[Federal Register Volume 80, Number 225 (Monday, November 23, 2015)]
[Notices]
[Pages 73028-73029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29726]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76458; File No. SR-NSCC-2015-005]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Permit Trades in
Eligible Fixed Income Securities Scheduled To Settle on Day After Trade
Date To Be Processed for Settlement at National Securities Clearing
Corporation
November 17, 2015.
On October 7, 2015, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2015-005 pursuant to
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ to allow certain fixed-income securities
trades that that are scheduled to settle on the day after trade date
(``T+1'') to settle either through NSCC's Continuous Net Settlement
(``CNS'') system, or through its Balance Order Accounting Operation on
a trade-for-trade basis. The proposed rule change was published for
comment in the Federal Register on October 15, 2015.\3\ The Commission
did not receive any comment letters on the proposed rule change. For
the reasons discussed below, the Commission is granting approval of the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 76112 (October 8,
2015), 80 FR 62121 (October 15, 2015) (SR-NSCC-2015-005).
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I. Description of the Proposed Rule Change
The following is a description of the proposed rule change, as
provided by NSCC:
The proposed rule change consists of amendments to NSCC's Rules &
Procedures (``Rules'') in order to permit trades in fixed income
securities (corporate and municipal bonds, and unit investment trusts,
collectively ``CMU'') that are T+1 to settle either through its CNS
system, as described below, or through its Balance Order Accounting
Operation on a trade-for-trade basis, as described below, when eligible
for settlement through these services.\4\
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\4\ Terms not defined herein are defined in the Rules, available
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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Background
CMU transactions that are effected in the over-the-counter markets
and submitted to NSCC directly by Members on a bilateral basis are
processed through NSCC's Real Time Trade Matching (``RTTM'') platform.
Within RTTM, the buy and sell sides of a transaction are validated and
matched, resulting in a compared trade that is reported to Members.
This process is called ``trade comparison.''
Today, with the exception of CMU trades that are submitted to NSCC
to settle on a timeframe that is shorter than T+2,\5\ CMU trades
submitted to NSCC through RTTM are first compared within RTTM, and then
are processed into NSCC's Universal Trade Capture (``UTC'') system,
where they are checked for eligibility for settlement either through
NSCC's CNS system \6\ or through its Balance Order Accounting Operation
on a trade-for-trade basis.\7\ These CMU trades, those that are
scheduled to settle on a T+2 or longer timeframe, are then processed
for settlement through the settlement service for which they are
eligible, i.e. either the CNS system or the Balance Order Accounting
Operation on a trade-for-trade basis. If a CMU trade is not eligible
for settlement through either CNS or the Balance Order Accounting
Operation, or if it is marked as ``comparison-only'' when it is
submitted to NSCC, it is only processed for trade comparison through
RTTM and then it must settle away from NSCC.
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\5\ The settlement timeframe of a trade, i.e. when the trade
will settle relative to the trade date, is determined by the
counterparties to that trade, and is indicated on the trade record
when the trade is submitted to NSCC.
\6\ CNS and its operation are described in Rule 11 and Procedure
VII. Rules, supra note 4. To be eligible for CNS settlement, a
transaction must be in a security that is eligible for book-entry
transfer on the books of The Depository Trust Company, 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.
\7\ The Balance Order Accounting Operation is described in
Procedure V. Rules, supra note 4. CMU trades that are processed
through the Balance Order Accounting Operation are processed on a
trade-for-trade basis, as described in Section B of Procedure V,
such that Receive and Deliver Orders, as defined in the Rules, are
created instructing the counterparties to the transaction to deliver
or receive a quantity of securities to or from their counterparty to
that transaction. These transactions are not netted and are not
subject to NSCC's risk management measures, as NSCC's central
counterparty guarantee does not attach to these trades.
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Today, all CMU trades submitted to NSCC through RTTM that are
scheduled to settle on T+1 are automatically processed as comparison-
only in RTTM, and must settle away from NSCC. T+1 CMU trades are
processed this way because, historically, NSCC's systems were not able
to adequately risk manage CMU trades that settled on this shortened
timeframe. NSCC has proposed to amend its Rules so that, following
trade comparison through RTTM, T+1 CMU trades will be processed into
UTC, where they will be checked for eligibility to settle through
either CNS or the Balance Order Accounting Operation on a trade-for-
trade basis. If eligible, these CMU trades will settle through the
settlement service for which they are eligible, i.e. either the CNS
system or the Balance Order Accounting Operation on a trade-for-trade
basis.
Pursuant to Addendum K of the Rules, NSCC guarantees the completion
of CNS settling trades that have reached the later of midnight of T+1
or midnight of the day they are reported to Members, and guarantees the
completion of shortened process trades, such as same-day and next-day
settling trades, upon comparison or trade recording processing.\8\
Therefore, for those T+1 CMU trades that are eligible for settlement
through CNS, NSCC will guarantee the completion of these trades upon
comparison or trade recording processing. T+1 CMU trades that settle
through CNS will be subject to all appropriate risk management measures
and margining, pursuant to the existing risk management methodology and
policies and procedures, including the Specified Activity charge
component of its Clearing Fund charges, which applies to trades
settling at NSCC on a shortened processing cycle.\9\ NSCC estimates
that CMU trades that are designated to settle on T+1 and will be
eligible to settle through CNS represent less than half of a percent of
all CMU trades processed at NSCC, and less than 2% of the total value
of all CMU trades processed at NSCC.\10\ In order to
[[Page 73029]]
implement this proposed rule change, NSCC will amend Procedure II
(Trade Comparison and Recording Service). In particular, these
amendments will provide that CMU T+1 transactions will be handled in
the same manner as CMU T+2 trades and trades submitted for regular way
(or T+3) settlement. Procedure II will also be amended to remove
reference to CMU T+1 transactions from the section that identifies
those trades that are accepted by NSCC for comparison-only processing.
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\8\ NSCC guarantees the completion of trades that settle through
CNS pursuant to Addendum K of the Rules. Rules, supra note 4.
\9\ The components of NSCC's Clearing Fund are described in
Procedure XV, and the Specified Activity charge is described in
Section I(A)(1)(g) for trades settling through CNS. Rules, supra
note 4.
\10\ Based on data from the first quarter of 2015, an
approximate daily average of 45,000 CMU trades are processed at
NSCC, with an approximate total daily value of an average of $8.3
billion. Of the approximate daily average of 45,000 CMU trades
processed at NSCC, an approximate daily average of 200 CMU trades
are designated to settle on T+1 and are in securities that are
eligible for settlement in CNS. Of the approximate daily value of an
average of $8.3 billion in CMU trades processed at NSCC, CMU trades
that are designated to settle on T+1 and are in securities that are
eligible for settlement in CNS have an approximate total daily value
of an average of $145 million. The average daily CMU transaction
volume is less than 1% of NSCC's overall daily volume.
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Implementation
The effective date of the proposed rule change will be announced
via an NSCC Important Notice.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \11\ 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. The Commission believes the proposal is
consistent with section 17A(b)(3)(F) of the Act.\12\
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\11\ 15 U.S.C. 78s(b)(2)(C).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, as well
as, in general, protect investors and the public interest.\13\ By
permitting T+1 CMU transactions to settle through CNS or the Balance
Order Accounting Operation, the transactions will receive the benefit
of NSCC's settlement services, including, in the case of CNS, a trade
guarantee. Thus, the proposal will protect investors and the public
interest by mitigating NSCC Members' settlement risk and counterparty
risk. As such, the Commission believes that the proposal is consistent
with section 17A(b)(3)(F) of the Act.\14\
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\13\ Id.
\14\ Id.
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III. 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 \15\ and the
rules and regulations thereunder.
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\15\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that proposed rule change SR-NSCC-2015-005 be, and hereby is,
approved.\16\
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\16\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\17\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29726 Filed 11-20-15; 8:45 am]
BILLING CODE 8011-01-P