[Federal Register Volume 83, Number 142 (Tuesday, July 24, 2018)]
[Notices]
[Pages 35041-35044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15766]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83666; File No. SR-NSCC-2018-004]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change To Terminate
the Commission Billing Service and the Commission Billing Limited
Membership
July 18, 2018.
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 July 13, 2018, National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to Rules and
Procedures of NSCC (``Rules'') in order to in order to terminate the
Commission Billing service and the Commission Billing type of limited
membership, as described in greater detail below.\3\
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\3\ Available at http://www.dtcc.com/legal/rules-and-procedures.
Capitalized terms used herein and not otherwise defined shall have
the meaning assigned to such terms in the Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency 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 clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
NSCC is proposing to revise its Rules in order to discontinue its
Commission Billing service and the Commission Billing type of limited
membership, for the reasons described below.
Overview of the Commission Billing Service
As currently described in Rule 16, NSCC provides a service through
which it facilitates the payment of commissions on monthly basis
between its Members and Commission Billing Members.\4\ Brokers that use
this service to charge and collect commissions are Commission Billing
Members, which is a type of limited membership that allows these firms
to participate in NSCC solely for the collection of commissions.
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\4\ Id.
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Currently, Commission Billing Members are floor broker firms that
are members of the New York Stock Exchange (``NYSE'') and NYSE American
(formerly the American Stock Exchange), although historically the
service was available to floor broker firms on any U.S. exchange. As
provided for in Rule 2 of the Rules, Commission Billing Members
participate solely in the collection and payment of commissions as
provided for under Rule 16 of the Rules.\5\
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\5\ Id.
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Floor broker firms execute trades on behalf of their clients for a
commission. In order to process commission charges applied to clients
who are Members, floor broker firms that are Commission Billing Members
may submit these charges to NSCC. Commission charges are submitted to
NSCC in one of two ways. In most cases, where the Commission Billing
Member is a member of NYSE, NYSE may act as a payment-data aggregator
and creates and submits payment files to NSCC. Alternatively,
Commission Billing Members may submit payments directly to NSCC through
a web-based system. NSCC tabulates all payment records received on a
monthly basis, and either sends amounts to The Depository Trust Company
(``DTC'') for payment (for billed Members that are also Participants of
DTC) or processes
[[Page 35042]]
payments through Automated Clearing House, or ``ACH,'' payments.
For many years, the Commission Billing service provided these
brokers and Members with an efficient way to submit and receive
commission payments when few alternative payment options existed in the
industry that would handle the large volume of transactions.
Rationale for Terminating the Commission Billing Service and Commission
Billing Limited Membership
NSCC is proposing to terminate the Commission Billing service for a
number of reasons, as described below. Because the Commission Billing
type of limited membership exists only for the purposes of the use of
this service, NSCC would terminate the existing Commission Billing
memberships simultaneously with the termination of the service.
Over the years, the volumes of trades handled by floor brokers
firms have decreased, leading to a significant decrease in commission
bill transactions and the use of this service. Between January 2017 and
June 2018, the Commission Billing service processed an average of
approximately 87 commission payments per month (averaging a total of
approximately $370,000 each month), compared to an average of
approximately 10,000 commission payments per month in the early 2000's.
The number of Commission Billing Members has also declined, with only
seven new firms joining over the last eight years. Commission Billing
Members have alternative methods to process commission payments. For
example, firms may process the charges and payments through their own
accounts payable systems, charging and collecting payments from their
clients directly. Due to the lower volumes of commission payments, this
is a more reasonable alternative to the Commission Billing Service than
it may have been when volumes of payments were higher. Therefore, the
industry's reliance on this service, which was built to provide an
efficient way to process large volumes of payments, has been
diminishing.
Since the introduction of the service, NSCC has provided the
Commission Billing service as a utility service to the industry and its
Members; the service provided its Members and the industry with value,
but it was not designed to generate profit for NSCC. Over time, the
reduced volumes of transactions has caused this service to be provided
at a financial loss to NSCC. Costs of providing the service include
engaging an ACH settling bank and ongoing system operating costs.
Additionally, due to the use of legacy systems that lack automation
and support features, the service continues to rely on manual processes
and requires personnel involvement. While errors in the operation of
the service are infrequent, the reliance on manual processes creates a
risk of such errors. Remediation of such errors, if they occur, could
distract support resources from higher priority tasks. NSCC would be
required to invest in enhancements to the systems that support the
Commission Billing service if it continued to offer the service.
Therefore, due to the reduced reliance on this service by the
industry, the cost of providing this service, and the availability of
other methods for Members and brokers to process these payments, NSCC
is proposing to terminate the Commission Billing service.
In order to terminate the Commission Billing service, NSCC would
amend the Rules to remove Rule 16 (Settlement of Commissions) and to
remove references to the Commission Billing type of limited membership
from Rule 1 (Definitions and Descriptions), Rule 2 (Members and Limited
Members), Rule 2A (Initial Membership Requirements), Rule 2B (Ongoing
Membership Requirements and Monitoring), Rule 18 (Procedures for When
the Corporation Declines or Ceases to Act), Rule 22 (Suspension of
Rules), Rule 24 (Charges for Services Rendered), Rule 26 (Bills
Rendered), Rule 34 (Insurance), Rule 37 (Hearing Procedures), Rule 46
(Restrictions on Access to Services), Rule 58 (Limitations on
Liability), Rule 64 (DTCC Shareholders Agreement), Addendum A (Fee
Structure), Addendum B (Qualifications and Standards of Financial
Responsibility, Operational Capability and Business History), Addendum
D (Statement of Policy Envelope Settlement Service, Mutual Fund
Services, Insurance and Retirement Processing Services, and Other
Services Offered by the Corporation), and Addendum P (Fine Schedule).
NSCC would also make necessary conforming changes to Addendum B
(Qualifications and Standards of Financial Responsibility, Operational
Capability and Business History) and Rule 1 (Definitions and
Descriptions). Finally, NSCC would add a legend to each of the above
listed Rules and Addenda that identifies the implementation date of the
proposed changes.
Implementation Timeframe
Given that all current Commission Billing Members are floor broker
members of NYSE and NYSE American, NSCC will work closely with these
exchanges to provide these firms with notice of the proposed
termination of this service and their related limited memberships with
NSCC. NSCC also would provide these firms with time to transition to
alternative methods for the submission of charges and receipt of
commission payments. Subject to the approval of this proposed rule
change filing, NSCC would implement this proposed rule change and
terminate the Commission Billing service by no later than November 30,
2018.
2. Statutory Basis
NSCC believes that the proposed changes are consistent with the
Section 17A(b)(3)(F) of the Act, which requires, in part, that the
rules of a registered clearing agency be designed to promote the prompt
and accurate clearance and settlement of securities transactions, for
the reasons described below.\6\ The proposed rule change would
terminate a service that takes up various resources (through its
reliance on manual operations and by operating at a financial loss) and
is no longer relied on by Members and the industry. Because NSCC would
no longer need to divert resources to an underutilized service, the
proposed rule change would afford NSCC the ability to employ those
resources in a manner that could better support and promote the prompt
and accurate clearance and settlement of securities transactions. In
that way, NSCC believes the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act.\7\
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ Id.
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Rule 17Ad-22(e)(21)(iv) under the Act requires, in part, that NSCC
be efficient and effective in meeting the requirements of its
participants and the markets it serves, and have the covered clearing
agency's management regularly review the efficiency and effectiveness
of its use of technology and communication procedures.\8\ As described
above, to continue providing the Commission Billing service, NSCC would
need to enhance the systems and technology used to operate the system
in order to implement more automation and support features. However,
given that the service currently operates at a financial loss and does
not provide the industry with the same value that it has in the past,
NSCC has determined that it would be more efficient and effective
[[Page 35043]]
in meeting the requirements of its Members to eliminate the service and
instead use its resources for higher priority services. Therefore, NSCC
believes the proposed rule change is consistent with Rule 17Ad-
22(e)(21)(iv).\9\
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\8\ 17 CFR 240.17Ad-22(e)(21)(iv).
\9\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
The proposed rule change could have an impact on competition
because Commission Billing Members that currently use the service to
process their commission bills, and firms that may apply to use the
service in the future, would no longer be able to do so. However, NSCC
does not believe that the impact of this proposed rule change on
competition would be significant. First, the proposal is unlikely to
have a significant impact because the use of the service has diminished
over time, as described above. NSCC has not onboarded a new Commission
Billing Member in over two years, and the number of active Commission
Billing Members has declined over time. Therefore, elimination of the
service is unlikely to impact many firms that may wish to join as
Commission Billing Members in the future. Second, while current
Commission Billing Members would need to use other methods to process
commission payments, alternatives currently exist, including using
their own accounts payable system. Given that volumes of commission
bills have trended lower over the past few years, these firms should
not incur a significant cost in processing commission bills and
collecting commission payments through their own internal billing
systems. Therefore, NSCC does not believe that the proposed rule change
would have a significant impact on competition.
NSCC also believes that any impact the proposed rule change may
have on competition would be both necessary and appropriate in
furtherance of the purposes of the Act.
The proposed rule change would afford NSCC the option to utilize
its resources for matters that better support and promote the prompt
and accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.\10\ The proposed rule
change would also allow NSCC to be more efficient and effective in
meeting the requirements of its Members by using its resources for
higher priority services, consistent with Rule 17Ad-22(e)(21)(iv) under
the Act.\11\ Therefore, by advancing NSCC's ability to meet the
requirements of both Section 17A(b)(3)(F) of the Act \12\ and Rule
17Ad-22(e)(21)(iv) under the Act,\13\ NSCC believes any impact the
proposed rule change may have on competition would be necessary in
furtherance of the purposes of the Act.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ 17 CFR 240.17Ad-22(e)(21)(iv).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
\13\ 17 CFR 240.17Ad-22(e)(21)(iv).
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Additionally, NSCC believes that the proposed rule change is a
reasonable method of advancing NSCC's ability to meet these
requirements. As noted above, Members' use of this service has reduced
over time, and the cost to NSCC of providing the service has outweighed
the benefit it provides to the industry. NSCC would provide Members and
Commission Billing Members with notice and time to transition to other
viable methods for processing these payments. Therefore, NSCC believes
the proposed rule change is a reasonable method of advancing NSCC's
ability to meet the requirements of both Section 17A(b)(3)(F) of the
Act \14\ and Rule 17Ad-22(e)(21)(iv) under the Act.\15\
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
\15\ 17 CFR 240.17Ad-22(e)(21)(iv).
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Therefore, NSCC does not believe that the proposed rule change
would have a significant impact on competition, and further believes
that any such impact would be both necessary and appropriate in
furtherance of the purposes of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not solicited or received any written comments relating to
this proposal. NSCC will notify the Commission of any written comments
that it receives.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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-NSCC-2018-004 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2018-004. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (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 website 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 the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2018-004 and should be submitted on
or before August 14, 2018.
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15766 Filed 7-23-18; 8:45 am]
BILLING CODE 8011-01-P