[Federal Register Volume 77, Number 228 (Tuesday, November 27, 2012)]
[Notices]
[Pages 70858-70860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-28680]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68268; File No. SR-BX-2012-072]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change, as Modified
by Amendment No. 1, To Amend Rule 4618
November 20, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 15, 2012, NASDAQ OMX BX, Inc. (``BX'' or the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by BX. On November 15, 2012, BX filed Amendment No.
1 to the proposed rule change.\3\ BX filed the proposal pursuant to
Section 19(b)(3)(A) \4\ and Rule 19b-4(f)(6) \5\ thereunder so that the
proposal was effective upon filing with the Commission. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, BX deleted ``October ----, 2012'' and
inserted ``November 1, 2012'' on page 9 of 18 of the original
filing, concerning when BX provided the Commission with written
notice of the proposed rule change.
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
BX is filing this proposed rule change to amend Rule 4618. The text
of the proposed rule change is below. Proposed new language is
italicized; proposed deletions are in brackets.
4618. Clearance and Settlement
(a) All transactions through the facilities of the NASDAQ OMX BX
Equities Market shall be cleared and settled through a registered
clearing agency using a continuous net settlement system. This
requirement may be satisfied by direct participation, use of direct
clearing services, [or] by entry into a correspondent clearing
arrangement with another member that clears trades through such
a[n]clearing agency[.], or by use of the services of CDS Clearing
and Depository Services, Inc. in its capacity as a member of such a
clearing agency.
(b) No change.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
BX proposes to modify Rule 4618 to clarify that the use of a long-
standing arrangement between National Securities Clearing Corporation
(``NSCC'') and CDS Clearing and Depository Services, Inc. (``CDS'') \6\
for clearing transactions in U.S. securities provides an acceptable
method for clearing transactions executed on BX. Among other things,
CDS operates Canada's national clearance and settlement operations for
cash equities trading, performing a role analogous to NSCC in the U.S.
CDS is regulated by the Ontario and Quebec securities commissions and
the Bank of Canada, with working and reporting relationships with the
Canadian Securities Administrators (CSA), other Canadian provincial
securities commissions, and the Canadian Office of the Superintendent
of Financial Institutions. CDS is also a full service member of NSCC
and a participant in the Depository Trust Company (``DTC'').
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\6\ CDS was formerly known as The Canadian Depository for
Securities Limited.
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Currently, a Canadian broker-dealer seeking to buy or sell U.S.
securities may do so through a U.S. registered broker-dealer with which
it establishes a relationship for that purpose. In such a relationship,
the U.S. broker-dealer manages the clearance and settlement of the
resulting trades, either through direct membership at NSCC or
indirectly through a clearing broker with which it has established a
relationship. Under the proposed change, a Canadian broker-dealer that
is a member of CDS may make use of CDS, and its direct membership in
NSCC, to clear and settle the resulting trades. Specifically, the
clearing report for the trade will ``lock in'' CDS, with reference to
the CDS membership of the Canadian broker-dealer, as a party to the
trade.\7\ NSCC then looks to CDS for satisfaction of clearance and
settlement obligations of the Canadian broker-dealer. NSCC requires CDS
to commit collateral to the NSCC clearing fund like any other NSCC
member, the amount of which is based on a risk-based margining
methodology. In a similar manner, CDS requires its participants to
commit collateral to CDS. The sole risk incurred by BX and then by NSCC
in the arrangement is the highly remote risk that CDS itself might
default on its obligations to clear and settle on behalf of the
Canadian broker-dealer. This risk is conceptually indistinguishable
from the risk of a clearing broker default; moreover, because the value
of Canadian trades cleared through the mechanism is likely to be small
in comparison to the values cleared through many large U.S. clearing
brokers, the magnitude of this risk is correspondingly smaller.
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\7\ As an NSCC member, CDS is responsible for the settling and
clearing of its participants' trades conducted with U.S. broker-
dealers. For purposes of ``locking-in'' parties, certain CDS
participants have discrete NSCC participant codes that identify the
Canadian broker-dealer and its participation in the NSCC/CDS
clearing arrangement. On midnight of T+1, NSCC takes on the buyer's
credit risk and the seller's delivery risk.
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The relationship between NSCC and CDS was established more than two
decades ago, and various aspects of the
[[Page 70859]]
relationship have been recognized through several prior filings \8\ and
no-action letters,\9\ as well as a recent similar filing by The NASDAQ
Stock Market LLC.\10\ A recent description of the parameters of the
relationship may be found in NSCC's Assessment of Compliance with the
CPSS/IOSCO Recommendations for Central Counterparties.\11\ The most
prominent use of the relationship arises under FINRA Rule 7220A, which
allows over-the-counter trades executed on behalf of CDS members to be
reported through the FINRA/NASDAQ Trade Reporting Facility and cleared
through the CDS/NSCC relationship.
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\8\ See Securities Exchange Act Release No. 36918 (March 4,
1996), 61 FR 9739 (March 11, 1996) (SR-NASD-95-49) (approving access
to Automated Confirmation Transaction Service for CDS members);
Securities Exchange Act Release No. 40523 (October 6, 1998), 63 FR
54739 (October 13, 1998) (approving establishment of a CDS omnibus
account at DTC to facilitate cross-border clearing).
\9\ See Letter from Dan W. Schneider, Deputy Associate Director,
Commission, to Karen L. Saperstein, Assistant General Counsel, NSCC
(November 26, 1984) (available at 1984 WL 47355) (taking no-action
position with respect to use of CDS and NSCC with respect to
clearing of trades executed on behalf of Canadian broker-dealers on
the Boston Stock Exchange); Letter from Dan W. Schneider, Deputy
Associate Director, Commission, to Karen L. Saperstein, Assistant
General Counsel, NSCC (October 24, 1984) (available at 1984 WL
47356) (taking no-action position with respect to CDS becoming a
member of NSCC).
\10\ Securities Exchange Act Release No. 66310 (February 2,
2012), 77 FR 6610 (February 8, 2012) (SR-NASDAQ-2012-015).
\11\ ``Assessment of Compliance with the CPSS/IOSCO
Recommendations for Central Counterparties,'' NSCC (November 14,
2011) (available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf).
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In order to clearly establish that use of the CDS/NSCC relationship
is a permissible method of clearing transactions executed on BX, BX is
proposing to amend Rule 4618. Currently, the rule provides that trades
must be cleared through a registered clearing agency using a continuous
net settlement (``CNS'') system, and that this requirement may be
satisfied by direct participation, use of direct clearing services, or
by entry into a correspondent clearing arrangement with another member
that clears trades through such an agency. NSCC is currently the only
registered clearing agency using a CNS system for trades executed on
BX. While it is possible that the term ``direct clearing services''
could be construed to cover CDS's participation in NSCC on behalf of
its members--because CDS is a direct member of NSCC for the purpose of
providing clearing services to its members--the term has not previously
been construed by BX in that manner. Accordingly, BX believes that the
clarity of the rule would be enhanced by directly recognizing the CDS/
NSCC relationship in the rule text. BX proposes amending the rule to
provide that the rule may be satisfied through ``use of the services of
CDS Clearing and Depository Services, Inc. in its capacity as a member
of such a clearing agency.'' Whenever a clearing arrangement making use
of CDS's membership in NSCC is established, NSCC will require the BX
member, the Canadian broker on whose behalf it is acting, CDS, and BX
to sign a short agreement, to be addressed to NSCC, in which the
parties acknowledge their use of the CDS/NSCC arrangement.
2. Statutory Basis
BX believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\12\ in general, and with Section
6(b)(5) of the Act,\13\ in particular, in that the proposal is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. Specifically, by allowing
Canadian broker-dealers whose trades are executed on BX to make use of
the long-standing arrangement between NSCC and CDS for clearing
transactions, BX believes that the proposed rule change will directly
foster cooperation and coordination with the two primary North American
cash equities clearinghouses and their respective members, thereby
promoting a free and open market. Because the arrangement between NSCC
and CDS--which has been in place, in varying forms, for over two
decades--includes mechanisms to provide for the collateralization of
the obligations arising thereunder, BX believes that the proposed
change is fully consistent with the protection of investors and the
public interest.
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\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
BX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. The proposed change
will ensure that Canadian broker-dealers whose trades are executed on
BX are able to make use of an additional available option for clearing
such transactions, thereby promoting competition with respect to the
availability of clearing services.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective upon filing pursuant
to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) thereunder
\15\ because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate. At any time within
60 days of the filing of the proposed rule change, the Commission
summarily may temporarily suspend such rule change if it appears to the
Commission that such action is necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Act.
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
Send an email to [email protected]. Please include
File Number SR-BX-2012-072 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-BX-2012-072. This file
number should be included on the subject line if email is used. To help
the
[[Page 70860]]
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filings will also be available for inspection
and copying at the principal office of BX and on BX's Web site: http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/pdf/bx-filings/2012/SR-BX-2012-072.pdf.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-BX-2012-072
and should be submitted on or before December 18, 2012.
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\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28680 Filed 11-26-12; 8:45 am]
BILLING CODE 8011-01-P