[Federal Register Volume 84, Number 223 (Tuesday, November 19, 2019)]
[Notices]
[Pages 63915-63917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24977]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87526; File No. SR-DTC-2019-009]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Amend the Redemptions Guide
Relating to the Call Lottery Process for Partial Redemptions
November 13, 2019.
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 October 31, 2019, 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. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change of DTC \3\ consists of amendments to the
Procedures \4\ set forth in the DTC Corporate Actions Redemptions
Service Guide \5\ (``Redemptions Guide'') relating to DTC's call
lottery process for the processing of partial redemptions (``Partial
Calls''), specifically with respect to allocations made for odd lot
positions in a called Security held by a Participant, as described
below.
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\3\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (the ``Rules''),
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/dtc_rules.pdf.
\4\ 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, id.
\5\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Redemptions.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The proposed rule change consists of amendments to the Procedures
set forth in the Redemptions Guide relating to DTC's lottery process
for the processing of Partial Calls, specifically with respect to
allocations made for odd lot positions in a called Security held by a
Participant, as described below.
Background
Partial Calls and the Call Lottery
An issuer of a Security may be allowed under the terms of the
Security to call a portion of the par value of the Security outstanding
for redemption, i.e., a Partial Call.\6\ In such a case, some investors
may have all or a portion of their position redeemed by the issuer,
while others may not have any portion of their position redeemed.
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\6\ See id. at 19.
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When an issuer initiates a Partial Call, DTC requires the trustee
for the Security to publish notice of such event or mail notice of the
event, including the specific amount to be redeemed, to the registered
holders.\7\ After DTC receives or collects notice of the Partial Call,
DTC creates an announcement through
[[Page 63916]]
its redemptions service,\8\ and preliminary call notice information is
made available to Participants.\9\
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\7\ See id.
\8\ DTC's redemption service includes announcing, collecting,
allocating, and reporting redemption and maturity payments on behalf
of its Participants holding Eligible Securities. See id. at 7.
\9\ See id. at 19.
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Under DTC's Procedures set forth in the Redemptions Guide relating
to a Partial Call, DTC allocates the called Securities among
Participants that hold the applicable Security by means of an impartial
lottery, based upon Participants' net long positions as of the close of
business on the day prior to the publication of the call notice.\10\
Upon performing the call lottery, DTC reports the results to
Participants.\11\
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\10\ See id.
\11\ See id. at 21.
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Odd Lots
From time to time, a Participant may hold position in a Security
that is not within the stated increments of the Security, i.e., the par
value at which, pursuant to the terms of the issue, the Security can be
purchased and traded. For example, a bond contract for a Security may
provide that all purchases must be made in authorized denominations
equal to a multiple of such an incremental value. E.g., if the
incremental value for the Security is $5,000 par value, then any amount
held by a Participant that has a par value that is not a multiple of
$5,000, such as a position with a par value of $5,001, would be an odd
lot; \12\ a position of $105,000 would not be an odd lot because
$105,000 is a multiple of $5,000.
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\12\ As an example, an odd lot position may be created as a
result of a beneficial holder's account at a Participant being split
into two accounts as a result of an event such as a divorce or the
administration of the estate of the beneficial holder. If the
division of the assets in the beneficial holder's account at the
Participant ultimately results in a portion of the beneficial
holder's position in the subject Security being transferred to
another Participant, and the remaining balance of the Security in
the beneficial holder's account at the Participant that held the
full position prior to the split is not in a par value amount that
is a multiple of the authorized denomination, then an odd lot amount
could be created in a Participant's DTC account.
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Running the lottery with the odd lot position intact could result
in another Participant being driven into an odd lot position, because
when the lottery is applied against existing odd lot positions it may
result in the creation of new positions for other Participants that are
not valued in a multiple of the established incremental value. Odd lot
positions that are created during the lottery process may have adverse
repercussions on Participants to which the odd lot positions are
allocated and their clients, because odd lot securities are more
difficult to trade due to the terms of the issue requiring trades to be
made only in multiples of the incremental value.
Pursuant to the proposed rule change, DTC would implement a
revision of the call lottery process to prevent creating new odd lot
positions for CUSIPs with minimum increments of $5,000 principal amount
or less. For purposes of running the lottery, Participants with odd lot
positions would have their positions adjusted down to nearest value
that is divisible by the minimum incremental value. However, the
Participant would continue to hold the Securities reduced from its
position for this purpose in its Account. This means that the
Participant with the initial odd lot would continue to maintain an odd
lot position after the lottery is run, but no new odd lot positions
would be created.
Following is an example of how the proposed change would govern the
determination of the portion of a Participant's position that would be
subject to allocation during a Partial Call on the affected Security:
Example (incremental value of $5,000):
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Participant Position Adjusted position
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1 105,000 * 105,000
2 151,000 * 150,000
3 194,000 * 190,000
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* (no adjustment)
Proposed Rule Change
Pursuant to the proposed rule change, DTC would amend the
Redemptions Guide to insert the following text into the section titled
``Partial Calls'':
Partial Calls When Participant Positions Are Not Divisible by the
Issue's Incremental Value
From time to time, Participants may hold positions that are not
within the stated increments of the security (odd lot). For issues
where the incremental value is $5,000 or less, each Participant that
has position that is not divisible by the incremental value will
have their lottery position rounded down to the nearest value that
is divisible by the minimum incremental value. These rounded
positions will be indicated as adjusted positions within the
entitlement screens and will be used as the position that will be
included in performing the lottery. No adjustments will be made for
any securities that have minimal incremental values greater than
$5,000.
Example (incremental value of 5,000):
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Participant Position Adjusted position
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1 105,000 * 105,000
2 151,000 * 150,000
3 194,000 * 190,000
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* (no adjustment)
In addition, a copyright date in the text of the Redemptions Guide
is currently shown as 1999-2014. Pursuant to the proposed rule change,
DTC would revise the text of the Redemptions Guide to reflect a
copyright date of 1999-2019.
Implementation Timeframe
The proposed rule change would be implemented upon its approval by
the Commission.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act \13\ requires that the rules of the
clearing agency be designed, inter alia, to promote the prompt and
accurate clearance and settlement of securities transactions. As
described above, odd lot positions are more difficult for Participants
and their clients to trade. The proposed rule change would prevent the
creation of new odd lot positions during the lottery process for issues
where the incremental value is $5,000 or less. Therefore, DTC believes
that the proposed rule change is consistent with this provision of the
Act, because by amending the Redemptions Guide to exclude odd lots from
Partial Call lottery processing as described above, the proposed rule
change would promote the prompt and accurate clearance and settlement
of securities transactions by preventing the creation of new odd lots
during the process, and therefore facilitate the allocation of
positions that are more amenable to trading for transactions that are
processed and settled through DTC's system.
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition
DTC believes that the proposed rule change could impose a burden on
competition. By excluding from a call lottery the portion of a
Participant's position in a Security that is not within the stated
increments of the Security as described above, the proposed rule change
would result in those Participants continuing to hold the odd lot
portion of their position regardless of the outcome of the lottery
results. In addition, having fewer Securities available to participate
in the call lottery from those Participants with the ``odd lot''
portion of their respective positions excluded may result in other
[[Page 63917]]
Participants having a larger portion of their positions in the Security
redeemed in connection with the Partial Call. This outcome may present
a burden or benefit to a Participant versus others with respect to a
given redemption resulting from a Partial Call, depending on whether
the terms of a Partial Call would be favorable to the Participant.
DTC believes that any burden on competition presented by the
proposal would not be significant because only the ``odd lot'' portion
of a Participant's holdings for Securities denominated in increments of
$5,000 or less would be excluded from the Partial Call, thus creating a
cap \14\ on the number of a Participant's Securities that could be
excluded from a call lottery, and thus limiting the benefit or burden
that a Participant whose Securities are called would realize versus
other Participants.
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\14\ An odd lot can only be an amount less than the incremental
value of the Security. Thus, if the incremental value of a Security
is $5,000, then the amount of a Participant's total position
excluded from a call lottery on that Security would be capped at
$4,999.
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DTC believes that any burden on competition that may be imposed by
the proposed rule changes, as described above, would be necessary and
appropriate in furtherance of the purposes of the Act, as permitted by
Section 17A(b)(3)(I) of the Act,\15\ because preventing the creation of
new odd lots resulting from the allocation for a call lottery on a
Security affected by the proposal would instead result in positions
that (i) avoid the adverse repercussions, with respect to tradability
of the Security, on a Participant who would otherwise have been
allocated a new odd lot position by the inclusion of one or more odd
lot positions of other Participants in the call lottery, as described
above, and (ii) are available in an incremental value that can be used
to satisfy Delivery obligations with respect to open trading positions
in the Security, and would therefore promote the prompt and accurate
clearance and settlement of securities transactions in the marketplace
for an affected Security.
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\15\ 15 U.S.C. 78q-1(b)(3)(I).
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DTC believes the proposed rule change may promote competition,
because eliminating the creation of new odd lot positions for called
Securities where the incremental value is $5,000 or less would prevent
circumstances where additional Participants, beyond any Participants
that already hold odd lot positions prior to the running of the
lottery, are allocated positions in odd lot amounts, which, as
described above, would be more difficult for the Participants and their
clients to trade than positions held in multiples of the incremental
value.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
DTC has not received or solicited any written comments relating to
this proposal. 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:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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 email to [email protected]. Please include
File Number SR-DTC-2019-009 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-DTC-2019-009. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of DTC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-DTC-2019-009 and should be submitted on
or before December 10, 2019.
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\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24977 Filed 11-18-19; 8:45 am]
BILLING CODE 8011-01-P