[Federal Register Volume 78, Number 97 (Monday, May 20, 2013)]
[Pages 29408-29410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11918]



[Release No. 34-69571; File No. SR-NSCC-2013-05]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change, as Modified by 
Amendment No. 1, To Require that All Locked-in Trade Data Submitted to 
It for Trade Recording be Submitted in Real-Time

May 14, 2013.
    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 April 30, 2013, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared primarily by NSCC. On May 14, 2013, NSCC filed 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified, from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, NSCC modified Exhibit 5 to the original 
proposed rule change filing to correct a typographical error in the 
text of its Rules & Procedures (``Rules'') related to the proposed 
rule change.

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    NSCC is proposing to modify its Rules to require that all locked-in 
trade data submitted to NSCC for trade recording be submitted in real-
time, as defined below, and to prohibit pre-netting and other practices 
that prevent real-time trade submission.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 

    \4\ The Commission has modified the text of the summaries 
prepared by NSCC.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is for NSCC to modify its 
Rules to require that all locked-in trade data submitted to NSCC for 
trade recording be submitted in real-time,\5\ and to prohibit pre-
netting and other practices that prevent real-time trade submission.

    \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.

    According to NSCC, the majority of all transactions processed at 
NSCC are submitted on a locked-in basis by self-regulatory 
organizations (``SROs'') (including national and regional exchanges and 
marketplaces) and Qualified Special Representatives (``QSRs'').\6\ 
Currently, NSCC data reveals

[[Page 29409]]

that all exchanges \7\ 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 proposed rule change 
would require that all locked-in trades submitted for trade recording 
by SROs and QSRs be submitted to NSCC in real-time.\8\

    \6\ QSRs are NSCC 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.
    \7\ One executing market with very low trade volume does not yet 
submit trades in real-time.
    \8\ NSCC is not at this time modifying Procedure III (Trade 
Recording Service (Interface Clearing Procedures)) of its Rules, so 
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.

    NSCC is also proposing to prohibit practices that preclude real-
time submission, such as pre-netting. Typically, pre-netting is done on 
a bilateral basis between a QSR and its customer, both NSCC Members. 
Any pre-netting practices--whether in the form of ``summarization'' 
(i.e., technique in which the clearing broker nets all trades in a 
single CUSIP by the same correspondent broker into fewer submitted 
trades), ``compression'' (i.e., 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), netting, or any other 
practice that combines two or more trades prior to their submission to 
NSCC (collectively, ``pre-netting'')--prevent the submission to NSCC of 
transactions on a trade-by-trade basis, and cause submitting firms to 
delay submission of their trades. According to NSCC, these practices 
disrupt NSCC's ability to accurately monitor market and credit risks as 
they evolve during the trading day. Therefore, NSCC's proposal will 
prohibit pre-netting activity on the part of entities submitting 
original trade data on a locked-in basis.\9\ The rules of NSCC's 
affiliate Fixed Income Clearing Corporation (``FICC'') currently 
prohibit such activity, and this proposed rule change would align 
NSCC's trade submission rules with those of FICC.\10\

    \9\ 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 the Corporation and shall not be considered to 
violate the pre-netting prohibition.
    \10\ 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).

    NSCC does not expect the proposed 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. NSCC's 
trade capture application, Universal Trade Capture, provides contract 
information to Members in real-time. Receipt of trade data in real-time 
will enable NSCC to record, and report to Members, trade data as it is 
received by the marketplaces, thereby promoting intra-day 
reconciliation of transactions at the Member level.
    In the wake of recent industry disruptions, industry participants 
have been focused on developing controls to address the risks that 
arise from technology issues. NSCC believes that technology issues that 
could potentially cause significant disruptions and losses have become 
more likely in the securities markets that have leveraged technology 
advances to move to higher frequency trading environment. A comment 
letter submitted to the Commission in advance of the 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 proposed 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.\11\

    \11\ Comment Letter signed by NYSE Euronext dated Sept. 28, 2012 

    As a central counterparty, NSCC contributes to market stability by 
interposing itself between counterparties to financial transactions and 
thereby reducing the risk faced by market participants. NSCC believes 
the proposed rule change will align NSCC's Rules with the trend in risk 
mitigation to move towards real-time trade submission and processing. 
NSCC believes the proposal will also support NSCC's critical role in 
maintaining financial stability by reducing the operational risk that 
results from locked-in trade data not being submitted to NSCC in real-
time, particularly from firms that delay trade submission so as to pre-
net their data. For example, 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 risk manage any issues relating to excessive exposure earlier in 
the day. NSCC will also be able to provide safe storage for real-time 
trade data, mitigating the risk that an event that occurs after trade 
execution and disrupts trade input will significantly delay completion 
of those trades or may even cause trade data to be lost.
    While the proposed rule change will require some QSRs to enhance 
their trade submission systems, and could cause increased fees for 
those NSCC Members that pre-net their trade data so as to reduce 
clearance fees, NSCC believes the significant risk mitigation benefits 
of this proposal outweigh any temporary burdens or increased costs that 
may result. As a user-owned industry utility and a registered clearing 
agency, NSCC believes it must appropriately allocate the costs of its 
services in order to maintain a fee schedule that is fair and equitable 
among its participants. According to NSCC, enabling Members to persist 
in pre-netting practices permits those participants to evade paying 
their fair share of NSCC's costs, rendering NSCC's fee schedule, as 
currently applied, inequitable to the firms for whom trades are 
submitted in real-time without any pre-netting. Further, over the past 
few years, NSCC has adjusted its fee schedule to give more weight to 
``value transacted'' and less weight to ``units processed,'' which NSCC 
believes will reduce the impact of this rule change on Members' fees.
Implementation Timeframe
    Pending Commission approval of this proposed rule change, Members 
will be advised of the implementation date through issuance of an NSCC 
Important Notice. The proposed rule change will not be implemented 
earlier than seven (7) months from the date of Commission approval.
Proposed Rule Changes
    NSCC proposes to amend Rule 7 (Comparison and Trade Recording 
Operation), Procedures II (Trade Comparison and Recording Service), IV 
(Special Representative Service), and XIII (Definitions) of its Rules 
in order to

[[Page 29410]]

require that all locked-in trades submitted for trade recording by SROs 
and QSRs be submitted on a real-time basis, and to make clear that 
locked-in trade data from SROs and QSRs must be submitted on a trade-
by-trade basis, in the original form in which they are executed, and 
that pre-netting and similar practices are prohibited.
    In light of these proposed changes, Addendum N (Interpretation of 
the Board of Directors: Locked-In Data From Qualified Special 
Representatives) of NSCC's Rules will be deleted, as it will be no 
longer relevant.
2. Statutory Basis
    NSCC believes that the proposed rule change is consistent with the 
requirements of the Act, specifically Section 17A(b)(3)(F),\12\ and the 
rules and regulations thereunder because it will reduce operational, 
market, and credit risk to both NSCC and its Members and promote the 
prompt and accurate clearance and settlement of securities 

    \12\ 15 U.S.C. 78q-1(b)(3)(F).

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC believes the proposed rule change will not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act. The submission requirements proposed in this 
filing will be applied to all locked-in trades submitted to NSCC, 
regardless of the type of submitting entity. According to NSCC the 
majority of NSCC's trade volume is currently submitted to NSCC in real-
time and the proposed rule change reflects an industry trend for risk 
mitigation to move towards real-time trade submission and processing. 
The proposed rule change facilitates the orderly clearance and 
settlement of securities transactions by addressing the operational 
risks that are caused by the practices it seeks to prohibit, as 
outlined in Item II(A) above. As such, according to NSCC, the business 
continuity and risk-mitigation benefits of the proposed rule change 
render not unreasonable or inappropriate any burden on competition that 
such submission requirements could be regarded as imposing.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others

    While written comments relating to the proposed rule change have 
not yet been solicited with respect to this filing, the proposed rule 
changes described herein were subject of a prior rule filing that was 
filed with the Commission in 2006 as File No. SR-NSCC-2006-04 (``2006 
Filing'').\13\ NSCC received a number of public comments to the 2006 
Filing. NSCC submitted a public response to each of the comments in 
2006.\14\ The 2006 Filing was officially withdrawn on December 29, 

    \13\ Release No. 34-53742 (Apr. 28, 2006), 71 FR 26804 (May 8, 
    \14\ Response Letter from NSCC dated Aug. 18, 2006 (http://www.sec.gov/comments/sr-nscc-2006-04/nscc200604-9.pdf).

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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\15\ The clearing 
agency shall post notice on its Web site of proposed changes that are 

    \15\ NSCC also filed the proposals contained in this proposed 
rule change as an advance notice (File No. SR-NSCC-2013-805) 
pursuant to Section 806(e)(1) of the Clearing Supervision Act and 
Rule 19b-4(n)(1)(i) thereunder. 12 U.S.C. 5465(e)(1); 17 CFR 
240.19b-4(n)(i). Proposed changes filed under the Clearing 
Supervision Act may be implemented either: At the time the 
Commission notifies the clearing agency that it does not object to 
the proposed change and authorizes its implementation, or, if the 
Commission does not object to the proposed change, within 60 days of 
the later of (i) the date that the advance notice was filed with the 
Commission or (ii) the date that any additional information 
requested by the Commission is received. 12 U.S.C. 5465(e)(1)(G). 
The Commission will consider all public comments received on these 
proposed changes regardless of whether the comments are submitted to 
File No. SR-NSCC-2013-05 or File No. SR-NSCC-2013-805.

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 No. SR-NSCC-2013-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-NSCC-2013-05. 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 Web site (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 Web site 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 such filings also will be available 
for inspection and copying at the principal office of NSCC and on 
NSCC's Web site at http://dtcc.com/legal/rule_filings/nscc/2013.php. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
    All submissions should refer to File No. SR-NSCC-2013-05 and should 
be submitted on or before June 10, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11918 Filed 5-17-13; 8:45 am]