[Federal Register Volume 83, Number 238 (Wednesday, December 12, 2018)]
[Notices]
[Pages 63948-63952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26913]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84751; File No. SR-DTC-2018-010]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of a Proposed Rule Change To Amend the Settlement
Guide Procedures To Provide Status Information for Institutional
Transactions To a Matching Utility
December 7, 2018.
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 November 29, 2018, 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 would amend the Procedures, set forth in
the DTC Settlement Guide,\3\ \4\ to allow DTC to provide status
information (``Status Information'') for institutional transactions in
Eligible Securities (``Institutional Transactions'') \5\ to an entity
providing a matching service \6\
[[Page 63949]]
(``Matching Utility''), as described below.
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\3\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in the Rules, By-Laws and
Organization Certificate of The Depository Trust Company
(``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx and the DTC Settlement Service Guide (``Settlement
Guide''), available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
\4\ The Settlement Guide, which is proposed to be amended
hereby, sets forth Procedures for the DTC's Settlement Service. See
Settlement Guide, supra note 3. Procedures, in this context,
pursuant to Section 1 of Rule 1, means ``the Procedures, service
guides, and regulations of DTC adopted pursuant to Rule 27, as
amended from time to time.'' Rule 1, Section 1, supra note 3. The
Settlement Guide constitutes Procedures of DTC, as defined in the
Rules. See Settlement Guide, supra note 3 at 1.
\5\ An Institutional Transaction is a securities transaction
between a broker-dealer and its institutional customer (e.g., sell-
side firms, buy-side institutions, and custodians).
\6\ A ``matching service'' is an electronic service to match
trade information, centrally, between a broker-dealer and its
institutional customer. The matching service intermediary matches
(i.e., reconciles) trade information from the counterparties to an
Institutional Transaction, to generate an affirmed transaction
(``Affirmed Transaction'') which is then used to provide settlement
instructions for the Affirmed Transactions to the central securities
depository, such as DTC, at which the Affirmed Transaction settles.
See Securities Exchange Act Release No. 39829 (April 6, 1998), 63 FR
17943 (April 13, 1998) at 17946 (providing interpretive guidance on
types of entities that may provide a matching service).
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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 would amend the Settlement Guide to allow
DTC to provide Status Information for Institutional Transactions to a
Matching Utility, as described below.
Background
DTC may accept Institutional Transactions from a Matching Utility
that is (i) a clearing agency registered pursuant to Section 17A of the
Act \7\ (ii) an entity that has obtained an exemption from such
registration from the Commission, or (iii) a ``qualified vendor'' for
trade confirmation/affirmation services as defined by the rules of a
self-regulatory organization.\8\
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\7\ 15 U.S.C. 78q-1.
\8\ See Settlement Guide, supra note 3 at 35.
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In accordance with the Settlement Guide, for a Matching Utility to
establish and maintain a connection with DTC, the Matching Utility must
be able to balance with DTC in an automated way \9\ and communicate
transactions to and from DTC with information required though mandated
fields in order to provide DTC with data necessary for it to be able to
process a transaction.\10\
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\9\ For each Matching Utility interfacing with DTC, DTC requires
the Matching Utility to deliver a daily message on each business day
shortly after noon from the Matching Utility with their accepted
item counts of institutional delivery and ID Net transaction totals
for Settlement Date minus one transactions. DTC's system will
compare the totals from the Matching Utility to its accepted item
counts. If the totals match, an ``acknowledged balance'' balance
file will be sent to the Matching Utility. If the totals do not
match, DTC will respond with the list of Settlement Date minus one
control numbers received from the Matching Utility, along with their
respective transaction types for the originating Matching Utility to
compare. Id.
\10\ The mandated fields for this purpose are the transaction
control number (``Control Number''), DTC receiver and deliverer
account numbers, CUSIP, message type, share quantity, market type,
buy-sell indicator, broker ID, ID agent internal account number,
broker internal account number, agent bank ID, settlement amount,
origination entity, recipient of message, institution, and
settlement date. Id. Institutional Transactions that are not
Affirmed Transactions, but which include a Control Number, may be
submitted directly by Participants.
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The submission of an Affirmed Transaction by the Matching Utility
to DTC, on behalf of a Participant, constitutes the duly authorized
instruction of the Participant to DTC to process the Affirmed
Transaction in accordance with the Rules and Procedures.\11\
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\11\ Id.
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As more fully described below, a transaction submitted to DTC for
processing may be subject to a processing exception (``Exception''),
causing it to pend in the DTC system or not be processed because the
transaction does not satisfy certain requirements and/or controls set
forth in the Rules and Service Guide. A Matching Utility that has
submitted an Institutional Transaction to DTC, or is otherwise involved
with the matching of a transaction, does not receive Status Information
regarding the transaction and is therefore unable to provide services
to facilitate resolution of processing Exceptions occurring at DTC.
Therefore, in order to resolve an Exception, the Participants to an
Institutional Transaction must (i) access Status Information directly
through the DTC Settlement User Interface and (ii), as necessary,
supply the information to their customers that are counterparties to
the transaction on their books, in order to facilitate the coordination
of the resolution of the Exception among the counterparties. Pursuant
to the proposed rule change, DTC would amend the Settlement Guide to
allow DTC to provide Status Information for an Institutional
Transaction to a Matching Utility. The proposal would allow the
Matching Utility to further provide the Status Information to the
counterparties to the Institutional Transaction to facilitate
coordination of the resolution of Exceptions among counterparties.\12\
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\12\ The proposed rule change would not change or have any
effect on Participants' ability to continue to access Status
Information directly through the DTC Settlement User Interface.
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DTC Transaction Processing Exceptions
Exceptions may arise at various points during the processing of an
Institutional Transaction submitted to DTC.
After an Affirmed Transaction, or other transaction that has been
submitted directly by a Participant, has been accepted by DTC, the
transaction must be approved by the Receiver through the Receiver
Authorized Delivery function (``RAD''), before it will be staged for
DTC settlement processing in accordance with the Rules and the
Settlement Guide.\13\ In this regard, a Receiving Participant may
reject a transaction for any reason using RAD. If a transaction is not
processed because of a rejection, then the transaction will drop from
the DTC system, resulting in an Exception that could only be resolved
through resubmission of the transaction and approval by the Receiving
Participant.\14\
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\13\ RAD allows Participants to review and either approve or
reject incoming Deliveries before they are processed. See Settlement
Guide, supra note 3 at 53. RAD limits a Participant's exposure from
misdirected or erroneously entered transactions. See Settlement
Guide, supra note 3 at 5.
\14\ See Settlement Guide, supra note 3 at 54-55.
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When processing a transaction for settlement, DTC checks risk
controls, including the Net Debit Cap and Collateral Monitor, and
inventory controls of the Participants to the transaction.\15\ If a
transaction satisfies DTC risk and inventory controls, as described
below, the transaction will be processed by DTC and will become
complete if the Receiving Participant satisfies its end-of-day funds
settlement obligation.\16\ If a transaction is not processed, i.e.,
because DTC risk controls are not met, or if the Deliverer has
insufficient inventory in the applicable Securities, this would result
in an Exception such that the transaction will pend in DTC's system and
recycle until the condition causing the pend is satisfied.\17\
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\15\ See Settlement Guide, supra note 3 at 64-68.
\16\ See Rules 9(A) and 9(B), supra note 3.
\17\ See Settlement Guide, supra note 3 at 55.
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An incomplete transaction recycles in DTC's system until the end of
the day, and if it remains incomplete at the end of the day it will be
dropped.\18\
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\18\ See Settlement Guide, supra note 3 at 55.
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Addressing Exceptions
An Exception creates inefficiencies for parties to the applicable
Institutional Transaction. If an Institutional Transaction results in
an Exception, information regarding the status of the Institutional
Transaction may need to be exchanged by Participants and others
involved in the trade life cycle, including buy-side firms, broker/
[[Page 63950]]
dealers, custodians, prime brokers, clearing brokers and other
settlement agents, to resolve the issue underlying the Exception and
successfully process the transaction. Communications among Participants
that have direct access to Status Information through DTC and other
counterparties regarding Exceptions are often processed in a
decentralized manner via email, creating a time consuming process that
is subject to error.
Any potential delays and/or errors in communicating the existence
of an Exception and related Status Information among counterparties may
impede the prompt and accurate clearance and settlement of affected
Institutional Transactions. A Participant's timely receipt of
information relating to an Exception would facilitate its ability to
take an action to facilitate the processing of the related transaction.
Examples of some of the actions the Participant may take include, as
applicable, (i) making a settlement progress payment (``Settlement
Progress Payment'') \19\ to lower its net settlement debit and increase
its Collateral Monitor in order to meet the DTC Net Debit Cap and
Collateral Monitor risk controls, (ii) managing the Securities in its
Account to increase its available Collateral, and/or (iii)
communication with counterparties to the transaction with respect to a
rejection so that the Deliverer and Receiver may agree on the details
for any related transaction to be submitted and approved via RAD.
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\19\ A Settlement Progress Payment is a payment wired intraday
by a Participant to DTC's account at the Federal Reserve Bank of New
York. The amount of a Settlement Progress Payment is (i) credited to
the Participant's intraday net settlement balance and (ii) is
Collateral that supports the Participant's Collateral Monitor. See
also Rule 1, supra note 3 (definition of Collateral) and Settlement
Guide, supra note 3 at 62-63.
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Proposed Rule Change
DTC has received a request from its Matching Utility affiliate, ITP
Matching (US) LLC (``ITP''), to receive Status Information so that ITP
may transmit the Status Information to counterparties in a centralized
format. DTC believes that distribution of Status Information to
relevant counterparties in a centralized format would facilitate
Participants' ability to monitor Exceptions and coordinate with their
institutional customers in order to resolve Exceptions.
Pursuant to the proposed rule change, in order to facilitate more
seamless transmission of the Status Information for (i) Affirmed
Transactions and (ii) other Institutional Transactions that may have
been confirmed at a Matching Utility and received a Control Number, and
are submitted directly to DTC by a Participant in an instruction
containing the Control Number, (collectively, ``Eligible
Transactions'') to Participants and facilitate their ability to manage
Exceptions, DTC proposes to amend the Settlement Guide to provide that
DTC may provide Status Information on Eligible Transactions to the
applicable Matching Utility that submitted the transaction to DTC, or
with respect to which its Control Number is included in transaction
details provided by a Participant,\20\ if so requested by the Matching
Utility. In this regard, DTC would send to a Matching Utility Status
Information for Eligible Transactions that DTC has received from the
Matching Utility or have been entered by the Participant, that have a
Control Number associated with that Matching Utility. The Status
Information provided to the Matching Utility would include the status
of the transaction (e.g., the Delivery of Securities has been made
within DTC, the transaction is pending Delivery within DTC, or the
transaction was reclaimed (i.e., sent back to the Deliverer)) and a
reason for any pending status (e.g., the Deliverer has insufficient
inventory in the applicable Securities, the Deliverer has insufficient
Collateral, the Receiver to the transaction has insufficient Net Debit
Cap, etc.). The Status Information would also include information
(``Identifying Information'') to facilitate the Matching Utility's
ability to identify the applicable Eligible Transaction and reconcile
the Status Information to the Eligible Transaction in its records.
Identifying Information would include, but not be limited to, (i) the
applicable Control Number (ii) identification numbers of the
Participants to the transaction, (iii) quantity of Securities, (iv)
dollar amount of the transaction, and (v) an indicator of whether the
transaction was submitted to DTC by the Matching Utility or directly by
a Participant.
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\20\ It is DTC's understanding that a transaction that has been
confirmed within a Matching Utility's system, but has not been
affirmed, may be assigned a Control Number by the Matching Utility.
Any transaction not affirmed by a Matching Utility would not be
submitted by it to DTC as an Affirmed Transaction. In that case, the
Participant may submit the transaction directly through DTC as a
Deliver Order, and include the applicable Control Number as assigned
by the Matching Utility on its submission to DTC.
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DTC believes that sharing Status Information with a Matching
Utility, on behalf of a Participant, would foster coordination among
persons engaged in the clearance and settlement of Institutional
Transactions by facilitating enhanced access to information for
relevant parties that may promote their ability to manage Exceptions.
Proposed Changes to the Settlement Guide
Pursuant to the proposed rule change, DTC proposes to revise the
Settlement Guide to allow DTC to provide Status Information of (i)
Affirmed Transactions and (ii) other institutional transactions to a
Matching Utility that requests such information, but only for those
transactions that are associated with a Control Number relating to the
Matching Utility. The proposed text to the Settlement Guide would also
(x) describe the types of Status Information and related Identifying
Information that would be shared with a Matching Utility in this
regard, as described above and (y) provide that DTC may charge a fee
(``Status Information Fee'') to a Matching Utility that receives Status
Information as set forth in the DTC Fee Guide.\21\ The proposed rule
change would also add a defined term for ``Control Number'' to the
Settlement Guide in existing text where the term is referred to but not
defined.
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\21\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/fee-guides/dtcfeeguide.pdf. Any such fee would be the subject
of a subsequent proposed rule change that DTC would file with the
Commission.
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The proposed rule change would require that prior to providing
Status Information to a Matching Utility, DTC would obtain the written
agreement, in such form as determined by DTC from time to time
(``Status Information Agreement''), from the Matching Utility that
includes (i) a request from the Matching Utility to receive Status
Information from DTC, (ii) an agreement by the Matching Utility that
the Matching Utility will not distribute Status Information to any
third party other than (a) the Participants indicated on the Status
Information and (b) the institutional customers that are counterparties
to the transaction for which the Participants indicated on the Status
Information are acting with respect to the transaction, (iii) the
agreement of the Matching Utility that the Matching Utility will
indemnify, hold harmless and agree, on demand, to reimburse DTC, its
stockholders, officers, directors and employees from and against and
for any and all claims, liabilities, obligations, damages, actions,
penalties, losses, costs, expenses and disbursements, including,
without limitation, attorneys' fees and disbursements (``Claims''),
which they may sustain by reason of DTC's providing Status Information
to the Matching Utility, except for any Claims
[[Page 63951]]
which result from the gross negligence or willful misconduct of the
person asserting a right to indemnification, (iv) the agreement of the
Matching Utility to pay the Status Information Fee, (v) the agreement
of the Matching Utility to notify DTC immediately if the Matching
Utility becomes aware of Status Information provided to it by DTC being
distributed to a third party other than as authorized pursuant to (ii)
above, and (vi) the acknowledgement of the Matching Utility that DTC
may terminate the Status Information Agreement in the event that (a)
DTC becomes aware that the Matching Utility has used or distributed the
Status Information in a manner that violates the terms of the Status
Information Agreement, (b) the Matching Utility does not pay the Status
Information Fee in accordance with the terms of the Fee Schedule, or
(c) DTC submits a rule filing to the SEC, which is approved by the SEC
or otherwise becomes effective pursuant to the Act to discontinue DTC's
distribution of Status Information to Matching Utilities.
Implementation Timeframe
The proposed rule change would be effective upon approval of the
proposed rule change by the Commission.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act \22\ requires, inter alia, that the
Rules promote the prompt and accurate clearance and settlement of
securities transactions. DTC believes that the proposed rule changes
are consistent with this provision because by allowing DTC to provide
Status Information to Matching Utilities in accordance with the
proposal as described above, the proposed rule change would facilitate
the distribution of information on Exceptions to the parties of
Eligible Transactions. This distribution of Status Information would
allow for enhanced communication among the parties to an Eligible
Transaction to address an Exception so that the Eligible Transaction
may meet DTC controls and be processed for end-of-day settlement.
Therefore, by facilitating the distribution of Status Information to a
Matching Utility, and thereby facilitating the ability of a Matching
Utility to provide this information to the applicable parties to an
Eligible Transaction that may address related Exceptions and resolve
related issues so that a transaction may be processed for settlement,
DTC believes that the proposed rule change would promote the prompt and
accurate clearance and settlement of securities transactions consistent
with Section 17A(b)(3)(F) of the Act.\23\
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ Id.
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Rule 17Ad-22(e)(20) \24\ promulgated under the Act requires DTC to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, identify, monitor,
and manage risks related to any link the covered clearing agency
establishes with one or more other clearing agencies, financial market
utilities, or trading markets. DTC believes that the proposed rule
change is consistent with this Rule because the proposed Status
Information Agreement, which would include the terms as set forth
above, that would be required to be provided by a Matching Utility
prior to DTC distributing Status Information to it, would limit DTC's
exposure to legal risks and expenses that may otherwise arise in
connection with such distribution by including an indemnity from the
Matching Utility with respect to its receipt of Status Information and
manage privacy risk by requiring Matching Utilities to not distribute
Status Information to unauthorized third parties, as described above.
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\24\ 17 CFR 240.17Ad-22(e)(20).
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(B) Clearing Agency's Statement on Burden on Competition
DTC believes the proposed rule change could impact competition.\25\
DTC does not believe that the proposed rule change to allow DTC to
provide Status Information to a Matching Utility that is a party to a
transaction (i.e., the party originating the confirm or processing the
affirm) would impose a burden on competition for Matching Utilities and
Participants, because by adding text to the Settlement Guide to allow
DTC to provide Status Information to a Matching Utility, as applicable,
the proposal is merely facilitating the transmission of Status
Information that would enable the counterparties to an Eligible
Transaction to address Exceptions in order to facilitate processing of
the transaction by DTC. In addition, Status Information would be
available to any Matching Utility that requests it and satisfies the
applicable requirements that would be set forth in the Settlement
Guide. DTC does not believe the proposed rule change that would add
text referencing that DTC may charge a fee to a Matching Utility that
receives Status Information would impose a burden on competition,
because any such fee would not take effect until after such a fee is
filed as part of a subsequent rule filing that would be submitted by
DTC to the Commission. DTC believes that the provision of Status
Information to a Matching Utility could promote competition, to the
extent Status Information is further transmitted by the Matching
Utility to the counterparties to an applicable Eligible Transaction, by
facilitating Participants' ability to address an Exception that may
affect the processing of the Eligible Transaction at DTC.
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\25\ 15 U.S.C. 78q-1(b)(3)(I).
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(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:
(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-2018-010 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-2018-010. 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
[[Page 63952]]
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-2018-010
and should be submitted on or before January 2, 2019.
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\26\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26913 Filed 12-11-18; 8:45 am]
BILLING CODE 8011-01-P