FR 2021-03090

The document in question is a notice from the Federal Register regarding a proposed rule change filed by the Depository Trust Company (DTC) with the Securities and Exchange Commission (SEC). This document outlines changes to the DTC's fee schedule specifically targeting its Money Market Instrument (MMI) Program. The proposal aims to introduce new fees for adjustments made within the program that require manual intervention. This measure is intended to incentivize participants to ensure accurate data entry and timely reconciliation to avoid potential risks.

General Summary

DTC's proposed rule change intends to introduce fees for adjustments in the MMI Program. These fees are associated with manual interventions required from DTC due to late or erroneous participant reconciliations. The adjustments sought by participants introduce risks, including settlement and operational risks, which this proposal aims to mitigate by discouraging such behavior. The proposed fees are structured into tiers depending on the nature and risk of the correction required. They range from $2,000 to $10,000 per CUSIP—a unique identifier for securities.

Significant Issues and Concerns

A notable issue in the document is the lack of a clear rationale or methodology for setting these specific fee amounts. The document does not explain how these fees will effectively reduce the risks described. Additionally, the technical jargon and complexity of the language used can make it challenging for individuals not well-versed in financial regulations to grasp the document fully.

There is also a lack of detailed discussion on how these changes might impact competition, with the document asserting an insignificant effect without substantial explanation. Moreover, there is no mention of alternative approaches that could have been considered to address the identified issues.

Impact on the Public

Broadly speaking, the general public may not see a direct effect from this rule change, as it pertains to institutional participants and their handling of money market instruments. However, implications could arise if these adjustments indirectly affect the efficiency and cost of financial services.

Impact on Specific Stakeholders

For specific stakeholders, particularly the participants in DTC's MMI Program, the proposed fees could be financially significant. The document suggests that participants could face substantial increases in operational costs if they fail to comply with the required standards for data accuracy and reconciliation. This might particularly disadvantage smaller firms or those with fewer financial resources, as the fees could represent a more significant percentage of their operational budget compared to larger entities.

While the intent is to foster diligent practices among participants, there is no discussion on how participants with fewer resources might adapt to these new requirements without incurring substantial costs. Additionally, the absence of commentary on how this might foster unfair competitive advantages for larger institutions is a notable omission.

Overall, while the rule change aims to improve market efficiency and reduce risks, the potential burdens on smaller firms and the broader market implications warrant further exploration and transparent discussion.

The Federal Register document outlines a proposed rule change by The Depository Trust Company (DTC) concerning its Money Market Instrument (MMI) Program. This proposal includes the introduction of new fees for specific types of adjustments related to transactions in money market instruments.

Financial References and Allocations

The document specifies three distinct fee levels related to adjustments that might be made by MMI Issuing and Paying Agents (IPAs):

1. $10,000 per CUSIP: This fee applies to adjustments requiring a reversal of a processed transaction on the Event Date or after. This is considered the highest risk category, as it involves the full reinstatement of securities and the reversal of credited funds, impacting both DTC and its participants significantly.

2. $7,500 per CUSIP: This charge is proposed for events that require a modification of the event type, such as changing the nature of a payment. While still considered a risk, it is deemed less risky than full transaction reversals.

3. $2,000 per CUSIP: This is the fee for changes in the rate, which may necessitate manual fund allocation adjustments. It represents the lowest level of risk since it does not involve securities movement but requires adjusting the amount allocated among participants.

These fees are designed as a deterrent for IPAs, encouraging them to input accurate information and reconcile their activities timely to avoid the risk associated with late adjustments.

Relation to Identified Issues

The primary issue with the proposed fees is a lack of clear explanation on how the amounts—$10,000, $7,500, and $2,000—were determined. The document does not provide an adequate justification for why these specific amounts are considered appropriate or how they correspond to the relative risks presented by each type of adjustment. Without this clarity, participants might find it challenging to understand the rationale and fairness behind these costs.

Additionally, while the document implies that these fees will mitigate operational risks by discouraging inconsistent practices, it does not explicitly articulate how they will achieve this outcome. The absence of detailed strategies or mechanisms explaining how the financial penalties will directly reduce such risks adds to the ambiguity surrounding the effectiveness of these financial references.

There is also an issue regarding the potential financial burden on smaller participants or those less financially capable. The document states that the impact on competition is not significant; however, it fails to address how these new fees will affect smaller players in the market, potentially posing a considerable financial burden due to the high fees.

Moreover, the document appears to gloss over alternative solutions or other strategies that might have been considered but ultimately not pursued. This lack of information could raise questions about whether the proposed financial penalties are indeed the most efficient option available.

In summary, while the new fee structure aims to reinforce compliance and operational accuracy within the MMI Program, the document's lack of clarity regarding fee justifications, their impact on competition, and the absence of explanations for alternative solutions leaves several questions unanswered.