SR-DTC-2021-005

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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
[email protected]
(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
[email protected]
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
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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
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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
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Transcripts, Other Communications
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Exhibit 1 - Notice of Proposed Rule Change *
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Exhibit 1A- Notice of Proposed Rule
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or Advance Notice by Clearing Agencies *Add
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ViewRemove
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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
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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
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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
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(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
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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
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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
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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
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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
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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
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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 [email protected]. 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
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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