[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24775-24776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09925]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72029; File No. SR-NSCC-2014-03]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Enhance the System
That Processes Corporate Actions Within NSCC's Continuous Net
Settlement System
April 25, 2014.
I. Introduction
On March 6, 2014, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2014-03 (``Proposed Rule
Change'') 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 March 21,
2014.\3\ The Commission did not receive comments on the Proposed Rule
Change. This Order approves the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Release No. 34-71725 (Mar. 14, 2014), 79 FR 15780 (Mar. 21,
2014) (SR-NSCC-2014-03).
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II. Description
With this Proposed Rule Change, NSCC will amend its Rules and
Procedures (``Rules'') \4\ to enhance the system that processes
corporate actions within NSCC's Continuous Net Settlement (``CNS'')
system. NSCC plans to implement the enhancements contained the Proposed
Rule Change in multiple phases during 2014, which NSCC will announce by
Important Notice.
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\4\ Defined terms not defined herein have the mean set forth in
the Rules.
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One of NSCC's core services as a central counterparty is to clear
and settle trades through CNS. In CNS, compared and recorded
transactions in CNS-eligible securities \5\ that are scheduled to
settle on a common settlement date are netted by issue into one net
long (i.e., buy) or net short (i.e., sell) position. CNS then nets
those positions further with positions of the same issue that remain
open after their originally scheduled settlement date (``Fail
Positions''). The result is a single deliver or receive obligation for
each NSCC member (``Member'') for each issue in which the Member has
activity on a given day.
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\5\ To be CNS-eligible, a security must be eligible for book-
entry transfer on the books of The Depository Trust Company
(``DTC''), an NSCC affiliate, and must be capable of being processed
in the CNS system. For example, securities may be ineligible for CNS
processing due to certain transfer restrictions (e.g., 144A
securities) or due to the pendency of certain corporate actions.
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As part of the services offered to Members, certain corporate
actions, including cash dividends, stock dividends, bond interest, and
other mandatory corporate actions (which include redemptions, stock and
cash mergers, and name changes) are automatically debited or credited
to Members' CNS accounts with open Fail Positions in CNS. Members are
also permitted to take part in certain voluntary corporate actions,
which include tender or exchange offers, with respect to open Fail
Positions in CNS.
Upon implementation of the Proposed Rule Change, NSCC will make
enhancements to its processing of corporate actions within the CNS
system, as described below.
A. Optional Dividends
When a Fail Position in CNS is subject to a dividend payment, the
issuer specifies the form in which that dividend will be paid (e.g.,
securities or cash) (``Default Option''). NSCC Members that have failed
to receive securities from CNS (``Long Members'') may elect a form of
payment that differs from the Default Option by submitting an
instruction to NSCC no later than a pre-set date and cut-off time. NSCC
currently sets a cut-off time for the submission of such election
instructions based on the cut-off time set by DTC. Under the Proposed
Rule Change, NSCC will set the date and cut-off time that is earlier
than the DTC cut-off time in order to provide Members that have failed
to deliver securities to CNS (``Short Members'') with additional time
to communicate elections to their customers. Additionally, such
elections are currently submitted to NSCC manually; however, upon
implementation of the Proposed Rule Change, the elections will be
submitted to NSCC electronically.
B. Support ``Offer to Consent'' Tender/Exchange Offers
Today, if an open Fail Position in CNS is subject to a tender or
exchange offer that includes an ``offer to consent,'' in order to
participate in that tender or exchange offer the Fail Position would be
closed, exited out of CNS, and would then settle directly between the
counterparties outside of CNS. With this Proposed Rule Change, Members
with open Fail Positions in CNS will be able to participate in tender
or exchange offers that include an ``offer to consent'' within CNS.
[[Page 24776]]
C. Protect Submission and Liability Notification
Currently, the cut-off time for a Long Member to place a
``protect'' on an open Fail Position in CNS in order to participate in
an upcoming corporate action or to add shares to a voluntary corporate
action is either (i) on the business day prior to the ``protect''
expiration date, or (ii) on the business day prior to the expiration
date of the corporate action if there is no ``protect'' for that
corporate action. Failure to meet those deadlines often results in Long
Members incurring additional costs. As such, NSCC staff, in its
discretion and on a best efforts basis, has accepted and processed such
``protect'' instructions either on the ``protect'' expiration date or
on the expiration date of the corporate action.
Upon implementation of the Proposed Rule Change, for a fee of
$500,\6\ Members will be permitted to place a ``protect'' on an open
fail position in CNS in order to participate in an upcoming corporate
action or to add shares to a voluntary corporate action either (i) on
the ``protect'' expiration date, or (ii) on the expiration date of the
corporate action if there is no ``protect'' for that corporate action.
Additionally, with this Proposed Rule Change, Members will submit
``protect'' instructions to NSCC electronically.
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\6\ The Commission understands that NSCC will propose this fee
in a separate rule filing with the Commission.
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D. Final Liability and Final Protection Notification
Today, CNS alerts Short Members of their final assigned liability
with respect to voluntary corporate actions either (i) on the business
day after the ``protect'' expiration date for that corporate action, or
(ii) on the business day after the expiration date of the corporate
action if there is no ``protect'' for that corporate action.
Upon implementation of the Proposed Rule Change, CNS will alert a
Short Member of its assigned final liability no later than the close of
business on the same business day the final liability is assigned to
that Member by CNS. The Proposed Rule Change will also clarify that
Long Members will be notified that their Fail Positions in CNS will be
subject to the ``protection'' for that corporate action no later than
the close of business on the same business day the final ``protection''
is assigned to that Member by CNS.
E. SMART/Track for CNS Corporate Actions
With this Proposed Rule Change, Members will submit instructions to
participate in a voluntary reorganization and access all corporate
action processing output data through SMART/Track for CNS Corporate
Actions, which is available within NSCC's SMART/Track for Corporate
Action Liability Notification Service. The output data, which is
currently delivered to Members through files and reports, will be
visible through on-line screens and include search options and filters.
F. Restriction on Movement of Positions Between CNS Sub-Accounts
Under the Proposed Rule Change, when a voluntary reorganization is
being processed on a security, CNS will no longer permit the movement
of positions in that security between non-reorganization sub-accounts
(e.g., the CNS General Account and the CNS Fully-Paid-For Account)
either (i) on the ``protect'' expiration date, or (ii) on the
expiration date of the voluntary reorganization if there is no
``protect'' for that voluntary reorganization.
G. Additional Rule Changes
In addition to the enhancements described above, with this Proposed
Rule Change NSCC will amend its Rules to clarify that the Rules are
drafted assuming the processing of subject securities with a
``protect'' period of three days. Similarly, the table that is
currently included in the Rules regarding this topic will be updated to
further illustrate the timeframes for processing of subject securities
with a ``protect'' period of two days or less.
III. Discussion and Commission Finding
Section 19(b)(2)(C) of the Act \7\ 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 \8\ requires that
the rules of a clearing agency 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.'' \9\ Here, the
Commission finds the enhancements to be implemented by the Proposed
Rule Change consistent with those requirements because each change
discussed above should result in greater efficiency and automation with
respect to the processing of corporate actions within CNS, thus
promoting the prompt and accurate clearance and settlement of
securities transactions.
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\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
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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 \10\ and the
rules and regulations thereunder.
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\10\ 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).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule change SR-NSCC-2014-03 be, and it hereby is,
approved.
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\11\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09925 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P