[Federal Register Volume 83, Number 139 (Thursday, July 19, 2018)]
[Notices]
[Pages 34263-34276]
[FR Doc No: 2018-15363]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83628; File No. SR-DTC-2017-021]

Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Adopt
a Recovery & Wind-Down Plan and Related Rules

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-2017-021
(``Proposed Rule Change'') to adopt a recovery and wind-down plan and
related rules.\1\ The Proposed Rule Change was published for comment in
the Federal Register on January 8, 2018.\2\ 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.\3\ On March 20, 2018, the
Commission instituted proceedings to determine whether to approve or
disapprove the Proposed Rule Change.\4\ 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.\5\ 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.\6\ 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. On
December 18, 2017, DTC filed the Proposed Rule Change as advance
notice SR-DTC-2017-803 (``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. 82579 (January 24, 2018), 83 FR
4310 (January 30, 2018) (SR-DTC-2017-803). 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. 82432 (January 2, 2018),
83 FR 884 (January 8, 2018) (SR-DTC-2017-021).
    \3\ Securities Exchange Act Release No. 82669 (February 8,
2018), 83 FR 6653 (February 14, 2018) (SR-DTC-2017-021; SR-FICC-
2017-021; SR-NSCC-2017-017).
    \4\ Securities Exchange Act Release No. 82912 (March 20, 2018),
83 FR 12999 (March 26, 2018) (SR-DTC-2017-021).
    \5\ Securities Exchange Act Release No. 83509 (June 25, 2018),
83 FR 30785 (June 29, 2018) (SR-DTC-2017-021; SR-FICC-2017-021; SR-
NSCC-2017-017).
    \6\ 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 of DTC proposes to (1) adopt the Recovery
& Wind-down Plan of DTC (``R&W Plan'' or ``Plan''); and (2) amend the
Rules, By-Laws and Organization Certificate of DTC (``Rules'') \7\ in
order to adopt Rule 32(A) (Wind-down of the Corporation) and Rule 38
(Market Disruption and Force Majeure) (each proposed Rule 32(A) and
proposed Rule 38, a ``Proposed Rule'' and, collectively, the ``Proposed
Rules'').
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    \7\ Capitalized terms used herein and not otherwise defined
herein are defined in the Rules, available at www.dtcc.com/~/media/
Files/Downloads/legal/rules/DTC_rules.pdf.
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    The R&W Plan would be maintained by DTC in compliance with Rule
17Ad-22(e)(3)(ii) under the Act by providing plans for the recovery and
orderly wind-down of DTC necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses, as
described below.\8\ The Proposed Rules are designed to (1) facilitate
the implementation of the R&W Plan when necessary and, in particular,
allow DTC to effectuate its strategy for winding down and transferring
its business; (2) provide Participants with transparency around
critical provisions of the R&W Plan that relate to their rights,
responsibilities and obligations; and (3) provide DTC with the legal
basis to implement those provisions of the R&W Plan when necessary, as
described below.
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    \8\ 17 CFR 240.17Ad-22(e)(3)(ii).
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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 Amendment No. 1
    This filing constitutes Amendment No. 1 (``Amendment'') to the
Proposed Rule Change (also referred to below as the ``Original
Filing'') previously filed by DTC.\9\ DTC is amending the proposed R&W
Plan and the Original Filing in order to clarify certain matters and
make minor technical and conforming changes to the R&W Plan, as
described below and as marked on Exhibit 4 hereto. To the extent such
changes to the Plan require changes to the Original Filing, the
information provided under ``Description of Proposed Changes'' in the
Original Filing has been amended and is restated in its entirety below.
Other sections of the Original Filing are unchanged and are restated in
their entity for convenience.
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    \9\ See Securities Exchange Act Release No. 82579 (January 24,
2018), 83 FR 4310 (January 30, 2018) (SR-DTC-2017-803).
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    First, this Amendment would clarify the use in the Plan of the term
``Participant Default Losses.'' This Amendment would also clarify the
actions and tools available in the third phase of the Crisis Continuum,
which is referred to as the ``Participant Default phase.'' This
Amendment would also make conforming changes as necessary to reflect
the use of these terms.
    Second, this Amendment would clarify that actions and tools
described in the Plan that are available in one phase of the Crisis
Continuum may be used in subsequent phases of the Crisis Continuum,
when appropriate to address the applicable situation. This Amendment
would also clarify that allocation of losses resulting from a
Participant Default would be applied when provide for in, and in
accordance with, Rule 4.
    Third, this Amendment would clarify that the Recovery Corridor (as
defined therein) is not a ``sub-phase'' of the recovery phase. Rather,
the Recovery Corridor is a period of time that would occur toward the
end of the Participant Default phase, when indicators are that DTC may
transition into the recovery phase. Thus, the Recovery Corridor
precedes the recovery phase.
    Fourth, this Amendment would make revisions to address the
allocation of losses resulting from a Participant Default in order to
more closely conform such statements to the changes proposed by the
Loss Allocation Filing, as defined below.
    Fifth, this Amendment would clarify the notifications that DTC
would be required to make under the Proposed Rule 38 (Market Disruption
and Force Majeure).
    Finally, this Amendment would make minor, technical and conforming
revisions to correct typographical errors and to simplify descriptions.
For example, such revisions would use lower case for terms that are not
defined therein, and would use upper case for terms that are defined.
The Amendment would also simplify certain descriptions by removing
extraneous words and statements that are repetitive. These minor,
technical revisions would not alter the substance of the proposal.
Description of Proposed Changes
    DTC is proposing to adopt the R&W Plan to be used by the Board and
management in the event DTC encounters scenarios that could potentially
prevent it from being able to provide its critical services as a going
concern. The R&W Plan would identify (i) the recovery tools available
to DTC to address the risks of (a) uncovered losses or liquidity
shortfalls resulting from the default of one or more of its
Participants, and (b) losses arising from non-default events, such as
damage to its physical assets, a cyber-attack, or custody and
investment losses, and (ii) the strategy for implementation of such
tools. The R&W Plan would also establish the strategy and framework for
the orderly wind-down of DTC and the transfer of its business in the
remote event the implementation of the available recovery tools does
not successfully return DTC to financial viability.
    As discussed in greater detail below, the R&W Plan would provide,
among other matters, (i) an overview of the business of DTC and its
parent, The Depository Trust & Clearing Corporation (``DTCC''); (ii) an
analysis of DTC's intercompany arrangements and critical links to other
financial market infrastructures (``FMIs''); (iii) a description of
DTC's services, and the criteria used to determine which services are
considered critical; (iv) a description of the DTC and DTCC governance
structure; (v) a description of the governance around the overall
recovery and wind-down program; (vi) a discussion of tools available to
DTC to mitigate credit/market and liquidity risks, including recovery
indicators and triggers, and the governance around management of a
stress event along a ``Crisis Continuum'' timeline; (vii) a

discussion of potential non-default losses and the resources available
to DTC to address such losses, including recovery triggers and tools to
mitigate such losses; (viii) an analysis of the recovery tools'
characteristics, including how they are comprehensive, effective, and
transparent, how the tools provide appropriate incentives to
Participants to, among other things, control and monitor the risks they
may present to DTC, and how DTC seeks to minimize the negative
consequences of executing its recovery tools; and (ix) the framework
and approach for the orderly wind-down and transfer of DTC's business,
including an estimate of the time and costs to effect a recovery or
orderly wind-down of DTC.
    The R&W Plan would be structured as a roadmap, and would identify
and describe the tools that DTC may use to effect a recovery from the
events and scenarios described therein. Certain recovery tools that
would be identified in the R&W Plan are based in the Rules (including
the Proposed Rules) and, as such, descriptions of those tools would
include descriptions of, and reference to, the applicable Rules and any
related internal policies and procedures. Other recovery tools that
would be identified in the R&W Plan are based in contractual
arrangements to which DTC is a party, including, for example, existing
committed or pre-arranged liquidity arrangements. Further, the R&W Plan
would state that DTC may develop further supporting internal guidelines
and materials that may provide operationally for matters described in
the Plan, and that such documents would be supplemental and subordinate
to the Plan.
    Key factors considered in developing the R&W Plan and the types of
tools available to DTC were its governance structure and the nature of
the markets within which DTC operates. As a result of these
considerations, many of the tools available to DTC that would be
described in the R&W Plan are DTC's existing, business-as-usual risk
management and default management tools, which would continue to be
applied in scenarios of increasing stress. In addition to these
existing, business-as-usual tools, the R&W Plan would describe DTC's
other principal recovery tools, which include, for example, (i)
identifying, monitoring and managing general business risk and holding
sufficient liquid net assets funded by equity (``LNA'') to cover
potential general business losses pursuant to the Clearing Agency
Policy on Capital Requirements (``Capital Policy''),\10\ (ii)
maintaining the Clearing Agency Capital Replenishment Plan
(``Replenishment Plan'') as a viable plan for the replenishment of
capital should DTC's equity fall close to or below the amount being
held pursuant to the Capital Policy,\11\ and (iii) the process for the
allocation of losses among Participants as provided in Rule 4.\12\ The
R&W Plan would provide governance around the selection and
implementation of the recovery tool or tools most relevant to mitigate
a stress scenario and any applicable loss or liquidity shortfall.
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    \10\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003; SR-FICC-2017-
007; SR-NSCC-2017-004).
    \11\ See id.
    \12\ See Rule 4 (Participants Fund and Participants Investment),
supra note 7. DTC is proposing changes to Rule 4 regarding
allocation of losses in a separate filing submitted simultaneously
with the Original Filing. 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) (collectively referred to herein as the ``Loss
Allocation Filing''). DTC has submitted an amendment to the Loss
Allocation Filing. A copy of the amendment to the Loss Allocation
Filing is available at http://www.dtcc.com/legal/sec-rule-filings.aspx. DTC expects the Commission to review both proposals,
as amended, together, and, as such, the proposal described in this
filing anticipates the approval and implementation of those proposed
changes to the Rules.
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    The development of the R&W Plan is facilitated by the Office of
Recovery & Resolution Planning (``R&R Team'') of DTCC.\13\ The R&R Team
reports to the DTCC Management Committee (``Management Committee'') and
is responsible for maintaining the R&W Plan and for the development and
ongoing maintenance of the overall recovery and wind-down planning
process. The Board, or such committees as may be delegated authority by
the Board from time to time pursuant to its charter, would review and
approve the R&W Plan biennially, and would also review and approve any
changes that are proposed to the R&W Plan outside of the biennial
review.
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    \13\ DTCC operates on a shared services model with respect to
DTC and its other subsidiaries. Most corporate functions are
established and managed on an enterprise-wide basis pursuant to
intercompany agreements under which it is generally DTCC that
provides a relevant service to a subsidiary, including DTC.
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    As discussed in greater detail below, the Proposed Rules would
define the procedures that may be employed in the event of a DTC wind-
down, and would provide for DTC's authority to take certain actions on
the occurrence of a ``Market Disruption Event,'' as defined therein.
Significantly, the Proposed Rules would provide Participants with
transparency and certainty with respect to these matters. The Proposed
Rules would facilitate the implementation of the R&W Plan, particularly
DTC's strategy for winding down and transferring its business, and
would provide DTC with the legal basis to implement those aspects of
the R&W Plan.
DTC R&W Plan
    The R&W Plan is intended to be used by the Board and DTC's
management in the event DTC encounters scenarios that could potentially
prevent it from being able to provide its critical services as a going
concern. The R&W Plan would be structured to provide a roadmap, define
the strategy, and identify the tools available to DTC to either (i)
recover, in the event it experiences losses that exceed its prefunded
resources (such strategies and tools referred to herein as the
``Recovery Plan'') or (ii) wind-down its business in a manner designed
to permit the continuation of its critical services in the event that
such recovery efforts are not successful (such strategies and tools
referred to herein as the ``Wind-down Plan''). The description of the
R&W Plan below is intended to highlight the purpose and expected
effects of the material aspects of the R&W Plan, and to provide
Participants with appropriate transparency into these features.
Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's
purpose and its regulatory background, and would outline a summary of
the Plan. The stated purpose of the R&W Plan is that it is to be used
by the Board and DTC management in the event DTC encounters scenarios
that could potentially prevent it from being able to provide its
critical services as a going concern. The R&W Plan would be maintained
by DTC in compliance with Rule 17Ad-22(e)(3)(ii) under the Act \14\ by
providing plans for the recovery and orderly wind-down of DTC.
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    \14\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The R&W Plan would describe DTCC's business profile, provide a
summary of DTC's services, and identify the intercompany arrangements
and critical links between DTC and other FMIs. This overview section
would provide a context for the R&W Plan by describing DTC's business,
organizational structure and critical links to other entities. By
providing this context, this section would facilitate the analysis of
the potential impact of utilizing the recovery tools set forth in later
sections of the Recovery Plan, and

the analysis of the factors that would be addressed in implementing the
Wind-down Plan.
    DTCC is a user-owned and user-governed holding company and is the
parent company of DTC and its affiliates, National Securities Clearing
Corporation (``NSCC'') and Fixed Income Clearing Corporation (``FICC,''
and, together with NSCC and DTC, the ``Clearing Agencies''). The Plan
would describe how corporate support services are provided to DTC from
DTCC and DTCC's other subsidiaries through intercompany agreements
under a shared services model.
    The Plan would provide a description of established links between
DTC and other FMIs, both domestic and foreign, including central
securities depositories (``CSDs'') and central counterparties
(``CCPs''), as well as the twelve U.S. Federal Reserve Banks. In
general, these links are either ``inbound'' or ``issuer'' links, in
which the other FMI is a Participant and/or a Pledgee and maintains one
or more accounts at DTC, or ``outbound'' or ``investor'' links in which
DTC maintains one or more accounts at another FMI. Key FMIs with which
DTC maintains critical links include CDS Clearing and Depository
Services Inc. (``CDS''), the Canadian CSD, with participant links in
both directions; Euroclear Bank SA/NV (``EB'') for cross-border
collateral management services; and The Options Clearing Corporation
(``OCC'') and the Federal Reserve Bank of New York (``FRBNY''), each of
which is both a Participant and a Pledgee. The critical link for the
U.S. marketplace is the relationship between DTC and NSCC, through
which continuous net settlement (``CNS'') transactions are completed by
settlement at DTC, and DTC acts as settlement agent for NSCC for end-
of-day funds settlement.\15\ This section of the Plan, identifying and
briefly describing DTC's established links, would provide a mapping of
critical connections and dependencies that may need to be relied on or
otherwise addressed in connection with the implementation of either the
Recovery Plan or the Wind-down Plan.
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    \15\ DTC has other links in addition to those mentioned above.
The current list of linked CSDs is available on the DTCC website.
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    The Plan would define the criteria for classifying certain of DTC's
services as ``critical,'' and would identify those critical services
and the rationale for their classification. This section would provide
an analysis of the potential systemic impact from a service disruption,
and is important for evaluating how the recovery tools and the wind-
down strategy would facilitate and provide for the continuation of
DTC's critical services to the markets it serves. The criteria that
would be used to identify a DTC service or function as critical would
include consideration as to (1) whether there is a lack of alternative
providers or products; (2) whether failure of the service could impact
DTC's ability to perform its book-entry and settlement services; (3)
whether failure of the service could impact DTC's ability to perform
its payment system functions; and (4) whether the service is
interconnected with other participants and processes within the U.S.
financial system, for example, with other FMIs, settlement banks and
broker-dealers. The Plan would then list each of those services,
functions or activities that DTC has identified as ``critical'' based
on the applicability of these four criteria. Such critical services
would include, for example, MMIs and Commercial Paper Processing,\16\
Mandatory and Voluntary Corporate Actions,\17\ Cash and Stock
Distributions,\18\ and End of Day Net Money Settlement.\19\ The R&W
Plan would also include a non-exhaustive list of DTC services that are
not deemed critical.
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    \16\ See Rule 9(C) (Transactions in MMI Securities), supra note
7.
    \17\ See DTC Reorganizations Service Guide, available at
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Reorganizations.pdf.
    \18\ See DTC Distributions Service Guide, available at http://
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Service%20Guide%20Distributions.pdf.
    \19\ See DTC Settlement Service Guide, available at
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Settlement.pdf.
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    The evaluation of which services provided by DTC are deemed
critical is important for purposes of determining how the R&W Plan
would facilitate the continuity of those services. As discussed further
below, while DTC's Wind-down Plan would provide for the transfer of all
critical services to a transferee in the event DTC's wind-down is
implemented, it would anticipate that any non-critical services that
are ancillary and beneficial to a critical service, or that otherwise
have substantial user demand from the continuing membership, would also
be transferred.
    The Plan would describe the governance structure of both DTCC and
DTC. This section of the Plan would identify the ownership and
governance model of these entities at both the Board of Directors and
management levels. The Plan would state that the stages of escalation
required to manage recovery under the Recovery Plan or to invoke DTC's
wind-down under the Wind-down Plan would range from relevant business
line managers up to the Board through DTC's governance structure. The
Plan would then identify the parties responsible for certain activities
under both the Recovery Plan and the Wind-down Plan, and would describe
their respective roles. The Plan would identify the Risk Committee of
the Board (``Board Risk Committee'') as being responsible for oversight
of risk management activities at DTC, which include focusing on both
oversight of risk management systems and processes designed to identify
and manage various risks faced by DTC, and, due to DTC's critical role
in the markets in which it operates, oversight of DTC's efforts to
mitigate systemic risks that could impact those markets and the broader
financial system.\20\ The Plan would identify the DTCC Management Risk
Committee (``Management Risk Committee'') as primarily responsible for
general, day-to-day risk management through delegated authority from
the Board Risk Committee. The Plan would state that the Management Risk
Committee has delegated specific day-to-day risk management, including
management of risks addressed through margining systems and related
activities, to the DTCC Group Chief Risk Office (``GCRO''), which works
with staff within the DTCC Financial Risk Management group. Finally,
the Plan would describe the role of the Management Committee, which
provides overall direction for all aspects of DTC's business,
technology, and operations and the functional areas that support these
activities.
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    \20\ The charter of the Board Risk Committee is available at
http://www.dtcc.com/~/media/Files/Downloads/legal/policy-and-
compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
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    The Plan would describe the governance of recovery efforts in
response to both default losses and non-default losses under the
Recovery Plan, identifying the groups responsible for those recovery
efforts. Specifically, the Plan would state that the Management Risk
Committee provides oversight of actions relating to the default of a
Participant, which would be reported and escalated to it through the
GCRO, and the Management Committee provides oversight of actions
relating to non-default events that could result in a loss, which would
be reported and escalated to it from the DTCC Chief Financial Officer
(``CFO'') and the DTCC Treasury group that reports to the CFO, and from
other relevant subject matter experts based on the nature and
circumstances of the non-default

event.\21\ More generally, the Plan would state that the type of loss
and the nature and circumstances of the events that lead to the loss
would dictate the components of governance to address that loss,
including the escalation path to authorize those actions. As described
further below, both the Recovery Plan and the Wind-down Plan would
describe the governance of escalations, decisions, and actions under
each of those plans.
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    \21\ The Plan would state that these groups would be involved to
address how to mitigate the financial impact of non-default losses,
and in recommending mitigating actions, the Management Committee
would consider information and recommendations from relevant subject
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events,
however, would be managed in accordance with applicable incident
response/business continuity process; for example, processes
established by the DTCC Technology Risk Management group would be
followed in response to a cyber event.
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    Finally, the Plan would describe the role of the R&R Team in
managing the overall recovery and wind-down program and plans for each
of the Clearing Agencies.
DTC Recovery Plan
    The Recovery Plan is intended to be a roadmap of those actions that
DTC may employ to monitor and, as needed, stabilize its financial
condition. As each event that could lead to a financial loss could be
unique in its circumstances, the Recovery Plan would not be
prescriptive and would permit DTC to maintain flexibility in its use of
identified tools and in the sequence in which such tools are used,
subject to any conditions in the Rules or the contractual arrangement
on which such tool is based. DTC's Recovery Plan would consist of (1) a
description of the risk management surveillance, tools, and governance
that DTC would employ across evolving stress scenarios that it may face
as it transitions through a ``Crisis Continuum,'' described below; (2)
a description of DTC's risk of losses that may result from non-default
events, and the financial resources and recovery tools available to DTC
to manage those risks and any resulting losses; and (3) an evaluation
of the characteristics of the recovery tools that may be used in
response to either losses arising out of a Participant Default (as
defined below) or non-default losses, as described in greater detail
below. In all cases, DTC would act in accordance with the Rules, within
the governance structure described in the R&W Plan, and in accordance
with applicable regulatory oversight to address each situation in order
to best protect DTC, its Participants and the markets in which it
operates.
    Managing Participant Default Losses and Liquidity Needs Through the
Crisis Continuum. The Plan would describe the risk management
surveillance, tools, and governance that DTC may employ across an
increasing stress environment, which is referred to as the ``Crisis
Continuum.'' This description would identify those tools that can be
employed to mitigate losses, and mitigate or minimize liquidity needs,
as the market environment becomes increasingly stressed. The phases of
the Crisis Continuum would include (1) a stable market phase, (2) a
stressed market phase, (3) a phase commencing with DTC's decision to
cease to act for a Participant or Affiliated Family of Participants
(referred to in the Plan as the ``Participant Default phase''),\22\ and
(4) a recovery phase. This section of the Recovery Plan would address
conditions and circumstances relating to DTC's decision to cease to act
for a Participant pursuant to the Rules.\23\ For ease of reference, the
R&W Plan would, for purposes of the Plan, use the term ``Participant
Default Losses'' to refer to losses that arise out of or relate to the
Participant Default and resulting cease to act (including any losses
that arise from liquidation of the Participant's Collateral).
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    \22\ The Plan defines an ``Affiliated Family'' of Participants
as a number of affiliated entities that are all Participants of DTC.
    \23\ In the Plan, ``cease to act'' and the actions that may lead
to such decision, are used within the context of the Rules,
including Rule 4 (Participants Fund and Participants Investment),
Rule 9(A) (Transactions in Securities and Money Payments), Rule 9(B)
(Transactions in Eligible Securities), Rule 9(C) (Transactions in
MMI Securities), Rule 10 (Discretionary Termination), Rule 11
(Mandatory Termination) and Rule 12 (Insolvency), supra note 7.
Further, the term ``Participant Default'' would also be used in the
Plan as such term is defined in Rule 4, as proposed to be amended by
the Loss Allocation filing, supra note 12.
---------------------------------------------------------------------------

    The Recovery Plan would provide context to its roadmap through this
Crisis Continuum by describing DTC's ongoing management of credit,
market risk and liquidity risk, and its existing process for measuring
and reporting its risks as they align with established thresholds for
its tolerance of those risks. The Recovery Plan would discuss the
management of credit/market risk and liquidity exposures together,
because the tools that address these risks can be deployed either
separately or in a coordinated approach in order to address both
exposures. DTC manages these risk exposures collectively to limit their
overall impact on DTC and its Participants. DTC has built-in mechanisms
to limit exposures and replenish financial resources used in a stress
event, in order to continue to operate in a safe and sound manner. DTC
is a closed, collateralized system in which liquidity resources are
matched against risk management controls, so, at any time, the
potential net settlement obligation of the Participant or Affiliated
Family of Participants with the largest net settlement obligation
cannot exceed the amount of liquidity resources.\24\ While Collateral
securities are subject to market price risk, DTC manages its liquidity
and market risks through the calculation of the required deposits to
the Participants Fund \25\ and risk management controls, i.e.,
collateral haircuts, the Collateral Monitor \26\ and Net Debit Cap.\27\
---------------------------------------------------------------------------

    \24\ DTC's liquidity risk management strategy, including the
manner in which DTC would deploy liquidity tools as well as its
intraday use of liquidity, is described in the Clearing Agency
Liquidity Risk Management Framework. See Securities Exchange Act
Release No. 80489 (April 19, 2017), 82 FR 19120 (April 25, 2017)
(SR-DTC-2017-004, SR-DTC-2017-005, SR-FICC-2017-008).
    \25\ See Rule 4 (Participants Fund and Participants Investment),
supra note 7.
    \26\ See Rule 1, Section 1, supra note 7. For DTC, credit risk
and market risk are closely related, as DTC monitors credit
exposures from Participants through these risk management controls,
which limit Participant settlement obligations to the amount of
available liquidity resources and require those obligations to be
fully collateralized. The pledge or liquidation of collateral in an
amount sufficient to restore liquidity resources depends on market
values and demand, i.e., market risk exposure. Such risk management
controls are part of DTC's market risk management strategy and are
designed to comply with Rule 17Ad-22(e)(4) under the Act, where
these risks are referred to as ``credit risks.'' See also 17 CFR
240.17Ad-22(e)(4).
    \27\ Id.
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    The Recovery Plan would outline the metrics and indicators that DTC
has developed to evaluate a stress situation against established risk
tolerance thresholds. Each risk mitigation tool identified in the
Recovery Plan would include a description of the escalation thresholds
that allow for effective and timely reporting to the appropriate
internal management staff and committees, or to the Board. The Recovery
Plan would make clear that these tools and escalation protocols would
be calibrated across each phase of the Crisis Continuum. The Recovery
Plan would also establish that DTC would retain the flexibility to
deploy such tools either separately or in a coordinated approach, and
to use other alternatives to these actions and tools as necessitated by
the circumstances of a particular Participant Default event, in
accordance with the Rules. Therefore, the Recovery Plan would both
provide DTC with a roadmap to follow within each phase of the Crisis
Continuum, and would permit it to adjust its risk

management measures to address the unique circumstances of each event.
    The Recovery Plan would describe the conditions that mark each
phase of the Crisis Continuum, and would identify actions that DTC
could take as it transitions through each phase in order to both
prevent losses from materializing through active risk management, and
to restore the financial health of DTC during a period of stress.
    The stable market phase of the Crisis Continuum would describe
active risk management activities in the normal course of business.
These activities would include performing (1) backtests to evaluate the
adequacy of the collateral level and the haircut sufficiency for
covering market price volatility and (2) stress testing to cover market
price moves under real historical and hypothetical scenarios to assess
the haircut adequacy under extreme but plausible market conditions. The
backtesting and stress testing results are escalated, as necessary, to
internal and Board committees.\28\
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    \28\ DTC's stress testing practices are described in the
Clearing Agency Stress Testing Framework (Market Risk). See
Securities Exchange Act Release No. 80485 (April 19, 2017), 82 FR
19131 (April 25, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-NSCC-
2017-006).
---------------------------------------------------------------------------

    The Recovery Plan would describe some of the indicators of the
stress market phase of the Crisis Continuum, which would include, for
example, volatility in market prices of certain assets where there is
increased uncertainty among market participants about the fundamental
value of those assets. This phase would involve general market
stresses, when no Participant Default would be imminent. Within the
description of this phase, the Recovery Plan would provide that DTC may
take targeted, routine risk management measures as necessary and as
permitted by the Rules.
    Within the Participant Default phase of the Crisis Continuum, the
Recovery Plan would provide a roadmap for the existing procedures that
DTC would follow in the event of a Participant Default and any decision
by DTC to cease to act for that Participant.\29\ The Recovery Plan
would provide that the objectives of DTC's actions upon a Participant
Default are to (1) minimize losses and market exposure, and (2), to the
extent practicable, minimize disturbances to the affected markets. The
Recovery Plan would describe tools, actions, and related governance for
both market risk monitoring and liquidity risk monitoring through this
phase. For example, in connection with managing its market risk during
this phase, DTC would, pursuant to its Rules and existing procedures,
(1) monitor and assess the adequacy of its Participants Fund and Net
Debit Caps; and (2) follow its operational procedures relating to the
execution of a liquidation of the Defaulting Participant's Collateral
securities through close collaboration and coordination across multiple
functions. Management of liquidity risk through this phase would
involve ongoing monitoring of, among other things, the adequacy of the
Participants Fund and risk controls, and the Recovery Plan would
identify certain actions DTC may deploy as it deems necessary to
mitigate a potential liquidity shortfall, which would include, for
example, the reduction of Net Debit Caps of some or all Participants,
or seeking additional liquidity resources. The Recovery Plan would
state that, throughout this phase, relevant information would be
escalated and reported to both internal management committees and the
Board Risk Committee.
---------------------------------------------------------------------------

    \29\ See Rule 10 (Discretionary Termination); Rule 11 (Mandatory
Termination); Rule 12 (Insolvency), supra note 7.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available
to DTC, pursuant to the Rules, to address losses arising out of a
Participant Default. Specifically, Rule 4, as proposed to be amended by
the Loss Allocation Filing, would provide that losses remaining after
application of the Defaulting Participant's resources be satisfied
first by applying a ``Corporate Contribution,'' and then, if necessary,
by allocating remaining losses among the membership in accordance with
such Rule 4, as amended.\30\
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    \30\ See supra note 12. The Loss Allocation Filing proposes to
amend Rule 4 to define the amount DTC would contribute to address a
loss resulting from either a Participant Default or a non-default
event as the ``Corporate Contribution.'' This amount would be 50
percent (50%) of the ``General Business Risk Capital Requirement,''
which is calculated pursuant to the Capital Policy and is an amount
sufficient to cover potential general business losses so that DTC
can continue operations and services as a going concern if those
losses materialize, in compliance with Rule 17Ad-22(e)(15) under the
Act. See also supra note 10; 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the
Recovery Plan would describe the period of time that would occur near
the end of the Participant Default phase, during which DTC may
experience stress events or observe early warning indicators that allow
it to evaluate its options and prepare for the recovery phase (referred
to in the Plan as the ``Recovery Corridor''). The Recovery Plan would
then describe the recovery phase of the Crisis Continuum, which would
begin on the date that DTC issues the first Loss Allocation Notice of
the second loss allocation round with respect to a given ``Event
Period.'' \31\ The recovery phase would describe actions that DTC may
take to avoid entering into a wind-down of its business.
---------------------------------------------------------------------------

    \31\ The Loss Allocation Filing proposes to amend Rule 4 to
introduce the concept of an ``Event Period'' as the ten (10)
Business Days beginning on (i) with respect to a Participant
Default, the day on which DTC notifies Participants that it has
ceased to act for a Participant, or (ii) with respect to a non-
default loss, the day that DTC notifies Participants of the
determination by the Board of Directors that there is a non-default
loss event, as described in greater detail in that filing. The
proposed Rule 4 would define a ``round'' as a series of loss
allocations relating to an Event Period, and would provide that the
first Loss Allocation Notice in a first, second, or subsequent round
shall expressly state that such notice reflects the beginning of a
first, second, or subsequent round. The maximum allocable loss
amount of a round is equal to the sum of the ``Loss Allocation
Caps'' (as defined in the proposed Rule 4) of those Participants
included in the round. See supra note 12.
---------------------------------------------------------------------------

    DTC expects that significant deterioration of liquidity resources
would cause it to enter the Recovery Corridor. As such, the Plan would
describe the actions DTC may take aimed at replenishing those resources
Recovery Corridor indicators may include, for example, a rapid and
material increase in market prices or sequential or simultaneous
failures of multiple Participants or Affiliated Families of
Participants over a compressed time period. Throughout the Recovery
Corridor, DTC would monitor the adequacy of its resources and the
expected timing of replenishment of those resources, and would do so
through the monitoring of certain corridor indicator metrics.
    The majority of the corridor indicators, as identified in the
Recovery Plan, relate directly to conditions that may require DTC to
adjust its strategy for hedging and liquidating Collateral securities,
and any such changes would include an assessment of the status of the
corridor indicators. Corridor indicators would include, for example,
effectiveness and speed of DTC's efforts to liquidate Collateral
securities, and an impediment to the availability of its resources to
repay any borrowings due to any Participant default. For each corridor
indicator, the Recovery Plan would identify (1) measures of the
indicator, (2) evaluations of the status of the indicator, (3) metrics
for determining the status of the deterioration or improvement of the
indicator, and (4) ``Corridor Actions,'' which are steps that may be
taken to improve the status of the indicator,\32\ as

well as management escalations required to authorize those steps.
Because DTC has never experienced the default of multiple Participants,
it has not, historically, measured the deterioration or improvements
metrics of the corridor indicators. As such, these metrics were chosen
based on the business judgment of DTC management.
---------------------------------------------------------------------------

    \32\ The Corridor Actions that would be identified in the Plan
are indicative, but not prescriptive; therefore, if DTC needs to
consider alternative actions due to the applicable facts and
circumstances, the escalation of those alternative actions would
follow the same escalation protocol identified in the Plan for the
Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation
of the status of the corridor indicators throughout the Recovery
Corridor. Significant deterioration of a corridor indicator, as
measured by the metrics set out in the Recovery Plan, would be
escalated to the Board. DTC management would review the corridor
indicators and the related metrics at least annually, and would modify
these metrics as necessary in light of observations from simulations of
Participant Defaults and other analyses. Any proposed modifications
would be reviewed by the Management Risk Committee and the Board Risk
Committee. The Recovery Plan would estimate that DTC may remain in the
Recovery Corridor stage between one day and two weeks. This estimate is
based on historical data observed in past Participant Default events,
the results of simulations of Participant Defaults, and periodic
liquidity analyses conducted by DTC. The actual length of a Recovery
Corridor would vary based on actual market conditions observed at the
time, and DTC would expect the Recovery Corridor to be shorter in
market conditions of increased stress.
    The Recovery Plan would outline steps by which DTC may allocate its
losses, which would occur when and in the order provided in Rule 4, as
amended.\33\ The Recovery Plan would also identify tools that may be
used to address foreseeable shortfalls of DTC's liquidity resources
following a Participant Default, and would provide that these tools may
be used as appropriate during the Crisis Continuum to address liquidity
shortfalls if they arise. The goal in managing DTC's liquidity
resources is to maximize resource availability in an evolving stress
situation, to maintain flexibility in the order and use of sources of
liquidity, and to repay any third party lenders in a timely manner.
Liquidity tools include, for example, DTC's committed 364-day credit
facility \34\ and Net Credit Reductions.\35\ The Recovery Plan would
state that the availability and capacity of these liquidity tools
cannot be accurately predicted and are dependent on the circumstances
of the applicable stress period, including market price volatility,
actual or perceived disruptions in financial markets, the costs to DTC
of utilizing these tools, and any potential impact on DTC's credit
rating.
---------------------------------------------------------------------------

    \33\ As these matters are described in greater detail in the
Loss Allocation Filing and in the proposed amendments to Rule 4,
described therein, reference is made to that filing and the details
are not repeated here. See supra note 12.
    \34\ See Securities Exchange Act Release No. 80605 (May 5,
2017), 82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; SR-NSCC-2017-
802).
    \35\ DTC may borrow amounts needed to complete settlement from
Participants by net credit reductions to their settlement accounts,
secured by the Collateral of the defaulting Participant. See
Securities Exchange Act Release Nos. 24689 (July 9, 1987), 52 FR
26613 (July 15, 1987) (SR-DTC-87-4); 41879 (September 15, 1999), 64
FR 51360 (September 22, 1999) (SR-DTC-99-15); 42281 (December 28,
1999), 65 FR 1420 (January 10, 2000) (SR-DTC-99-25).
---------------------------------------------------------------------------

    As stated above, the Recovery Plan would state that DTC will have
entered the recovery phase on the date that it issues the first Loss
Allocation Notice of the second loss allocation round with respect to a
given Event Period. The Recovery Plan would provide that, during the
recovery phase, DTC would continue and, as needed, enhance, the
monitoring and remedial actions already described in connection with
previous phases of the Crisis Continuum, and would remain in the
recovery phase until its financial resources are expected to be or are
fully replenished, or until the Wind-down Plan is triggered, as
described below.
    The Recovery Plan would describe governance for the actions and
tools that may be employed within each phase of the Crisis Continuum,
which would be dictated by the facts and circumstances applicable to
the situation being addressed. Such facts and circumstances would be
measured by the various indicators and metrics applicable to that phase
of the Crisis Continuum, and would follow relevant escalation protocol
that would be described in the Recovery Plan. The Recovery Plan would
also describe the governance procedures around a decision to cease to
act for a Participant, pursuant to the Rules, and around the management
and oversight of the subsequent liquidation of Collateral securities.
The Recovery Plan would state that, overall, DTC would retain
flexibility in accordance with the Rules, its governance structure, and
its regulatory oversight, to address a particular situation in order to
best protect DTC and its Participants, and to meet the primary
objectives, throughout the Crisis Continuum, of minimizing losses and,
where consistent and practicable, minimizing disturbance to affected
markets.
    Non-Default Losses. The Recovery Plan would outline how DTC may
address losses that result from events other than a Participant
Default. While these matters are addressed in greater detail in other
documents, this section of the Plan would provide a roadmap to those
documents and an outline for DTC's approach to monitoring and managing
losses that could result from a non-default event. The Plan would first
identify some of the risks DTC faces that could lead to these losses,
which include, for example, the business and profit/loss risks of
unexpected declines in revenue or growth of expenses; the operational
risks of disruptions to systems or processes that could lead to large
losses, including those resulting from, for example, a cyber-attack;
and custody or investment risks that could lead to financial losses.
The Recovery Plan would describe DTC's overall strategy for the
management of these risks, which includes a ``three lines of defense''
approach to risk management that allows for comprehensive management of
risk across the organization.\36\ The Recovery Plan would also describe
DTC's approach to financial risk and capital management. The Plan would
identify key aspects of this approach, including, for example, an
annual budget process, business line performance reviews with
management, and regular review of capital requirements against LNA.
These risk management strategies are collectively intended to allow DTC
to effectively identify, monitor, and manage risks of non-default
losses.
---------------------------------------------------------------------------

    \36\ This ``three lines of defense'' approach to risk management
includes (1) a first line of defense comprised of the various
business lines and functional units that support the products and
services offered by DTC; (2) a second line of defense comprised of
control functions that support DTC, including the risk management,
legal and compliance areas; and (3) a third line of defense, which
is performed by an internal audit group. The Clearing Agency Risk
Management Framework includes a description of this ``three lines of
defense'' approach to risk management, and addresses how DTC
comprehensively manages various risks, including operational,
general business, investment, custody, and other risks that arise in
or are borne by it. See Securities Exchange Act Release No. 81635
(September 15, 2017), 82 FR 44224 (September 21, 2017) (SR-DTC-2017-
013; SR-FICC-2017-016; SR-NSCC-2017-012). The Clearing Agency
Operational Risk Management Framework describes the manner in which
DTC manages operational risks, as defined therein. See Securities
Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332
(October 4, 2017) (SR-DTC-2017-014; SR-FICC-2017-017; SR-NSCC-2017-
013).

---------------------------------------------------------------------------

    The Plan would identify the two categories of financial resources
DTC maintains to cover losses and expenses arising from non-default
risks or events as (1) LNA, maintained, monitored, and managed pursuant
to the Capital Policy, which include (a) amounts held in satisfaction
of the General Business Risk Capital Requirement,\37\ (b) the Corporate
Contribution,\38\ and (c) other amounts held in excess of DTC's capital
requirements pursuant to the Capital Policy; and (2) resources
available pursuant to the loss allocation provisions of Rule 4.\39\
---------------------------------------------------------------------------

    \37\ See supra note 30.
    \38\ See supra note 30.
    \39\ See supra note 12.
---------------------------------------------------------------------------

    The Plan would address the process by which the CFO and the DTCC
Treasury group would determine which available LNA resources are most
appropriate to cover a loss that is caused by a non-default event. This
determination involves an evaluation of a number of factors, including
the current and expected size of the loss, the expected time horizon
over when the loss or additional expenses would materialize, the
current and projected available LNA, and the likelihood LNA could be
successfully replenished pursuant to the Replenishment Plan, if
triggered.\40\ Finally the Plan would discuss how DTC would apply its
resources to address losses resulting from a non-default event,
including the order of resources it would apply if the loss or
liability is expected to exceed DTC's excess LNA amounts, or is large
relative thereto, and the Board has declared the event a ``Declared
Non-Default Loss Event'' pursuant to Rule 4.\41\
---------------------------------------------------------------------------

    \40\ See supra note 10.
    \41\ See supra note 12.
---------------------------------------------------------------------------

    The Plan would also describe proposed Rule 38 (Market Disruption
and Force Majeure), which DTC is proposing to adopt in its Rules. This
Proposed Rule would provide transparency around how DTC would address
extraordinary events that may occur outside its control. Specifically,
the Proposed Rule would define a ``Market Disruption Event'' and the
governance around a determination that such an event has occurred. The
Proposed Rule would also describe DTC's authority to take actions
during the pendency of a Market Disruption Event that it deems
appropriate to address such an event and facilitate the continuation of
its services, if practicable, as described in greater detail below.
    The Plan would describe the interaction between the Proposed Rule
and DTC's existing processes and procedures addressing business
continuity management and disaster recovery (generally, the ``BCM/DR
procedures''), making clear that the Proposed Rule is designed to
support those BCM/DR procedures and to address circumstances that may
be exogenous to DTC and not necessarily addressed by the BCM/DR
procedures. Finally, the Plan would describe that, because the
operation of the Proposed Rule is specific to each applicable Market
Disruption Event, the Proposed Rule does not define a time limit on its
application. However, the Plan would note that actions authorized by
the Proposed Rule would be limited to the pendency of the applicable
Market Disruption Event, as made clear in the Proposed Rule. Overall,
the Proposed Rule is designed to mitigate risks caused by Market
Disruption Events and, thereby, minimize the risk of financial loss
that may result from such events.
    Recovery Tool Characteristics. The Recovery Plan would describe
DTC's evaluation of the tools identified within the Recovery Plan, and
its rationale for concluding that such tools are comprehensive,
effective, and transparent, and that such tools provide appropriate
incentives to Participants and minimize negative impact on Participants
and the financial system, in compliance with guidance published by the
Commission in connection with the adoption of Rule 17Ad-22(e)(3)(ii)
under the Act.\42\ DTC's analysis and the conclusions set forth in this
section of the Recovery Plan are described in greater detail in Item
3(b) of this filing, below.
---------------------------------------------------------------------------

    \42\ Standards for Covered Clearing Agencies, Securities
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786
(October 13, 2016) (S7-03-14).
---------------------------------------------------------------------------

DTC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the
orderly wind-down of DTC if the use of the recovery tools described in
the Recovery Plan do not successfully return DTC to financial
viability. While DTC believes that, given the comprehensive nature of
the recovery tools, such event is extremely unlikely, as described in
greater detail below, DTC is proposing a wind-down strategy that
provides for (1) the transfer of DTC's business, assets, securities
inventory, and membership to another legal entity, (2) such transfer
being effected in connection with proceedings under Chapter 11 of the
U.S. Federal Bankruptcy Code,\43\ and (3) after effectuating this
transfer, DTC liquidating any remaining assets in an orderly manner in
bankruptcy proceedings. DTC believes that the proposed transfer
approach to a wind-down would meet its objectives of (1) assuring that
DTC's critical services will be available to the market as long as
there are Participants in good standing, and (2) minimizing disruption
to the operations of Participants and financial markets generally that
might be caused by DTC's failure.
---------------------------------------------------------------------------

    \43\ 11 U.S.C. 1101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to DTC's Wind-down Plan, the
Plan would identify the factors that DTC considered in developing this
approach, including the fact that DTC does not own material assets that
are unrelated to its clearance and settlement activities. As such, a
business reorganization or ``bail-in'' of debt approach would be
unlikely to mitigate significant losses. Additionally, DTC's approach
was developed in consideration of its critical and unique position in
the U.S. markets, which precludes any approach that would cause DTC's
critical services to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios
that could lead to the wind-down of DTC, and the likelihood of such
scenarios. The Wind-down Plan would identify the time period leading up
to a decision to wind-down DTC as the ``Runway Period.'' This period
would follow the implementation of any recovery tools, as it may take a
period of time, depending on the severity of the market stress at that
time, for these tools to be effective or for DTC to realize a loss
sufficient to cause it to be unable to borrow to complete settlement
and to repay such borrowings.\44\ The Plan would identify some of the
indicators that DTC has entered this Runway Period, which would
include, for example, simultaneous successive Participant Defaults,
significant Participant retirements, and DTC's inability to replenish
financial resources following the liquidation of Collateral securities.
---------------------------------------------------------------------------

    \44\ The Wind-down Plan would state that, given DTC's position
as a user-governed financial market utility, it is possible that its
Participants might voluntarily elect to provide additional support
during the recovery phase leading up to a potential trigger of the
Wind-down Plan, but would also make clear that DTC cannot predict
the willingness of Participants to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a
determination by the Board that recovery efforts have not been, or are
unlikely to be, successful in returning DTC to viability as a going
concern. As described in the Plan, DTC believes this is an appropriate
trigger because it is both broad and flexible enough to cover

a variety of scenarios, and would align incentives of DTC and
Participants to avoid actions that might undermine DTC's recovery
efforts. Additionally, this approach takes into account the
characteristics of DTC's recovery tools and enables the Board to
consider (1) the presence of indicators of a successful or unsuccessful
recovery, and (2) potential for knock-on effects of continued iterative
application of DTC's recovery tools.
    The Wind-down Plan would describe the general objectives of the
transfer strategy, and would address assumptions regarding the transfer
of DTC's critical services, business, assets, securities inventory, and
membership \45\ to another legal entity that is legally, financially,
and operationally able to provide DTC's critical services to entities
that wish to continue their membership following the transfer
(``Transferee''). The Wind-down Plan would provide that the Transferee
would be either (1) a third party legal entity, which may be an
existing or newly established legal entity or a bridge entity formed to
operate the business on an interim basis to enable the business to be
transferred subsequently (``Third Party Transferee''); or (2) an
existing, debt-free failover legal entity established ex-ante by DTCC
(``Failover Transferee'') to be used as an alternative Transferee in
the event that no viable or preferable Third Party Transferee timely
commits to acquire DTC's business. DTC would seek to identify the
proposed Transferee, and negotiate and enter into transfer arrangements
during the Runway Period and prior to making any filings under Chapter
11 of the U.S. Federal Bankruptcy Code.\46\ As stated above, the Wind-
down Plan would anticipate that the transfer to the Transferee,
including the transfer and establishment of the Participant and Pledgee
securities accounts on the books of the Transferee, be effected in
connection with proceedings under Chapter 11 of the U.S. Federal
Bankruptcy Code, and pursuant to a bankruptcy court order under Section
363 of the Bankruptcy Code, such that the transfer would be free and
clear of claims against, and interests in, DTC, except to the extent
expressly provided in the court's order.\47\
---------------------------------------------------------------------------

    \45\ Arrangements with FAST Agents and DRS Agents (each as
defined in proposed Rule 32(A)) and with Settling Banks would also
be assigned to the Transferee, so that the approach would be
transparent to issuers and their transfer agents, as well as to
Settling Banks.
    \46\ 11 U.S.C. 1101 et seq.
    \47\ See id. at 363.
---------------------------------------------------------------------------

    In order to effect a timely transfer of its services and minimize
the market and operational disruption of such transfer, DTC would
expect to transfer all of its critical services and any non-critical
services that are ancillary and beneficial to a critical service, or
that otherwise have substantial user demand from the continuing
membership. Given the transfer of the securities inventory and the
establishment on the books of the Transferee Participant and Pledgee
securities accounts, DTC anticipates that, following the transfer, it
would not itself continue to provide any services, critical or not.
Following the transfer, the Wind-down Plan would anticipate that the
Transferee and its continuing membership would determine whether to
continue to provide any transferred non-critical service on an ongoing
basis, or terminate the non-critical service following some transition
period. DTC's Wind-down Plan would anticipate that the Transferee would
enter into a transition services agreement with DTCC so that DTCC would
continue to provide the shared services it currently provides to DTC,
including staffing, infrastructure and operational support. The Wind-
down Plan would also anticipate the assignment of DTC's ``inbound''
link arrangements to the Transferee. The Wind-down Plan would provide
that in the case of ``outbound'' links, DTC would seek to have the
linked FMIs agree, at a minimum, to accept the Transferee as a link
party for a transition period.\48\
---------------------------------------------------------------------------

    \48\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding
agreements, which are generally not assignable by DTC. However, to
the extent the Transferee adopts rules substantially identical to
those DTC has in effect prior to the transfer, it would have the
benefit of any rules-based liquidity funding. The Wind-down Plan
contemplates that no Participants Fund would be transferred to the
Transferee, as it is not held in a bankruptcy remote manner and it
is the primary prefunded liquidity resource to be accessed in the
recovery phase.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness
of the transfer to the Transferee, the wind-down of DTC would involve
addressing any residual claims against DTC through the bankruptcy
process and liquidating the legal entity. As such, and as stated above,
the Wind-down Plan does not contemplate DTC continuing to provide
services in any capacity following the transfer time, and any services
not transferred would be terminated.
    The Wind-down Plan would also identify the key dependencies for the
effectiveness of the transfer, which include regulatory approvals that
would permit the Transferee to be legally qualified to provide the
transferred services from and after the transfer, and approval by the
applicable bankruptcy court of, among other things, the proposed sale,
assignments, and transfers to the Transferee.
    The Wind-down Plan would address governance matters related to the
execution of the transfer of DTC's business and its wind-down. The
Wind-down Plan would address the duties of the Board to execute the
wind-down of DTC in conformity with (1) the Rules, (2) the Board's
fiduciary duties, which mandate that it exercise reasonable business
judgment in performing these duties, and (3) DTC's regulatory
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in
making these decisions, which would include, for example, whether DTC
could safely stabilize the business and protect its value without
seeking bankruptcy protection, and DTC's ability to continue to meet
its regulatory requirements.
    The Wind-down Plan would describe (1) actions DTC or DTCC may take
to prepare for wind-down in the period before DTC experiences any
financial distress, (2) actions DTC would take both during the recovery
phase and the Runway Period to prepare for the execution of the Wind-
down Plan, and (3) actions DTC would take upon commencement of
bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the
estimated time and costs to effectuate the plan, and would provide that
this estimate be reviewed and approved by the Board annually. In order
to estimate the length of time it might take to achieve a recovery or
orderly wind-down of DTC's critical operations, as contemplated by the
R&W Plan, the Wind-down Plan would include an analysis of the possible
sequencing and length of time it might take to complete an orderly
wind-down and transfer of critical operations, as described in earlier
sections of the R&W Plan. The Wind-down Plan would also include in this
analysis consideration of other factors, including the time it might
take to complete any further attempts at recovery under the Recovery
Plan. The Wind-down Plan would then multiply this estimated length of
time by DTC's average monthly operating expenses, including adjustments
to account for changes to DTC's profit and expense profile during these
circumstances, over the previous twelve months to determine the amount
of LNA that it should hold to achieve a recovery or

orderly wind-down of DTC's critical operations. The estimated wind-down
costs would constitute the ``Recovery/Wind-down Capital Requirement''
under the Capital Policy.\49\ Under that policy, the General Business
Risk Capital Requirement is calculated as the greatest of three
estimated amounts, one of which is this Recovery/Wind-down Capital
Requirement.\50\
---------------------------------------------------------------------------

    \49\ See supra note 10.
    \50\ See supra note 10.
---------------------------------------------------------------------------

    The R&W Plan is designed as a roadmap, and the types of actions
that may be taken both leading up to and in connection with
implementation of the Wind-down Plan would be primarily addressed in
other supporting documentation referred to therein.
    The Wind-down Plan would address proposed Rule 32(A) (Wind-down of
the Corporation and proposed Rule 38 (Force Majeure and Market
Disruption)), which would be adopted to facilitate the implementation
of the Wind-down Plan, as discussed below.
Proposed Rules
    In connection with the adoption of the R&W Plan, DTC is proposing
to adopt the Proposed Rules, each described below. The Proposed Rules
would facilitate the execution of the R&W Plan and would provide
Participants with transparency as to critical aspects of the Plan,
particularly as they relate to the rights and responsibilities of both
DTC and its Participants. The Proposed Rules also provide a legal basis
to these aspects of the Plan.
Rule 32(A) (Wind-Down of the Corporation)
    The proposed Rule 32(A) (``Wind-down Rule'') would be adopted to
facilitate the execution of the Wind-down Plan. The Wind-down Rule
would include a proposed set of defined terms that would be applicable
only to the provisions of this Proposed Rule. The Wind-down Rule would
make clear that a wind-down of DTC's business would occur (1) after a
decision is made by the Board, and (2) in connection with the transfer
of DTC's services to a Transferee, as described therein. Generally, the
proposed Wind-down Rule is designed to create clear mechanisms for the
transfer of Eligible Participants and Pledgees, Settling Banks, DRS
Agents, and FAST Agents (as these terms would be defined in the Wind-
down Rule), and DTC's inventory of financial assets in order to provide
for continued access to critical services and to minimize disruption to
the markets in the event the Wind-down Plan is initiated.
    Wind-down Trigger. First, the Proposed Rule would make clear that
the Board is responsible for initiating the Wind-down Plan, and would
identify the criteria the Board would consider when making this
determination. As provided for in the Wind-down Plan and in the
proposed Wind-down Rule, the Board would initiate the Plan if, in the
exercise of its business judgment and subject to its fiduciary duties,
it has determined that the execution of the Recovery Plan has not or is
not likely to restore DTC to viability as a going concern, and the
implementation of the Wind-down Plan, including the transfer of DTC's
business, is in the best interests of DTC, its Participants and
Pledgees, its shareholders and creditors, and the U.S. financial
markets.
    Identification of Critical Services; Designation of Dates and Times
for Specific Actions. The Proposed Rule would provide that, upon making
a determination to initiate the Wind-down Plan, the Board would
identify the critical and non-critical services that would be
transferred to the Transferee at the Transfer Time (as defined below
and in the Proposed Rule), as well as any non-critical services that
would not be transferred to the Transferee. The proposed Wind-down Rule
would establish that any services transferred to the Transferee will
only be provided by the Transferee as of the Transfer Time, and that
any non-critical services that are not transferred to the Transferee
would be terminated at the Transfer Time. The Proposed Rule would also
provide that the Board would establish (1) an effective time for the
transfer of DTC's business to a Transferee (``Transfer Time''), and (2)
the last day that instructions in respect of securities and other
financial products may be effectuated through the facilities of DTC
(the ``Last Activity Date''). The Proposed Rule would make clear that
DTC would not accept any transactions for settlement after the Last
Activity Date. Any transactions to be settled after the Transfer Time
would be required to be submitted to the Transferee, and would not be
DTC's responsibility.
    Notice Provisions. The proposed Wind-down Rule would provide that,
upon a decision to implement the Wind-down Plan, DTC would provide its
Participants, Pledgees, DRS Agents, FAST Agents, Settling Banks and
regulators with a notice that includes material information relating to
the Wind-down Plan and the anticipated transfer of DTC's Participants
and business, including, for example, (1) a brief statement of the
reasons for the decision to implement the Wind-down Plan; (2)
identification of the Transferee and information regarding the
transaction by which the transfer of DTC's business would be effected;
(3) the Transfer Time and Last Activity Date; and (4) identification of
Participants and the critical and non-critical services that would be
transferred to the Transferee at the Transfer Time, as well as those
Non-Eligible Participants (as defined below and in the Proposed Rule)
and any non-critical services that would not be included in the
transfer. DTC would also make available the rules and procedures and
membership agreements of the Transferee.
    Transfer of Membership. The proposed Wind-down Rule would address
the expected transfer of DTC's membership to the Transferee, which DTC
would seek to effectuate by entering into an arrangement with a
Failover Transferee, or by using commercially reasonable efforts to
enter into such an arrangement with a Third Party Transferee. Thus,
under the proposal, in connection with the implementation of the Wind-
down Plan and with no further action required by any party:
    (1) Each Eligible Participant would become (i) a Participant of the
Transferee and (ii) a party to a Participants agreement with the
Transferee;
    (2) each Participant that is delinquent in the performance of any
obligation to DTC or that has provided notice of its election to
withdraw as a Participant (a ``Non-Eligible Participant'') as of the
Transfer Time would become (i) the holder of a transition period
securities account maintained by the Transferee on its books
(``Transition Period Securities Account'') and (ii) a party to a
Transition Period Securities Account agreement of the Transferee;
    (3) each Pledgee would become (i) a Pledgee of the Transferee and
(ii) a party to a Pledgee agreement with the Transferee;
    (4) each DRS Agent would become (i) a DRS Agent of the Transferee
and (ii) a party to a DRS Agent agreement with the Transferee;
    (5) each FAST Agent would become (i) a FAST Agent of the Transferee
and (ii) a party to a FAST Agent agreement with the Transferee; and
    (6) each Settling Bank for Participants and Pledgees would become
(i) a Settling Bank for Participants and Pledgees of the Transferee and
(ii) a party to a Settling Bank Agreement with the Transferee.

    Further, the Proposed Rule would make clear that it would not
prohibit (1) Non-Eligible Participants from applying for membership
with the Transferee, (2) Non-Eligible Participants that have become
holders of Transition Period Securities Accounts (``Transition Period
Securities Account Holders'') of the Transferee from withdrawing as a
Transition Period Securities Account Holder from the Transferee,
subject to the rules and procedures of the Transferee, and (3)
Participants, Pledgees, DRS Agents, FAST Agents, and Settling Banks
that would be transferred to the Transferee from withdrawing from
membership with the Transferee, subject to the rules and procedures of
the Transferee. Under the Proposed Rule, Non-Eligible Participants that
have become Transition Period Securities Account Holders of the
Transferee shall have the rights and be subject to the obligations of
Transition Period Securities Account Holders set forth in special
provisions of the rules and procedures of the Transferee applicable to
such Transition Period Securities Account Holder. Specifically, Non-
Eligible Participants that become Transition Period Securities Account
Holders must, within the Transition Period (as defined in the Proposed
Rule), instruct the Transferee to transfer the financial assets
credited to its Transition Period Securities Account (i) to a
Participant of the Transferee through the facilities of the Transferee
or (ii) to a recipient outside the facilities of the Transferee, and no
additional financial assets may be delivered versus payment to a
Transition Period Securities Account during the Transition Period.
    Transfer of Inventory of Financial Assets. The proposed Wind-down
Rule would provide that DTC would enter into arrangements with a
Failover Transferee, or would use commercially reasonable efforts to
enter into arrangements with a Third Party Transferee, providing that,
in either case, at Transfer Time:
    (1) DTC would transfer to the Transferee (i) its rights with
respect to its nominee Cede & Co. (``Cede'') (and thereby its rights
with respect to the financial assets owned of record by Cede), (ii) the
financial assets held by it at the FRBNY, (iii) the financial assets
held by it at other CSDs, (iv) the financial assets held in custody for
it with FAST Agents, (v) the financial assets held in custody for it
with other custodians and (vi) the financial assets it holds in
physical custody.
    (2) The Transferee would establish security entitlements on its
books for Eligible Participants of DTC that become Participants of the
Transferee that replicate the security entitlements that DTC maintained
on its books immediately prior to the Transfer Time for such Eligible
Participants, and DTC would simultaneously eliminate such security
entitlements from its books.
    (3) The Transferee would establish security entitlements on its
books for Non-Eligible Participants of DTC that become Transition
Period Securities Account Holders of the Transferee that replicate the
security entitlements that DTC maintained on its books immediately
prior to the Transfer Time for such Non-Eligible Participants, and DTC
would simultaneously eliminate such security entitlements from its
books.
    (4) The Transferee would establish pledges on its books in favor of
Pledgees that become Pledgees of the Transferee that replicate the
pledges that DTC maintained on its books immediately prior to the
Transfer Time in favor of such Pledgees, and DTC shall simultaneously
eliminate such pledges from its books.
    Comparability Period. The proposed automatic mechanism for the
transfer of DTC's membership is intended to provide DTC's membership
with continuous access to critical services in the event of DTC's wind-
down, and to facilitate the continued prompt and accurate clearance and
settlement of securities transactions. Further to this goal, the
proposed Wind-down Rule would provide that DTC would enter into
arrangements with a Failover Transferee, or would use commercially
reasonable efforts to enter into arrangements with a Third Party
Transferee, providing that, in either case, with respect to the
critical services and any non-critical services that are transferred
from DTC to the Transferee, for at least a period of time to be agreed
upon (``Comparability Period''), the business transferred from DTC to
the Transferee would be operated in a manner that is comparable to the
manner in which the business was previously operated by DTC.
Specifically, the proposed Wind-down Rule would provide that: (1) The
rules of the Transferee and terms of Participant, Pledgee, DRS Agent,
FAST Agent and Settling Bank agreements would be comparable in
substance and effect to the analogous Rules and agreements of DTC, (2)
the rights and obligations of any Participants, Pledgees, DRS Agents,
FAST Agents, and Settling Banks that are transferred to the Transferee
would be comparable in substance and effect to their rights and
obligations as to DTC, and (3) the Transferee would operate the
transferred business and provide any services that are transferred in a
comparable manner to which such services were provided by DTC.
    The purpose of these provisions and the intended effect of the
proposed Wind-down Rule is to facilitate a smooth transition of DTC's
business to a Transferee and to provide that, for at least the
Comparability Period, the Transferee (1) would operate the transferred
business in a manner that is comparable in substance and effect to the
manner in which the business was operated by DTC, and (2) would not
require sudden and disruptive changes in the systems, operations and
business practices of the new Participants, Pledgees, DRS Agents, FAST
Agents, and Settling Banks of the Transferee.
    Subordination of Claims Provisions and Miscellaneous Matters. The
proposed Wind-down Rule would also include a provision addressing the
subordination of unsecured claims against DTC of its Participants who
fail to participate in DTC's recovery efforts (i.e., such firms are
delinquent in their obligations to DTC or elect to retire from DTC in
order to minimize their obligations with respect to the allocation of
losses, pursuant to the Rules). This provision is designed to
incentivize Participants to participate in DTC's recovery efforts.\51\
---------------------------------------------------------------------------

    \51\ Nothing in the proposed Wind-down Rule would seek to
prevent a Participant that retired its membership at DTC from
applying for membership with the Transferee. Once its DTC membership
is terminated, however, such firm would not be able to benefit from
the membership assignment that would be effected by this proposed
Wind-down Rule, and it would have to apply for membership directly
with the Transferee, subject to its membership application and
review process.
---------------------------------------------------------------------------

    The proposed Wind-down Rule would address other ex-ante matters,
including provisions providing that its Participants, Pledgees, DRS
Agents, FAST Agents and Settling Banks (1) will assist and cooperate
with DTC to effectuate the transfer of DTC's business to a Transferee,
(2) consent to the provisions of the rule, and (3) grant DTC power of
attorney to execute and deliver on their behalf documents and
instruments that may be requested by the Transferee. Finally, the
Proposed Rule would include a limitation of liability for any actions
taken or omitted to be taken by DTC pursuant to the Proposed Rule. The
purpose of the limitation of liability is to facilitate and protect
DTC's ability to act expeditiously in response to extraordinary events.
As noted, such limitation of liability would be available only
following triggering of the Wind-down Plan. In addition, and as a
separate matter, the limitation of

liability provides Participants with transparency for the unlikely
situation when those extraordinary events could occur, as well
supporting the legal framework within which DTC would take such
actions. These provisions, collectively, are designed to enable DTC to
take such acts as the Board determines necessary to effectuate an
orderly transfer and wind-down of its business should recovery efforts
prove unsuccessful.
Rule 38 (Market Disruption and Force Majeure)
    The proposed Rule 38 (``Force Majeure Rule'') would address DTC's
authority to take certain actions upon the occurrence, and during the
pendency, of a ``Market Disruption Event,'' as defined therein. The
Proposed Rule is designed to clarify DTC's ability to take actions to
address extraordinary events outside of the control of DTC and of its
membership, and to mitigate the effect of such events by facilitating
the continuity of services (or, if deemed necessary, the temporary
suspension of services). To that end, under the proposed Force Majeure
Rule, DTC would be entitled, during the pendency of a Market Disruption
Event, to (1) suspend the provision of any or all services, and (2)
take, or refrain from taking, or require its Participants and Pledgees
to take, or refrain from taking, any actions it considers appropriate
to address, alleviate, or mitigate the event and facilitate the
continuation of DTC's services as may be practicable.
    The proposed Force Majeure Rule would identify the events or
circumstances that would be considered a ``Market Disruption Event,''
including, for example, events that lead to the suspension or
limitation of trading or banking in the markets in which DTC operates,
or the unavailability or failure of any material payment, bank
transfer, wire or securities settlement systems. The proposed Force
Majeure Rule would define the governance procedures for how DTC would
determine whether, and how, to implement the provisions of the rule. A
determination that a Market Disruption Event has occurred would
generally be made by the Board, but the Proposed Rule would provide for
limited, interim delegation of authority to a specified officer or
management committee if the Board would not be able to take timely
action. In the event such delegated authority is exercised, the
proposed Force Majeure Rule would require that the Board be convened as
promptly as practicable, no later than five Business Days after such
determination has been made, to ratify, modify, or rescind the action.
The proposed Force Majeure Rule would also provide for prompt
notification to the Commission, and advance consultation with
Commission staff, when practicable, including notification when an
event is no longer continuing and the relevant actions are terminated.
The Proposed Rule would require Participants and Pledgees to notify DTC
immediately upon becoming aware of a Market Disruption Event, and,
likewise, would require DTC to notify its Participants and Pledgees if
it has triggered the Proposed Rule and of actions taken or intended to
be taken thereunder.
    Finally, the Proposed Rule would address other related matters,
including a limitation of liability for any failure or delay in
performance, in whole or in part, arising out of the Market Disruption
Event. The purpose of the limitation of liability would be similar to
the purpose of the analogous provision in the proposed Wind-down Rule,
which is to facilitate and protect DTC's ability to act expeditiously
in response to extraordinary events.
(a) Statutory Basis
    DTC believes that the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to a
registered clearing agency. In particular, DTC believes that the R&W
Plan and each of the Proposed Rules are consistent with Section
17A(b)(3)(F) of the Act,\52\ the R&W Plan and each of the Proposed
Rules are consistent with Rule 17Ad-22(e)(3)(ii) under the Act,\53\ and
the R&W Plan is consistent with Rule 17Ad-22(e)(15)(ii) under the
Act,\54\ for the reasons described below.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78q-1(b)(3)(F).
    \53\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \54\ Id. at 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of DTC be designed to promote the prompt and accurate clearance and
settlement of securities transactions, and to assure the safeguarding
of securities and funds which are in the custody or control of DTC or
for which it is responsible.\55\ The Recovery Plan and the proposed
Force Majeure Rule would promote the prompt and accurate clearance and
settlement of securities transactions by providing DTC with a roadmap
for actions it may employ to mitigate losses, and monitor and, as
needed, stabilize, its financial condition, which would allow it to
continue its critical clearance and settlement services in stress
situations. Further, as described above, the Recovery Plan is designed
to identify the actions and tools DTC may use to address and minimize
losses to both DTC and its Participants. The Recovery Plan and the
proposed Force Majeure Rule would provide DTC's management and the
Board with guidance in this regard by identifying the indicators and
governance around the use and application of such tools to enable them
to address stress situations in a manner most appropriate for the
circumstances. Therefore, the Recovery Plan and the proposed Force
Majeure Rule would also contribute to the safeguarding of securities
and funds which are in the custody or control of DTC or for which it is
responsible by enabling actions that would address and minimize losses.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Wind-down Plan and the proposed Wind-down Rule, which would
facilitate the implementation of the Wind-down Plan, would also promote
the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of DTC or for which it is responsible.
The Wind-down Plan and the proposed Wind-down Rule would collectively
establish a framework for the transfer and orderly wind-down of DTC's
business. These proposals would establish clear mechanisms for the
transfer of DTC's critical services and membership as well as clear
provision for the transfer of the securities inventory it holds in
fungible bulk for Participants. By doing so, the Wind-down Plan and
these Proposed Rules are designed to facilitate the continuity of DTC's
critical services and enable its Participants and Pledgees to maintain
access to DTC's services through the transfer of its membership in the
event DTC defaults or the Wind-down Plan is triggered by the Board.
Therefore, by facilitating the continuity of DTC's critical clearance
and settlement services, DTC believes the proposals would promote the
prompt and accurate clearance and settlement of securities
transactions. Further, by creating a framework for the transfer and
orderly wind-down of DTC's business, DTC believes the proposals would
enhance the safeguarding of securities and funds which are in the
custody or control of DTC or for which it is responsible.
    Therefore, DTC believes the R&W Plan and each of the Proposed Rules
are consistent with the requirements of Section 17A(b)(3)(F) of the
Act.\56\
---------------------------------------------------------------------------

    \56\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(3)(ii) under the Act requires DTC to establish,
implement, maintain and enforce written policies

and procedures reasonably designed to maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the covered clearing agency, which
includes plans for the recovery and orderly wind-down of the covered
clearing agency necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses.\57\ The R&W
Plan and each of the Proposed Rules are designed to meet the
requirements of Rule 17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    The R&W Plan would be maintained by DTC in compliance with Rule
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and
orderly wind-down of DTC necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses, as
described above.\58\ Specifically, the Recovery Plan would define the
risk management activities, stress conditions and indicators, and tools
that DTC may use to address stress scenarios that could eventually
prevent it from being able to provide its critical services as a going
concern. Through the framework of the Crisis Continuum, the Recovery
Plan would address measures that DTC may take to address risks of
credit losses and liquidity shortfalls, and other losses that could
arise from a Participant Default. The Recovery Plan would also address
the management of general business risks and other non-default risks
that could lead to losses.
---------------------------------------------------------------------------

    \58\ Id.
---------------------------------------------------------------------------

    The Wind-down Plan would be triggered by a determination by the
Board that recovery efforts have not been, or are unlikely to be,
successful in returning DTC to viability as a going concern. Once
triggered, the Wind-down Plan would set forth clear mechanisms for the
transfer of DTC's membership and business, and would be designed to
facilitate continued access to DTC's critical services and to minimize
market impact of the transfer. By establishing the framework and
strategy for the execution of the transfer and wind-down of DTC in
order to facilitate continuous access to DTC's critical services, the
Wind-down Plan establishes a plan for the orderly wind-down of DTC.
Therefore, DTC believes the R&W Plan would provide plans for the
recovery and orderly wind-down of the covered clearing agency
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses, and, as such, meets the
requirements of Rule 17Ad-22(e)(3)(ii).\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    As described in greater detail above, the Proposed Rules are
designed to facilitate the execution of the R&W Plan, provide
Participants with transparency regarding the material provisions of the
Plan, and provide DTC with a legal basis for implementation of those
provisions. As such, DTC also believes the Proposed Rules meet the
requirements of Rule 17Ad-22(e)(3)(ii).\60\
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

    DTC has evaluated the recovery tools that would be identified in
the Recovery Plan and has determined that these tools are
comprehensive, effective, and transparent, and that such tools provide
appropriate incentives to DTC's Participants to manage the risks they
present. The recovery tools, as outlined in the Recovery Plan and in
the proposed Force Majeure Rule, provide DTC with a comprehensive set
of options to address its material risks and support the resiliency of
its critical services under a range of stress scenarios. DTC also
believes the recovery tools are effective, as DTC has both legal basis
and operational capability to execute these tools in a timely and
reliable manner. Many of the recovery tools are provided for in the
Rules; Participants are bound by the Rules through their Participants
Agreements with DTC, and the Rules are adopted pursuant to a framework
established by Rule 19b-4 under the Act,\61\ providing a legal basis
for the recovery tools found therein. Other recovery tools have legal
basis in contractual arrangements to which DTC is a party, as described
above. Further, as many of the tools are embedded in DTC's ongoing risk
management practices or are embedded into its predefined default-
management procedures, DTC is able to execute these tools, in most
cases, when needed and without material operational or organizational
delay.
---------------------------------------------------------------------------

    \61\ Id. at 240.19b-4.
---------------------------------------------------------------------------

    The majority of the recovery tools are also transparent, as they
are or are proposed to be included in the Rules, which are publicly
available. DTC believes the recovery tools also provide appropriate
incentives to its owners and Participants, as they are designed to
control the amount of risk they present to DTC's clearance and
settlement system. Finally, DTC's Recovery Plan provides for a
continuous evaluation of the systemic consequences of executing its
recovery tools, with the goal of minimizing their negative impact. The
Recovery Plan would outline various indicators over a timeline of
increasing stress, the Crisis Continuum, with escalation triggers to
DTC management or the Board, as appropriate. This approach would allow
for timely evaluation of the situation and the possible impacts of the
use of a recovery tool in order to minimize the negative effects of the
stress scenario. Therefore, DTC believes that the recovery tools that
would be identified and described in its Recovery Plan, including the
authority provided to it in the proposed Force Majeure Rule, would meet
the criteria identified within guidance published by the Commission in
connection with the adoption of Rule 17Ad-22(e)(3)(ii).\62\
---------------------------------------------------------------------------

    \62\ Supra note 42.
---------------------------------------------------------------------------

    Therefore, DTC believes the R&W Plan and each of the Proposed Rules
are consistent with Rule 17Ad-22(e)(3)(ii).\63\
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(ii) under the Act requires DTC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor, and manage its general
business risk and hold sufficient LNA to cover potential general
business losses so that DTC can continue operations and services as a
going concern if those losses materialize, including by holding LNA
equal to the greater of either (x) six months of the covered clearing
agency's current operating expenses, or (y) the amount determined by
the board of directors to be sufficient to ensure a recovery or orderly
wind-down of critical operations and services of the covered clearing
agency.\64\ While the Capital Policy addresses how DTC holds LNA in
compliance with these requirements, the Wind-down Plan would include an
analysis that would estimate the amount of time and the costs to
achieve a recovery or orderly wind-down of DTC's critical operations
and services, and would provide that the Board review and approve this
analysis and estimation annually. The Wind-down Plan would also provide
that the estimate would be the ``Recovery/Wind-down Capital
Requirement'' under the Capital Policy. Under that policy, the General
Business Risk Capital Requirement, which is the sufficient amount of
LNA that DTC should hold to cover potential general business losses so
that it can continue operations and services as a going concern if
those losses materialize, is calculated as the greatest of three
estimated amounts, one of which is this Recovery/Wind-down Capital
Requirement. Therefore, DTC believes the R&W Plan, as it interrelates

with the Capital Policy, is consistent with Rule 17Ad-
22(e)(15)(ii).\65\
---------------------------------------------------------------------------

    \64\ Id. at 240.17Ad-22(e)(15)(ii).
    \65\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe the proposal would have any impact, or impose
any burden, on competition not necessary or appropriate in furtherance
of the purpose of the Act.\66\ The proposal would apply uniformly to
all Participants and Pledgees. DTC does not anticipate that the
proposal would affect its day-to-day operations under normal
circumstances, or in the management of a typical Participant default
scenario or non-default event. DTC is not proposing to alter the
standards or requirements for becoming or remaining a Participant or
Pledgee, or otherwise using its services. DTC also does not propose to
change its methodology for calculation of Participants Fund
contributions. The proposal is intended to (1) address the risk of loss
events and identify the tools and resources available to it to
withstand and recover from such events, so that it can restore normal
operations, and (2) provide a framework for its orderly wind-down and
the transfer of its business in the event those recovery tools do not
restore DTC to financial viability, as described herein.
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    \66\ 15 U.S.C. 78q-1(b)(3)(I).
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    The R&W Plan and each of the Proposed Rules have been developed and
documented in order to satisfy applicable regulatory requirements, as
discussed above.
    With respect to the Recovery Plan, the proposal generally reflects
DTC's existing tools and existing internal procedures. Existing tools
that would have a direct impact on the rights, responsibilities or
obligations of Participants are reflected in the existing Rules or are
proposed to be included in the Rules. Accordingly, the Recovery Plan
and the proposed Force Majeure Rule are intended to provide a roadmap,
define the strategy and identify the tools available to DTC in
connection with its recovery efforts. By proposing to enhance DTC's
existing internal management and its regulatory compliance related to
its recovery efforts, DTC does not believe the Recovery Plan or the
proposed Force Majeure Rule would have any impact, or impose any
burden, on competition.
    With respect to the Wind-down Plan and the proposed Wind-down Rule,
which facilitate the execution of the Wind-down Plan, the proposal
would operate to effect the transfer of all eligible Participants and
Pledgees to the Transferee, and would not prohibit any market
participant from either bidding to become the Transferee or from
applying for membership with the Transferee. The proposal also would
not prohibit any Participant or Pledgee from withdrawing from DTC prior
to the Transfer Time, as is permitted under the Rules today, or from
applying for membership with the Transferee. Therefore, as the proposal
would treat each similarly situated Participant and Pledgee identically
under the Wind-down Plan and under the Proposed Wind-down Rule, DTC
does not believe the Wind-down Plan or the proposed Wind-down Rule
would have any impact, or impose any burden, on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others

    While DTC has not solicited or received any written comments
relating to this proposal, DTC has conducted outreach to its Members in
order to provide them with notice of the proposal. DTC will notify the
Commission of any written comments received by DTC.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-DTC-2017-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2017-021. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the Proposed Rule Change that are filed with
the Commission, and all written communications relating to the Proposed
Rule Change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of DTC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-DTC-2017-021 and should be submitted on
or before August 3, 2018.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\67\
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    \67\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15363 Filed 7-18-18; 8:45 am]
 BILLING CODE 8011-01-P