[Federal Register Volume 78, Number 129 (Friday, July 5, 2013)]
[Notices]
[Pages 40525-40527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16086]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69894; File No. SR-NSCC-2013-805]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of No Objection to Advance Notice Filing To Require
That All Locked-in Trade Data Submitted to It for Trade Recording Be
Submitted in Real-Time
June 28, 2013.
I. Introduction
On April 30, 2013, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-NSCC-2013-805 (``Advance Notice'')
pursuant to Section 806(e) of Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act''),\1\ entitled
the Payment, Clearing, and Settlement Supervision Act of 2010
(``Clearing Supervision Act'' or ``Title VIII'') and Rule 19b-4(n) of
the Securities Exchange Act of 1934 (``Exchange Act''). On May 14,
2013, NSCC filed with the Commission Amendment No. 1 to the Advance
Notice.\2\ The Advance Notice was published in the Federal Register on
June 11, 2013.\3\ The Commission received one comment letter to the
proposed rule change.\4\ This publication serves as notice of no
objection to the Advance Notice.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ In Amendment No. 1, NSCC corrected a typographical error in
the text of its Rules & Procedures (``Rules'') related to the
Advance Notice.
\3\ Release No. 34-69699 (June 5, 2013), 78 FR 35076 (June 11,
2013). NSCC also filed a proposed rule change pursuant to Section
19(b)(1) of the Exchange Act on April 30, 2013 seeking Commission
approval to permit NSCC to change its rules to reflect the proposed
change described herein. The Commission, through delegated
authority, published notice of the proposed rule change on May 14,
2013. Release No. 34-69571 (May 14, 2013), 78 FR 29408 (May 20,
2013).
\4\ Comment letter from Kermit Kubitz (``Kubitz'') dated June
10, 2013, http://www.sec.gov/comments/sr-nscc-2013-05/nscc201305.shtml. Kubitz supports the proposed rule change's
requirement ``to submit trades without any pre-processing . . .''
and believes that, ``any cost associated with submitting higher
volumes of data from limiting pre-netting is small compared to the
risks and costs of inaccurate data which might result from
submission of other than accurate trade data.'' The Commission
considers all public comments received on the proposed rule change
as comments to the Advance Notice.
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II. Analysis
NSCC filed the Advance Notice to require that all locked-in trade
data submitted to NSCC for trade recording
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be submitted in real-time,\5\ and to prohibit pre-netting \6\ and other
practices that prevent real-time trade submission, as discussed below.
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\5\ The term ``real-time,'' when used with respect to trade
submission, will be defined in Procedure XIII (Definitions) of
NSCC's Rules as the submission of such data on a trade-by-trade
basis promptly after trade execution, in any format and by any
communication method acceptable to NSCC.
\6\ According to NSCC, any pre-netting practices include: (i)
``Summarization'' (i.e., a technique in which the clearing broker
nets all trades in a single CUSIP by the same correspondent broker
into fewer submitted trades); (ii) ``compression'' (i.e., a
technique to combine submissions of data for multiple trades to the
point where the identity of the party actually responsible for the
trades is masked); (iii) netting; and (iv) any other practice that
combines two or more trades prior to their submission to NSCC
(collectively, ``Pre-netting'').
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Proposal Overview
According to NSCC, the majority of all transactions processed at
NSCC are submitted on a locked-in basis by self-regulatory
organizations (``SRO'') (including national and regional exchanges and
marketplaces), and Qualified Special Representatives (``QSR'').\7\
Currently, NSCC data reveals that almost all exchanges \8\ and some
QSRs submit trades executed on their respective markets in real-time,
representing approximately 91% of the locked-in trades submitted to
NSCC today. The rule change will require that all locked-in trades
submitted for trade recording by SROs and QSRs be submitted to NSCC in
real-time.\9\
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\7\ QSRs are NSCC members (``Members'') that either (i) operate
an automated execution system where they are always the contra side
of every trade, (ii) are the parent or affiliate of an entity
operating such an automated system, where they are the contra side
of every trade, or (iii) clear for a broker-dealer that operates
such a system and the subscribers to the system acknowledge the
clearing Member's role in the clearance and settlement of these
trades.
\8\ One executing market with very low trade volume does not yet
submit trades in real-time.
\9\ Files submitted to NSCC by The Options Clearing Corporation
(``OCC'') relating to option exercises and assignments (Procedure
III, Section D--Settlement of Option Exercises and Assignments) will
not be required to be submitted in real-time. OCC's process of
assigning option assignments is and will continue to be an end-of-
day process.
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NSCC will also prohibit Pre-netting practices that preclude real-
time trade submission. NSCC states that typically, Pre-netting is done
on a bilateral basis between a QSR and its customer, both NSCC Members.
According to NSCC, Pre-netting practices disrupt NSCC's ability to
accurately monitor market and credit risks as they evolve during the
trading day. Therefore, NSCC will prohibit Pre-netting activity on the
part of entities submitting original trade data on a locked-in
basis.\10\ The rules of NSCC's affiliate Fixed Income Clearing
Corporation (``FICC'') currently prohibit such activity, and this rule
change will align NSCC's trade submission rules with those of FICC.\11\
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\10\ Trades executed in the normal course of business between a
Member that clears for other broker-dealers, and its correspondent,
or between correspondents of the Member, which correspondent(s) is
not itself a Member and settles such obligations through such
clearing Member (i.e., ``internalized trades'') are not required to
be submitted to NSCC and shall not be considered to violate the Pre-
netting prohibition.
\11\ See, e.g., GSD Rule 11 (Netting System), Section 3 (``All
trade data required to be submitted to the Corporation under this
Section must be submitted on a trade-by-trade basis with the
original terms of the trades unaltered. A Member or any of its
Affiliates may not engage in the Pre-Netting of Trades prior to
their submission to the Corporation in contravention of this
section. In addition, a Member or any of its Affiliates may not
engage in any practice designed to contravene the prohibition
against the Pre-Netting of Trades.''), http://dtcc.com/legal/rules_proc/FICC-Government_Security_Division_Rulebook.pdf. See also
Order Granting Approval of a Proposed Rule Change Relating to Trade
Submission Requirements and Pre-Netting, Release No. 34-51908 (June
22, 2005), 70 FR 37450 (June 29, 2005).
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Further, NSCC does not expect the rule changes to impact trade
volumes significantly. According to NSCC, the majority of trades are
currently being submitted to NSCC in real-time on a trade-by-trade
basis, and NSCC is operationally capable of managing trade volumes that
are multiple times larger than the historical peak volumes.
In the wake of recent industry disruptions, industry participants
have been focused on developing controls to address the risks that
arise from technology issues. A comment letter submitted to the
Commission in advance of its Technology and Trading Roundtable, held in
October 2012, and signed by a number of industry participants including
SROs, broker-dealers, and buy-side firms, supported this rule change as
a crucial component of the industry controls that could increase market
transparency and ultimately mitigate risks associated with high-
frequency trading and related technology.\12\
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\12\ See Market Technology Roundtable Comment Letter dated Sept.
28, 2012, available at http://www.sec.gov/comments/4-652/4652-17.pdf.
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Implementation Timeframe
NSCC will advise Members of the implementation date of the rule
change through issuance of an NSCC Important Notice. The rule change
will not be implemented earlier than seven (7) months from the date of
Commission approval.
III. Discussion
Although Title VIII does not specify a standard of review for an
Advance Notice, the stated purpose of Title VIII is instructive.\13\
The stated purpose of Title VIII is to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for systemically-
important financial market utilities (``FMU'') and providing an
enhanced role for the Board of Governors of the Federal Reserve System
(``Federal Reserve'') in the supervision of risk management standards
for systemically-important FMUs.\14\
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\13\ 12 U.S.C. 5461(b).
\14\ Id.
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Section 805(a)(2) of the Clearing Supervision Act \15\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing, and settlement activities of designated clearing entities and
financial institutions engaged in designated activities for which it is
the supervisory agency or the appropriate financial regulator. Section
805(b) of the Clearing Supervision Act \16\ states that the objectives
and principles for the risk management standards prescribed under
Section 805(a) shall be to:
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\15\ 12 U.S.C. 5464(a)(2).
\16\ 12 U.S.C. 5464(b).
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promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act on October 22, 2012
(``Clearing Agency Standards'').\17\ The Clearing Agency Standards
became effective on January 2, 2013 and require clearing agencies that
perform central counterparty (``CCP'') services to establish,
implement, maintain, and enforce written policies and procedures that
are reasonably designed to meet certain minimum requirements for their
operations and risk management practices on an ongoing basis.\18\ As
such, it is appropriate for the Commission to review Advance Notices
against these risk management standards that the Commission promulgated
under Section 805(a) and the objectives and principles of these
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risk management standards as described in Section 805(b).
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\17\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2,
2012).
\18\ The Clearing Agency Standards are substantially similar to
the risk management standards established by the Board of Governors
governing the operations of designated FMUs that are not clearing
entities and financial institutions engaged in designated activities
for which the Commission or the Commodity Futures Trading Commission
is the Supervisory Agency. See Financial Market Utilities, 77 FR
45907 (Aug. 2, 2012).
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Consistent with Section 805(a), the Commission believes NSCC's
proposal promotes robust risk management, as well as the safety and
soundness of NSCC's operations, while reducing systemic risks and
supporting the stability of the broader financial system. As discussed
above, the rule change will allow NSCC to mitigate the operational risk
that results from locked-in trade data not being submitted to NSCC in
real-time.
Commission Rule 17Ad-22(d)(4) regarding identification and
mitigation of operational risk,\19\ adopted as part of the Clearing
Agency Standards,\20\ requires clearing agencies to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to: ``[i]dentify sources of operational risk and
minimize them through the development of appropriate systems, controls,
and procedures . . . .'' \21\ The Commission believes that the receipt
of locked-in trade data on a real-time basis will permit NSCC's risk
management processes to monitor trades closer to trade execution on an
intra-day basis and identify and manage any issues relating to
excessive risk exposure earlier on a closer to real-time basis, thereby
potentially minimizing a source of operational risk.
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\19\ 17 CFR 240.17Ad-22(d)(4).
\20\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2,
2012).
\21\ 17 CFR 240.17Ad-22(d)(4).
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IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\22\ that the Commission does not object to
the proposed rule change described in the Advance Notice (File No. SR-
NSCC-2013-805) and that NSCC be and hereby is authorized to implement
the proposed rule change as of the date of this notice or the date of
the ``Order Approving Proposed Rule Change to Require that All Locked-
in Trade Data Submitted to It for Trade Recording be Submitted in Real-
time,'' \23\ whichever is later.
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\22\ 12 U.S.C. 5465(e)(1)(I).
\23\ Release No. 34-69890 (June 28, 2013).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16086 Filed 7-3-13; 8:45 am]
BILLING CODE 8011-01-P