[Federal Register Volume 79, Number 8 (Monday, January 13, 2014)]
[Notices]
[Pages 2237-2239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00332]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71251; File No. SR-NSCC-2013-11]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Add a New Service
to the National Securities Clearing Corporation's Obligation Warehouse
(``OW'') Which Would Pair Off and Close Certain Open Obligations,
Reducing the Number of Open Obligations in OW
January 7, 2014.
I. Introduction
On November 14, 2013, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change SR-NSCC-2013-11 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change was published
for comment in the Federal Register on November 29, 2013.\3\ The
Commission did not receive comments on the proposed rule change. This
order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-70937 (Nov. 25,
2013), 78 FR 71686 (Nov. 29, 2013) (SR-NSCC-2013-11).
---------------------------------------------------------------------------
II. Description of the Proposal
NSCC's proposed rule change consisted of amendments to the Rules
and Procedures (``Rules'') of NSCC to modify its Rules to add a new
service to NSCC's Obligation Warehouse (``OW'') that will daily apply a
pair off methodology to open OW Obligations, designated by Members as
eligible for the service, based on the quantity of underlying
securities, the final money amount, and the settlement dates of the
underlying obligations, the (``Pair Off Function''). Upon making those
revisions to NSCC's Rules, this approved, new service to OW will pair
off and close certain open obligations, thereby reducing the number of
open obligations in OW. The effective date of the proposed rule change
will be announced via an NSCC Important Notice.
NSCC's OW, implemented in 2011, is a non-guaranteed, automated
service that tracks, stores, and maintains unsettled ex-clearing and
failed obligations, as well as obligations exited from NSCC's
Continuous Net Settlement (``CNS'') system, non-CNS Automated Customer
Account Transfer Service
[[Page 2238]]
(``ACATS'') Receive and Deliver Instructions, Balance Orders, and
Special Trades, as defined in NSCC's Rules (collectively ``OW
Obligations''). The service provides transparency, serves as a central
storage of open (i.e. failed or unsettled) broker-to-broker
obligations, and allows users to manage and resolve exceptions in an
efficient and timely manner. Simultaneously, OW provides on-going
maintenance and servicing of matched obligations that have not been
marked by a Member as subject to upcoming delivery, closure, or
cancellation. Examples of this on-going maintenance and servicing
include: Adjustments for certain corporate actions; daily review for
CNS eligibility; and regular processing of the Reconfirmation and
Pricing Service (``RECAPS'') in the OW on days announced by Important
Notices. During the daily review for CNS eligibility, OW Obligations
that are eligible for CNS are exited from the OW and forwarded to CNS.
On days when RECAPS is run in the OW, OW Obligations that are eligible
for RECAPS \4\ are re-netted and, if appropriate, marked to the current
market price \5\ and provided with an updated settlement date of the
next business day. The Pair Off Function will run once a day,
immediately following the completion of the review for CNS
eligibility.\6\
---------------------------------------------------------------------------
\4\ Obligations that are matched and have a settlement date of
at least two days prior to the date on which the RECAPS process
commences will be considered for inclusion in the RECAPS process,
and therefore, fail items not already in the OW and eligible for
RECAPS processing must be submitted by the Member prior to RECAPS
processing.
\5\ In the event that the current market price for a security is
not available, the obligation's price details will be unchanged from
when it was previously matched.
\6\ NSCC will announce by Important Notice days on which Pair
Off function will not run, which may include days on which the
RECAPS process is run in the OW.
---------------------------------------------------------------------------
Today, in order to reduce the number of obligations that remain on
their books and records, Members may take actions away from NSCC to
close out these open obligations in OW. Those Members would then close
the obligations in OW. The Pair Off Function will facilitate the close
out of any OW Obligations that Members designate as eligible for the
service. By facilitating the close out of these obligations in an
automated manner within the OW, the Pair Off Function should add
transparency to the life cycle of these obligations that may otherwise
be closed out away from NSCC. With respect to obligations that are
removed from the OW as a result of the Pair Off Function, Members'
administrative costs associated with maintaining these obligations in
OW should be reduced.
NSCC Members will have the opportunity to designate certain OW
Obligations that are in ``Open'' status in the OW, to which they are a
party, to be eligible to be paired off with other OW Obligations in the
same CUSIP, and ultimately closed.\7\ NSCC may, in its discretion,
exclude certain obligations from the Pair Off Function, and will
announce by Important Notice which obligations are excluded. Initially,
the following obligations will be excluded: (1) OW Obligations in which
the underlying security is a mutual fund, a when-issued security,\8\ or
is part of a syndicate; (2) OW Obligations that are identified in OW as
an ACATS Receive and Deliver Instruction; (3) obligations that, as of
the time the Pair Off Function runs, are identified in the OW as being
subject to a corporate action; and (4) an obligation that is marked in
the OW as being in ``Open'' status but has already been sent to The
Depository Trust Company's Inventory Management System (IMS) as a
pending delivery.
---------------------------------------------------------------------------
\7\ Members may either participate in the Pair Off Function on
an account level, designating all OW Obligations in an ``Open''
status in the OW to which they are a party as eligible for the Pair
Off function and then opt out of the function with respect to
certain OW Obligations, or they may designate only certain OW
Obligations as eligible for pair off.
\8\ A transaction in a ``when issued'' security is made
conditionally because the underlying security has been authorized
but not yet issued, and will only settle after the security has been
issued.
---------------------------------------------------------------------------
The Pair Off Function will use a matching methodology that will
pair off eligible OW Obligations based on the quantity of underlying
securities, the final money amount, and the settlement dates of the
underlying obligations. The Pair Off Function will only match OW
Obligations that have been designated as eligible for pair off by both
Members that are party thereto, and that are in the same CUSIP and have
the same counterparties, where the counterparties have offsetting long
and short obligations. The methodology will pair off eligible OW
Obligations in order by first pairing off those obligations that have
the most criteria in common. For example, the methodology will first
pair off eligible OW Obligations where the quantity of underlying
securities, the settlement dates of the obligations, and the final
money amounts are identical. The methodology will continue to review
eligible OW Obligations subject to certain rules, beginning with
eligible OW Obligations with the oldest settlement date, and eligible
OW Obligations with the smallest number of underlying securities.
Eligible OW Obligations will be paired off where the quantity of
underlying securities, the final money amount, or the settlement dates
of the underlying obligations may not be identical, and, in certain
cases, one OW Obligation may be paired off against multiple OW
Obligations. However, a pair off would never occur if it would result
in: (1) A negative quantity of underlying securities in either of the
original obligations; (2) a negative final money amount; or (3) at
least one of the obligations subject to the pair off to remaining open,
with a reduced quantity of underlying securities and a final money
amount of zero or less than zero. Additionally, OW Obligations in
municipal bonds would only be eligible for pair off where the quantity
of the underlying securities in the obligations subject to the pair off
is identical and no underlying securities remain.
When the pair off criteria are met, the OW Obligations will either
be closed or, when the quantities of underlying securities are not
exactly matched between obligations being paired off, the pair off will
result in one or more of the obligations being reduced by the quantity
of securities that were paired off. Those obligations will remain in
``Open'' status in OW and will be adjusted to reflect the reduced
number of underlying securities. Where the underlying final money
amounts are not exactly matched between obligations being paired off,
the pair off will result in a cash adjustment, which will be reflected
in the Members' money settlement with NSCC on the following business
day.
III. Discussion and Commission Finding
Section 19(b)(2)(C) of the Act \9\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. Section 17A(b)(3)(F) of the Act \10\ requires
that the rules of a clearing agency to be designed to, among other
things, ``promote the prompt and accurate clearance and settlement of
securities transactions and . . . 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.'' \11\ Further, Section
17A(b)(3)(F) of the Act requires that the rules of a clearing agency be
designed to, ``perfect the mechanism of a national system for the
[[Page 2239]]
prompt and accurate clearance and settlement of securities
transactions.'' \12\ The Commission finds that NSCC's proposed rule
change is consistent with these requirements because: the Pair Off
Function is designed to provide for greater efficiency and transparency
with respect to obligations processed through the OW; and to improve
NSCC's current mechanism for the clearance and settlement of securities
transactions that are placed in the OW.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78s(b)(2)(C).
\10\ 12 U.S.C. 78q-1(b)(3)(F).
\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ Id.
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \13\ and the
rules and regulations thereunder.
---------------------------------------------------------------------------
\13\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NSCC-2013-11 be, and it hereby is,
approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00332 Filed 1-10-14; 8:45 am]
BILLING CODE 8011-01-P