## _cr10128

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### Accessibility of the regulatory framework and legal basis
- Laws, regulations, rules, procedures and contractual provisions governing the relationship of DTC and its Participants are public and readily accessible (examples listed in source).
- Key governing statutes and rules include:
  - Securities Exchange Act of 1934; Sections 17A and 19 and rules thereunder.
  - Federal Reserve Act; Federal Reserve Banks Operating Circulars (in particular OC 1, OC12, OC6).
  - DTC’s rules and procedures; Article 8 of the Uniform Commercial Code; Subpart B of regulation J incorporating article 4A UCC; FDICIA of 1991; New York State Law and Banking Law; liquidation provisions of applicable federal and state banking laws.

### Enforceability and customer asset protection
- Membership agreement (system rules and procedures) enforceable under New York State law.
- Each DTC participant must provide Counsel opinion that the Participants Agreement and DTC rules/procedures are enforceable against it.
- Legal protections and insolvency regimes:
  - Judicial proceedings concerning DTC insolvency administered under New York Banking Law or U.S. Federal Bankruptcy Code.
  - UCC Article 8 (as adopted by New York) establishes “security entitlement” for deposits with securities intermediaries.
  - Fully-paid customer securities held in custody by an intermediary generally would not be deemed assets of the intermediary under U.S. law.
  - For insured depository institutions, distribution in insolvency governed by FDIA liquidation provisions.
  - Non-bank broker-dealers governed by SIPA and U.S. Bankruptcy Code.

### Immobilization/dematerialization and transfer of title
- Article 8 UCC and revised New York Article 8 create book-entry framework for DTC.
- Section 17A of the Exchange Act directs SEC to end physical certificate movement for broker/dealer settlements.
- Approximately 90 percent of corporate and municipal securities issued to the public are distributed through DTC and are represented by immobilized physical certificates.
- Through August 2009, over 99 percent of municipal and corporate debt by par value distributed through DTC was in book-entry-only form.
- Book-entry transfers by DTC sufficient to transfer beneficial ownership; depositor obtains a “security entitlement”.

### Replication of debits/credits and transaction finality
- DTC replicates debits/credits to DTC’s accounts as incomplete transactions in receiving participant accounts; collateral monitor of receiving participant adjusted.
- Each incomplete transaction for a business day becomes effective with finality for the receiving participant at the earliest of:
  - a) the time DTC determines receiving Party’s Settlement Account balance is not negative for that business day;
  - b) the time the receiving Party pays the amount of the negative balance in its Settlement Account as finally determined by DTC for that business day to DTC; or
  - c) the time during that business day when, subject to DTC risk management controls, the receiving Party instructs DTC to effect delivery/pledge/release/withdrawal of securities as specified (cases 1–4).
- Under DTC Rule 9(B) DVP steps (summary of sequence):
  1. DTC debits delivering participant account and credits DTC’s account by number of obligations/shares/rights subject to instruction (DTC becomes holder of the securities subject to the instruction);
  2. DTC credits delivering participant and debits its own account by amount of payment specified in instruction.

### Netting, DVP model and settlement mechanics
- DTC operates DVP Model 2: securities settle gross intraday; associated funds settle net at end of day.
- All valued transactions in DTC are settled on a DVP basis.
- NSCC CNS interaction:
  - NSCC maintains securities account at DTC for net securities from CNS.
  - CNS deliveries to receiver are provisional intraday and not final until end-of-day payment received.
  - CNS averaged, November 2009: daily closing fail value of USD 35.7 million per day out of average daily total CNS start value of USD 1.175 billion → average fail rate per day of 3.04 percent.
- Cash settlement and end-of-day process:
  - Final net payment settled through Federal Reserve’s NSS.
  - Settlement file typically submitted between 16:00 and 16:30 ET.
  - NSS debits/net credits are final when made by the Federal Reserve.
  - If debit cannot be processed, Reserve Bank notifies DTC; DTC may transfer funds into NSS technical settlement account, likely from liquidity resources.
- DTC’s “Look-Ahead Process” (ATP) calculates net effect on collateral and net debit caps to simultaneously process transactions if no participant would have a deficit.

### Intraday finality, returns and matching
- DTC provides both end-of-day and intraday finality:
  - Net money settlement final at end-of-day via NSS funds transfers (immediately final when effected).
  - Under DTC Rule 9B, DVP securities transfer final and irrevocable as to delivering party once it has passed DTC risk controls and securities debited.
  - Receiver finality: end-of-day when final cash balance not negative or when receiving party pays negative balance; intraday when DTC risk controls satisfied and receiving participant instructs delivery/pledge/withdrawal.
- Returns:
  - Receiving participants can return securities intraday; returns amount to less than 2 percent of aggregate dollar amount of deliver orders and payment orders processed on an average day.
  - Receiver Authorized Delivery (RAD) thresholds: USD 15 million for Deliver Orders and USD 1 million for Payment Orders; receiver can raise but not reduce RAD limit.
- Trade confirmation and matching:
  - Over 99 percent of trades submitted to NSCC are on a locked-in basis.
  - NSCC provides trade comparison services for remaining ~1 percent.
  - Omgeo: approximately 90 percent of institutional trades are affirmed by noon of T+2; industry affirmation percentages: trade date = 33.8 percent; by T + 1 = 86.2 percent; by noon on T + 2 = 88.8 percent.
  - DTC does not match settlement instructions prior to settlement.
  - Recommendation: DTC should explore introducing instruction-matching mechanism prior to settlement.

### Intraday credit, caps, collateral and liquidity controls
- Net debit cap of a Participant is the least of 4 amounts:
  - (a) a net debit cap based on the 3 largest net debits that each Participant incurs over a rolling 3-month period;
  - (b) an amount, if any, determined by the Participant’s settling bank;
  - (c) an amount, if any, determined by DTC; or
  - (d) US$1.8 billion.
- Affiliated family net debit caps limited to US$3.0 billion or less.
- Collateral valuation: uses prior business day’s closing market price less a haircut.
- DTC monitors participants with excess collateral value less than 300 percent of their end-of-day net debit.
- Committed liquid resources and waterfall:
  - Participants Fund and committed lines of credit together totaling $3.2 billion at present.
  - In event of Participant failure, DTC accesses resources in this order:
    1. defaulting Participant’s contribution to Participants Fund;
    2. borrow on DTC’s name from non-defaulting Participants’ contributions to Participants Fund (may be secured by failing Participant collateral);
    3. borrow from committed lines of credit (loan to DTC as principal, secured by pledged collateral of failing Participant);
    4. borrow from some or all Participants up to entire amount of the end-of-day credit balance due to Participants on that business day.
- Overdrafts in securities not permitted; if shortfall, DTC debits Participant’s cash account for 130 percent of market value to offset credit for redelivery plus margin of safety (130 percent is DTC’s interim adjustment judgment).
- Assessment: current controls sufficient for single-largest family failure; extreme multiple failures could test liquidity resources.
- Recommendation: DTC should be given access to central bank liquidity facilities.

### Settlement asset safety and settling banks
- Intraday cash settlement is commercial bank money (net debit balances); end-of-day final cash settlement occurs in central bank money via Federal Reserve NSS.
- Participants designate a settling bank (Rule 9(B)) which must have access to Fedwire and NSS.
- Federal Reserve NSS supports settlements in USD only.
- Canadian dollar arrangements:
  - DTC has a link to the Canadian CSD (CDS) with a single net Canadian dollar settlement using a Canadian cash correspondent bank as DTC’s settlement agent.
  - Recommendation: DTC needs to reduce concentration of settlement cash for Canadian dollar and may explore becoming a direct participant of the Canadian RTGS system.
- Concentration of settling banks (as of February 4, 2010):
  - 62 settling banks used, 21 of which settle for their own accounts as well as other DTC Participants.
  - Payment flows highly concentrated in top five banks representing around 70 percent or more of total payment flow.
- Recommendation: DTC should monitor financial conditions and begin monitoring exposures of settlement banks.
- Recommendation: The self-assessment of the Federal Reserve’s NSS against the CPSIPS should be reviewed by relevant authorities and made public.

### Securities lending, repos and facilitation
- U.S. law supports securities lending arrangements.
- DTC does not provide securities lending facilities directly but provides services that support securities lending.
- NSCC Stock Borrow Program (SBP) provides securities borrowing and lending facilities; SBP operates as part of CNS.
- DTC provides Stock Loan (SL) and Repurchase (REPO) Income tracking system creating SL/REPO memo positions and automatically debiting/crediting borrower/lender on income payment dates.
- Supervision: no specific regulatory regime for securities lending/repo; supervisors and securities regulators oversee participants’ risk management practices.

### Operational risk management, BCP and testing
- Governance of operational risk: Business continuity organized at holding company level (DTCC corporate function), Operational Risk Group, Internal Risk Management Committee, Security Committee, Internal Audit, independent accountants.
- Data centers and BCP:
  - Out-of-region data centre is a warm site with 2 hour recovery capability; out-of-region business operations sites are hot sites.
  - DTCC data centers in New York region act as a single data centre with secondary backup; out-of-region recovery site recovers all critical systems if New York region unavailable; network reroutes client traffic automatically.
- Testing and participant interaction:
  - Connectivity tests with critical participants (critical participants represent 80% of DTC’s total transaction volume and value); many smaller participants (20% of transactions) do not have dedicated backup and rent/share space.
  - Contingency plans and backup facilities for failure of key systems are not tested and reviewed with participants except connectivity tests with critical participants.
  - Data centre failover tests conducted 3-4 times per year; business operations tests conducted throughout the year.
  - Recommendation: DTCC should test its back-up sites to critical participants’ backup sites.
- Audit: Deloitte LLC issued most recent report for DTC on October 30, 2009, for the year ended June 30 (report referenced in source).

### Availability and scalability
- DTC reported no system failures in the past year; exception: night of 3/27/08 delays after database utility changes, cut off affected and certain deliver orders not processed in night cycle; affected transactions processed in day cycle next morning and successfully settled.
- DTC reported in late 2009 system availability for DTC systems was 100 percent, year-to-date.
- Processing capacity:
  - DTC can process in excess of 2 times their respective historical peaks in a processing day.
  - Capacity planning: daily, weekly and monthly capacity/utilization reports; annual Capacity Planning Report presented to Board and regulators.

### Governance, access, transparency and cost-effectiveness
- DTCC is the holding company for DTC, FICC and NSCC with single governance structure; DTCC common shareholders include approximately 362 banks, broker-dealers, mutual funds and other companies.
- Board composition (current DTCC Board: 18 members):
  - Fourteen members designated by shareholders (employees of DTCC participants);
  - Two DTCC Executives (CEO and COO);
  - Two designated by preferred shareholders (NYSE and FINRA).
- Governance assessment: Broadly Observed; comment that governance arrangements should be more clearly specified and transparent, including criteria for composition and selection of Board members.
- Access rules: DTC Rules (Rule 2 and Rule 3) set qualifications, approvals, Required Participants Fund Deposit and Required Preferred Stock Investment when required.
- Pricing: DTC’s fees are cost based; returns excess net revenues to users via rebates or refunds; periodic benchmarking studies conducted.

### International communication, links and cross-border settlement
- Messaging and identifiers:
  - DTC uses ISO 15022 for cross-border linkages; messages sent over proprietary system and SWIFT.
  - Plans to publish Corporate Action announcement information in ISO 20022 beginning April 2011 (pilot expected February 2011) and expand in 2012–2013.
  - DTCC/DTC use ISINs in many applications; older applications use CUSIPS.
- Types and count of links:
  - Two types: inbound and outbound. At assessment date: ten incoming links and three outgoing links; inbound/outbound with Canada and Germany.
  - Among inbound CSD links, 3 are DVP: CDS (Canada), CAVALI ICLV (Peru) and DCV (Chile).
- Sample list of linked CSDs, link types and cut-off times (as presented in assessment):
  - Canadian Depository for securities Ltd (CDS) / Canada — Bilateral DVP — Cut-Off Time for Deliveries Into Account: 3:15 PM NYT — Network Provider: SMART
  - Euroclear UK & Ireland — FOP — Cut-Off Time: 11:30 AM NYT — Network Provider: SWIFT
  - Clearstream Banking Frankfurt / Germany — Bilateral FOP — Cut-Off Time: 10:00 AM NYT — Network Provider: SWIFT
  - Monte Titoli / Italy — FOP — Cut-Off Time: 11:30 AM NYT — Network Provider: SWIFT
  - Caja de Valores / Argentina — FOP — Cut-Off Time: 3:15 PM NYT — Network Provider: SMART
  - CAVALI ICLV / Peru — DVP — Cut-Off Time: 3:15 PM NYT — Network Provider: SMART
  - Deposito Central de Valores (DCV) / Chile — DVP — Cut-Off Time: 3:15 PM NYT — Network Provider: SMART
  - Stock Exchange Clearing House / Israel — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SMART
  - Hong Kong Securities Clearing Corp. / Hong Kong — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SMART
  - Japan Securities Depository Center (JASDEC) / Japan — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SWIFT
  - The Central Depository (PTE) Limited / Singapore — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SMART
  - SIX SIS — FOP — Cut-Off Time: 14:30 PM NYT — Network Provider: Fax
- Cross-border risk mitigants for links:
  - DTC assesses credit, market, processing, business, third party, technology, legal and regulatory risks for outbound links.
  - Mitigants include collateral and debit cap controls, haircuts on collateral, securities available as additional collateral, liquidation procedures, requirement for CDS link participants to make additional cash deposit to DTC’s participant fund, and legal opinions.
- Observed issue:
  - DTC operates DVP Model 2 but allows provisional deliveries (example: CDS deliveries during day can be transferred through link while DTC finality is achieved at end of day).
  - Recommendation: DTC should update information on links on DTCC’s website to reflect current status.

### Assessment highlights, key statistics and notable dates
- Industry timeliness metrics:
  - Broker trade input: on Trade date = 88 percent; by T + 1 = 96.7 percent.
  - Industry affirmation percentage (institutions/agents): on trade date = 33.8 percent; by T + 1 = 86.2 percent; by noon on T + 2 = 88.8 percent.
- CNS fails (November 2009): average daily closing fail value = USD 35.7 million per day; average daily total CNS start value = USD 1.175 billion; average fail rate per day = 3.04 percent.
- Net debit caps and liquidity:
  - Participant cap ceiling: US$1.8 billion (one of cap determinants).
  - Affiliated family cap ceiling: US$3.0 billion or less.
  - Committed liquidity (Participants Fund and committed lines of credit): $3.2 billion at present.
- System availability: DTC reported 100 percent availability year-to-date in late 2009.
- Processing capacity: DTC can process in excess of 2 times historical peaks in a processing day.
- Critical operational date referenced: night of 3/27/08 (processing delays due to database utility changes).
- Audit report reference date: October 30, 2009 (Deloitte LLC report for year ended June 30).

### Selected recommended actions (Table 3, Actions to Improve Compliance)
- Recommendation 2: Trade confirmation — DTC should explore introducing instruction matching prior to settlement.
- Recommendation 4: CCPs — Conduct cost-benefit analysis for introduction of CCP for transactions settled through DTC but not cleared by NSCC.
- Recommendation 4 (cash finality): Consider conducting additional net funds settlement batches during the day to provide intraday finality.
- Recommendation 9: Risk controls — DTC should be given access to central bank liquidity facilities.
- Recommendation 10: Cash settlement — continue monitoring financial conditions and begin monitoring exposures of settlement banks; reduce concentration of settlement cash for Canadian dollar; explore direct participation of Canadian RTGS system; publish NSS self-assessment against CPSIPS.
- Recommendation 11: Operational risk — DTCC should test its back-up sites to critical participants’ backup sites.
- Recommendation 13: Governance — clarify and increase transparency of DTC governance arrangements, including composition/selection criteria for Board members.
- Recommendation 18: Oversight and regulation — establish formal cooperation with Authorities in Peru; consider legally entrusting Fed with overseer role for securities settlement infrastructure; SEC encouraged to require clearing agencies to perform CPSS-IOSCO self-assessments.
- Recommendation 19: Links — DTC should update link information on DTCC’s website to reflect current status.

### Authorities’ response
- U.S. authorities welcome the IMF assessment and note high degree of compliance of DTC with RSSS.
- Authorities largely agree with comments and recommendations and will share them with DTC.
- Authorities appreciate assessment contribution to stability and regulation of systemically important payment, clearing and settlement systems.

*Source: IMF staff assessment contained in the provided content unit.*

### 1. Detailed Assessment of Observance of the Depository Trust

### Detailed Assessment of Observance of the Depository Trust Company (DTC) of the CPSS-IOSCO Recommendations for Securities Settlement Systems

### Accessibility of the regulatory framework and legal basis
- Laws, regulations, rules, procedures and contractual provisions governing the relationship of DTC and its Participants are public and readily accessible to system participants (see Securities Exchange Act of 1934, SEC rules and regulations, Federal Reserve Act, Federal Reserve Bank Operating Circulars (OC), self regulatory organization rules and procedures and state laws, DTC’s rules and procedures).
- Securities settlement activities are governed and regulated by specific laws and regulations, and the provisions in other financial legislation and regulations, including:
  - Securities Exchange Act of 1934;
  - Securities and Exchange Commission rules and regulations; see particularly Sections 17A and 19 of the Securities Exchange Act and the rules thereunder;
  - Federal Reserve Act;
  - Federal Reserve Banks Operating Circulars (in particular OC 1, OC12, OC6);
  - Self Regulatory Organizations Rules and Procedures;
  - New York State Law;
  - DTC’s rules and procedures;
  - Article 8 of the Uniform Commercial Code;
  - Subpart B of regulation J incorporating the provisions of article 4A of the Uniform Commercial Code;
  - Federal Deposit Insurance Corporation Improvement act of 1991;
  - New York State Banking Law; and
  - Liquidation provisions of applicable federal and state banking laws.

### Enforceability of transactions and participants’ agreements
- The membership agreement (encompassing the system’s rules and procedures) into which participants enter is enforceable under New York State law.
- Each DTC participant is required to provide a Counsel opinion that the Participants Agreement it enters into and the rules and procedures of DTC are enforceable against it.

### Customers’ assets protection and insolvency regimes
- The legal framework provides a high degree of legal assurance that customers' assets are adequately protected.
- Any judicial proceeding concerning DTC’s insolvency will be administered under the New York Banking Law or the U.S. Federal Bankruptcy Code.
- UCC Article 8 (as adopted by the State of New York) sets out rules regarding the rights and obligations of securities intermediaries and provides that a person that deposits securities with a securities intermediary obtains a “security entitlement.”
- Generally under U.S. law, fully-paid for customer securities held in custody by an intermediary would not be deemed as assets of the intermediary. Indirect holders are not entitled to claims against an issuer, but rather against the intermediary on whose records the security is reflected.
- For insured depository institutions, distribution of customer securities in insolvency is governed by the liquidation provisions of the Federal Deposit Insurance Act (FDIA), which generally provide that the beneficial owner of securities held by a failed bank normally would be entitled to the security if the customer’s exclusive ownership is sufficiently documented.
- The failure of non-bank broker dealers would require application of other statutes: the Securities Investor Protection Act (SIPA) and the U.S. Bankruptcy Code. Other entities would be governed by the U.S. Bankruptcy Code.

### Immobilization or dematerialization of securities
- Article 8 of the Uniform Commercial Code sets out rules regarding the rights and obligations of entitlement holders, securities intermediaries, and other parties in both direct and indirect holding systems.
- The State of New York has adopted revised Article 8 which sets forth the legal framework for the book-entry movements of securities at the depository.
- Section 17A of the Exchange Act directs the SEC to use its authority to end the physical movement of securities certificates in connection with settlement among brokers and dealers of transactions consummated by means of the mails or any means or instrumentalities of interstate commerce.

### Netting arrangements and legal protection
- U.S. law supports netting arrangements relating to securities transactions.
- The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) supports “netting contracts” providing for the netting of payment obligations and payment entitlements between and among clearing organizations and their members; under FDICIA, a payment under a netting contract is not subject to disaffirmance by the receiver or trustee in a subsequent insolvency proceeding.
- The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “2005 Amendments”) includes provisions that validate master netting agreements in respect of securities, commodities, forward, swap and repurchase transactions, and provide that the close-out and netting of transactions arising under such agreements may not be stayed or avoided in any bankruptcy proceeding brought under the Code, the Federal Deposit Insurance Act (FDIA), or the Securities Investor Protection Act (SIPA) (subject in the case of SIPA, to certain exceptions not relevant for clearing organizations).

### Securities lending arrangements
- U.S. law supports securities lending arrangements.
- DTC does not provide securities lending facilities to its participants but provides certain services that support securities lending activities by its Participants.
- Securities borrowing and lending facilities are provided by NSCC, through its Stock Borrow Program (SBP) (see RSSS 5 for details on the SBP).

### Delivery versus Payment (DVP) and settlement finality
- Section 8–501(b) of the Uniform Commercial Code (UCC), as adopted by New York State, provides that a person acquires a securities entitlement if a securities intermediary (e.g., DTC) indicates by book entry that a financial asset has been credited to the person’s securities account.
- The UCC provides that a rule adopted by a clearing corporation governing rights and obligations among the clearing corporation and its participants in the clearing corporation is effective even if the rule conflicts with the UCC or affects another party who does not consent to the rule.
- As a condition to participation in DTC, each participant must agree in writing to, among other things, abide by the Rules and By-Laws of DTC and to be bound by all of the provisions thereof including the provisions prescribing the rights and remedies which DTC shall have with respect to securities held by or for the DTC in or for the participant’s account and that the Rules and By-Laws are part of the terms and conditions of every contract or transaction that the participant may make or have with DTC. Participant Agreements are enforceable under New York State law.
- Under DTC Rule 9(B), when a participant (the “delivering participant”) gives DTC an instruction to deliver securities versus payment the following steps are taken (provided the instruction complies with all relevant risk management controls):
  1. DTC debits the account of the delivering participant and credits its own account by the amount of the number of obligations or the number shares or rights subject to the instruction (whereby DTC shall be the holder of the securities subject of the instruction);
  2. DTC credits the account of the delivering participant and debits its own account by the amount of the payment specified in the instruction.

*Source: Detailed Assessment of Observance of the Depository Trust Company (DTC) of the CPSS-IOSCO Recommendations for Securities Settlement Systems*

### 3. The debits and credits to DTC’s accounts are replicated as incomplete transactions in

### _cr10128 - 3. The debits and credits to DTC’s accounts are replicated as incomplete transactions in

### Replication of debits/credits and transaction finality
- DTC replicates the debits and credits to DTC’s accounts as incomplete transactions in the accounts of the receiving participant; the collateral monitor of the receiving participant is appropriately adjusted.
- For each business day, each incomplete transaction is converted to an effective transaction with finality as to the receiving participant at the earliest of:
  - a) the time it is finally determined by DTC on that business day that the balance in the Settlement Account of the receiving Party for that business day is not negative;
  - b) the time the receiving Party pays the amount of the negative balance in its Settlement Account, as finally determined by DTC for that business day to DTC; or
  - c) the time during that business day when:
    - 1) in the case of a DVP, the receiving Party instructs DTC to effect a delivery, pledge or withdrawal of the securities;
    - 2) in the case of a pledge versus payment, the receiving Party instructs DTC to effect a delivery, release or withdrawal of securities;
    - 3) in the case of a release versus payment, the receiving Party instructs DTC to effect a delivery, pledge or withdrawal of securities; and
    - 4) in each case, the request shall pass applicable DTC relevant risk management controls.
- Technical note (DTC rules): DTC transfers the securities from the account of the delivering participant to an account of DTC, debits the account of DTC by the same payment amount and credits the delivering participant, and then replicates the money debit and securities deposit in the account of the receiving participant as incomplete transactions.

### Legal enforceability, conflict of law and court challenges
- Challenges by a Court: So far no court in the jurisdiction has failed to uphold the legal basis for DTC activities or arrangements.
- Enforceability of rules and regulations in the event of a bankruptcy (Q3):
  - DTC rules and contracts between the participants are enforceable notwithstanding the insolvency of a participant because of: i) U.S. insolvency law, which does not include a zero hour rule; (ii) provisions of the Bankruptcy Code and FDIA, iii) the requirement for a legal counsel opinion from each participant stating that the DTC rules are enforceable against it.
- Conflict of law issues (Q4):
  - Several foreign CSDs and participants are participating in DTC and are subject to United States law on securities transfers and pledges (Uniform Commercial Code Articles 8 and 9).
  - Foreign CSDs would look to courts in New York to uphold the validity of CSD’s claims as a participant in DTC; for non-U.S. Participants, additional jurisdictions also may be relevant.
  - For foreign participants, DTC requires the applicant to submit a foreign counsel opinion to evaluate the risk of conflict of laws.
- Assessment: Observed.

### Recommendation 2 — Confirmation of trades (Q1–Q3): practices and metrics
- Recommendation summary: Confirmation of trades between direct market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation of trades by indirect market participants is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.
- Description / practices:
  - Over 99 percent of trades submitted to NSCC are done on a locked-in basis (trade already compared when NSCC receives it).
  - NSCC provides trade comparison services for the remaining ~1 percent (broker-to-broker OTC equity and fixed income not matched at marketplace).
  - By MSRB rules, brokers must report all municipal securities trades to NSCC for trade matching.
  - Omgeo (affiliate of NSCC) provides trade comparison services for institutional trades; approximately 90 percent of institutional trades are affirmed by noon of T+2; the remaining 10 percent being instructed directly to DTC by the delivering DTC participant.
  - Omgeo confirmations: usually available within 15 minutes of receipt of a broker’s trade input; real time messages are pushed immediately; batch file clients receive data within the 15-minute timeframe.
  - DTC does not match settlement instructions prior to settlement.
  - Receiving participants can return securities intraday; returns amount to less than 2 percent of the aggregate dollar amount of deliver orders and payment orders processed on an average day.
  - Receiver Authorized Delivery (RAD) thresholds: DTC permits a receiver to review incoming orders before they are processed if settlement value is above USD 15 million for a Deliver Order and USD 1 million if the transaction is a payment order; receiver can raise but not reduce RAD limit.
- Industry timeliness metrics (reported):
  - Broker trade input: on Trade date = 88 percent; by T + 1 = 96.7 percent.
  - Industry affirmation percentage (institutions/agents): on trade date = 33.8 percent; by T + 1 = 86.2 percent; by noon on T + 2 = 88.8 percent.
- Assessment: Observed.
- Comment: DTC should explore the possibility to introduce instructions matching mechanism prior to settlement.

### Recommendation 3 — Rolling settlement, failed trades and implications (Q1–Q4)
- Rolling settlement:
  - Current U.S. practice: T+3 for equities and OTC eligible instruments; T+0 for money market instruments (MMI) and stock loan markets supported by DTC.
- Failed trades (Q2) and monitoring:
  - NSCC monitors and margins fails via CNS; NSCC reports percentage of fails in the CNS system (no member-level fail details reported).
  - November 2009 CNS statistics: CNS averaged a daily closing fail value of USD 35.7 million per day out of an average daily total CNS start value of USD 1.175 billion, for an average fail rate per day of 3.04 percent.
  - NSCC margins fails at the member level and nets open fails positions with members’ other settlement positions (see NSCC Rule 11 and procedure XV).
  - SEC publishes NSCC fails data on its website.
- Incentives and capital treatment:
  - NSCC imposes a fail-to-deliver charge increasing over time; CNS fails component included in margin formula.
  - U.S. banking regulators (Basel I approach): standard risk weight, usually 100 percent, applied to full notional of trades failed to settle outside a grace period (typically 5 days).
  - Basel II: failed trades require a capital charge increasing with duration: five days after fail bank books risk weighted asset equal to difference between trade price and market value times a risk weight multiplier (ranges from 100 percent at 5 days to 1.250 percent at 46 or more days).
  - SEC capital rules for broker-dealers include a capital charge for aged fails.
- Cost/benefit of shorter than T+3: the 2004 SEC Concept Release found current T+3 acceptable at that stage; for transactions cleared via NSCC, CCP mitigates risks.
- Assessment: Observed.

### Recommendation 4 — Central counterparty (CCP) considerations (Q1–Q4)
- NSCC (DTC affiliate) is the CCP for broker-to-broker equities and corporate/municipal bonds in the United States; securities executed on SRO exchanges and other trading venues clear through NSCC.
- Not all broker-to-broker transactions settled at DTC clear through NSCC; transactions not cleared by a CCP include OTC transactions in MMI, foreign securities, CDOs, and certain MBS other than U.S. Agency issues.
- Cost-benefit analysis:
  - No market-wide cost-benefit analysis has been conducted for introduction of a CCP for products/transactions settled at DTC but not cleared by a CCP.
  - Authorities note that for some instruments (e.g., single-day maturing MMI) insufficient secondary market may not merit lengthy analysis.
- Assessment: Broadly observed.
- Comment: A cost-benefit analysis should be conducted for introduction of a CCP for transactions settled through DTC but not cleared by NSCC.

### Recommendation 5 — Securities lending, repos and settlement facilitation
- Legal/fiscal/contractual impediments: DTC is not aware of legal impediments to stock loan or repo transactions; securities lending and repo arrangements are largely bilateral OTC transactions.
- Support facilities:
  - NSCC Stock Borrow Program (SBP) (SEC-approved in 1981) operates as part of CNS to automatically borrow securities from participants who voluntarily made shares available and have them on deposit in DTC accounts to fulfill CNS delivery obligations.
  - DTC provides functionality to facilitate stock loan and repo settlement: Stock Loan (SL) and Repurchase (REPO) Income tracking system creates SL/REPO memo positions and automatically debits/credits borrower/lender on income payment dates.
- Supervision: No specific regulatory regime for securities lending/repo; supervisors and securities regulators oversee market participants’ risk management practices.
- Assessment: Observed.

### Recommendation 6 — Immobilization/dematerialization and transfer of title (Q1–Q2)
- Dematerialization/immobilization:
  - Approximately 90 percent of corporate and municipal securities issued to the public are distributed through DTC and are represented by one or more physical certificates immobilized in the depository.
  - Trend toward dematerialization: DRS adoption milestones (Delaware adoption 2005; January 2007 newly listed issues required DRS eligibility; March 2008 all existing listed issues mandated DRS eligible; December 2008 SEC approved staged elimination of certificated withdrawals).
  - Through August 2009, over 99 percent of municipal and corporate debt by par value distributed through DTC was in book-entry-only form.
- Transfer of title:
  - Domestic participant depositing a certificate is given immediate credit in Participant’s DTC account; for certificates not in negotiable form DTC operates Branch Deposit Service (BDS) holding positions until stock power received.
  - Under commercial law (UCC Art. 8 as adopted in New York), book-entry transfers by DTC are legally sufficient to transfer beneficial ownership; depositor obtains a “security entitlement”.
- Assessment: Observed.

### Recommendation 7 — DVP Model 2, settlement mechanics and controls (Q1–Q3)
- Technical/contractual framework:
  - DTC operates a DVP Model 2 settlement system: securities settle on a gross basis intraday; associated funds settle on a net basis at end of day.
  - DTC provides intraday liquidity to participants based on risk management procedures; incomplete securities transactions become final at end-of-day money settlement or when intraday redelivery/pledge/withdrawal passes DTC risk controls.
  - NSCC CNS interaction: NSCC maintains securities account at DTC for net securities coming out of CNS; CNS deliveries to receiver are provisional intraday and not final until payment received at end of day; securities deliveries to/from NSCC’s CNS account are made free of payment in DTC.
- Optimization:
  - DTC’s “Look-Ahead Process” (ATP) calculates net effect on collateral and net debit caps to simultaneously process transactions if no participant would have a deficit.
- Cash settlement and end-of-day process:
  - Intraday credits/debits in settlement accounts; final net payment settled through Federal Reserve’s NSS.
  - Settlement file typically submitted between 16:00 and 16:30 ET.
  - Federal Reserve processes file, debits/net credits are final when made by the Federal Reserve.
  - If a debit cannot be processed for insufficient balances/credit, Reserve Bank notifies DTC; DTC would arrange to transfer funds into NSS technical settlement account, likely from liquidity resources.
  - For participant failure, securities designated as “incomplete transactions” would not be final to failing participant; DTC may act as holder to issue/transfer/sell/pledge/dispose of such securities.
- Amount of transactions settled on DVP basis:
  - All valued transactions in DTC are settled on a DVP basis.
- Assessment: Observed.

### Recommendation 8 — Timing of finality and intraday finality (Q1–Q3)
- Finality provisions:
  - DTC provides both end-of-day and intraday finality.
  - Net money settlement is final at end of day via NSS funds transfers (immediately final when effected).
  - Under DTC Rule 9B, a DVP securities transfer is final and irrevocable as to the delivering party once it has successfully passed DTC risk controls and securities debited from the delivering party’s account.
  - Securities deliveries are final and irrevocable as to the receiving party either at end of day or intraday (end of day when final cash balance is not negative or receiving party pays negative balance; intraday when DTC risk management controls are satisfied and receiving participant instructs DTC to effect delivery/pledge/withdrawal).
  - Free of payment (FOP) deliveries, such as CNS deliveries, are final and irrevocable.
- Needs for intraday finality and returns:
  - DTC provides intraday finality: deliverer’s account debited and credited intraday; receiver intraday finality if re-delivery/transfer/pledge passes risk controls.
  - Participants can return securities intraday subject to DTC risk controls except for thresholds: same-day matched returns of Deliver Orders less than $15 million and Payment Orders less than $1 million are not subject to risk management controls; same-day matched returns permitted until 3:30 p.m.
  - Returns amount to less than 2 percent of aggregate dollar amount of deliver orders and payment orders on an average day.
- Assessment: Observed.
- Comment: DTC should consider conducting additional net funds settlement batches during the day to provide intraday finality for participants’ net payment obligations; additional intraday batches would impose liquidity demands on net debit participants.

### Recommendation 9 — Intraday credit, caps, collateral and liquidity controls (Q1–Q3)
- Intraday credit extension:
  - DTC provides intra-day funds accounts representing end-of-day claims (positive) or claims by DTC on participant (negative).
  - DTC limits settlement credit exposures by setting net debit caps for participants and affiliated families and requires full collateralization of net debits with caps.
  - DTC maintains a Participant Fund and committed lines of credit among other risk controls; if Participant Fund and collateral are insufficient, losses allocated to surviving participants.
- Net debit cap calculation (limits):
  - Net debit cap of a Participant is the least of 4 amounts:
    - (a) a net debit cap based on the 3 largest net debits that each Participant incurs over a rolling 3-month period;
    - (b) an amount, if any, determined by the Participant’s settling bank;
    - (c) an amount, if any, determined by DTC; or
    - (d) US$1.8 billion.
  - Affiliated family net debit caps are limited to US$3.0 billion or less.
- Collateral valuation and monitoring:
  - Collateral Valuation System uses prior business day’s closing market price less a haircut.
  - DTC monitors participants whose excess collateral value is less than 300 percent of their end-of-day net debit.
  - Stress testing conducted to determine largest haircuts DTC could absorb when pledging collateral against committed lines of credit.
- Liquidity resources and waterfall (current totals and sequence):
  - DTC maintains committed liquid resources: Participants Fund and committed lines of credit (together totaling $3.2 billion at present).
  - In event of a Participant failure, DTC accesses liquidity resources in succession:
    - First use defaulting Participant’s contribution to the Participants Fund.
    - If insufficient, borrow on DTC’s name from non-defaulting Participants’ contributions to Participants Fund (may be secured by failing Participant collateral).
    - If insufficient, borrow from committed lines of credit (loan to DTC as principal, secured by pledged collateral of failing Participant).
    - Finally, in multiple failures exceeding committed liquidity, DTC may borrow from some or all Participants up to the entire amount of the end-of-day credit balance due to Participants on that business day.
- Replacement cost risk:
  - Potential market risk if collateral price declines; any loss, up to specified limits, would be mutualized among DTC Participants per Participants Agreement and Rules (see DTC Rule 4).
  - DTC marks collateral to market daily and applies haircuts to mitigate this risk.
- Overdrafts in securities:
  - DTC does not permit overdrafts/debit balances in securities accounts; if shortfall created (e.g., transfer agent re-registration delay), DTC debits Participant’s cash account for 130 percent of market value to offset credit for redelivery plus margin of safety.
  - 130 percent figure is DTC’s interim adjustment judgment.
- Evaluation of multiple fails:
  - Controls designed to cover failure of single largest participant or largest family by ensuring sufficient liquid resources; net debits fully collateralized.
  - DTC has never drawn on lenders for liquidity to finance settlement and has never failed to complete end-of-day net money settlement.
- Assessment: Observed.
- Comment: Although sufficient for single-largest family failure, extreme multiple failures could test DTC’s liquidity resources; recommendation that DTC should be given access to central bank liquidity facilities.

### Recommendation 10 — Settlement asset safety and settlement banks (Q1–Q4)
- Settlement asset and process:
  - Intraday cash settlement takes form of net debit balances (commercial bank money); end-of-day final cash settlement occurs in central bank money via Federal Reserve NSS.
  - Participants designate a settling bank (Rule 9(B)); settling banks must have access to Fedwire and NSS.
  - Federal Reserve NSS supports settlements in USD only.
- Canadian dollar settlements:
  - DTC has a link to the Canadian CSD (CDS) supporting transactions settled in Canadian dollars; DTC performs a single net Canadian dollar settlement with CDS at end of day using a Canadian cash correspondent bank as DTC’s settlement agent.
  - If the private Canadian correspondent bank failed during pay-ins/pay-outs period, DTC would still be responsible to make pay-outs to participants and would generally pass losses to participants; potential systemic risk is remote and amounts small relative to overall DTC settlement.
- Concentration of settling banks and exposures:
  - As of February 4, 2010: 62 settling banks used, 21 of which settle for their own accounts as well as other DTC Participants.
  - On any business day, payment flows tend to be highly concentrated in the top five banks representing around 70 percent or more of the total payment flow (which banks may vary over time).
  - DTC monitors settling banks via risk management department but DTCC does not monitor concentration of payment flows of settlement banks; settlement banks are supervised by federal/state regulators.
- Proceeds and intraday withdrawals:
  - NSS payments are final and irrevocable when made; settling bank credits Participant accounts according to individual agreements.
  - Where DTC is funded by paying agents, participants may be entitled to intraday withdrawal of redemption/reorganization/dividend/income payments subject to DTC risk controls.
- CPSIPS compliance:
  - Relevant payment system: Federal Reserve’s NSS; NSS provides Fedwire-like payment finality and shares business continuity model; Federal Reserve regularly publishes self-assessment of Fedwire Funds Service; NSS self-assessment against CPSIPS not published.
- Assessment: Observed.
- Comments:
  - High concentration of payment flows at top five settling banks; DTC should continue monitoring financial conditions and begin monitoring exposures of settlement banks.
  - DTC needs to reduce concentration of settlement cash for Canadian dollar; DTC may explore becoming a direct participant of the Canadian RTGS system.
  - The self-assessment of Federal Reserve’s NSS against CPSIPS should be reviewed by relevant authorities and made public.

### Recommendation 11 — Operational risk management, BCP and testing
- Organizational arrangements:
  - Business continuity arrangements organized at holding company level (DTCC corporate function coordinates BCP for DTCC and all subsidiaries).
  - Operational Risk Group, Internal Risk Management Committee, Security Committee, Internal Audit Department and independent accountants identify/mitigate operational risks.
- Contingency plans and backup facilities:
  - DTCC operates data centers and staff in multiple locations; out-of-region data centre is a warm site with 2 hour recovery capability; out-of-region business operations sites are hot sites.
  - Contingency plans and backup facilities for failure of key systems are not tested and reviewed with participants except connectivity tests with critical participants (critical participants represent 80% of DTC’s total transaction volume and value).
  - Many smaller participants (representing 20% of transactions) do not have dedicated backup facilities and rent/share space; DTC does not require activation of recovery contracts/sites for those smaller participants.
  - DTCC data centers in New York region act as a single data centre with secondary backup; out-of-region recovery site recovers all critical systems if New York region unavailable; network reroutes client traffic automatically; DTC does not test failure of one key system with participants given automatic rerouting.
  - Connectivity tests performed for all participants on joining and annually for participants deemed critical.
  - DTCC uses BITS Shared Assessments Program to describe BCP and evaluate service providers’ information security controls.
- Testing frequency and documentation:
  - DTCC updates an annual white paper describing DTCC BCP program; produces an “Out-of-Region” guide.
  - Data centre failover tests are conducted 3-4 times per year.
  - Business Operations tests conducted throughout the year.
- Audit and management oversight:
  - Operational reliability reviewed by DTCC senior management, internal audit and external auditors.
  - Deloitte LLC issued the most recent report for DTC on October 30, 2009, for the year ended June 30, (report referenced in source).
- Assessment: Observed.

*Italic: Source — Extracted from the provided IMF content unit.*

### 2009. These reports are available on the DTCC website.

### _cr10128 - 2009. These reports are available on the DTCC website.

### Availability and scalability of the system (Q4)
- DTC reported no system failures in the past year; however on the night of 3/27/08, a few delays were encountered in key systems following changes to a database utility. A cut off time was affected which resulted in certain deliver orders not being processed in the night cycle. All affected transaction were processed in the day cycle during the following morning and successfully settled.
- DTC reported in late 2009 that the system availability for DTC systems was 100 percent, year-to-date.
- Processing capacity:
  - DTC can process in excess of 2 times their respective historical peaks in a processing day.
  - DTCC maintains dedicated capacity planning staffing and ensures sufficient capacity in all data centers.
  - Daily, weekly and monthly capacity/utilization reports are generated and reviewed by the Infrastructure Department.
  - A yearly annual Capacity Planning Report is produced and presented to the Board of Directors, and to DTC’s regulators.
- Assessment: Observed.
- Comments:
  - Contingency plans and backup facilities for the failure of key systems are not tested and reviewed with participants (only connectivity is tested with the critical participants).
  - NSCC explained that the data centers in the New York region act as a single data centre and provide secondary back-up to both systems and the entire facility. If New York region data centers are not available, the out of region recovery site is available to cover all critical systems.
  - Failover and recovery of any data centre does not require changes by participants; the network automatically reroutes client traffic from their primary or backup sites to the recovered data centre.
  - Recommendation (from assessment): DTCC should test its back-up sites to critical participants’ backup sites.

### Protection of customers’ assets (Recommendation 12)
- Description of indirect holding system:
  - DTC is the clearing corporation at the top of a chain of ownership in the “indirect holding” system under UCC Article 8.
  - Securities are registered on issuer books in the name (or nominee name) of securities intermediaries (such as DTC or its Participants).
  - For DTC, securities are registered in its nominee name, Cede & Co., and DTC credits securities to securities accounts of its Participants, who in turn credit securities to their customers’ securities accounts.
  - Each entitlement holder has rights only against its securities intermediary, not against intermediaries further up the chain or the issuer.
  - Securities held in the indirect holding system may be certificated or uncertificated; with some exceptions such as Federal Reserve book-entry securities (e.g., U.S. Treasury bills, bonds and notes).
- Legal and regulatory obligations:
  - Under DTC Rules, segregated securities (including fully paid customer securities) are not subject to any DTC lien or interest (see DTC Rule 6).
  - Other securities held by Participants, including securities that are the subject, intraday, of a DVP, are held subject to DTC’s interest and right to pledge them to its creditors.
  - Judicial proceedings concerning DTC’s insolvency will be administered under either the New York Banking Law or the U.S. Federal Bankruptcy Code.
  - Under the Uniform Commercial Code, securities intermediaries are required to maintain sufficient investment property to satisfy all customers’ claims.
  - As a registered clearing agency, DTC is subject to Section 17(A)(b)(3)(F) of the Exchange Act requiring rules designed to “assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible”.
- DTC protection against liability loss:
  - Insurance coverage maintained:
    - US$850 million aggregate on premises and/or in-transit coverage under blanket bond/all-risk policies;
    - US$800 million aggregate in-transit coverage under an all-risk policy;
    - Additional limited coverage for mail losses.
  - DTC does not have financial guaranty insurance.
- Account segregation:
  - Broker-dealers are required to segregate holdings from their customers’ fully paid securities under the Securities Exchange Act and rules thereunder.
  - DTC participants can use DTC or their own books to achieve this segregation; DTC does not know which option participants choose.
- Inventory control and reconciliation:
  - DTC requires participants to reconcile activity and positions with DTC upon receipt of the Participant Position Statement and Participant Daily Activity Statement and to immediately report discrepancies.
  - DTC prepares at end of each day:
    - Participant Position Statement (details a Participant’s DTC securities holding).
    - Participant Daily Activity Statement (details opening balance, activity, and closing balance for each security issue with activity that day).
  - FAST Automated Securities Transfer (“FAST”) Program:
    - Transfer agent acts as custodian for securities registered in the name of Cede & Co.
    - Transfer agent is obligated to confirm daily with DTC the balances of the securities.
    - FAST securities are not under DTC’s direct physical control; DTC receives reports on transfer agent internal controls from independent accountants annually.
    - Entities holding securities on behalf of DTC confirm number of shares, units, or obligations daily.
  - Some securities are kept in custody by DTC itself.
- Audits of inventory management procedures:
  - DTC’s Internal Audit Department and its independent accountant regularly review adequacy of internal controls, procedures, and records.
  - Evaluations of financial statements and internal controls over securities and related monies processed and/or held for Participants and others are conducted on a periodic basis and cover all critical processing areas and the data processing environment.

### Supervision/regulation of entities holding customers’ securities in custody (Q3)
- Regulators and oversight:
  - DTC is regulated by the SEC and the Board of Governors of the Fed and NYSBD.
  - These regulators and DTC’s internal and external auditors regularly review the adequacy of DTC’s internal controls, procedures, and records.
- Assessment: Observed.
- Comments: (none provided in source)

### Governance arrangements (Recommendation 13)
- Structure and transparency:
  - DTCC is a holding company of DTC, FICC and NSCC with a single governance structure for the three clearing agencies.
  - DTCC governance arrangements are publicly available and updated yearly (last update October 2009).
  - DTCC common shareholders include approximately 362 banks, broker-dealers, mutual funds and other companies in the financial services industry participating in one or more DTCC clearing agency subsidiaries, including DTC.
  - Certain governance information is publicly disclosed and other information is confidential/proprietary; at the time of assessment only limited information is available to the public.
  - DTCC is reviewing its corporate governance structure and anticipates making certain information publicly available after approval and authorization.
- Recent governance actions:
  - DTC submitted a rule filing approved by the SEC in December 2009 relating to proposed changes in the election of directors (Filing No. SR-2009-16).
  - Three non-participant directors, who are not affiliated with firms that use DTCC services, were recently elected to DTC Board of Directors.
- Public interest objectives and rule filing process:
  - DTC's public interest objectives are based on Section 17 A of the Securities Exchange Act.
  - SEC review of each DTC rule filing includes receiving and considering public comments.
  - SEC rules: public comment period for proposed rule changes is at least 35 days from publication in the Federal Register (unless accelerated/immediate approval criteria met).
  - DTC, NSCC and FICC publish notices of proposed rule changes on their websites at filing time, often providing participants an effectively longer review period.
  - DTC consults with participants or participant groups and regulators for proposals likely to have significant impact; DTC staff participates in industry groups and publishes periodicals/newsletters.
- Management incentives, skills and accountability:
  - DTCC Management and the Board establish formal corporate goals yearly based on consultation with participants, Board members, Board committees, advisory committees, industry associations, regulators, and others.
  - Management’s performance is assessed by the Board against these goals; compensation is linked to performance via the Board’s Compensation Committee composed of non-management directors.
- Board composition and nomination:
  - Current DTCC Board composition: 18 members.
    - Fourteen members designated by shareholders and are employees of DTCC participants.
    - Two are DTCC Executives (CEO and COO).
    - Two designated by preferred shareholders (NYSE and FINRA). FINRA is not a participant of DTCC or its subsidiaries.
  - Directors are elected for a one year term, usually at the April shareholders meeting.
  - Governance Committee nominates directors based on standards designed to satisfy the fair representation requirement of Section 17A and governance best practices, considering: ability to represent users, ownership of DTCC common stock, expertise, length of service, attendance, effectiveness, and adequate diversity on the Board.
- Risk management reporting lines:
  - Clear separation exists between risk management and other operations of DTC.
  - The Chief Risk Officer reports directly to the Chairman and CEO.
  - Board has standing committees including a credit and market risk management committee, compliance and operational risk management committee and core services operations and planning committee.
- Assessment: Broadly Observed.
- Comments:
  - For full observance, governance arrangements for DTC should be more clearly specified and transparent, including criteria for the composition and selection of Board members. At the time of assessment only limited information is available to the public.

### Access rules and criteria (Recommendation 14)
- Rules and criteria:
  - DTC's rules and by-laws provide access rules and criteria; DTC’s rules are available on its website.
  - Rule 2 (participants and pledges) requires applicants to:
    - (i) apply to DTC for the use of its services,
    - (ii) meet qualifications specified in Rule 3,
    - (iii) be approved by DTC, and
    - (iv) if required, make a Required Participants Fund Deposit and Required Preferred Stock Investment.
  - DTC approves applications if applicant meets standards of financial condition, operational capability and character; these standards should be met on an ongoing basis.
  - DTCC’s Risk Management Department obtains information daily from other DTC departments regarding settlement or operational problems with any DTC participant and reviews financial condition of all DTC Participants at least quarterly.
  - DTC Rule 2 requires an applicant to have “demonstrated that it has sufficient financial ability to meet all of its anticipated obligations to the Corporation.” Dollar standards implementing this Rule are in guidelines provided to membership applicants on request.
  - DTC Rule 3 provides further details on qualifications for different participant types.
- Legal framework for fair access:
  - Section 17A of the Exchange Act:
    - Section 17A(b)(3) requires that clearing agency rules permit specified categories (e.g., registered brokers or dealers, banks, insurance companies, etc.) to become participants, subject to standards of financial responsibility, operational capability, experience, and competence.
    - Rules may not permit unfair discrimination in admission or impose burdens on competition not necessary or appropriate to Act’s purposes.
- Restrictions in access (Q2):
  - Different criteria apply according to scope of services used; same rules apply regardless of type, identity, location.
  - DTC differentiates between “limited participants” (use only certain limited services) and full-service participants.
  - A Limited Participant that does not utilize DTC’s settlement services is not required to make the minimum Participants’ Funds deposit. Rule 4 explains that depending upon services utilized, a Limited Participant may or may not be required to make a Required Participants Fund Deposit.
  - Some business and market-driven restrictions exist for foreign CSDs in different time zones: such CSDs can maintain only free of payment (FOP) accounts at DTC because of time zone differences, a risk-based restriction to prevent misdirected value transactions.
- Exit procedures (Q3):
  - Termination can be voluntary (participant notifies DTC in writing) or involuntary by DTC under Rules:
    - DTC Rule 32 (Wind Down of a Participant) allows special action if participant notifies intent to wind down.
    - DTC Rule 11 (mandatory termination) terminates participation of members no longer meeting membership qualifications.
    - DTC Rule 10 (Discretionary Termination) allows cessation of acting for a participant deemed unable to fulfill obligations (e.g., subject to formal insolvency, fails to perform obligations, fraudulent or dishonest conduct, approaching significant financial difficulty). Rule 10 requires a written report of reasons for termination.
    - A terminating participant that is a settling bank will also be terminated as a settling bank.
    - Under Rule 32, DTC may restrict or modify Wind-Down Participant’s use of services and require increased Participants Fund deposits under Rule 4.
  - These procedures are detailed in DTC’s rules and procedures published on DTCC’s website.
- Assessment: Observed.

### Cost-effectiveness and pricing (Recommendation 15)
- Benchmarking and cost control:
  - DTC's fees are cost based.
  - DTC returns to its users excess net revenues not needed to fund its operations via rebates or other refunds.
  - DTCC performs periodic benchmarking studies to assess cost effectiveness in the market place.
  - Pricing levels are reviewed against costs of operations during the annual budget process to provide guidance to the Board of the price impact.

*Source: _cr10128 - 2009. These reports are available on the DTCC website.*

### Section 17A of the Exchange Act requires that the rules of a clearing agency ensure a fair

### _cr10128 - Section 17A of the Exchange Act requires that the rules of a clearing agency ensure a fair

### Governance, participant voice, and fee allocation (Section 17A)
- Section 17A of the Exchange Act requires that the rules of a clearing agency ensure a fair representation of its shareholders (or members) and participants in the selection of its directors and administration of its affairs to allow participants to have a voice in maintaining cost-effective services.
- The Exchange Act also provides that the rules of a clearing agency provide for the equitable allocation of reasonable dues, fees, and other charges among its participants.
- DTCC confirmation:
  - There is no cross-subsidization among entities in the DTCC Group.
  - The subsidiaries of DTCC operate as separate businesses on a self-sustaining at-cost basis.
  - There are no transfers of cash or other assets among the operating companies in the Group and no bargain sale or service or other such arrangements.
  - Operating companies pay DTCC only the actual costs of corporate and technology services provided plus a uniform (percentage of cost) management fee.
  - Costs are allocated on the basis of actual use of (i) DTCC corporate personnel (including occupancy costs attributed to such personnel) and (ii) DTCC technology resources (principally data processing).
  - Both Internal Audit and DTCC's external auditors review and test elements of this cost allocation methodology.

### Service-level monitoring and operational reliability
- Mechanisms:
  - DTC surveys its participants on an annual basis to test and help ensure adherence to service levels.
  - Some Committees of the Board of Directors oversee different aspects covering the systems’ operations (see RSSS 13 description).
  - Operational reliability is continuously monitored against specific service level targets; results are transmitted to IT, product and senior management on a monthly basis.
  - An annual Capacity Planning Report considering projected capacity growth for the year to come is submitted to the Board of Directors of DTCC and to its regulators.
- Assessment: Observed.

### International communication procedures and messaging standards (Recommendation 16)
- Use of international procedures (Q1):
  - DTC uses ISO 15022 for cross-border linkages with CSDs.
  - Messages (ISO-based and Message Queuing) are sent and received over DTC’s proprietary system as well as SWIFT.
  - DTC anticipates publishing Corporate Action announcement information in an ISO 20022 format beginning April 2011 after a pilot phase expected to start in February 2011.
  - CAG plans to add further IS 20022 messaging to cover the complete Corporate Action lifecycle, such as election and payment processing, during 2012 and early 2013.
- Identifier usage:
  - DTCC and its operating subsidiaries, including DTC, use ISINs in a number of applications to identify securities, particularly in global applications and newer U.S. based applications.
  - DTCC does not exclusively use ISINs; older applications use CUSIPS.
- Assessment: Observed.

### Availability of rules, transparency, and disclosure (Recommendation 17)
- Availability:
  - DTC's rules and procedures, including service guides, are publicly available on its website.
  - Proposed rule changes are communicated via Important Notices posted on DTC’s website; proposed rule change filings are also submitted to the SEC.
  - Information about key financial and operational risks associated with DTC services is publicly disclosed.
- Financial reporting (DTC Rule 15 (Reports)):
  - As soon as practicable after the end of each calendar year, DTC must provide participants with financial statements of DTC audited by independent public accountants for that calendar year.
  - DTC must also provide unaudited financial statements of DTC for each of the first three calendar quarters of each calendar year.
- Operational communications:
  - Operational issues (e.g., extensions and connectivity problems) are broadcast through DTC’s network system.
  - Fee schedules of DTC, which are part of its rules, are published on DTCC’s website.
- CPSS-IOSCO disclosure framework:
  - DTC completed and disclosed the CPSS-IOSCO questionnaire and answers to key questions from this assessment methodology.
  - The self-assessment based on the RSSS assessment methodology is published on DTCC’s website.
- Accessibility:
  - Information is made available in plain English via the Internet.
- Periodical review:
  - As set in the Federal Reserve Policy on Payment System Risk, senior management and the board of directors review and approve self-assessments upon completion.
  - DTC's self-assessment was reviewed by senior management and approved by the Board of Directors prior to publication.
  - The review is conducted at least every two years, unless necessary earlier due to a material change.
- Assessment: Observed.

### Regulation, oversight framework, and institutional responsibilities (Recommendation 18)
- Legal and institutional status of DTC:
  - DTC is a limited purpose trust company organized under the New York Banking Law, a clearing agency registered under the Exchange Act, a clearing organization as defined in the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), a clearing corporation as defined in the UCC and a member bank of the Federal Reserve System.
- Regulators and oversight roles:
  - The SEC, the Board of Governors of the Federal Reserve System (and under delegated authority from the Board, the FRBNY), and the NYSBD regulate and oversee DTC.
  - Federal Reserve Board:
    - Derives supervisory authority from DTC’s membership in the Federal Reserve System as a State Member Bank.
    - Has authority to examine state member banks pursuant to the Federal Reserve Act.
    - As the “appropriate regulatory agency” under Exchange Act Section 3(a)(34)(B)(ii), is primarily responsible for examining and enforcing compliance with Section 17 and Section 17A of the Exchange Act.
  - SEC:
    - Derives authority from the Exchange Act; DTC must register with the SEC under Section 17A.
    - Regulates DTC as a clearing agency and as a self-regulatory organization (SRO).
    - Reviews and, with limited exceptions, approves all rule changes proposed by DTC based on its SRO status.
    - Under Section 19, the SEC is required to consider the views of the Board regarding whether DTC’s proposed rule changes are inconsistent with safeguarding securities or funds (Section 19(b)(4)(C) of the Exchange Act).
  - NYSBD:
    - Supervisory authority derives from DTC’s organization as a limited purpose trust company under the New York Banking Law.
- Resources devoted to oversight:
  - FRBNY and the Board: about 20 budgeted officers and staff work full time on policy and oversight for payment, clearing and settlement.
    - Additionally, about 15 supervisory staff are dedicated full time to specific private sector systems; 9 examiners broadly dedicated to payment and settlement infrastructure; and 12 more focused on systemically important clearing activities by banks and affiliates.
  - SEC: an estimated 51 staff are involved in whole or in part in clearing oversight (approximately 23 full-time equivalent staff positions), encompassing staff from 7 different offices.
- Onsite examinations:
  - SEC staff conducts onsite examinations of registered clearing agencies, including DTC.
  - Examination areas may include internal audit, membership, member financial surveillance, clearing fund and collateral risk, risk assessment and risk management systems, clearance and settlement processes, and liquidity.
- Basis of framework:
  - Statutorily based on the Securities Exchange Act, SEC rules and policies, the Federal Reserve Act and Board regulations and policies.
- Cooperation among authorities:
  - Section 17A of the Exchange Act directs the SEC to consult with the Federal Reserve Board to facilitate linked or coordinated facilities for clearance and settlement.
  - Section 17A(d)(3) requires consultation and cooperation between the SEC and the appropriate regulatory authority for clearing agencies not regulated by the SEC as the ARA.
  - The SEC and Federal Reserve cooperate, as appropriate, to exchange information to ensure the effectiveness and efficiency of the securities settlement system.
- Cross-border cooperation:
  - Section 24(d) of the Exchange Act gives the SEC authority to facilitate cooperation with foreign authorities.
  - The SEC has entered into MOUs with relevant foreign authorities for facilitating exchange of information; enforcement cooperation exists with authorities in Argentina, Canada, Chile, Germany, Hong Kong, Israel, Italy, Japan, the Netherlands, Singapore, Switzerland and the UK with which DTC has developed cross border links.
  - For the Peru link, the SEC does not yet have a MOU with the relevant Peruvian authorities; however some cooperation is in place.
- Assessments and comments:
  - Assessment: Observed.
  - Comment: Formal co-operation with Authorities in Peru needs to be established.
  - Comment: Fed’s oversight of DTC is not based on a general statutory oversight authority for payment, clearing, and settlement systems, but rather on DTC’s status as a State Member Bank. It is noted that it would be more effective and transparent to legally entrust the Fed the role of overseer of securities settlement infrastructure because banking supervision and oversight functions have different objectives and tools.
  - Comment: The SEC has not yet required DTC to perform a self-assessment with respect to the CPSS-IOSCO recommendations. The SEC reviews each self-assessment prepared by clearing agencies and may consider recommending that clearing agencies be required to perform self-assessments against the CPSS-IOSCO recommendations by rules or in a policy statement.

### Cross-border links, DVP arrangements, and link types (Recommendation 19)
- Types of cross-border links (Q1):
  - DTC has two types of cross-border links with other CSDs: “inbound” and “outbound.”
  - An “inbound” link is establishment by a foreign CSD of one or more accounts at DTC. As of the date of this assessment, DTC has ten incoming links.
  - An “outbound” link is establishment by DTC of one or more accounts with a foreign CSD. As of the date of this assessment, there are three outgoing links.
  - DTC has both inbound and outbound relationships with 2 CSDs: Canada and Germany.
  - Among inbound CSD links, 3 are DVP: CDS (Canada), CAVALI ICLV (Peru) and DCV (Chile).
- Time zone and operational constraints:
  - No prohibition exists on foreign CSDs in other time zones having DVP links, but it is largely impractical because of DTC’s 5 p.m. end-of-day settlement.
  - All CSD participants must appoint a U.S. settlement bank to represent them in DTC settlement every day.
  - Distant non-U.S. CSD Participants may find it impracticable to manage DVP settlement if they wish to give instructions from their own (later) time zone.
- Obligations of CSD Participants:
  - Even FOP CSD Participants must appoint a settlement bank and will have a daily settlement within DTC’s money settlement system for items such as net corporate action proceeds and monthly bill payments via the DTC Settlement System.

### Risk assessment and controls for links
- Outbound link risk assessment:
  - DTC assesses credit risk, market risk, processing risk, general business risk, and other areas including third party due diligence, technology, legal and regulatory issues.
  - DTC reviews risk management controls available to mitigate identified risks.
  - Example mitigants for credit risk:
    - (i) Settlement debit obligations are subject to DTC established collateral and debit cap controls; DTC can control participants’ debit caps.
    - (ii) Collateral collected by DTC is subject to DTC’s security pricing and haircuts.
    - (iii) Securities received by the participant via settlement are available as additional collateral for DTC.
    - (iv) Liquidation of collateral, if necessary, would be done by DTC in accordance with its procedures.
    - (v) DTC requires CDS link participants to make an additional cash deposit to DTC’s participant fund as determined by DTC.
- Inbound link admission:
  - Applicant CSD is treated like any other Participant and must meet established risk criteria, including submission of legal opinions.
  - Non-U.S. entities face heightened scrutiny and must enter additional undertakings to address jurisdictional concerns, regulatory status, and provide audited financial information acceptable to DTC.
  - All Participants must appoint a settling bank, including CSD Participants.
- Legal opinions:
  - Legal opinions are required to ensure soundness of link arrangements.

### List of linked CSDs, link types, cut-off times and network providers (as presented in the assessment)
- Canadian Depository for securities Ltd (CDS) / Canada — Bilateral DVP — Cut-Off Time for Deliveries Into Account: 3:15 PM NYT — Network Provider: SMART
- Euroclear UK & Ireland — FOP — Cut-Off Time: 11:30 AM NYT — Network Provider: SWIFT
- Clearstream Banking Frankfurt / Germany — Bilateral FOP — Cut-Off Time: 10:00 AM NYT — Network Provider: SWIFT
- Monte Titoli / Italy — FOP — Cut-Off Time: 11:30 AM NYT — Network Provider: SWIFT
- Caja de Valores / Argentina — FOP — Cut-Off Time: 3:15 PM NYT — Network Provider: SMART
- CAVALI ICLV / Peru — DVP — Cut-Off Time: 3:15 PM NYT — Network Provider: SMART
- Deposito Central de Valores (DCV) / Chile — DVP — Cut-Off Time: 3:15 PM NYT — Network Provider: SMART
- Stock Exchange Clearing House / Israel — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SMART
- Hong Kong Securities Clearing Corp. / Hong Kong — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SMART
- Japan Securities Depository Center (JASDEC) / Japan — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SWIFT
- The Central Depository (PTE) Limited / Singapore — FOP — Cut-Off Time: 6:15 PM NYT — Network Provider: SMART
- SIX SIS — FOP — Cut-Off Time: 14:30 PM NYT — Network Provider: Fax
- Source attribution for table: http://www.dtcc.com/customer/dtc_international.php

### Delivery versus payment (DVP) details and observed issues
- DVP deliveries to CSDs are final in accordance with DTC Rules on the same terms and conditions as for any other Participants.
- A CSD engaging in DVP transactions is subject to DTC risk management controls (net debit cap, collateral monitor) and, subject to those measures, may redeliver, pledge or withdraw securities intraday.
- A CSD engaging in DVP transactions must have a settling bank for end-of-day net settlement; failure to settle results in not taking delivery of securities that are the subject of an “Incomplete Transaction.”
- Assessment noted: DTC operates a DVP model 2 but allows provisional deliveries (delivers securities before finality is achieved in DTC), as evidenced by Canadian CSD (CDS) deliveries during the day that can be transferred through the link while finality is achieved at end of day.
- Outbound links:
  - For outbound links, settlement occurs under foreign CSD rules, applicable law and market practices.
  - The only outbound link with DVP is CDS.
  - DTC maintains an omnibus account at CDS for both funds and securities subject to CDS risk management controls including full collateralization subject to haircuts and limits on allowable net debits.
  - The DTC Omnibus Account has:
    - (i) collateral requirements and controls and net debit requirements and controls,
    - (ii) settlement obligations,
    - (iii) a line of credit from a Canadian bank that is a CDS Participant to secure DTC’s settlement obligations to CDS.
  - All DTC participants are eligible to participate in the CDS link provided compliance with DTC and CDS rules; DTC maintains control over securities and funds credited to the DTC Omnibus Account.
  - Participants using the CDS link are subject to enhanced risk management controls including an additional Clearing Fund Deposit, a separate net debit cap for Canadian Link transactions, and special adjustments to the participant’s collateral monitor at DTC.
- Rule changes:
  - DTC adopted a new Rule 30 addressing operational and risk management issues with the CDS link, covering money and securities settlement, participant standards, securities eligibility, operational interface issues between CDS and DTC, and risk management (net debit cap, collateral monitor adjustments, required Clearing fund deposit, and security for Canadian-Link Transactions).

### Settlement agent risk and credit extensions
- Settlement agent risk:
  - For DVP links, foreign CSDs follow the same processes as DTC participants and must have settling banks.
  - If a settling bank for a CSD becomes unavailable and DTC owes funds to that CSD Participant, the CSD Participant must identify to DTC a bank for payment; DTC would assist if necessary.
  - If a CSD Participant owes DTC and its settling bank fails to pay, the CSD Participant must make payment through another settling bank or other bank; the CSD Participant is the primary obligor for its net settlement obligation.
  - If a CSD Participant does not pay its net settlement obligation, DTC may use its collateral to finance settlement as described under Recommendation 7.
- Credit extensions to a linked CSD (Q3):
  - CSDs that are DTC participants are subject to the same risk controls and requirements as other participants.
  - If a CSD has a net debit balance intraday, it must be less than the amount of its net debit cap and, subject to the collateral monitor, will be fully collateralized.
- Assessment: Observed.
- Comment: DTC should update the information on links on DTCC’s website to reflect the current status.

### Assessment summary table (excerpt)
- Table 2 heading: Summary of the Detailed Assessment of the Observance of DTC of the CPSS-IOSCO Recommendations for Securities Settlement Systems
- Responsibility / Grading / Comments — (table begins; next entry shown: Legal risk)

*Source: _cr10128 - Section 17A of the Exchange Act requires that the rules of a clearing agency ensure a fair*

### 1. Securities settlement systems should have a well-

### 1. Securities settlement systems should have a well-

### Pre-settlement risk
- Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than the trade date (T+0).
- Where confirmation of trades by indirect market participants (such as institutional investors) is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.
- Recommendation: DTC should explore the possibility to introduce instructions matching mechanism prior to settlement.
- Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be assessed.
- The benefits and costs of a central counterparty should be assessed. Where such a mechanism is introduced, the central counterparty should rigorously control the risks it assumes.
  - For the observance of this recommendation, a cost-benefit analysis should be conducted of the introduction of a CCP for transactions settled through DTC but not cleared by NSCC.
- Securities lending and borrowing (or repurchase agreements and other economically equivalent transactions) should be encouraged to expedite settlement; barriers that inhibit lending for this purpose should be removed.

### Settlement risk
- Securities should be immobilized or dematerialized and transferred by book entry in CSD to the greatest extent possible.
- Securities settlement systems should eliminate principal risk by linking securities transfers to funds transfers to achieve delivery versus payment.
- Final settlement on a DVP basis should occur no later than the end of the settlement day. Intra-day or real-time finality should be provided where necessary to reduce risks.
  - Comment: The DVP 2 model is characterized by intraday securities deliveries and end of day net money settlements. Without additional safeguards this design would expose DTC participants to principal and liquidity risk, potentially with systemic implications, in the event that the participants fail to meet their cash obligations at the end of day. However, DTC has in place measures to limit and control these risks.
  - Recommendation: DTC should consider to conducting additional net funds settlement batches during the day in order to provide intraday finality for cash transfers, which will allow participants in a net credit position to have earlier access to their liquidity and move them out of DTC. However, participants in a net debit position would be obligated to make their payments during the day rather than at the end of the day.
- CSDs that extend intraday credit to participants, including CSDs that operate net settlement systems, should institute risk controls that, at a minimum, ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle. The most reliable set of controls is a combination of collateral requirements and limits.
  - Comment: Although DTC currently has sufficient liquidity resources to protect against the failure of the largest affiliated family of Participants, more extreme cases of multiple failures could test DTC’s liquidity resources.
  - Recommendation: DTC should be given access to central bank liquidity facilities.
- Assets used to settle the ultimate payment obligations arising from securities transactions should carry little or no credit or liquidity risk. If Central Bank money is not used, steps must be taken to protect CSD members from potential losses and liquidity pressures arising from the failure of the cash settlement agent whose assets are used for that purpose.
  - Comment: There is a high concentration of payment flows at the top five settling banks. DTC should continue to monitor the financial conditions and should begin monitoring the exposures of the settlement banks.
  - Recommendation: DTC needs to reduce the concentration of settlement cash for Canadian dollar.
  - Recommendation: DTC may explore the possibility to of becoming a direct participant of the Canadian RTGS system.
  - Recommendation: The self-assessment of the Federal Reserve’s NSS against the CPSIPS should be reviewed by the relevant authorities and made public.

### Operational risk
- Sources of operational risk arising in the clearing and settlement process should be identified and minimized through the development of appropriate systems, controls, and procedures. Systems should be reliable and secure, and have adequate, scalable capacity. Contingency plans and back-up facilities should be established to allow for timely recovery of operations and completion of the settlement process.
  - Comment: Contingency plans and backup facilities for the failure of key systems are not tested and reviewed with participants (only connectivity is tested with the critical participants).
  - Comment: NSCC explained that the data centers in the New York region act as a single data centre and provide secondary back-up to both systems and the entire facility. In the event that New York region data centers are not available, the out of region recovery site is available to cover all critical systems. Failover and recovery of any data centre does not require changes by participants. The network automatically reroutes the client traffic from their primary or backup sites to the recovered data centre. Therefore, it is not reliant to test the failure of one key system with the participants.
  - Recommendation: DTCC should test its back-up sites to critical participants’ backup sites.

### Custody risk
- Entities holding securities in custody should employ accounting practices and safekeeping procedures that fully protect customers' securities. It is essential that customers' securities be protected against the claims of a custodian's creditors.

### Other issues (Governance, Access, Cost-effectiveness, Standards, Transparency, Oversight, Links)
- Governance arrangements for CSDs and central counterparties should be designed to fulfill public interest requirements and to promote the objectives of owners and users.
  - For the observance of this recommendation, the governance arrangements for DTC should be more clearly specified and transparent, including criteria for the composition and selection of Board members. At the time of this assessment only limited information is available to the public.
  - Recommendation: DTCC may also consider including independent members in the Board to reduce conflict of interests within the group, and ensuring the integrity and soundness of each entity.
  - Comment: DTCC is currently reviewing its corporate governance structure and anticipates that once any changes have been duly approved and publication authorized.
- CSDs and central counterparties should have objectives and publicly disclosed criteria for participation that permit fair and open access.
- While maintaining safe and secure operations, securities settlement systems should be cost-effective in meeting the requirements of users.
- Securities settlement systems should use or accommodate the relevant international communication procedures and standards in order to facilitate efficient settlement of cross-border transactions.
- CSDs and central counterparties should provide market participants with sufficient information for them to accurately identify the risks and costs associated with using the CSD or central counterparty services.
- Securities settlement systems should be subject to regulation and oversight. The responsibilities and objectives of the securities regulator and the central bank with respect to SSSs should be clearly defined, and their roles and major policies should be publicly disclosed. They should have the ability and resources to perform their responsibilities, including assessing and promoting implementation of these recommendations. They should cooperate with each other and with other relevant authorities.
  - Comment: Formal co-operation with Authorities in Peru needs to be established.
  - Comment: It is important to point out that the Fed’s oversight of DTC is not based on a general statutory oversight authority for payment, clearing, and settlement systems, but rather on DTC’s status as a State Member Bank of the Federal Reserve System and the Fed’s subsequent roles as banking supervisor and ARA. It would be more effective and transparent to legally entrust the Fed the role of overseer of securities settlement infrastructure. The banking supervision and the oversight functions have two different objectives and use different tools.
  - Comment: The SEC has not yet required DTC to perform a self assessment with respect to the CPSS-IOSCO recommendations. However, the SEC reviews each self-assessment prepared by the clearing agencies.
  - Recommendation: SEC staff stated that it would consider recommending to the Commission that clearing agencies be required to perform self-assessments against the CPSS-IOSCO recommendations by rules or in a policy statement. SEC is encouraged to do so, also with a view to encouraging consistency in the assessment of globally relevant systems and to facilitate co-operation with other domestic and international authorities.
- CSDs that establish links to settle cross-border trades should design and operate such links to reduce effectively the risks associated with cross-border settlement.
  - Recommendation: DTC should update the information on links on DTCC’s website to reflect the current status.

### Table 3. Actions to Improve Compliance (selected recommended actions)
- Recommendation 2: Trade confirmation — DTC should explore the possibility to introduce instructions matching mechanism prior to settlement.
- Recommendation 4: CCPs — A cost-benefit analysis should be conducted of the introduction of a CCP for transactions not cleared by NSCC.
- Recommendation 4 (cash finality): DTC should consider to conducting additional net funds settlement batches during the day in order to provide intraday finality for cash transfers.
- Recommendation 9: Risk controls — DTC should be given access to central bank liquidity facilities.
- Recommendation 10: Cash settlement — DTC should continue to monitor the financial conditions and should begin monitoring the exposures of the settlement banks; DTC needs to reduce the concentration of settlement cash for Canadian dollar; DTC may explore the possibility to of becoming a direct participant of the Canadian RTGS system; The self-assessment of the Federal Reserve’s NSS against the CPSIPS should be reviewed by the relevant authorities and made public.
- Recommendation 11: Operational risk — DTCC should test its back-up sites to critical participants’ backup sites.
- Recommendation 13: Governance — DTC’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of Board members.
- Recommendation 18: Oversight and regulation — Formal co-operation with Authorities in Peru needs to be established; It would be more effective and transparent to legally entrust the Fed the role of overseer of financial market infrastructure, and to separate between the banking supervision and the oversight functions; SEC is encouraged to require clearing agencies to perform self-assessments against the CPSS-IOSCO recommendations by rules or in a policy statement.
- Recommendation 19: Risks in links — DTC should update the information on links on DTCC’s website to reflect the current status.

### Authorities’ response to the assessment
- The U.S. authorities welcome the IMF’s assessment of the Depository Trust Company (DTC) against the CPSS-IOSCO Recommendations for Securities Settlement Systems (RSSS).
- The authorities appreciate the significant undertaking associated with an FSAP review of the biggest financial sector in the world, as well as the challenges that accompany the first assessment of a large advanced country in the wake of the crisis.
- The authorities are pleased to note that the IMF’s assessment reflects the high degree of compliance of DTC with the RSSSs, and are largely in agreement with the assessment’s comments and recommendations, which the authorities will share with DTC.
- The authorities appreciate the significant undertaking associated with the assessment of DTC and the contribution that the assessment process makes to the stability and effective regulation and oversight of systemically important payment, clearing and settlement systems.

*Source: IMF staff assessment contained in the provided content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10128.pdf_