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- Page 1Notice of proposed change pursuant to the Payment, Clearing, and Settlement Act of 2010Section 806(e)(1) *
- Section 806(e)(2) *Security-Based Swap Submission pursuant
- to the Securities Exchange Act of 1934Section 3C(b)(2) *Exhibit 2 Sent As Paper Document
- Exhibit 3 Sent As Paper Documenthas duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.
- 19b-4(f)(6)
- 19b-4(f)(5)
- Provide a brief description of the action (limit 250 characters, required when Initial is checked *).(Name *)
- NOTE: Clicking the button at right will digitally sign and lock
- this form. A digital signature is as legally binding as a physical
- signature, and once signed, this form cannot be changed.Deputy General Counsel and Managing Director(Title *)04/01/2021
- DateProvide the name, telephone number, and e-mail address of the person on the staff of the self-regulatory organization
- prepared to respond to questions and comments on the action.Assistant General Counsel and Director
- Title *
- Contact Information19b-4(f)(4)
- 19b-4(f)(2)
- 19b-4(f)(3)Extension of Time Period
- for Commission Action *
- SECURITIES AND EXCHANGE COMMISSION
- WASHINGTON, D.C. 20549
- Form 19b-4
- Withdrawal
- Fax
- John
- Last Name *
- Filing by
- Pilot
- The Depository Trust Company
- 005
- - *
- 2021Amendment No. (req. for Amendments *)File No.* SR -
- Petrofsky
- JPetrofsky@dtcc.com
- (813) 470-2115
- Telephone *
- E-mail *
- First Name *
- SignaturePursuant to the requirements of the Securities Exchange Act of 1934,Section 19(b)(3)(A) *
- Section 19(b)(3)(B) *
- Initial *
- Amendment *
- Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
- Description
- Modify the DTC Settlement Service Guide and the Form of DTC Pledgee’s Agreement
- bbecker@dtcc.com
- Brandon Becker
- By
- Section 19(b)(2) *19b-4(f)(1)Required fields are shown with yellow backgrounds and asterisks.Page 1 of * 45OMB APPROVAL
- OMB Number: 3235-0045
- Estimated average burden
- hours per response............38RuleDate Expires *Page 2
- If the self-regulatory organization is amending only part of the text of a lengthy
- proposed rule change, it may, with the Commission's permission, file only those
- portions of the text of the proposed rule change in which changes are being made if
- the filing (i.e. partial amendment) is clearly understandable on its face. Such partial
- amendment shall be clearly identified and marked to show deletions and additions.Partial AmendmentAdd
- Remove
- ViewThe self-regulatory organization may choose to attach as Exhibit 5 proposed changes
- to rule text in place of providing it in Item I and which may otherwise be more easily
- readable if provided separately from Form 19b-4. Exhibit 5 shall be considered part
- of the proposed rule change.Exhibit 5 - Proposed Rule Text
- SECURITIES AND EXCHANGE COMMISSION
- WASHINGTON, D.C. 20549
- For complete Form 19b-4 instructions please refer to the EFFS website.Copies of any form, report, or questionnaire that the self-regulatory organization
- proposes to use to help implement or operate the proposed rule change, or that is
- referred to by the proposed rule change.Exhibit Sent As Paper DocumentExhibit 4 - Marked Copies
- Add
- Remove
- View
- Exhibit 3 - Form, Report, or Questionnaire
- Add
- Remove
- View
- Exhibit 2 - Notices, Written Comments,
- Transcripts, Other Communications
- Add
- Remove
- View
- Exhibit 1 - Notice of Proposed Rule Change *
- Add
- Form 19b-4 Information *
- Exhibit 1A- Notice of Proposed Rule
- Change, Security-Based Swap Submission,
- or Advance Notice by Clearing Agencies *Add
- Remove
- ViewRemove
- Add
- RemoveThe full text shall be marked, in any convenient manner, to indicate additions to and
- deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit
- the staff to identify immediately the changes made from the text of the rule with which
- it has been working.ViewThe self-regulatory organization must provide all required information, presented in a
- clear and comprehensible manner, to enable the public to provide meaningful
- comment on the proposal and for the Commission to determine whether the proposal
- is consistent with the Act and applicable rules and regulations under the Act.ViewExhibit Sent As Paper DocumentThe Notice section of this Form 19b-4 must comply with the guidelines for publication
- in the Federal Register as well as any requirements for electronic filing as published
- by the Commission (if applicable). The Office of the Federal Register (OFR) offers
- guidance on Federal Register publication requirements in the Federal Register
- Document Drafting Handbook, October 1998 Revision. For example, all references to
- the federal securities laws must include the corresponding cite to the United States
- Code in a footnote. All references to SEC rules must include the corresponding cite
- to the Code of Federal Regulations in a footnote. All references to Securities
- Exchange Act Releases must include the release number, release date, Federal
- Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
- -xx-xx). A material failure to comply with these guidelines will result in the proposed
- rule change being deemed not properly filed. See also Rule 0-3 under the Act (17
- CFR 240.0-3)
- The Notice section of this Form 19b-4 must comply with the guidelines for publication
- in the Federal Register as well as any requirements for electronic filing as published
- by the Commission (if applicable). The Office of the Federal Register (OFR) offers
- guidance on Federal Register publication requirements in the Federal Register
- Document Drafting Handbook, October 1998 Revision. For example, all references to
- the federal securities laws must include the corresponding cite to the United States
- Code in a footnote. All references to SEC rules must include the corresponding cite
- to the Code of Federal Regulations in a footnote. All references to Securities
- Exchange Act Releases must include the release number, release date, Federal
- Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
- -xx-xx). A material failure to comply with these guidelines will result in the proposed
- rule change, security-based swap submission, or advance notice being deemed not
- properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3)
- Copies of notices, written comments, transcripts, other communications. If such
- documents cannot be filed electronically in accordance with Instruction F, they shall be
- filed in accordance with Instruction G.Add
- Remove
- ViewRequired fields are shown with yellow backgrounds and asterisks.Page 3
- Page 3 of 45
- 1.
- Text of the Proposed Rule Change
- (a) The proposed rule change1 of The Depository Trust Company (“DTC”) would
- modify the DTC Settlement Service Guide (“Settlement Guide”)2 and the form of DTC
- Pledgee’s Agreement (“Pledgee’s Agreement”),3 as described below. Specifically, the proposed
- rule change would revise text in the Settlement Guide and Pledgee’s Agreement to clarify the
- text with respect to the processing of book entries of Pledge-related4 activity at DTC. The1Capitalized terms not defined herein are defined in the Rules, By-Laws and Organization
- Certificate of DTC (“Rules”) available at
- http://www.dtcc.com/~/media/Files/Downloads/legal/rules/dtc_rules.pdf.2Available at https://www.dtcc.com/legal/rules-and-procedures. The Service Guides
- constitute Procedures of DTC. Pursuant to the Rules, the term “Procedures” means the
- Procedures, service guides, and regulations of DTC adopted pursuant to Rule 27, as
- amended from time to time. See Rule 1, Section 1, infra note 3. DTC’s Procedures are
- filed with the Securities and Exchange Commission (“Commission”). They are binding
- on DTC and each Participant in the same manner as they are bound by the Rules. See
- Rule 27, infra note 3.3Available at https://www.dtcc.com/legal/rules-and-procedures. Pursuant to Rule 2,
- Section 3, an entity that uses DTC’s pledge services must enter into an agreement with
- DTC satisfactory to DTC. See Rule 2, Section 3, supra note 1. In this regard, DTC
- requires a Pledgee that is not a Participant to sign a Pledgee’s Agreement. Participants
- enter into a Participant’s Agreement which binds them to the Rules and Procedures
- (including, but not limited to, those related to pledge activity), and are not required by
- DTC to enter into a separate Pledgee’s Agreement. See also Rule 1, Section 1, supra note
- 1 (providing terms of the Participant’s Agreement).4Pursuant to Rule 1, The defined term “Pledge” in the Rules means, inter alia, “creating or
- providing for a security interest in a Certificated or Uncertificated Security, a Securities
- Account or a Securities [sic] Entitlement in accordance with the NYUCC.” See Rule 1,
- supra note 1. Pursuant to Rule 1, the term “NYUCC” means the Uniform Commercial
- Code of New York, as amended from time to time. See Rule 1, supra note 1. Pursuant to
- Rule 1, the term “Certificated Security” has the meaning given to the term “certificated
- security” in Section 8-102 of the NYUCC. See Rule 1, supra note 1. Pursuant to
- Section 8-102 of the NYUCC, “certificated security” means a security that is represented
- by a certificate. See NYUCC 8-102. Pursuant to Rule 1, the term “Uncertificated
- Security” has the meaning given to the term “uncertificated security” in Section 8-102 of
- the NYUCC. See Rule 1, supra note 1. Pursuant to Section 8-102 of the NYUCC,
- “uncertificated security” means a security that is not represented by a certificate.
- Pursuant to Rule 1, the term “Securities Account” (1) as used with respect to a Participant
- or Pledgee, means an account maintained by DTC for the Participant or Pledgee to which
- Securities transactions of the Participant or Pledgee effected through the facilities of DTC
- are debited and credited in the manner specified in the Rules and Procedures; and (2) as
- used with respect to DTC, means an internal account of DTC to which Securities
- transactions are debited and credited to DTC. See Rule 1, supra note 1. Pursuant to RulePage 4
- Page 4 of 45
- proposed revisions would reflect in the text of the Settlement Guide and Pledgee’s Agreement
- that Pledged Securities remain credited to a Pledgor’s Account unless the Pledgee makes a
- demand for the Pledged Securities, as described below. In this regard, the respective texts of the
- Settlement Guide and the Pledgee’s Agreement currently indicate that Pledged Securities are
- credited to a Pledgee’s Account. As discussed below, the proposed rule change relates to a
- technical aspect of the operational processing of Pledge transactions and would not impact the
- rights or obligations of a Participant or Pledgee. The text of the proposed changes to the rules of
- DTC are annexed hereto as Exhibit 5.
- (b) Not applicable.
- (c) Not applicable.
- 2.
- Procedures of the Clearing Agency
- The proposed rule change was approved by a Deputy General Counsel of DTC on April
- 1, 2021.
- 3.
- Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the
- Proposed Rule Change
- (a) Purpose
- The proposed rule change of DTC would modify the Settlement Guide and the form of
- Pledgee’s Agreement, as described below. Specifically, the proposed rule change would revise
- text in the Settlement Guide and Pledgee’s Agreement to clarify the text with respect to the
- processing of book entries of Pledge-related5 activity at DTC. The proposed revisions would
- 1, the term “Security Entitlement” has the meaning given to the term “security
- entitlement” in Section 8-102 of the NYUCC. The interest of a Participant or Pledgee in
- a Security credited to its Account is a Security Entitlement. See id. Pursuant to
- Section 8-102 of the NYUCC, “security entitlement” means the rights and property
- interest of an entitlement holder with respect to a financial asset specified in Part 5. See
- NYUCC §8-102. NYUCC Section 8-501(b) provides that a person acquires a “security
- entitlement” when, inter alia, a securities intermediary indicates by book entry that a
- financial asset has been credited to the person’s securities account. The absence of the
- crediting of a financial asset to an account of a Pledgee and the fact that an account of a
- Pledgee is not a securities account under Article 8 mean that the Pledgee has not acquired
- a security entitlement under Article 8. See NYUCC § 8-501(b). Pursuant to Section 8-
- 102, “entitlement holder” means a person identified in the records of a securities
- intermediary as the person having a security entitlement against the securities
- intermediary. If a person acquires a security entitlement by virtue of Section 8-501(b)(2)
- or (3), that person is the entitlement holder. See NYUCC §8-102.5Pursuant to Rule 1, The defined term “Pledge” in the Rules means, inter alia, “creating or
- providing for a security interest in a Certificated or Uncertificated Security, a Securities
- Account or a Securities [sic] Entitlement in accordance with the NYUCC.” See Rule 1,
- supra note 1. Pursuant to Rule 1, the term “NYUCC” means the Uniform CommercialPage 5
- Page 5 of 45
- reflect in the text of the Settlement Guide and Pledgee’s Agreement that Pledged Securities
- remain credited to a Pledgor’s Account unless the Pledgee makes a demand for the Pledged
- Securities, as described below. In this regard, the respective texts of the Settlement Guide and
- the Pledgee’s Agreement currently indicate that Pledged Securities are credited to a Pledgee’s
- Account. As discussed below, the proposed rule change relates to a technical aspect of the
- operational processing of Pledge transactions and would not impact the rights or obligations of a
- Participant or Pledgee.
- Code of New York, as amended from time to time. See Rule 1, supra note 1. Pursuant to
- Rule 1, the term “Certificated Security” has the meaning given to the term “certificated
- security” in Section 8-102 of the NYUCC. See Rule 1, supra note 1. Pursuant to Section
- 8-102 of the NYUCC, “certificated security” means a security that is represented by a
- certificate. See NYUCC 8-102. Pursuant to Rule 1, the term “Uncertificated Security”
- has the meaning given to the term “uncertificated security” in Section 8-102 of the
- NYUCC. See Rule 1, supra note 1. Pursuant to Section 8-102 of the NYUCC,
- “uncertificated security” means a security that is not represented by a certificate.
- Pursuant to Rule 1, the term “Securities Account” (1) as used with respect to a Participant
- or Pledgee, means an account maintained by DTC for the Participant or Pledgee to which
- Securities transactions of the Participant or Pledgee effected through the facilities of DTC
- are debited and credited in the manner specified in the Rules and Procedures; and (2) as
- used with respect to DTC, means an internal account of DTC to which Securities
- transactions are debited and credited to DTC. See Rule 1, supra note 1. Pursuant to Rule
- 1, the term “Security Entitlement” has the meaning given to the term “security
- entitlement” in Section 8-102 of the NYUCC. The interest of a Participant or Pledgee in
- a Security credited to its Account is a Security Entitlement. See id. Pursuant to
- Section 8-102 of the NYUCC, “security entitlement” means the rights and property
- interest of an entitlement holder with respect to a financial asset specified in Part 5. See
- NYUCC §8-102. NYUCC Section 8-501(b) provides that a person acquires a “security
- entitlement” when, inter alia, a securities intermediary indicates by book entry that a
- financial asset has been credited to the person’s securities account. The absence of the
- crediting of a financial asset to an account of a Pledgee and the fact that an account of a
- Pledgee is not a securities account under Article 8 mean that the Pledgee has not acquired
- a security entitlement under Article 8. See NYUCC § 8-501(b). Pursuant to Section 8-
- 102, “entitlement holder” means a person identified in the records of a securities
- intermediary as the person having a security entitlement against the securities
- intermediary. If a person acquires a security entitlement by virtue of Section 8-501(b)(2)
- or (3), that person is the entitlement holder. See NYUCC §8-102.Page 6
- Page 6 of 45
- The following discussion is provided by DTC and includes, but is not limited to, its own
- analysis of applicable state law provisions that DTC believes are relevant for purposes of
- describing the proposed rule change.
- Background.
- Eligibility for Pledge Services
- The pledge services of DTC are available to banks, trust companies, broker-dealers and
- other Persons approved by the DTC, which have entered into an agreement with the DTC
- satisfactory to it, for the purpose of effecting a Pledge of Deposited Securities to such banks,
- trust companies, broker-dealers and other Persons.6 A Pledgee may but need not be a
- Participant. A Pledgee is required by DTC to sign a Pledgee’s Agreement unless it is also a
- Participant. Participants are not required to sign a separate Pledgee’s Agreement to use DTC’s
- pledge services because the Participant’s Agreement binds the Participant to DTC’s Rule and
- Procedures, including those relating to pledge-related activity. Only a Pledgee which is a
- Participant may receive a Pledge Versus Payment.7
- Book Entry of Pledges and Legal Effect
- As indicated above, the definition of a “Security Entitlement” in the DTC Rules
- incorporates the definition of such term in Article 8 of the NYUCC and notes that “[t]he interest
- of a Participant or Pledgee in a Security credited to its Account is a Security Entitlement.”
- However, as more fully discussed below, while the Settlement Guide and the Pledgee’s
- Agreement make reference to the movement of Securities to a Pledgee’s Account, from an
- operational standpoint, DTC does not in fact credit a Security to an Account of a Pledgee; what
- the Pledgee receives is not a Security Entitlement. The Securities remain credited to the
- Pledgor’s account until the Pledgee releases the Pledged Securities or makes a demand for the
- Pledged Securities, as discussed below. Rather, a notation is placed on the Account of the
- Pledgor that the Securities are Pledged to the Pledgee and the Securities remain in pledged status
- until the Pledgee instructs otherwise.
- As described below, this bookkeeping method does not adversely impact the rights of the
- Pledgee in that the Pledgee maintains Control over the Pledged Securities and the Pledged
- Securities cannot be used by the Pledgee for any other transaction unless the Pledgee releases the
- Securities from the Pledged Status through an instruction to DTC.
- DTC’s Description of Pledge
- DTC’s Settlement Service Guide states that:6See Rule 2, Section 3, supra note 1.7See id.Page 7
- Page 7 of 45
- “[w]hen pledging securities to a pledgee, the pledgor’s position is moved from the
- pledgor’s general free account to the pledgee’s account which prevents the pledged position from
- being used to complete other transactions. Likewise, the release of a pledged position would
- move the pledged position back to the pledgor’s general free account where it would then be
- available to complete other transactions.”8
- Paragraph 2 of DTC’s form of Pledgee’s Agreement provides that:
- “[s]o long as Pledgee shall maintain a Depository Trust account, Depository Trust, upon
- the pledge to Pledgee of securities held by Depository Trust for the account of any depositor in
- Depository Trust, will make appropriate entries on its books transferring the securities from the
- account of such depositor to the account of Pledgee and shall maintain such securities in the
- account of Pledgee until instructed by Pledgee to release such securities to the account of the
- pledgor, to deliver such securities to the order of Pledgee or to transfer such securities on the
- books of Depository Trust to the account of a depositor in Depository Trust other than the
- pledgor.”
- The descriptions of DTC’s pledge arrangements in the (1) Settlement Service Guide, with
- respect to the text shown above, and as more fully described below, and (2) form of Pledgee’s
- Agreement are imprecise because in practice DTC does not move or transfer the securities from
- an account of the Pledgor to an account of the Pledgee, as more fully described below.
- The definition of a “Security Entitlement” in the DTC Rules incorporates the definition
- of such term in Article 8 of the NYUCC and notes that “[t]he interest of a Participant or Pledgee
- in a Security credited to its Account is a Security Entitlement.”
- However, since DTC is not in fact crediting a Security to an Account of a Pledgee, what
- the Pledgee receives is not a Security Entitlement.
- The definition of an “Entitlement Holder” in the DTC Rules incorporates the definition of
- such term in Article 8 of the NYUCC (as to which see below) and notes that “[a] Participant or
- Pledgee is an Entitlement Holder with respect to a Security credited to its Account”.
- However, since DTC is not in fact crediting a Security to an Account of a Pledgee, the
- Pledgee is not an Entitlement Holder. However, the Pledgee maintains Control of the Pledged
- Securities as more fully described below. A key to a Pledgee exercising its Control is its ability
- to instruct DTC an Entitlement Order for the delivery, pledge release or withdrawal of a security.
- Entitlement Order
- The definition of an “Entitlement Order” in the Rules incorporates the definition of such
- term in Article 8 of the NYUCC that “[a]n instruction from a Participant or Pledgee to the
- Corporation with respect to a Delivery, Pledge, Release or Withdrawal of a Security credited to a
- Securities Account is an Entitlement Order”.8See Settlement Guide, supra note 2 at 3-4.Page 8
- Page 8 of 45
- Note that the definition of an Entitlement Order does not require that the Security be
- credited to a Securities Account of the instructor. The breadth of this definition allows permitted
- entities, such as Pledgees, to issue Entitlement Orders to DTC in respect of Securities credited to
- Securities Accounts belonging to others.
- DTC Rule 9(B)9 provides that:
- “[i]f [DTC] receives an instruction from a Pledgee to effect a Delivery or Withdrawal of
- Pledged Securities, such instruction shall have the effect of notifying [DTC] that the
- Pledgee elects not to Release the Pledged Securities but, rather, to assert its Control over
- the Pledged Securities by the transfer of a greater interest in the Pledged Securities to itself
- or another Person. [DTC] shall accept such an instruction as a representation that the
- Pledgee is acting in accordance with applicable law, rules or regulations, agreements or
- any adjudication thereof.”
- Under NYUCC Section 8-507(a),10 a securities intermediary satisfies its duty to comply
- with an Entitlement Order if it acts with respect to the duty as agreed upon by the entitlement
- holder and the securities intermediary. DTC satisfies its duty to comply with an Entitlement Order
- if it acts with respect to the duty as agreed upon by the Entitlement Holder and the Securities
- Intermediary. In the case of Security Entitlements pledged on the books of DTC, DTC satisfies its
- duty to comply with an Entitlement Order by complying with the Entitlement Order of the Pledgee.
- Control
- Under NYUCC Section 9-106(a),11 “[a] person has control of a certificated security,
- uncertificated security, or security entitlement as provided in Section 8-106”.12
- Under NYUCC Section 8-106(d), “[a] purchaser has “control” of a security entitlement
- if:
- (1) the purchaser becomes the entitlement holder;
- (2) the securities intermediary has agreed that it will comply with entitlement orders
- originated by the purchaser without further consent by the entitlement holder; or
- (3) another person has control of the security entitlement on behalf of the purchaser or,
- having previously acquired control of the security entitlement, acknowledges that it has control
- on behalf of the purchaser.”9See Rule 9(B), supra note 1.10NYUCC § 8-507(a).11See NYUCC § 9-106(a).12NYUCC § 8-106.Page 9
- Page 9 of 45
- Under NYUCC Section 1-102,13 a purchaser is “a person that takes by purchase” with
- “purchase” being defined as “taking by sale, lease, discount, negotiation, mortgage, pledge, lien,
- security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in
- property”.
- NYUCC Section 8-106(f) further provides that “[a] purchaser has “control” under
- subsection (c)(2) or (d)(2) even if any duty of the issuer or the securities intermediary to comply
- with instructions or entitlement orders originated by the purchaser is subject to any condition or
- conditions (other than further consent by the registered owner or the entitlement holder).”
- Official Comment 4 to NYUCC Section 8-10614 notes that:
- “[s]ubsection (d)(2) provides that a purchaser has control if the securities intermediary
- has agreed to act on entitlement orders originated by the purchaser if no further consent by the
- entitlement holder is required. Under subsection (d)(2), control may be achieved even though the
- original entitlement holder remains as the entitlement holder.”
- Example 6 of Official Comment 4 is illustrative:
- “Able & Co., a securities dealer, grants Alpha Bank a security interest in a security
- entitlement that includes 1000 shares of XYZ Co. stock that Able holds through an account with
- Clearing Corporation. Able causes Clearing Corporation to transfer the shares into a pledge
- account, pursuant to an agreement under which Able will continue to receive dividends,
- distributions, and the like, but Alpha has the right to direct dispositions. As in Example 3, Alpha
- has control of the 1000 shares under subsection (d)(2).”
- In the case of security entitlements pledged on the books of DTC, because DTC will
- comply with the instructions of a Pledgee as provided for in Rule 9(B),15 which is an agreement
- between DTC and its Participants and Pledgees, a Pledgee has control of such security
- entitlements under NYUCC § 8-106(d)(2) even when the Pledged Securities remain credited to
- the account of the Pledgor.
- DTC’s pledge arrangements operate pursuant to the DTC Rules and the NYUCC. When
- Security Entitlements are pledged to a Pledgee through the facilities of DTC, the Pledgee has a
- security interest in such pledged Security Entitlements.16 A Pledgee has “control” under Articles13See NYUCC § 1-102.14See NYUCC § 8-106.15See Rule 9(B), supra note 1.16The interest transferred is, however, only a security interest if the Pledgor and Pledgee
- have an agreement outside of DTC that constitutes a security agreement under applicable
- law and as to which the other requirements for attachment and enforceability of a security
- interest have been satisfied. The agreement is entered into by the parties outside of DTC,Page 10
- Page 10 of 45
- 8 and 9 of the NYUCC and under the DTC Rules of any Security Entitlements pledged to it
- through the facilities of DTC,17 and the Pledgee is empowered to issue Entitlement Orders18 to
- DTC to direct the release, delivery or withdrawal of any such pledged Security Entitlements.
- Example of a Pledge by a Participant to a Pledgee
- When Security Entitlements credited to Participant A’s account at DTC are pledged to
- Pledgee B through the facilities of DTC, B has a security interest in such pledged security
- entitlements.19
- B does not itself have “security entitlements” to the underlying securities and B is not an
- “entitlement holder” as such terms are defined in the NYUCC.
- However, B as Pledgee would have “control” under Articles 8 and 9 of the NYUCC and
- under the Rules of any Security Entitlements pledged to it through the facilities of DTC, and B is
- empowered to issue Entitlement Orders to DTC to direct the release, delivery or withdrawal of
- any such pledged Security Entitlements.
- Proposed Rule Change
- Proposed change to text of Settlement Guide
- Pursuant to the proposed rule change, DTC would revise the text of the Settlement Guide
- to reflect that Pledged Securities do not move to an Account of the Pledgee. As discussed above,
- the movement of the securities is not required to effect a Pledge and does not impact the rights of
- Pledgor or Pledgee under the Rules or the NYUCC. Rather a Pledged Securities continues
- and DTC does not have knowledge or information on the existence of such an agreement
- between the parties.17The definition of “Control” in the Rules incorporates the definition of such term in
- Article 8 of the NYUCC and notes that “[a] Pledgee has Control of Pledged Securities
- until they are Delivered, Released or Withdrawn by the Pledgee.” See Rule 1, Section 1,
- supra note 1.18The definition of an “Entitlement Order” in the Rules incorporates the definition of such
- term in Section 8-102 of the NYUCC and notes that “[a]n instruction from a Participant
- or Pledgee to the Corporation with respect to a Delivery, Pledge, Release or Withdrawal
- of a Security credited to a Securities Account is an Entitlement Order”. As noted above,
- Pursuant to Section 8-102, “entitlement order” means a notification communicated to
- a securities intermediary directing transfer or redemption of a financial asset to which
- the entitlement holder has a security entitlement. See NYUCC 8-102.19As mentioned above, the interest transferred is, however, only a security interest if A and
- B have an agreement outside of DTC that constitutes a security agreement under applicable
- law and as to which the other requirements for attachment and enforceability of a security
- interest have been satisfied.Page 11
- Page 11 of 45
- credited to the pledgor’s account, however with a system notation showing the status of the
- position as pledged by the pledgor to the pledgee. This status systemically prevents the pledged
- position from being used to complete other transactions, which is consistent with the Pledgees
- Control over the Pledge Securities, as discussed above. Likewise, the release of a pledged
- position results in the removal of notation of the pledge status of the position and the position
- would become available to the pledgor to complete other transactions.
- The changes to the Settlement Guide text are technical in nature, and while enhancing
- clarity with respect to the book entries performed by DTC as they relate to pledge activity, the
- change would not impact the rights or obligations of Participants and Pledgees. In this regard,
- the applicable sections of the Settlement Guide would be revised to (1) clarify the text with
- respect operational aspect of book entries of pledges, as discussed above, and (2) make changes
- to text for readability necessary in the context of the proposed clarification, as follows (bold,
- underlined text indicates additions; bold strike-through text indicates deletions):
- (a) Text included in Item 3 (Collateral Loans) set forth under the heading “Settlement
- Transactions”20 would be revised as follows:
- “[w]hen pledging securities to a pledgee, the pledgor’s position is moved from the
- pledgor’s general free account to the pledgee’s account continues to be credited
- to the pledgor’s account, however with a system notation showing the status of
- the position as pledged by the pledgor to the pledgee. This status systemically
- which prevents the pledged position from being used to complete other transactions.
- Likewise, the release of a pledged position would move the pledged position back
- to the results in the removal of notation of the pledge status of the position and
- the position would become pledgor’s general free account where it would then be
- available to the pledgor to complete other transactions.”
- (b) Text included under the heading “About the Product” that appears under the heading
- “Collateral Loan Program”21 would be revised as follows:
- “The Collateral Loan Program allows you to pledge securities from held in your
- general free account as collateral for a loan or for other purposes (such as Letters of
- Credit) to a pledgee participating in the program. You can also request the pledgee to
- release pledge securities back to your general free account. These pledges and
- releases can be free (when money proceeds are handled outside DTC) or valued
- (when money proceeds are applied as debits and credits to the pledgee’s and
- pledgor’s money settlement accounts). A Pledgee may, but need not be, a Participant.
- Only a Pledgee which is a Participant may receive valued pledges.”20See Settlement Guide, supra note 2 at 3-4.21See Settlement Guide, supra note 2 at 8-9.Page 12
- Page 12 of 45
- (c) Text included under the heading “Pledges to the Options Clearing Corporation”22
- would be revised as follows:
- “A Participant writing an option on any options exchange may fully collateralize that
- option by pledging the underlying securities by book-entry through DTC to the
- Options Clearing Corporation (OCC). If the option is called (exercised), the securities
- may be released and delivered to the holder of the call. If the option contract is not
- exercised, OCC validates a release of the pledged securities, which are then
- returned to the Participant’s general free account.”
- (d) Text included under the heading “Release of Deposits with Options Clearing
- Corporation on Expired Options” would be revised as follows:
- OCC automatically releases securities deposited with it to cover margin requirements
- on an option contract when the option contract expires. The securities are then
- allocated to your general free account. Notification of the released securities is
- received via the Collateral Loan Services functionality in the Settlement User
- Interface or automated output.
- (e) Text included under the heading “Shared Control Accounts”23 would be revised as
- follows: In addition to changes made for the purposes described in (x) and (y) above,
- DTC would also delete text shown below that states” “Pledgee account continue to be
- available at DTC.” This sentence was added to the text when Shared control account
- arrangements were added to the Procedures24 to clarify that the existing pledge
- services would continue to be offered. As both the original pledge program and the
- Shared control account process are both established programs, DTC believes the
- sentence is no longer necessary:
- About the Product
- Shared control accounts are available as an alternative to “agreement to pledge”
- arrangements.
- Background
- When a Participant pledges securities to the pledgee account of a pledgee at DTC
- (sometimes called a “hard pledge”), the securities are under the sole control of the
- pledgee. Only the pledgee can redeliver or release the securities. Pledgee accounts
- continue to be available at DTC.22See Settlement Guide, supra note 2 at 10.23See Settlement Guide, supra note 2 at 15-16.24See Securities Exchange Act Release No. 40191 (July 10, 1998), 63 FR 38444 (July 16,
- 1998) (SR-DTC-98-5).Page 13
- Page 13 of 45
- Shared control accounts are available at DTC as an alternative to agreement to pledge
- (sometimes called “agreement to deliver”) arrangements. A pledgee has control over
- securities delivered by a Participant to the Participant’s shared control account at
- DTC since the pledge has the ability to redeliver the securities without further consent
- by the Participant. Until the pledgee redelivers the securities, the Participant has the
- flexibility to redeliver or make substitutions for the securities without obtaining the
- pledgee’s release of the securities.
- Shared controls are separately identified in DTC’s Reference Directory. Participants
- interested in establishing a shared control account should contact their Relationship
- Manager.
- Procedures for DTC Shared Control Accounts
- The following procedures are an addition to DTC’s Procedures for Pledgees.
- 1. Any Participant may establish a shared control account at DTC and may
- designate any DTC pledgee to be the pledgee for that shared control account.
- A Participant may deliver securities (or other financial assets) by a free pledge
- from any of its DTC accounts (the “original account”) to its shared control
- account in order to grant a security interest or other interest in the securities to
- the pledgee. The shared control account is an account of the Participant and is
- identified with a separate account number from any other account of the
- Participant. A Participant may establish multiple shared control accounts, but
- only one pledge can be designated for each shared control account.
- 2. Except as modified by these procedures, the operation of a shared control
- account is identical to the operation of a DTC pledge account and all DTC
- procedures applicable to pledges accounts are applicable to shared control
- accounts. No deliveries vs. payment, pledges vs. payment, or physical
- deposits can be made to a shared control account and no deliveries vs.
- payment, pledges vs. payment, or physical withdrawals can be made from a
- shared control account. A Participant should not deliver securities to another
- Participant’s shared control account. In the instructions for a delivery of
- securities to a shared control account, the mandatory hypothecation code field
- should be completed in the same manner as it is for a pledge made without
- the use of a shared control delivery to a pledge account. The DTC fees and
- charges for a transaction involving a shared control account are the same as
- the fees and charges for a pledge transaction that does not involving involve
- a pledge account. The DTC monthly account usage charges applicable to a
- shared control account are charged to the Participant. The DTC reports and
- statements to the Participant and the pledge for a transaction involving a
- shared control account are the same as the reports and statements for a
- transaction involving a pledge that does not involve a shared control
- account.Page 14
- Page 14 of 45
- 3. As with a pledge account, voting Voting rights on the securities credited to a
- shared control account are assigned to the Participant. Cash dividend and
- interest payments and other cash distributions on such securities are credited
- to the original account. Distribution of securities for which the ex-distribution
- date is on or prior to the payable date or in which the distribution is payable in
- a different security are also credited to the original account. Any stock splits
- or other distributions of the same securities for which the ex-distribution date
- is after the payable date are credited to the shared control account.
- 4. The securities credited to a shared control account cannot be designated as or
- included in the collateral for any obligation of the Participant or the pledgee to
- DTC. DTC has no lien or other interest in any securities credited to a shared
- control account”
- Proposed change to text of the Pledgee’s Agreement
- Pursuant to the proposed rule change, DTC would revise the text of the Pledgee’s
- Agreement to reflect that Pledged Securities do not move to a pledgee account. The change is
- technical in nature and while enhancing clarity with respect to the book entries performed by
- DTC as they relate to pledge activity, the change would not impact the rights or obligations of
- Participants and Pledgees pursuant to the Rules, Service Guide and/or the Pledgee’s Agreement.
- In this regard, the applicable text of the Pledgee’s Agreement would be revised as follows (bold,
- underlined text indicates additions; bold strike-through text indicates deletions):
- “[s]o long as Pledgee shall maintain a Depository Trust account, Depository Trust,
- upon the pledge to Pledgee of securities held by Depository Trust for the account of
- any depositor in Depository Trust, will make appropriate entries on its books to
- indicate the pledge of transferring the securities from the account of such
- depositor to the account of Pledgee and shall maintain such securities in the account
- of with a notation that the securities are pledged by the depositor to the Pledgee
- until instructed by Pledgee to release such securities to the account of the pledgor, to
- deliver such securities to the order of Pledgee or to transfer such securities on the
- books of Depository Trust to the account of a depositor in Depository Trust other than
- the pledgor.”
- Effective Date
- The proposed rule change would become effective upon filing.
- (b) Statutory Basis
- Section 17A(b)(3)(F) of the Securities Exchange Act of 1934 (“Act”),25 requires that the
- rules of the clearing agency be designed, inter alia, to promote the prompt and accurate clearance
- and settlement of securities transactions. DTC believes that the proposed rule change is2515 U.S.C. 78q-1(b)(3)(F).Page 15
- Page 15 of 45
- consistent with this provision of the Act. DTC believes that the proposed rule change is
- consistent with this provision of the Act for the reasons described below.
- As described above, the proposed rule change would allow Participants and Pledgees to
- more readily understand the Rules and Procedures relating to the processing of book entries of
- Pledges at DTC by (1) clarifying text to more accurately reflect the operational process of how
- book entries of pledges are entered on DTC’s system, and (2) making changes to text for
- readability necessary in the context of the proposed clarification. By clarifying the Rules to
- facilitate Participants ability to understand the operational processes relating to pledge services,
- DTC believes that the proposed changes would facilitate Participants’ and Pledgees’ ability to
- process pledge transactions and related understand DTC system functionality designed to
- accommodate key aspects of the pledge process, including the ability of the Pledgee to release
- Pledged Securities or make a demand for collateral relating to the Pledged Securities, as
- described above. Therefore, by facilitating the ability of Participants to understand the related
- Rules and pledge functionality, DTC believes the proposed rule change would promote the
- prompt and accurate clearance and settlement of securities transactions, consistent with Section
- 17(A)(b)(3)(f) of the Act.26
- 4.
- Clearing Agency’s Statement on Burden on Competition
- DTC does not believe that the proposed rule change would have any impact on
- competition because it would merely make technical clarifying changes and changes for
- enhanced readability to the text of the Settlement Service Guide and the Pledgee’s Agreement
- that do not otherwise affect Participants’ and Pledgee’s rights or obligations.
- 5.
- Clearing Agency’s Statement on Comments on the Proposed Rule Change Received
- from Members, Participants, or Others
- Written comments relating to this proposed rule change have not been solicited or
- received. DTC will notify the Commission of any written comments received by DTC.
- 6.
- Extension of Time Period for Commission Action
- Not applicable.
- 7.
- Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated
- Effectiveness Pursuant to Section 19(b)(2)
- (a) The proposed rule change is to take effect immediately upon filing pursuant to
- Section 19(b)(3)(A) of the Act27 and subparagraph (f)(4)(i) of Rule 19b-4 under the Act.2826Id.2715 U.S.C. 78s(b)(3)(A).2817 CFR 240.19b-4(f)(4)(i).Page 16
- Page 16 of 45
- (b) In accordance with subparagraph (f)(4)(i) of Rule 19b-4 under the Act,29 the
- proposed rule change effects a change in an existing DTC service that (A) does not adversely
- affect the safeguarding of securities or funds in the custody or control of DTC or for which it is
- responsible, and (B) does not significantly affect the respective rights or obligations of DTC or
- persons using the service. The proposed rule change would clarify text in the Settlement Guide
- and Pledgee’s Agreement without impacting the respective rights or obligations of DTC or
- persons using DTC’s services, because the changes are technical in nature.
- (c) Not applicable.
- (d) Not applicable.
- 8.
- Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or
- of the Commission
- Not applicable.
- 9.
- Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
- Not applicable.
- 10. Advance Notice Filed Pursuant to Section 806(e) of the Payment, Clearing and
- Settlement Supervision Act of 2010
- Not applicable.
- 11. Exhibits
- Exhibit 1 – Not applicable.
- Exhibit 1A – Notice of proposed rule change for publication in the Federal Register.
- Exhibit 2 – Not applicable.
- Exhibit 3 – Not applicable.
- Exhibit 4 – Not applicable.
- Exhibit 5 – Proposed changes to the Settlement Guide and Pledgee’s Agreement.29Id.Page 17
- Page 17 of 45
- EXHIBIT 1A
- SECURITIES AND EXCHANGE COMMISSION
- (Release No. 34-[_________]; File No. SR-DTC-2021-005)
- [DATE]
- Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of and
- Immediate Effectiveness of a Proposed Rule Change to Modify the DTC Settlement
- Service Guide and the Form of DTC Pledgee’s Agreement
- Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)1 and
- Rule 19b-4 thereunder,2 notice is hereby given that on April __, 2021, The Depository
- Trust Company (“DTC”)] filed with the Securities and Exchange Commission
- (“Commission”) the proposed rule change as described in Items I, II and III below, which
- Items have been prepared by the clearing agency. DTC filed the proposed rule change
- pursuant to Section 19(b)(3)(A) of the Act3 and Rule 19b-4(f)(4) thereunder.4 The
- Commission is publishing this notice to solicit comments on the proposed rule change
- from interested persons.
- I.
- Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule
- Change
- The proposed rule change consists would modify the DTC Settlement Service
- Guide (“Settlement Guide”)5 and the form of DTC Pledgee’s Agreement (“Pledgee’s115 U.S.C. 78s(b)(1).217 CFR 240.19b-4.315 U.S.C. 78s(b)(3)(A).417 CFR 240.19b-4(f)(4).5Available at https://www.dtcc.com/legal/rules-and-procedures. The Service
- Guides constitute Procedures of DTC. Pursuant to the Rules, the term
- “Procedures” means the Procedures, service guides, and regulations of DTC
- adopted pursuant to Rule 27, as amended from time to time. See Rule 1, Section
- 1, infra note 3. DTC’s Procedures are filed with the Securities and ExchangePage 18
- Page 18 of 45
- Agreement”),6 as described below. Specifically, the proposed rule change would revise
- text in the Settlement Guide and Pledgee’s Agreement to clarify the text with respect to
- the processing of book entries of Pledge-related7 activity at DTC. The proposed
- Commission (“Commission”). They are binding on DTC and each Participant in
- the same manner as they are bound by the Rules. See Rule 27, infra note 3.6Available at https://www.dtcc.com/legal/rules-and-procedures. Pursuant to Rule
- 2, Section 3, an entity that uses DTC’s pledge services must enter into an
- agreement with DTC satisfactory to DTC. See Rule 2, Section 3, supra note 1. In
- this regard, DTC requires a Pledgee that is not a Participant to sign a Pledgee’s
- Agreement. Participants enter into a Participant’s Agreement which binds them
- to the Rules and Procedures (including, but not limited to, those related to pledge
- activity), and are not required by DTC to enter into a separate Pledgee’s
- Agreement. See also Rule 1, Section 1, supra note 1 (providing terms of the
- Participant’s Agreement).7Pursuant to Rule 1, The defined term “Pledge” in the Rules means, inter alia,
- “creating or providing for a security interest in a Certificated or Uncertificated
- Security, a Securities Account or a Securities [sic] Entitlement in accordance with
- the NYUCC.” See Rule 1, supra note 1. Pursuant to Rule 1, the term “NYUCC”
- means the Uniform Commercial Code of New York, as amended from time to
- time. See Rule 1, supra note 1. Pursuant to Rule 1, the term “Certificated
- Security” has the meaning given to the term “certificated security” in Section 8-
- 102 of the NYUCC. See Rule 1, supra note 1. Pursuant to Section 8-102 of the
- NYUCC, “certificated security” means a security that is represented by a
- certificate. See NYUCC 8-102. Pursuant to Rule 1, the term “Uncertificated
- Security” has the meaning given to the term “uncertificated security” in Section 8-
- 102 of the NYUCC. See Rule 1, supra note 1. Pursuant to Section 8-102 of the
- NYUCC, “uncertificated security” means a security that is not represented by a
- certificate. Pursuant to Rule 1, the term “Securities Account” (1) as used with
- respect to a Participant or Pledgee, means an account maintained by DTC for the
- Participant or Pledgee to which Securities transactions of the Participant or
- Pledgee effected through the facilities of DTC are debited and credited in the
- manner specified in the Rules and Procedures; and (2) as used with respect to
- DTC, means an internal account of DTC to which Securities transactions are
- debited and credited to DTC. See Rule 1, supra note 1. Pursuant to Rule 1, the
- term “Security Entitlement” has the meaning given to the term “security
- entitlement” in Section 8-102 of the NYUCC. The interest of a Participant or
- Pledgee in a Security credited to its Account is a Security Entitlement. See id.
- Pursuant to Section 8-102 of the NYUCC, “security entitlement” means the rights
- and property interest of an entitlement holder with respect to a financial
- asset specified in Part 5. See NYUCC §8-102. NYUCC Section 8-501(b)
- provides that a person acquires a “security entitlement” when, inter alia, aPage 19
- Page 19 of 45
- revisions would reflect in the text of the Settlement Guide and Pledgee’s Agreement that
- Pledged Securities remain credited to a Pledgor’s Account unless the Pledgee makes a
- demand for the Pledged Securities, as described below. In this regard, the respective
- texts of the Settlement Guide and the Pledgee’s Agreement currently indicate that
- Pledged Securities are credited to a Pledgee’s Account. As discussed below, the
- proposed rule change relates to a technical aspect of the operational processing of Pledge
- transactions and would not impact the rights or obligations of a Participant or Pledgee.
- The text of the proposed changes to the rules of DTC are annexed hereto as Exhibit 5, as
- described in greater detail below.8
- 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 IV below. The clearing agency has prepared
- securities intermediary indicates by book entry that a financial asset has been
- credited to the person’s securities account. The absence of the crediting of a
- financial asset to an account of a Pledgee and the fact that an account of a Pledgee
- is not a securities account under Article 8 mean that the Pledgee has not acquired
- a security entitlement under Article 8. See NYUCC § 8-501(b). Pursuant to
- Section 8-102, “entitlement holder” means a person identified in the records of a
- securities intermediary as the person having a security entitlement against the
- securities intermediary. If a person acquires a security entitlement by virtue of
- Section 8-501(b)(2) or (3), that person is the entitlement holder. See NYUCC §8-
- 102.8Capitalized terms not defined herein are defined in the Rules, By-Laws and
- Organization Certificate of DTC (“Rules”) available at
- http://www.dtcc.com/~/media/Files/Downloads/legal/rules/dtc_rules.pdf.Page 20
- Page 20 of 45
- 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
- The proposed rule change of DTC would modify the Settlement Guide and the form
- of Pledgee’s Agreement, as described below. Specifically, the proposed rule change would
- revise text in the Settlement Guide and Pledgee’s Agreement to clarify the text with respect
- to the processing of book entries of Pledge-related9 activity at DTC. The proposed9Pursuant to Rule 1, The defined term “Pledge” in the Rules means, inter alia,
- “creating or providing for a security interest in a Certificated or Uncertificated
- Security, a Securities Account or a Securities [sic] Entitlement in accordance with
- the NYUCC.” See Rule 1, supra note 1. Pursuant to Rule 1, the term “NYUCC”
- means the Uniform Commercial Code of New York, as amended from time to
- time. See Rule 1, supra note 1. Pursuant to Rule 1, the term “Certificated
- Security” has the meaning given to the term “certificated security” in Section 8-
- 102 of the NYUCC. See Rule 1, supra note 1. Pursuant to Section 8-102 of the
- NYUCC, “certificated security” means a security that is represented by a
- certificate. See NYUCC 8-102. Pursuant to Rule 1, the term “Uncertificated
- Security” has the meaning given to the term “uncertificated security” in Section 8-
- 102 of the NYUCC. See Rule 1, supra note 1. Pursuant to Section 8-102 of the
- NYUCC, “uncertificated security” means a security that is not represented by a
- certificate. Pursuant to Rule 1, the term “Securities Account” (1) as used with
- respect to a Participant or Pledgee, means an account maintained by DTC for the
- Participant or Pledgee to which Securities transactions of the Participant or
- Pledgee effected through the facilities of DTC are debited and credited in the
- manner specified in the Rules and Procedures; and (2) as used with respect to
- DTC, means an internal account of DTC to which Securities transactions are
- debited and credited to DTC. See Rule 1, supra note 1. Pursuant to Rule 1, the
- term “Security Entitlement” has the meaning given to the term “security
- entitlement” in Section 8-102 of the NYUCC. The interest of a Participant or
- Pledgee in a Security credited to its Account is a Security Entitlement. See id.
- Pursuant to Section 8-102 of the NYUCC, “security entitlement” means the rights
- and property interest of an entitlement holder with respect to a financial
- asset specified in Part 5. See NYUCC §8-102. NYUCC Section 8-501(b)
- provides that a person acquires a “security entitlement” when, inter alia, a
- securities intermediary indicates by book entry that a financial asset has been
- credited to the person’s securities account. The absence of the crediting of aPage 21
- Page 21 of 45
- revisions would reflect in the text of the Settlement Guide and Pledgee’s Agreement that
- Pledged Securities remain credited to a Pledgor’s Account unless the Pledgee makes a
- demand for the Pledged Securities, as described below. In this regard, the respective texts
- of the Settlement Guide and the Pledgee’s Agreement currently indicate that Pledged
- Securities are credited to a Pledgee’s Account. As discussed below, the proposed rule
- change relates to a technical aspect of the operational processing of Pledge transactions
- and would not impact the rights or obligations of a Participant or Pledgee.
- The following discussion is provided by DTC and includes, but is not limited to, its
- own analysis of applicable state law provisions that DTC believes are relevant for purposes
- of describing the proposed rule change.
- Background.
- Eligibility for Pledge Services
- The pledge services of DTC are available to banks, trust companies, broker-dealers
- and other Persons approved by the DTC, which have entered into an agreement with the
- DTC satisfactory to it, for the purpose of effecting a Pledge of Deposited Securities to such
- financial asset to an account of a Pledgee and the fact that an account of a Pledgee
- is not a securities account under Article 8 mean that the Pledgee has not acquired
- a security entitlement under Article 8. See NYUCC § 8-501(b). Pursuant to
- Section 8-102, “entitlement holder” means a person identified in the records of a
- securities intermediary as the person having a security entitlement against the
- securities intermediary. If a person acquires a security entitlement by virtue of
- Section 8-501(b)(2) or (3), that person is the entitlement holder. See NYUCC §8-
- 102.Page 22
- Page 22 of 45
- banks, trust companies, broker-dealers and other Persons.10 A Pledgee may but need not
- be a Participant. A Pledgee is required by DTC to sign a Pledgee’s Agreement unless it is
- also a Participant. Participants are not required to sign a separate Pledgee’s Agreement to
- use DTC’s pledge services because the Participant’s Agreement binds the Participant to
- DTC’s Rule and Procedures, including those relating to pledge-related activity. Only a
- Pledgee which is a Participant may receive a Pledge Versus Payment.11
- Book Entry of Pledges and Legal Effect
- As indicated above, the definition of a “Security Entitlement” in the DTC Rules
- incorporates the definition of such term in Article 8 of the NYUCC and notes that “[t]he
- interest of a Participant or Pledgee in a Security credited to its Account is a Security
- Entitlement.”
- However, as more fully discussed below, while the Settlement Guide and the
- Pledgee’s Agreement make reference to the movement of Securities to a Pledgee’s
- Account, from an operational standpoint, DTC does not in fact credit a Security to an
- Account of a Pledgee; what the Pledgee receives is not a Security Entitlement. The
- Securities remain credited to the Pledgor’s account until the Pledgee releases the Pledged
- Securities or makes a demand for the Pledged Securities, as discussed below. Rather, a
- notation is placed on the Account of the Pledgor that the Securities are Pledged to the
- Pledgee and the Securities remain in pledged status until the Pledgee instructs otherwise.
- As described below, this bookkeeping method does not adversely impact the rights
- of the Pledgee in that the Pledgee maintains Control over the Pledged Securities and the10See Rule 2, Section 3, supra note 1.11See id.Page 23
- Page 23 of 45
- Pledged Securities cannot be used by the Pledgee for any other transaction unless the
- Pledgee releases the Securities from the Pledged Status through an instruction to DTC.
- DTC’s Description of Pledge
- DTC’s Settlement Service Guide states that:
- “[w]hen pledging securities to a pledgee, the pledgor’s position is moved from the
- pledgor’s general free account to the pledgee’s account which prevents the pledged
- position from being used to complete other transactions. Likewise, the release of a pledged
- position would move the pledged position back to the pledgor’s general free account where
- it would then be available to complete other transactions.”12
- Paragraph 2 of DTC’s form of Pledgee’s Agreement provides that:
- “[s]o long as Pledgee shall maintain a Depository Trust account, Depository Trust,
- upon the pledge to Pledgee of securities held by Depository Trust for the account of any
- depositor in Depository Trust, will make appropriate entries on its books transferring the
- securities from the account of such depositor to the account of Pledgee and shall maintain
- such securities in the account of Pledgee until instructed by Pledgee to release such
- securities to the account of the pledgor, to deliver such securities to the order of Pledgee or
- to transfer such securities on the books of Depository Trust to the account of a depositor in
- Depository Trust other than the pledgor.”
- The descriptions of DTC’s pledge arrangements in the (1) Settlement Service
- Guide, with respect to the text shown above, and as more fully described below, and (2)
- form of Pledgee’s Agreement are imprecise because in practice DTC does not move or12See Settlement Guide, supra note 2 at 3-4.Page 24
- Page 24 of 45
- transfer the securities from an account of the Pledgor to an account of the Pledgee, as more
- fully described below.
- The definition of a “Security Entitlement” in the DTC Rules incorporates the
- definition of such term in Article 8 of the NYUCC and notes that “[t]he interest of a
- Participant or Pledgee in a Security credited to its Account is a Security Entitlement.”
- However, since DTC is not in fact crediting a Security to an Account of a Pledgee,
- what the Pledgee receives is not a Security Entitlement.
- The definition of an “Entitlement Holder” in the DTC Rules incorporates the
- definition of such term in Article 8 of the NYUCC (as to which see below) and notes that
- “[a] Participant or Pledgee is an Entitlement Holder with respect to a Security credited to
- its Account”.
- However, since DTC is not in fact crediting a Security to an Account of a Pledgee,
- the Pledgee is not an Entitlement Holder. However, the Pledgee maintains Control of the
- Pledged Securities as more fully described below. A key to a Pledgee exercising its Control
- is its ability to instruct DTC an Entitlement Order for the delivery, pledge release or
- withdrawal of a security.
- Entitlement Order
- The definition of an “Entitlement Order” in the Rules incorporates the definition of
- such term in Article 8 of the NYUCC that “[a]n instruction from a Participant or Pledgee
- to the Corporation with respect to a Delivery, Pledge, Release or Withdrawal of a Security
- credited to a Securities Account is an Entitlement Order”.
- Note that the definition of an Entitlement Order does not require that the Security
- be credited to a Securities Account of the instructor. The breadth of this definition allowsPage 25
- Page 25 of 45
- permitted entities, such as Pledgees, to issue Entitlement Orders to DTC in respect of
- Securities credited to Securities Accounts belonging to others.
- DTC Rule 9(B)13 provides that:
- “[i]f [DTC] receives an instruction from a Pledgee to effect a Delivery or
- Withdrawal of Pledged Securities, such instruction shall have the effect of notifying
- [DTC] that the Pledgee elects not to Release the Pledged Securities but, rather, to
- assert its Control over the Pledged Securities by the transfer of a greater interest in
- the Pledged Securities to itself or another Person. [DTC] shall accept such an
- instruction as a representation that the Pledgee is acting in accordance with
- applicable law, rules or regulations, agreements or any adjudication thereof.”
- Under NYUCC Section 8-507(a),14 a securities intermediary satisfies its duty to
- comply with an Entitlement Order if it acts with respect to the duty as agreed upon by the
- entitlement holder and the securities intermediary. DTC satisfies its duty to comply with
- an Entitlement Order if it acts with respect to the duty as agreed upon by the Entitlement
- Holder and the Securities Intermediary. In the case of Security Entitlements pledged on the
- books of DTC, DTC satisfies its duty to comply with an Entitlement Order by complying
- with the Entitlement Order of the Pledgee.
- Control
- Under NYUCC Section 9-106(a),15 “[a] person has control of a certificated
- security, uncertificated security, or security entitlement as provided in Section 8-106”.1613See Rule 9(B), supra note 1.14NYUCC § 8-507(a).15See NYUCC § 9-106(a).16NYUCC § 8-106.Page 26
- Page 26 of 45
- Under NYUCC Section 8-106(d), “[a] purchaser has “control” of a security
- entitlement if:
- (1) the purchaser becomes the entitlement holder;
- (2) the securities intermediary has agreed that it will comply with entitlement
- orders originated by the purchaser without further consent by the entitlement holder; or
- (3) another person has control of the security entitlement on behalf of the
- purchaser or, having previously acquired control of the security entitlement,
- acknowledges that it has control on behalf of the purchaser.”
- Under NYUCC Section 1-102,17 a purchaser is “a person that takes by purchase”
- with “purchase” being defined as “taking by sale, lease, discount, negotiation, mortgage,
- pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction
- creating an interest in property”.
- NYUCC Section 8-106(f) further provides that “[a] purchaser has “control” under
- subsection (c)(2) or (d)(2) even if any duty of the issuer or the securities intermediary to
- comply with instructions or entitlement orders originated by the purchaser is subject to
- any condition or conditions (other than further consent by the registered owner or the
- entitlement holder).”
- Official Comment 4 to NYUCC Section 8-10618 notes that:
- “[s]ubsection (d)(2) provides that a purchaser has control if the securities
- intermediary has agreed to act on entitlement orders originated by the purchaser if no
- further consent by the entitlement holder is required. Under subsection (d)(2), control
- may be achieved even though the original entitlement holder remains as the entitlement
- holder.”17See NYUCC § 1-102.18See NYUCC § 8-106.Page 27
- Page 27 of 45
- Example 6 of Official Comment 4 is illustrative:
- “Able & Co., a securities dealer, grants Alpha Bank a security interest in a
- security entitlement that includes 1000 shares of XYZ Co. stock that Able holds through
- an account with Clearing Corporation. Able causes Clearing Corporation to transfer the
- shares into a pledge account, pursuant to an agreement under which Able will continue to
- receive dividends, distributions, and the like, but Alpha has the right to direct
- dispositions. As in Example 3, Alpha has control of the 1000 shares under subsection
- (d)(2).”
- In the case of security entitlements pledged on the books of DTC, because DTC
- will comply with the instructions of a Pledgee as provided for in Rule 9(B),19 which is an
- agreement between DTC and its Participants and Pledgees, a Pledgee has control of such
- security entitlements under NYUCC § 8-106(d)(2) even when the Pledged Securities
- remain credited to the account of the Pledgor.
- DTC’s pledge arrangements operate pursuant to the DTC Rules and the NYUCC.
- When Security Entitlements are pledged to a Pledgee through the facilities of DTC, the
- Pledgee has a security interest in such pledged Security Entitlements.20 A Pledgee has
- “control” under Articles 8 and 9 of the NYUCC and under the DTC Rules of any Security19See Rule 9(B), supra note 1.20The interest transferred is, however, only a security interest if the Pledgor and
- Pledgee have an agreement outside of DTC that constitutes a security agreement
- under applicable law and as to which the other requirements for attachment and
- enforceability of a security interest have been satisfied. The agreement is entered
- into by the parties outside of DTC, and DTC does not have knowledge or
- information on the existence of such an agreement between the parties.Page 28
- Page 28 of 45
- Entitlements pledged to it through the facilities of DTC,21 and the Pledgee is empowered
- to issue Entitlement Orders22 to DTC to direct the release, delivery or withdrawal of any
- such pledged Security Entitlements.
- Example of a Pledge by a Participant to a Pledgee
- When Security Entitlements credited to Participant A’s account at DTC are
- pledged to Pledgee B through the facilities of DTC, B has a security interest in such
- pledged security entitlements.23
- B does not itself have “security entitlements” to the underlying securities and B is
- not an “entitlement holder” as such terms are defined in the NYUCC.
- However, B as Pledgee would have “control” under Articles 8 and 9 of the
- NYUCC and under the Rules of any Security Entitlements pledged to it through the
- facilities of DTC, and B is empowered to issue Entitlement Orders to DTC to direct the
- release, delivery or withdrawal of any such pledged Security Entitlements.21The definition of “Control” in the Rules incorporates the definition of such term
- in Article 8 of the NYUCC and notes that “[a] Pledgee has Control of Pledged
- Securities until they are Delivered, Released or Withdrawn by the Pledgee.” See
- Rule 1, Section 1, supra note 1.22The definition of an “Entitlement Order” in the Rules incorporates the definition
- of such term in Section 8-102 of the NYUCC and notes that “[a]n instruction from
- a Participant or Pledgee to the Corporation with respect to a Delivery, Pledge,
- Release or Withdrawal of a Security credited to a Securities Account is an
- Entitlement Order”. As noted above, Pursuant to Section 8-102, “entitlement
- order” means a notification communicated to a securities intermediary directing
- transfer or redemption of a financial asset to which the entitlement holder has
- a security entitlement. See NYUCC 8-102.23As mentioned above, the interest transferred is, however, only a security interest if
- A and B have an agreement outside of DTC that constitutes a security agreement
- under applicable law and as to which the other requirements for attachment and
- enforceability of a security interest have been satisfied.Page 29
- Page 29 of 45
- Proposed Rule Change
- Proposed change to text of Settlement Guide
- Pursuant to the proposed rule change, DTC would revise the text of the Settlement
- Guide to reflect that Pledged Securities do not move to an Account of the Pledgee. As
- discussed above, the movement of the securities is not required to effect a Pledge and
- does not impact the rights of Pledgor or Pledgee under the Rules or the NYUCC. Rather
- a Pledged Securities continues credited to the pledgor’s account, however with a system
- notation showing the status of the position as pledged by the pledgor to the pledgee. This
- status systemically prevents the pledged position from being used to complete other
- transactions, which is consistent with the Pledgees Control over the Pledge Securities, as
- discussed above. Likewise, the release of a pledged position results in the removal of
- notation of the pledge status of the position and the position would become available to
- the pledgor to complete other transactions.
- The changes to the Settlement Guide text are technical in nature, and while
- enhancing clarity with respect to the book entries performed by DTC as they relate to
- pledge activity, the change would not impact the rights or obligations of Participants and
- Pledgees. In this regard, the applicable sections of the Settlement Guide would be
- revised to (1) clarify the text with respect operational aspect of book entries of pledges, as
- discussed above, and (2) make changes to text for readability necessary in the context of
- the proposed clarification, as follows (bold, underlined text indicates additions; bold
- strike-through text indicates deletions):Page 30
- Page 30 of 45
- (a) Text included in Item 3 (Collateral Loans) set forth under the heading
- “Settlement Transactions”24 would be revised as follows:
- “[w]hen pledging securities to a pledgee, the pledgor’s position is moved
- from the pledgor’s general free account to the pledgee’s account
- continues to be credited to the pledgor’s account, however with a system
- notation showing the status of the position as pledged by the pledgor to
- the pledgee. This status systemically which prevents the pledged position
- from being used to complete other transactions. Likewise, the release of a
- pledged position would move the pledged position back to the results in
- the removal of notation of the pledge status of the position and the
- position would become pledgor’s general free account where it would
- then be available to the pledgor to complete other transactions.”
- (b) Text included under the heading “About the Product” that appears under the
- heading “Collateral Loan Program”25 would be revised as follows:
- “The Collateral Loan Program allows you to pledge securities from held in
- your general free account as collateral for a loan or for other purposes (such as
- Letters of Credit) to a pledgee participating in the program. You can also
- request the pledgee to release pledge securities back to your general free
- account. These pledges and releases can be free (when money proceeds are
- handled outside DTC) or valued (when money proceeds are applied as debits24See Settlement Guide, supra note 2 at 3-4.25See Settlement Guide, supra note 2 at 8-9.Page 31
- Page 31 of 45
- and credits to the pledgee’s and pledgor’s money settlement accounts). A
- Pledgee may, but need not be, a Participant. Only a Pledgee which is a
- Participant may receive valued pledges.”
- (c) Text included under the heading “Pledges to the Options Clearing
- Corporation”26 would be revised as follows:
- “A Participant writing an option on any options exchange may fully
- collateralize that option by pledging the underlying securities by book-entry
- through DTC to the Options Clearing Corporation (OCC). If the option is
- called (exercised), the securities may be released and delivered to the holder
- of the call. If the option contract is not exercised, OCC validates a release of
- the pledged securities, which are then returned to the Participant’s general
- free account.”
- (d) Text included under the heading “Release of Deposits with Options Clearing
- Corporation on Expired Options” would be revised as follows:
- OCC automatically releases securities deposited with it to cover margin
- requirements on an option contract when the option contract expires. The
- securities are then allocated to your general free account. Notification
- of the released securities is received via the Collateral Loan Services
- functionality in the Settlement User Interface or automated output.
- (e) Text included under the heading “Shared Control Accounts”27 would be
- revised as follows: In addition to changes made for the purposes described in26See Settlement Guide, supra note 2 at 10.27See Settlement Guide, supra note 2 at 15-16.Page 32
- Page 32 of 45
- (x) and (y) above, DTC would also delete text shown below that states”
- “Pledgee account continue to be available at DTC.” This sentence was added
- to the text when Shared control account arrangements were added to the
- Procedures28 to clarify that the existing pledge services would continue to be
- offered. As both the original pledge program and the Shared control account
- process are both established programs, DTC believes the sentence is no longer
- necessary:
- About the Product
- Shared control accounts are available as an alternative to “agreement to
- pledge” arrangements.
- Background
- When a Participant pledges securities to the pledgee account of a pledgee at
- DTC (sometimes called a “hard pledge”), the securities are under the sole
- control of the pledgee. Only the pledgee can redeliver or release the securities.
- Pledgee accounts continue to be available at DTC.
- Shared control accounts are available at DTC as an alternative to agreement to
- pledge (sometimes called “agreement to deliver”) arrangements. A pledgee
- has control over securities delivered by a Participant to the Participant’s
- shared control account at DTC since the pledge has the ability to redeliver the
- securities without further consent by the Participant. Until the pledgee
- redelivers the securities, the Participant has the flexibility to redeliver or make28See Securities Exchange Act Release No. 40191 (July 10, 1998), 63 FR 38444
- (July 16, 1998) (SR-DTC-98-5).Page 33
- Page 33 of 45
- substitutions for the securities without obtaining the pledgee’s release of the
- securities.
- Shared controls are separately identified in DTC’s Reference Directory.
- Participants interested in establishing a shared control account should contact
- their Relationship Manager.
- Procedures for DTC Shared Control Accounts
- The following procedures are an addition to DTC’s Procedures for Pledgees.
- 1. Any Participant may establish a shared control account at DTC and
- may designate any DTC pledgee to be the pledgee for that shared
- control account. A Participant may deliver securities (or other financial
- assets) by a free pledge from any of its DTC accounts (the “original
- account”) to its shared control account in order to grant a security
- interest or other interest in the securities to the pledgee. The shared
- control account is an account of the Participant and is identified with a
- separate account number from any other account of the Participant. A
- Participant may establish multiple shared control accounts, but only
- one pledge can be designated for each shared control account.
- 2. Except as modified by these procedures, the operation of a shared
- control account is identical to the operation of a DTC pledge account
- and all DTC procedures applicable to pledges accounts are applicable
- to shared control accounts. No deliveries vs. payment, pledges vs.
- payment, or physical deposits can be made to a shared control account
- and no deliveries vs. payment, pledges vs. payment, or physicalPage 34
- Page 34 of 45
- withdrawals can be made from a shared control account. A Participant
- should not deliver securities to another Participant’s shared control
- account. In the instructions for a delivery of securities to a shared
- control account, the mandatory hypothecation code field should be
- completed in the same manner as it is for a pledge made without the
- use of a shared control delivery to a pledge account. The DTC fees and
- charges for a transaction involving a shared control account are the
- same as the fees and charges for a pledge transaction that does not
- involving involve a pledge account. The DTC monthly account usage
- charges applicable to a shared control account are charged to the
- Participant. The DTC reports and statements to the Participant and the
- pledge for a transaction involving a shared control account are the
- same as the reports and statements for a transaction involving a pledge
- that does not involve a shared control account.
- 3. As with a pledge account, voting Voting rights on the securities
- credited to a shared control account are assigned to the Participant.
- Cash dividend and interest payments and other cash distributions on
- such securities are credited to the original account. Distribution of
- securities for which the ex-distribution date is on or prior to the
- payable date or in which the distribution is payable in a different
- security are also credited to the original account. Any stock splits or
- other distributions of the same securities for which the ex-distribution
- date is after the payable date are credited to the shared control account.Page 35
- Page 35 of 45
- 4. The securities credited to a shared control account cannot be
- designated as or included in the collateral for any obligation of the
- Participant or the pledgee to DTC. DTC has no lien or other interest in
- any securities credited to a shared control account”
- Proposed change to text of the Pledgee’s Agreement
- Pursuant to the proposed rule change, DTC would revise the text of the Pledgee’s
- Agreement to reflect that Pledged Securities do not move to a pledgee account. The
- change is technical in nature and while enhancing clarity with respect to the book entries
- performed by DTC as they relate to pledge activity, the change would not impact the
- rights or obligations of Participants and Pledgees pursuant to the Rules, Service Guide
- and/or the Pledgee’s Agreement. In this regard, the applicable text of the Pledgee’s
- Agreement would be revised as follows (bold, underlined text indicates additions; bold
- strike-through text indicates deletions):
- “[s]o long as Pledgee shall maintain a Depository Trust account, Depository
- Trust, upon the pledge to Pledgee of securities held by Depository Trust for
- the account of any depositor in Depository Trust, will make appropriate
- entries on its books to indicate the pledge of transferring the securities
- from the account of such depositor to the account of Pledgee and shall
- maintain such securities in the account of with a notation that the securities
- are pledged by the depositor to the Pledgee until instructed by Pledgee to
- release such securities to the account of the pledgor, to deliver such securities
- to the order of Pledgee or to transfer such securities on the books of
- Depository Trust to the account of a depositor in Depository Trust other than
- the pledgor.”Page 36
- Page 36 of 45
- Effective Date
- The proposed rule change would become effective upon filing.
- (b) Statutory Basis
- Section 17A(b)(3)(F) of the Securities Exchange Act of 1934 (“Act”),29 requires
- that the rules of the clearing agency be designed, inter alia, to promote the prompt and
- accurate clearance and settlement of securities transactions. DTC believes that the
- proposed rule change is consistent with this provision of the Act. DTC believes that the
- proposed rule change is consistent with this provision of the Act for the reasons described
- below.
- As described above, the proposed rule change would allow Participants and
- Pledgees to more readily understand the Rules and Procedures relating to the processing
- of book entries of Pledges at DTC by (1) clarifying text to more accurately reflect the
- operational process of how book entries of pledges are entered on DTC’s system, and (2)
- making changes to text for readability necessary in the context of the proposed
- clarification. By clarifying the Rules to facilitate Participants ability to understand the
- operational processes relating to pledge services, DTC believes that the proposed changes
- would facilitate Participants’ and Pledgees’ ability to process pledge transactions and
- related understand DTC system functionality designed to accommodate key aspects of
- the pledge process, including the ability of the Pledgee to release Pledged Securities or
- make a demand for collateral relating to the Pledged Securities, as described above.
- Therefore, by facilitating the ability of Participants to understand the related Rules and
- pledge functionality, DTC believes the proposed rule change would promote the prompt2915 U.S.C. 78q-1(b)(3)(F).Page 37
- Page 37 of 45
- and accurate clearance and settlement of securities transactions, consistent with Section
- 17(A)(b)(3)(f) of the Act.30
- 2.
- Statutory Basis
- Section 17A(b)(3)(F) of the Securities Exchange Act of 1934 (“Act”),31 requires
- that the rules of the clearing agency be designed, inter alia, to promote the prompt and
- accurate clearance and settlement of securities transactions. DTC believes that the
- proposed rule change is consistent with this provision of the Act. DTC believes that the
- proposed rule change is consistent with this provision of the Act for the reasons described
- below.
- As described above, the proposed rule change would allow Participants and
- Pledgees to more readily understand the Rules and Procedures relating to the processing
- of book entries of Pledges at DTC by (1) clarifying text to more accurately reflect the
- operational process of how book entries of pledges are entered on DTC’s system, and (2)
- making changes to text for readability necessary in the context of the proposed
- clarification. By clarifying the Rules to facilitate Participants ability to understand the
- operational processes relating to pledge services, DTC believes that the proposed changes
- would facilitate Participants’ and Pledgees’ ability to process pledge transactions and
- related understand DTC system functionality designed to accommodate key aspects of
- the pledge process, including the ability of the Pledgee to release Pledged Securities or
- make a demand for collateral relating to the Pledged Securities, as described above.
- Therefore, by facilitating the ability of Participants to understand the related Rules and30Id.3115 U.S.C. 78q-1(b)(3)(F).Page 38
- Page 38 of 45
- pledge functionality, DTC believes the proposed rule change would promote the prompt
- and accurate clearance and settlement of securities transactions, consistent with Section
- 17(A)(b)(3)(f) of the Act.32
- (B) Clearing Agency’s Statement on Burden on Competition
- DTC does not believe that the proposed rule change would have any impact on
- competition because it would merely make technical clarifying changes and changes for
- enhanced readability to the text of the Settlement Service Guide and the Pledgee’s
- Agreement that do not otherwise affect Participants’ and Pledgee’s rights or obligations.
- (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change
- Received from Members, Participants, or Others
- Written comments relating to this proposed rule change have not been solicited or
- received. DTC will notify the Commission of any written comments received by DTC.
- III. Date of Effectiveness of the Proposed Rule Change, and Timing for Commission
- Action
- Within 45 days of the date of publication of this notice in the Federal Register or
- within such longer period up to 90 days (i) as the Commission may designate if it finds
- such longer period to be appropriate and publishes its reasons for so finding or (ii) as to
- which the self-regulatory organization consents, the Commission will:32Id.Page 39
- Page 39 of 45
- (A) by order approve or disapprove such proposed rule change, or
- (B) institute proceedings to determine whether the proposed rule change
- should be disapproved.
- The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)33
- of the Act and paragraph (f)34 of Rule 19b-4 thereunder. At any time within 60 days of
- the filing of the proposed rule change, the Commission summarily may temporarily
- suspend such rule change if it appears to the Commission that such action is necessary or
- appropriate in the public interest, for the protection of investors, or otherwise in
- furtherance of the purposes of the Act.
- IV. Solicitation of Comments
- Interested persons are invited to submit written data, views and arguments
- concerning the foregoing, including whether the proposed rule change is consistent with
- the Act. 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 e-mail to rule-comments@sec.gov. Please include File NumberSR-DTC-2021-005 on the subject line.
- Paper Comments:• Send paper comments in triplicate to Secretary, Securities and ExchangeCommission, 100 F Street, NE, Washington, DC 20549.3315 U.S.C 78s(b)(3)(A).3417 CFR 240.19b-4(f).Page 40
- Page 40 of 45
- All submissions should refer to File Number SR-DTC-2021-005. This file number
- should be included on the subject line if e-mail 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-2021-005 and
- should be submitted on or before [insert date 21 days from publication in the Federal
- Register].
- For the Commission, by the Division of Trading and Markets, pursuant to
- delegated authority.35
- Secretary3517 CFR 200.30-3(a)(12).Page 41
- Page 41 of 45
- EXHIBIT 5
- Struck-through, boldface text indicates deleted language
- Bold and underlined text indicates added language.Settlement Service Guide***Settlement TransactionsThere are three main types of transactions processed through the Settlement system.***3. Collateral loans: The collateral loan service allows a Participant (the pledgor) to
- pledge securities as collateral for a loan or for other purposes and also request
- the release of pledged securities. This service allows such pledges and pledge
- releases to be made free, meaning that the money component of the transaction
- is settled outside of the depository, or valued, meaning that the money
- component of the transaction is settled through DTC as a debit/credit to the
- pledgor's and pledgee's DTC money settlement account. When pledging
- securities to a pledgee, the pledgor's position is moved from the pledgor's
- general free account to the pledgee’s account continues to be credited to
- the pledgor’s account, however with a system notation showing the status
- of the position as pledged by the pledgor to the pledgee. This status
- systemically which prevents the pledged position from being used to complete
- other transactions. Likewise, the release of a pledged position would move the
- pledged position back to the results in the removal of notation of the
- pledge status of the position and the position would become pledgor's
- general free account where it would then be available to the pledgor to
- complete other transactions.***Collateral Loan ProgramAbout the ProductThe Collateral Loan Program allows you to pledge securities from held in your general
- free account as collateral for a loan or for other purposes (such as Letters of Credit) to a
- pledgee participating in the program. You can also request the pledgee to release
- pledge securities back to your general free account. These pledges and releases can
- be free (when money proceeds are handled outside DTC) or valued (when moneyPage 42
- Page 42 of 45proceeds are applied as debits and credits to the pledgee's and pledgor's money
- settlement accounts). A Pledgee may, but need not be, a Participant. Only a Pledgee
- which is a Participant may receive valued pledges.***Pledges to the Options Clearing CorporationA Participant writing an option on any options exchange may fully collateralize that option by
- pledging the underlying securities by book-entry through DTC to the Options Clearing
- Corporation (OCC). If the option is called (exercised), the securities may be released and
- delivered to the holder of the call. If the option contract is not exercised, OCC validates a release
- of the pledged securities, which are then returned to the Participant's general free account.***Release of Deposits with Options Clearing Corporation on Expired Options
- OCC automatically releases securities deposited with it to cover margin requirements on
- an option contract when the option contract expires. The securities are then allocated
- to your general free account. Notification of the released securities is received via the
- Collateral Loan Services functionality in the Settlement User Interface or automated
- output.***Shared Control Accounts
- About the Product
- Shared control accounts are available as an alternative to “agreement to pledge”
- arrangements.
- Background
- When a Participant pledges securities to the pledgee account of a pledgee at DTC
- (sometimes called a “hard pledge”), the securities are under the sole control of the
- pledgee. Only the pledgee can redeliver or release the securities. Pledgee accounts
- continue to be available at DTC.
- Shared control accounts are available at DTC as an alternative to agreement to pledge
- (sometimes called “agreement to deliver”) arrangements. A pledgee has control over
- securities delivered by a Participant to the Participant’s shared control account at DTC
- since the pledge has the ability to redeliver the securities without further consent by the
- Participant. Until the pledgee redelivers the securities, the Participant has the flexibility to
- redeliver or make substitutions for the securities without obtaining the pledgee’s release
- of the securities.Page 43
- Page 43 of 45Shared controls are separately identified in DTC’s Reference Directory. Participants
- interested in establishing a shared control account should contact their Relationship
- Manager.
- Procedures for DTC Shared Control Accounts
- The following procedures are an addition to DTC’s Procedures for Pledgees.
- 1. Any Participant may establish a shared control account at DTC and may
- designate any DTC pledgee to be the pledgee for that shared control account. A
- Participant may deliver securities (or other financial assets) by a free pledge from
- any of its DTC accounts (the “original account”) to its shared control account in
- order to grant a security interest or other interest in the securities to the pledgee.
- The shared control account is an account of the Participant and is identified with
- a separate account number from any other account of the Participant. A
- Participant may establish multiple shared control accounts, but only one pledge
- can be designated for each shared control account.
- 2. Except as modified by these procedures, the operation of a shared control
- account is identical to the operation of a DTC pledge account and all DTC
- procedures applicable to pledges accounts are applicable to shared control
- accounts. No deliveries vs. payment, pledges vs. payment, or physical deposits
- can be made to a shared control account and no deliveries vs. payment, pledges
- vs. payment, or physical withdrawals can be made from a shared control
- account. A Participant should not deliver securities to another Participant’s
- shared control account. In the instructions for a delivery of securities to a shared
- control account, the mandatory hypothecation code field should be completed in
- the same manner as it is for a pledge made without the use of a shared
- control delivery to a pledge account. The DTC fees and charges for a
- transaction involving a shared control account are the same as the fees and
- charges for a pledge transaction that does not involving involve a pledge
- account. The DTC monthly account usage charges applicable to a shared control
- account are charged to the Participant. The DTC reports and statements to the
- Participant and the pledge for a transaction involving a shared control account
- are the same as the reports and statements for a transaction involving a pledge
- that does not involve a shared control account.
- 3. As with a pledge account, voting Voting rights on the securities credited to a
- shared control account are assigned to the Participant. Cash dividend and
- interest payments and other cash distributions on such securities are credited to
- the original account. Distribution of securities for which the ex-distribution date is
- on or prior to the payable date or in which the distribution is payable in a different
- security are also credited to the original account. Any stock splits or other
- distributions of the same securities for which the ex-distribution date is after the
- payable date are credited to the shared control account.
- 4. The securities credited to a shared control account cannot be designated as or
- included in the collateral for any obligation of the Participant or the pledgee to
- DTC. DTC has no lien or other interest in any securities credited to a shared
- control account.Page 44
- Page 44 of 45
- ***Pledgee’s Agreement
- AGREEMENT as of [Date], between The Depository Trust Company (Depository Trust)
- and [Pledgee Name] (Pledgee).
- WHEREAS, Depository Trust maintains a centralized securities depository within which
- transfers and pledges of securities are effected by book entry methods;
- WHEREAS, Pledgee desires to have the benefits of a Depository Trust account in order
- that it may be designated from time to time as a pledgee of securities within the system;
- and
- WHEREAS, subject to the terms and conditions hereof, Depository Trust is willing to
- provide Pledgee with a Depository Trust account.
- NOW, THEREFORE, in consideration of the premises and the mutual covenants
- herein contained the parties
- hereto do hereby agree as follows:
- 1.
- So long as Depository Trust makes available to Pledgee a Depository Trust
- account, Pledgee agrees to pay Depository Trust the charges and fees from time to time
- in effect for Depository Trust applicable to Pledgee and to participate in Depository Trust
- in accordance with such Rules and procedures as may from time to time be established
- by Depository Trust, provided, however, that Pledgee may terminate this agreement at
- anytime, upon written notice delivered to Depository Trust, accompanied by a written
- demand for delivery of the certificates representing the securities, or for transfer by book
- entry of the securities, then being held by Depository Trust for Pledgee’s Depository
- Trust account and payment of any charges of fees then owing to Depository Trust.
- Immediately upon such notice and demand Pledgee’s participation in Depository Trust
- shall cease. Pledgee shall thereafter be under no obligation to pay any further charges
- or fees referred to in this paragraph and Depository Trust shall promptly arrange for
- delivery of Pledgee’s certificates representing the securities, or for transfer by book entry
- of the securities, then being held by Depository Trust for Pledgee’s account, such
- delivery or transfer to be at Pledgee’s expense.
- 2.So long as Pledgee shall maintain a Depository Trust account, Depository
- Trust, upon the pledge to Pledgee of securities held by Depository Trust for the
- account of any depositor in Depository Trust, will make appropriate entries on its
- books to indicate the pledge of transferring the securities from the account of
- such depositor to the account of Pledgee and shall maintain such securities in
- the account of with a notation that the securities are pledged by the
- depositor to the Pledgee until instructed by Pledgee to release such securities
- to the account of the pledgor, to deliver such securities to the order of Pledgee
- or to transfer such securities on the books of Depository Trust to the account of a
- depositor in Depository Trust other than the pledgor.Page 45
- Page 45 of 453.
- Pledgee agrees to indemnify and hold harmless Depository Trust, its officers,
- directors, employees and agents against any and all loss, liability, damage, cost and
- expense, including reasonable attorneys’ fees, arising out of any act or omission by
- Pledgee, or any of its employees or agents, or the Pledgee’s or any of its employee’s or
- agent’s error, negligence or fraud relating to Pledgee’s Depository Trust account.
- 4.
- This agreement and any transactions hereunder shall be governed by and
- construed in accordance with the laws of the State of New York.
- 5.
- This agreement shall be binding upon, and shall inure to the benefit of, the
- parties hereto and their respective successors and assigns.
- 6.
- This agreement shall be effective upon the date when it is executed by both
- parties hereto and a fully executed copy hereof has been delivered to the box of the
- Pledgee maintained by Depository Trust on its premises or has been deposited in the
- United States Postal Service, with posta
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