquidity purposes in order to complete
settlement, when a Defaulting Participant fails to satisfy its
settlement obligation and the amount charged to its Actual Participants
Fund Deposit by DTC pursuant to Section 3 of Rule 4 is insufficient to
complete settlement. Proposed Section 5 of Rule 4 would contain the
proposed loss allocation provisions.
Proposed Section 4
    Pursuant to the proposed rule change, current Section 4 would be
replaced in its entirety by proposed Section 4, and titled
``Application of Participants Fund Deposits of Non-Defaulting
Participants.'' First, for clarity, proposed Section 4 would expressly
state that ``[t]he Participants Fund shall constitute a liquidity
resource which may be applied by the Corporation in such amounts as the
Corporation shall determine, in its sole discretion, to fund settlement
if there is a Defaulting Participant and the amount charged to the
Actual Participants Fund Deposit of the Defaulting Participant pursuant
to Section 3 of this Rule is not sufficient to complete settlement. In
that case, the Corporation may apply the Actual Participants Fund
Deposits of Participants other than the Defaulting Participant (each, a
``non-defaulting Participant'') as provided in this Section and/or
apply such other liquidity resources as may be available to the
Corporation from time to time, including the End-of-Day Credit
Facility.''
    Proposed Section 4 would retain the current principle that DTC must
notify Participants and the Commission when it applies the Participants
Fund deposits of non-defaulting Participants, by stating that if the
Actual Participants Fund Deposits of non-defaulting Participants are
applied to complete settlement, DTC must promptly notify each
Participant and the Commission of the amount of the charge and the
reasons therefor, and would define such notice as a Settlement Charge
Notice.
    Proposed Section 4 would retain the current calculation of pro rata
charges by providing that each non-defaulting Participant's pro rata
share \47\ of any such application of the Participants Fund, defined as
a ``pro rata settlement charge,'' would be equal to (i) its Required
Participants Fund Deposit, as such Required Participants Fund Deposit
was fixed on the Business Day of such application \48\ less its
Additional Participants Fund Deposit, if any, on that day, divided by
(ii) the sum of the Required Participants Fund Deposits of all non-
defaulting Participants, as such Required Participants Fund Deposits
were fixed on that day, less the sum of the Additional Participants
Fund Deposits, if any, of such non-defaulting Participants on that day.
---------------------------------------------------------------------------

    \47\ See supra note 20.
    \48\ See supra note 21.
---------------------------------------------------------------------------

    Proposed Section 4 would also provide a period of time within which
a Participant could notify DTC of its election to terminate its
business with DTC and thereby cap its liability, by providing that a
Participant would have a period of five (5) Business Days following the
issuance of a Settlement Charge Notice (``Settlement Charge Termination
Notification Period'') to notify DTC of its election to terminate its
business with DTC pursuant to proposed Section 8(a), and thereby
benefit from its Settlement Charge Cap, as set forth in proposed
Section 8(a).\49\ Proposed Section 4 would also require that any
Participant that gives DTC notice of its election to terminate its
business with DTC must comply with proposed Section 6(b) of Rule 4,\50\
and if it does not, its election to terminate would be deemed void.
---------------------------------------------------------------------------

    \49\ See supra note 22.
    \50\ Proposed Section 6(b) is discussed below.
---------------------------------------------------------------------------

    Proposed Section 4 would further provide that DTC may retain the
entire amount of the Actual Participants Fund Deposit of a Participant
subject to a pro rata settlement charge, up to the amount of the
Participant's Settlement Charge

Cap in accordance with proposed Section 8(a) of Rule 4.
    Current Section 5 of Rule 4 provides that ``[e]xcept as provided in
Section 8 of this Rule, if a pro rata charge is made pursuant to
Section 4 of the current Rule against the Required Participants Fund
Deposit of a Participant, and, as a consequence, the Actual
Participants Fund Deposit of such Participant is less than its Required
Participants Fund Deposit, the Participant shall, upon the demand of
the Corporation, within such time as the Corporation shall require,
Deposit to the Participants Fund the amount in cash needed to eliminate
any resulting deficiency in its Required Participants Fund Deposit. If
the Participant shall fail to make such deposit to the Participants
Fund, the Corporation may take disciplinary action against the
Participant pursuant to these Rules. Any disciplinary action which the
Corporation takes pursuant to these Rules, or the voluntary or
involuntary cessation of participation by the Participant, shall not
affect the obligations of the Participant to the Corporation or any
remedy to which the Corporation may be entitled under applicable law.''
    Proposed Section 4 would incorporate current Section 5 of Rule 4,
modified as follows: (i) Conformed to reflect the consolidation of
Section 5 into proposed Section 4, (ii) replacement of ``Except as
provided in'' with ``Subject to,'' to harmonize with language used
elsewhere in proposed Rule 4, and (iii) corrections of two
typographical errors, in order to accurately reflect that the Actual
Participants Fund Deposit of a Participant would be applied, and not
the Required Participants Fund Deposit, and to capitalize the word
``deposit'' because it is a defined term.
Proposed Section 5
    Proposed Section 5 of Rule 4 would address the substantially new
and revised proposed loss allocation, which would apply to losses and
liabilities relating to or arising out of a Default Loss Event or a
Declared Non-Default Loss Event. Pursuant to the proposed rule change,
DTC would restructure and modify its existing loss allocation waterfall
as described below. The heading ``Loss Allocation Waterfall'' would be
added to proposed Section 5.
    Proposed Section 5 would establish the concept of an ``Event
Period'' to provide for a clear and transparent way of handling
multiple loss events occurring in a period of ten (10) Business Days,
which would be grouped into an Event Period. As stated above, both
Default Loss Events and Declared Non-Default Loss Events could occur
within the same Event Period.
    The Event Period with respect to a Default Loss Event would begin
on the day on which DTC notifies Participants that it has ceased to act
for the Participant (or the next Business Day, if such day is not a
Business Day). In the case of a Declared Non-Default Loss Event, the
Event Period would begin on the day that DTC notifies Participants of
the Declared Non-Default Loss Event (or the next Business Day, if such
day is not a Business Day). Proposed Section 5 would provide that if a
subsequent Default Loss Event or Declared Non-Default Loss Event occurs
during an Event Period, any losses or liabilities arising out of or
relating to any such subsequent event would be resolved as losses or
liabilities that are part of the same Event Period, without extending
the duration of such Event Period.
    As proposed, each CTA Participant would be obligated to DTC for the
entire amount of any loss or liability incurred by DTC arising out of
or relating to any Default Loss Event with respect to such CTA
Participant. Under the proposal, to the extent that such loss or
liability is not satisfied pursuant to proposed Section 3 of Rule 4,
DTC would apply a Corporate Contribution thereto and charge the
remaining amount of such loss or liability as provided in proposed
Section 5.
    Under proposed Section 5, the loss allocation waterfall would begin
with a new mandatory Corporate Contribution from DTC. Rule 4 currently
provides that the use of any retained earnings and undivided profits by
DTC is a voluntary contribution of a discretionary amount of its
retained earnings. Proposed Section 5 of Rule 4 would, instead, require
a defined corporate contribution to losses and liabilities that are
incurred by DTC with respect to an Event Period. As proposed, the
Corporate Contribution to losses or liabilities that are incurred by
DTC with respect to an Event Period would be defined as an amount that
is equal to fifty percent (50%) of the amount calculated by DTC in
respect of its General Business Risk Capital Requirement as of the end
of the calendar quarter immediately preceding the Event Period.\51\
DTC's General Business Risk Capital Requirement, as defined in DTC's
Clearing Agency Policy on Capital Requirements,\52\ is, at a minimum,
equal to the regulatory capital that DTC is required to maintain in
compliance with Rule 17Ad-22(e)(15) under the Act.\53\
---------------------------------------------------------------------------

    \51\ See supra note 26.
    \52\ See supra note 27.
    \53\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    If DTC applies the Corporate Contribution to a loss or liability
arising out of or relating to one or more Default Loss Events or
Declared Non-Default Loss Events relating to an Event Period, then for
any subsequent Event Periods that occur during the next two hundred
fifty (250) Business Days, the Corporate Contribution would be reduced
to the remaining unused portion of the Corporate Contribution amount
that was applied for the first Event Period.\54\ Proposed Section 5
would require DTC to notify Participants of any such reduction to the
Corporate Contribution.
---------------------------------------------------------------------------

    \54\ See supra note 30.
---------------------------------------------------------------------------

    Proposed Section 5 of Rule 4 would provide that nothing in the
Rules would prevent DTC from voluntarily applying amounts greater than
the Corporate Contribution against any DTC loss or liability, if the
Board of Directors, in its sole discretion, believes such to be
appropriate under the factual situation existing at the time.
    Proposed Section 5 of Rule 4 would provide that DTC shall apply the
Corporate Contribution to losses and liabilities that arise out of or
relate to one or more Default Loss Events and/or Declared Non-Default
Loss Events that occur within an Event Period. The proposed rule change
also provides that if losses and liabilities with respect to such Event
Period remain unsatisfied following application of the Corporate
Contribution, DTC would allocate such losses and liabilities to
Participants, as described below.
    Proposed Section 5 of Rule 4 would state that each Participant that
is a Participant on the first day of an Event Period would be obligated
to pay its pro rata share of losses and liabilities arising out of or
relating to each Default Loss Event (other than a Default Loss Event
with respect to which it is the CTA Participant) and each Declared Non-
Default Loss Event occurring during the Event Period. In addition,
proposed Section 5 of Rule 4 would make it clear that any CTA
Participant for which DTC ceases to act on a non-Business Day,
triggering an Event Period that commences on the next Business Day,
would be deemed to be a Participant on the first day of that Event
Period. In addition, DTC is proposing to clarify that after a first
round of loss allocations with respect to an Event Period, only
Participants that have not submitted a Termination Notice in accordance
with proposed Section 6(b) of Rule 4 would be subject to loss
allocations with respect to subsequent rounds relating to that Event
Period. The proposed change would also provide that DTC may retain the
entire Actual Participants Fund

Deposit of a Participant subject to loss allocation, up to the
Participant's Loss Allocation Cap in accordance with proposed Section
8(b) of Rule 4.
    Pursuant to the proposed rule change, DTC would notify Participants
subject to loss allocation of the amounts being allocated to them by a
Loss Allocation Notice in successive rounds of loss allocations.
Proposed Section 5 would state that a loss allocation ``round'' would
mean a series of loss allocations relating to an Event Period, the
aggregate amount of which is limited by the sum of the Loss Allocation
Caps of affected Participants (a ``round cap''). When the aggregate
amount of losses allocated in a round equals the round cap, any
additional losses relating to the applicable Event Period would be
allocated in one or more subsequent rounds, in each case subject to a
round cap for that round. DTC may continue the loss allocation process
in successive rounds until all losses from the Event Period are
allocated among Participants that have not submitted a Termination
Notice in accordance with proposed Section 6(b) of Rule 4.
    Each Loss Allocation Notice would specify the relevant Event Period
and the round to which it relates. The first Loss Allocation Notice in
any first, second, or subsequent round would expressly state that such
Loss Allocation Notice reflects the beginning of the first, second, or
subsequent round, as the case may be, and that each Participant in that
round has five (5) Business Days from the issuance of such first Loss
Allocation Notice for the round \55\ to notify DTC of its election to
terminate its business with DTC pursuant to proposed Section 8(b) of
Rule 4, and thereby benefit from its Loss Allocation Cap.\56\
---------------------------------------------------------------------------

    \55\ i.e., the Loss Allocation Termination Notification Period
for that round.
    \56\ See supra note 37.
---------------------------------------------------------------------------

    Loss allocation obligations would continue to be calculated based
upon a Participant's pro rata share of the loss.\57\ As proposed, each
Participant's pro rata share of losses and liabilities to be allocated
in any round would be equal to (i) (A) its Required Participants Fund
Deposit, as such Required Participants Fund Deposit was fixed on the
first day of the Event Period,\58\ less (B) its Additional Participants
Fund Deposit, if any, on such day, divided by (ii) (A) the sum of the
Required Participants Fund Deposits of all Participants subject to loss
allocation in such round, as such Required Participants Fund Deposits
were fixed on such day, less (B) the sum of any Additional Participants
Fund Deposits, if any, of all Participants subject to loss allocation
in such round on such day.\59\
---------------------------------------------------------------------------

    \57\ See supra note 20.
    \58\ See supra note 21.
    \59\ See supra note 16.
---------------------------------------------------------------------------

    As proposed, Participants would have two (2) Business Days after
DTC issues a first round Loss Allocation Notice to pay the amount
specified in any such notice. In contrast to the current Section 4,
under which DTC may apply the Actual Participants Fund Deposits of
Participants directly to the satisfaction of loss allocation amounts,
under proposed Section 5, DTC would require Participants to pay their
loss allocation amounts (leaving their Actual Participants Fund
Deposits intact).\60\ On a subsequent round (i.e., if the first round
did not cover the entire loss of the Event Period because DTC was only
able to allocate up to the sum of the Loss Allocation Caps of those
Participants included in the round), Participants would also have two
(2) Business Days after notice by DTC to pay their loss allocation
amounts (again subject to their Loss Allocation Caps), unless a
Participant timely notified (or will timely notify) DTC of its election
to terminate its business with DTC with respect to a prior loss
allocation round.
---------------------------------------------------------------------------

    \60\ See supra note 36.
---------------------------------------------------------------------------

    Under the proposal, if a Participant fails to make its required
payment in respect of a Loss Allocation Notice by the time such payment
is due, DTC would have the right to proceed against such Participant as
a Participant that has failed to satisfy an obligation in accordance
with proposed Section 3 of Rule 4 described above. For additional
clarity, proposed Section 5 of Rule 4 would state that all amounts due
from a Participant pursuant to proposed Section 5 of Rule 4 may be
debited from the Settlement Account of such Participant. Proposed
Section 5 of Rule 4 would also provide that DTC may retain the entire
Actual Participants Fund Deposit of a Participant subject to loss
allocation, up to the Participant's Loss Allocation Cap in accordance
with Section 8(b) of Rule 4. Participants that wish to terminate their
business with DTC would be required to comply with the requirements in
proposed Section 6(b) of Rule 4, described further below. Specifically,
proposed Section 5 would provide that if, after notifying DTC of its
election to terminate its business with DTC pursuant to proposed
Section 8(b) of Rule 4, the Participant fails to comply with the
provisions of proposed Section 6(b) of Rule 4, its notice of
termination would be deemed void and any further losses resulting from
the applicable Event Period may be allocated against it as if it had
not given such notice.
Section 6
    Section 6 of Rule 4 currently provides that whenever a Participant
ceases to be such, it continues to be obligated (a) to satisfy any
deficiency in the amount of its Required Participants Fund Deposit and/
or Required Preferred Stock Investment that it did not satisfy prior to
such time, including (i) any deficiency resulting from a pro rata
charge with respect to which the Participant has given notice to DTC of
its election to terminate its business with DTC pursuant to Section 8
of Rule 4 and (ii) any deficiency the Participant is required to
satisfy pursuant to Sections 3 (an obligation that a Participant failed
to satisfy) or 5 (the requirement of a Participant to eliminate the
deficiency in its Required Participants Fund Deposit) of Rule 4 and (b)
to discharge any liability of the Participant to DTC resulting from the
transactions of the Participant open at the time it ceases to be a
Participant or on account of transactions occurring while it was a
Participant.
    The heading ``Obligations of Participant Upon Termination'' would
be added to Section 6 of Rule 4. As discussed above, DTC is proposing
to add proposed Section 6(a) to Rule 4, which would (i) clarify the
requirements for the Voluntary Retirement of a Participant, and (ii)
address the situation where a Participant submits a Voluntary
Retirement Notice and subsequently receives a Settlement Charge Cap or
the first Loss Allocation Notice in a round on or prior to the
Voluntary Retirement Date. Proposed Section 6(a) of Rule 4 would also
provide that if a Participant submits a Voluntary Retirement Notice and
subsequently receives a Settlement Charge Notice or the first Loss
Allocation Notice in a round on or prior to the Voluntary Retirement
Date, such Participant must timely submit a Termination Notice in order
to benefit from its Settlement Charge Cap or Loss Allocation Cap,
respectively. In such a case, the Termination Notice would supersede
and void the pending Voluntary Retirement Notice submitted by the
Participant.
    DTC is proposing to add Proposed Section 6(b), titled ``Upon
Termination Following Settlement Charge or Loss Allocation.'' Proposed
Section 6(b) would state that if a Participant timely notifies DTC of
its election to terminate its business with DTC in respect of a pro
rata settlement charge as set forth in proposed Section 4 of Rule 4 or
a loss allocation as set forth in proposed

Section 5 of Rule 4, defined as a ``Termination Notice'', the
Participant would be required to: (1) Specify in the Termination Notice
a Participant Termination Date, which date shall be no later than ten
Business Days following the last day of the applicable Settlement
Charge Termination Notification Period or Loss Allocation Termination
Notification Period; (2) cease all activities and use of the
Corporation's services other than activities and services necessary to
terminate the business of the Participant with DTC; and (3) ensure that
all activities and use of DTC services by such Participant cease on or
prior to the Participant Termination Date.
    Proposed Section 6(b) of Rule 4 would provide that a Participant
that terminates its business with DTC in compliance with proposed
Section 6(b) would remain obligated for its pro rata share of losses
and liabilities with respect to any Event Period for which it is
otherwise obligated; however, its aggregate obligation would be limited
to the amount of its Loss Allocation Cap (as fixed in the round for
which it withdrew).
    DTC is proposing to include a sentence in proposed Section 6(b) to
make it clear that if the Participant fails to comply with the
requirements set forth in this section, its Termination Notice will be
deemed void, and the Participant will remain subject to further pro
rata settlement charges pursuant to proposed Section 4 of Rule 4 or
loss allocations pursuant to proposed Section 5 of Rule 4, as
applicable, as if it had not given such notice.
    For clarity, DTC is proposing to consolidate the requirements from
current Section 6 of Rule 4 into proposed Section 6(c) of Rule 4,
titled ``After Any Termination,'' and modify them to conform to other
proposed rule changes. In particular, DTC is proposing to clarify that
a Participant that ceases to be such would continue to be subject to
proposed Section 5 of Rule 4 for any Event Period for which it was a
Participant on the first day of the Event Period. Proposed Section 6(c)
of Rule 4 would state that whenever a Participant ceases to be such, it
would continue to be obligated (i) to satisfy any deficiency in the
amounts of its Required Participants Fund Deposit and/or Required
Preferred Stock Investment that it did not satisfy prior to such time,
including any deficiency the Participant is required to satisfy
pursuant to proposed Sections 3 or 4 of Rule 4, (ii) subject to
proposed Section 8, to satisfy any loss allocation pursuant to proposed
Section 5 of Rule 4, and (iii) to discharge any liability of the
Participant to DTC resulting from the transactions of the Participant
open at the time it ceases to be a Participant or on account of
transactions occurring while it was a Participant.
Section 8
    Pursuant to the proposed rule change, Section 8 would be titled
``Termination; Obligation for Pro Rata Settlement Charges and Loss
Allocations,'' and would be divided among proposed Section 8(a)
``Settlement Charges,'' proposed Section 8(b) ``Loss Allocations,''
proposed Section 8(c) ``Maximum Obligation,'' and proposed Section 8(d)
``Obligation to Replenish Deposit.''
    Pursuant to proposed Section 8(a), if a Participant, within five
(5) Business Days after issuance of a Settlement Charge Notice pursuant
to proposed Section 4 of Rule 4, gives notice to DTC of its election to
terminate its business with DTC, the Participant would remain obligated
for (i) its pro rata settlement charge that was the subject of such
Settlement Charge Notice and (ii) all other pro rata settlement charges
made by DTC until the Participant Termination Date. Subject to proposed
Section 8(c), the terminating Participant's obligation would be limited
to the amount of its Aggregate Required Deposit and Investment, as
fixed on the day of the pro rata settlement charge that was the subject
of the Settlement Charge Notice, plus 100% of the amount thereof, which
is substantively the same limitation as provided for pro rata charges
in current Section 8 of Rule 4.\61\
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    \61\ See supra note 24.
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    Pursuant to proposed Section 8(b), if a Participant, within five
(5) Business Days after the issuance of a first Loss Allocation Notice
for any round pursuant to proposed Section 5 of Rule 4 gives notice to
DTC of its election to terminate its business with DTC, the Participant
would remain liable for (i) the loss allocation that was the subject of
such notice and (ii) all other loss allocations made by DTC with
respect to the same Event Period. Subject to proposed Section 8(c), the
obligation of a Participant which elects to terminate its business with
DTC would be limited to the amount of its Aggregate Required Deposit
and Investment, as fixed on the first day of the Event Period, plus
100% of the amount thereof, which is substantively the same limitation
as provided for pro rata charges in current Section 8 of Rule 4.\62\
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    \62\ See supra note 39.
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    Proposed Section 8(c) would provide that under no circumstances
would the aggregate obligation of a Participant under proposed Section
8(a) and proposed Section 8(b) exceed the amount of its Aggregate
Required Deposit and Investment, as fixed on the earlier of the (i) day
of the pro rata settlement charge that was the subject of the
Settlement Charge Notice giving rise to a Termination Notice, and (ii)
first day of the Event Period that was the subject of the first Loss
Allocation Notice in a round giving rise to a Termination Notice, plus
100% of the amount thereof. The purpose of proposed Section 8(c) is to
address a situation where a Participant could otherwise be subject to
both a Settlement Charge Cap and Loss Allocation Cap.
    Proposed Section 8(d) would retain the last paragraph in current
Section 8 of Rule 4, replacing ``pro rata charge'' with ``pro rata
settlement charge'' and'' loss allocation.'' \63\ Proposed Section 8(d)
would provide that if the amount of the Actual Participants Fund
Deposit of a Participant is insufficient to satisfy a pro rata
settlement charge pursuant to proposed Section 4 and proposed Section
8(a) or a loss allocation pursuant to proposed Section 5 and proposed
Section 8(b), the Participant would be obligated to Deposit the amount
of any such deficiency to the Participants Fund notwithstanding the
fact that the Participant subsequently ceases to be a Participant.
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    \63\ This is a ministerial change because this paragraph
currently applies to current Section 4 of Rule 4, which includes
charges to complete settlement and for loss allocation, as would be
provided in proposed Section 4 and proposed Section 5 of Rule 4.
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Section 9
    Pursuant to the proposed rule change, proposed Section 9 of Rule 4
would provide that the recovery and repayment provisions in current
Rule 4 apply to both pro rata settlement charges and loss
allocations.\64\ Specifically, proposed Section 9 would provide that if
an amount is charged ratably pursuant to proposed Section 4 or
allocated ratably pursuant to proposed Section 5 and such amount is
recovered by DTC, in whole or in part, the net amount of the recovery
shall be repaid ratably (on the same basis that it was originally
charged or allocated) to the Persons against which the amount was
originally charged or allocated by

(i) crediting the appropriate amounts to the Actual Participants Fund
Deposits of Persons which are still Participants and (ii) paying the
appropriate amounts in cash to Persons which are not still
Participants. In addition, proposed Section 9 would clarify that no
loss allocation under proposed Rule 4 would constitute a waiver of any
claim DTC may have against a Participant for any losses or liabilities
to which the Participant is subject under DTC Rules and Procedures,
including, without limitation, any loss or liability to which it may be
subject under proposed Rule 4.
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    \64\ This is a ministerial change because Section 9 currently
applies to current Section 4 of Rule 4, which includes charges to
complete settlement and for loss allocation, as would be provided in
proposed Section 4 and proposed Section 5 of Rule 4.
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    DTC further proposes to add the heading ``No Waiver; Recovery and
Repayment'' to proposed Section 9.
B. Other Proposed Clarifying, Conforming and Technical Changes to Rule
4
Section 1
    Section 1(a) and Section 1(b). Section 1(a) addresses, among other
things, the formula for determining the Required Participants Fund
Deposits of Participants. DTC is proposing to insert the words ``or
wind-down'' to make it clear that the formulas for determining the
Required Participants Fund Deposits of Participants and the amount of
the minimum Required Participants Fund Deposit would be fixed by DTC so
as to assure that the aggregate amount of Required Participants Fund
Deposits of Participants will be increased to provide for the costs and
expenses incurred by it incidental to the wind-down of DTC, in addition
to the voluntary liquidation of DTC.\65\ Further, DTC proposes to
delete the extraneous phrase ``if any.'' For increased clarity and
readability, DTC is proposing to consolidate Section 1(b) into Section
1(a), and to relocate the sentences ``The Corporation may require a
Participant to Deposit an additional amount to the Participants Fund
pursuant to Section 2 of Rule 9(A). Any such additional amount shall be
part of the Required Participants Fund Deposit of such Participant.''
from Section 1(a) to a new proposed Section 1(b). In addition to the
relocation, DTC would add a defined term for such additional amount, as
``Additional Participants Fund Deposit,'' for drafting convenience and
transparency throughout proposed Rule 4. Further, DTC proposes to add
the headings ``Required Participants Fund Deposits'' and ``Additional
Participants Fund Deposits'' to Section 1(a) and proposed Section 1(b),
respectively.
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    \65\ On December 18, 2017, DTC submitted a proposed rule change
and advance notice to adopt the Recovery & Wind-down Plan of DTC,
and amend the Rules in order to adopt Rule 32(A) (Wind-down of the
Corporation) and Rule 38 (Market Disruption and Force Majeure). See
Securities Exchange Act Release Nos. 82432 (January 2, 2018), 83 FR
884 (January 8, 2018) (SR-DTC-2017-021) and 82579 (January 24,
2018), 83 FR 4310 (January 30, 2018) (SR-DTC-2017-803). On June 28,
2018, DTC filed amendments to the proposed rule change and advance
notice with the Commission and the Board of Governors of the Federal
Reserve System, respectively, available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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    Section 1(c). For enhanced readability, DTC is proposing to add the
heading ``Voluntary Participants Fund Deposits'' to Section 1(c) of
Rule 4, and to replace the word ``as'' with ``in the manner.''
    Section 1(d). For enhanced clarity, DTC is proposing to modify
Section 1(d) to make it clear that any Additional Participants Fund
Deposit is required to be in cash. DTC is also proposing to delete the
extraneous phrase ``pursuant to this Section'' and to replace language
regarding Section 2 of Rule 9(A) with the proposed defined term
``Additional Participants Fund Deposit.'' Further, DTC proposes to add
the heading ``Cash Participants Fund'' to Section 1(d) of Rule 4.
    Section 1(e). For enhanced clarity, DTC is proposing to add the
language ``among Account Families'' to clarify the scope of the
allocation described in Section 1(e). In addition, DTC proposes to add
the heading ``Allocation of Participants Fund Deposits Among Account
Families'' to Section 1(e) of Rule 4.
    Section 1(f). Section 1(f) addresses, among other things, the
permitted use of the Participants Fund. For consistency with the
balance of Section 1(f), the first paragraph would be amended to state
that the Actual Participants Fund Deposits of Participants ``may be
used or invested'' instead of stating ``shall be applied.'' Section
1(f) provides, in part, that the Participants Fund is limited to the
satisfaction of losses or liabilities of DTC incident to the business
of DTC. Section 1(f) currently defines ``business'' with respect to DTC
as ``the doing of all things in connection with or relating to [DTC's]
performance of the services specified in the first and second
paragraphs of Rule 6 or the cessation of such services.'' For enhanced
transparency of the permitted uses of the Participants Fund, proposed
Section 1(f) would be amended to explicitly state that the Actual
Participants Fund Deposits of Participants may be used (i) to satisfy
the obligations of Participants to DTC, as provided in proposed Section
3, (ii) to fund settlement among non-defaulting Participants, as
provided in proposed Section 4 and (iii) to satisfy losses and
liabilities of DTC incident to the business of DTC, as provided in
proposed Section 5. Section 1(f) would also be amended to make the
definition of ``business'' applicable to the entirety of Rule 4,
instead of just Section 1(f), as the term would appear elsewhere in the
rule pursuant to the proposed rule change. In addition, DTC proposes to
add the heading ``Maintenance, Permitted Use and Investment of
Participants Fund'' to Section 1(f) of Rule 4.
    Section 1(g) (consolidated into proposed Section 1(f)). Pursuant to
the proposed rule change, DTC would consolidate current Section 1(g)
into proposed Section 1(f), and modify language to make it clear that
DTC may invest cash in the Participants Fund in accordance with the
Clearing Agency Investment Policy adopted by DTC.\66\ Further, language
would be streamlined by replacing ``securities, repurchase agreements
or deposits'' with ``financial assets,'' and ``securities and
repurchase agreements in which such cash is invested'' with ``its
investment of such cash.''
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    \66\ See Securities Exchange Act Release No. 79528 (December 12,
2016), 81 FR 91232 (December 16, 2016) (SR-DTC-2016-007). The
Clearing Agency Investment Policy (the ``Policy'') governs the
management, custody, and investment of cash deposited to the
Participants Fund, the proprietary liquid net assets (cash and cash
equivalents) of DTC and other funds held by DTC. The Policy sets
forth guiding principles for the investment of those funds, which
include adherence to a conservative investment philosophy that
places the highest priority on maximizing liquidity and avoiding
risk, as well as mandating the segregation and separation of funds.
The Policy also addresses the process for evaluating credit ratings
of counterparties and identifies permitted investments within
specified parameters. In general, assets are required to be held by
regulated and creditworthy financial institution counterparties and
invested in financial instruments that, with respect to the
Participants Fund, may include deposits with banks, including the
Federal Reserve Bank of New York, collateralized reverse-repurchase
agreements, direct obligations of the U.S. government and money-
market mutual funds.
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    Section 1(h) (proposed Section 1(g)).
    As discussed above, DTC is proposing to replace ``four'' years with
``two'' years, in order to reduce the time within which DTC would be
required to return the Actual Participants Fund Deposit of a former
Participant. In addition, DTC is proposing to (i) add the heading
``Return of Participants Fund Deposits to Participants'' to proposed
Section 1(g), (ii) update a cross reference, and (iii) correct two
typographical errors.
Section 2
    Pursuant to the proposed rule change, Section 2 of Rule 4 would be
titled ``Participants Investment.''
    Section 2(a)-2(d) (Proposed Section 2(a)). For clarity, DTC is
proposing to consolidate Sections 2(b)-2(d) into proposed Section 2(a)
and would add

the heading ``Required Preferred Stock Investments'' to proposed
Section 2(a). In addition, DTC proposes to modify certain language to
update references and cross-references to specific subsections to
reflect the proposed changes to the numbering of the subsections in
proposed Section 2 of Rule 4.
    Section 2(e) (Proposed Section 2(b)). For enhanced clarity, DTC is
proposing to add the language ``among Account Families'' to clarify the
scope of the allocation described in proposed Section 2(b). In
addition, DTC proposes to add the heading ``Allocation of Preferred
Stock Investments Among Account Families'' to proposed Section 2(b) of
Rule 4.
    Section 2(f) (Proposed Section 2(c)). DTC is proposing to add
language to clarify that when any Pledge of a Preferred Stock Security
Interest pursuant to proposed Section 2(c) of Rule 4 is made by
appropriate entries on the books of DTC, the Rules, in addition to such
entries, shall be deemed to be a security agreement for purposes of the
New York Uniform Commercial Code. In addition, DTC proposes to update a
cross-reference to proposed Section 2(c). In addition, DTC proposes to
add the heading ``Security Interest in Preferred Stock Investments of
Participants'' to proposed Section 2(c).
    Sections 2(g)-2(i) (Proposed Sections 2(d)-2(f)). DTC proposes to
add the headings ``Dividends on Preferred Stock Investments of
Participants,'' ``Sale of Preferred Stock Investments of
Participants,'' and ``Permitted Transfers of Preferred Stock
Investments of Participants'' to proposed Sections 2(d), 2(e), and
2(f), respectively. Proposed Sections 2(e) and 2(f) would be modified
to update cross-references to certain subsections. In addition,
proposed Section 2(f) would be modified to renumber paragraphs and
internal lists for consistency with the numbering schemes in Rule 4.
    Section 7. For clarity, DTC is proposing to amend Section 7 of Rule
4 to (i) replace language referencing Additional Participants Fund
Deposits with the proposed defined term, (ii) update cross-references
to reflect proposed renumbering, and (iii) add the headings ``Increased
Participants Fund Deposits and Preferred Stock Investments,''
``Required Participants Fund Deposits,'' and ``Required Preferred Stock
Investments'' to proposed Sections 7, 7(a) and 7(b) of Rule 4,
respectively.
C. Proposed Changes to Rule 1
    DTC is proposing to amend Rule 1 (Definitions; Governing Law) to
add cross-references to proposed terms that would be defined in Rule 4,
and to delete one defined term. The defined terms to be added are:
``Additional Participants Fund Deposit,'' ``Corporate Contribution,''
``CTA Participant,'' ``Declared Non-Default Loss Event,'' ``Default
Loss Event,'' ``Event Period,'' ``Loss Allocation Cap,'' ``Loss
Allocation Notice,'' ``Loss Allocation Termination Notification
Period,'' ``Participant Default,'' ``Participant Termination Date,''
``Settlement Charge Cap,'' ``Settlement Charge Notice,'' ``Settlement
Charge Termination Notification Period,'' ``Termination Notice,''
``Voluntary Retirement,'' Voluntary Retirement Date,'' and ``Voluntary
Retirement Notice''. The term ``Section 8 Pro Rata Charge'' would be
deleted from Rule 1, because it would be deleted from proposed Rule 4
as no longer necessary.
D. Proposed Changes to Rule 2
    Section 1. The proposed rule change would modify Section 1 of Rule
2 by adding ``subject to Section 6 of Rule 4'' to the end of the
following provision: ``A Participant may terminate its business with
the Corporation by notifying the Corporation as provided in Sections 7
or 8 of Rule 4 or, if for a reason other than those specified in said
Sections 7 and 8, by notifying the Corporation thereof; the Participant
shall, upon receipt of such notice by the Corporation, cease to be a
Participant.'' DTC is proposing to add this language in order to
clarify that the termination would be subject to the requirements in
proposed Section 6 of Rule 4.
Participant Outreach
    Beginning in August 2017, DTC has conducted outreach to
Participants in order to provide them with advance notice of the
proposed changes. As of the date of this filing, no written comments
relating to the proposed changes have been received in response to this
outreach. The Commission will be notified of any written comments
received.
Implementation Timeframe
    Pending Commission approval, DTC expects to implement this proposal
within two (2) Business Days after approval. Participants would be
advised of the implementation date of this proposal through issuance of
a DTC Important Notice.
2. Statutory Basis
    DTC believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. Specifically, DTC believes
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \67\ and Rules 17Ad-22(e)(7)(i), 17Ad-22(e)(13) and
(e)(23)(i),\68\ each as promulgated under the Act, for the reasons
described below.
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    \67\ 15 U.S.C. 78q-1(b)(3)(F).
    \68\ 17 CFR 240.17Ad-22(e)(7)(i), (e)(13) and (e)(23)(i).
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    Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to promote the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities