Notice2021-24619
Self-Regulatory Organizations; National Securities Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Establish the Securities Financing Transaction Clearing Service and Make Other Changes
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 12, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 216 (Friday, November 12, 2021)</title>
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[Federal Register Volume 86, Number 216 (Friday, November 12, 2021)]
[Notices]
[Pages 62851-62853]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-24619]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93532; File No. SR-NSCC-2021-010]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Establish the
Securities Financing Transaction Clearing Service and Make Other
Changes
November 5, 2021.
I. Introduction
On July 22, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2021-010 (``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 August 12,
2021.\3\ The Commission has received comment letters on the Proposed
Rule Change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 92570 (August 5, 2021),
86 FR 44482 (August 12, 2021) (SR-NSCC-2021-010) (``Notice''). NSCC
also filed the proposal contained in the Proposed Rule Change as
advance notice SR-NSCC-2021-803 (``Advance Notice'') with the
Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act''). 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i).
Notice of filing of the Advance Notice was published for comment in
the Federal Register on August 12, 2021. Securities Exchange Act
Release No. 92568 (August 5, 2021), 86 FR 44530 (August 12, 2021)
(SR-NSCC-2021-803). The proposal contained in the Proposed Rule
Change and the Advance Notice shall not take effect until all
regulatory actions required with respect to the proposal are
completed.
\4\ Comment letters are available at <a href="https://www.sec.gov/comments/sr-nscc-2021-010/srnscc2021-010.htm">https://www.sec.gov/comments/sr-nscc-2021-010/srnscc2021-010.htm</a>.
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On September 2, 2021, pursuant to Section 19(b)(2) of the Act,\5\
the Commission designated a longer period within which to approve,
disapprove, or institute proceedings to determine whether to approve or
disapprove the Proposed Rule Change.\6\ This order institutes
proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\ to
determine whether to approve or disapprove the Proposed Rule Change.
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\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 92860 (September 2,
2021), 86 FR 50569 (September 9, 2021) (SR-NSCC-2021-010).
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change
As described in the Notice,\8\ NSCC proposes to (i) establish the
securities financing transaction clearing service (``SFT Clearing
Service'') to make central clearing available at NSCC for equity
securities financing transactions, which are, broadly speaking,
transactions where the parties exchange equity securities against cash
and simultaneously agree to exchange the same securities and cash, plus
or minus a rate payment, on a future date (collectively, ``SFTs''),
(ii) establish new membership categories and requirements for
sponsoring members and sponsored members whereby existing Members would
be permitted to sponsor certain institutional firms into membership,
(iii) establish a new membership category and requirements for agent
clearing members whereby existing Members would be permitted to submit,
on behalf of their customers, transactions to NSCC for novation, and
(iv) make other amendments and clarifications to the Rules, as
described in greater detail below.
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\8\ The description of the Proposed Rule Change is based on the
statements prepared by NSCC in the Notice. See Notice, supra note 3.
Capitalized terms used herein and not otherwise defined herein are
defined in NSCC's Rules & Procedures, available at www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf, and the Notice.
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(i) Key Parameters of the Proposed SFT Clearing Service
NSCC proposes central clearing for SFTs with a one business day
term in eligible equity securities that are entered into by Members,
Sponsored Members that are sponsored into NSCC by Sponsoring Members
(as described below), or Agent Clearing Members on behalf of Customers
(as described below). NSCC will maintain eligibility criteria for the
securities that may underlie an SFT that NSCC will accept for novation.
NSCC would, as an initial matter, provide the proposed SFT Clearing
Service for only those SFTs where the underlying securities are CNS-
eligible equity securities that have a per share price of $5 or more,
although NSCC may modify eligible equity at a later date.
The final settlement obligations of each SFT, other than a
Sponsored Member transaction, that is novated to NSCC would settle
receive-versus-payment/delivery-versus-payment at The Depository Trust
Company (``DTC''). SFT deliver orders would be processed in accordance
with DTC's
[[Page 62852]]
rules and procedures, including provisions relating to risk controls.
DTC would accept delivery instructions for an SFT from NSCC, as agent
for DTC participants that are SFT Members.\9\
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\9\ On July 22, 2021, DTC submitted a proposed rule change to
provide DTC participants that are also NSCC Members with settlement
services in connection with NSCC's proposed SFT Clearing Service.
See Securities Exchange Act Release No. 92572 (August 5, 2021), 86
FR 44077 (August 11, 2021) (SR-DTC-2021-014).
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A securities lender would have the right to submit a recall notice
to NSCC in respect of a novated SFT for which Final Settlement
obligations have not yet been satisfied. If a securities borrower does
not return the lent securities by the recall date specified in such
notice, the securities lender would be eligible to buy-in, in
accordance with such timeframes and deadlines as established by NSCC
for such purpose, such securities. Buy-in would allow a securities
lender to purchase securities equivalent to the borrowed securities in
the market and charge a securities borrower for the cost of this
purchase. Similarly, a securities borrower would have the right to
accelerate the scheduled final settlement of a novated SFT and return
the borrowed securities earlier than the scheduled final settlement and
settle the transaction.
SFT activity would be risk managed by NSCC in a manner consistent
with Members' CNS positions but would be margined independently of the
Member's CNS positions. NSCC would collect margin (referred to as the
Required SFT Deposit) for all SFT activities, subject to a $250,000
minimum deposit. NSCC would also require an additional premium for non-
returned SFTs. In addition, NSCC would require that (i) a minimum of
40% of an SFT Member's margin for SFT consist of a combination of cash
and certain treasury securities, and (ii) the lesser of $5,000,000 or
10% of an SFT Member's margin for SFT (but not less than $250,000)
consist of cash. NSCC would also have the discretion to raise the
minimum cash deposit required.
In a case of an SFT Member default, NSCC would be able to delay its
satisfaction of final settlement obligations to non-defaulting SFT
Members beyond the normal settlement cycle for the purchase or sale of
securities to the extent NSCC determines that taking market action to
close-out some or all of the defaulted SFT Member's novated SFT
Positions would create a disorderly market in the relevant SFT
Securities. In such a situation, non-defaulting SFT Members would not
be able to effect a recall or an associated buy-in or accelerate the
delayed final settlement obligations. During any such delay, NSCC would
continue paying to and receiving from non-defaulting SFT Members the
payment for the change in market value of the securities with respect
to their novated SFTs.
(ii) Sponsoring Members and Sponsored Members
NSCC would establish a sponsored membership program to allow
Members to serve as the pre-novation counterparty and credit
intermediary for their institutional firm clients in clearing. Under
the proposal, all Members would be eligible to apply to become
Sponsoring Members in NSCC, subject to specified credit criteria. A
Member whose application to become a Sponsoring Member has been
approved would be permitted to sponsor their institutional firm clients
into membership as Sponsored Members. Such Sponsoring Members would
then be able to facilitate their institutional firm clients' cleared
activity, and such transactions would be eligible for novation to NSCC.
A Sponsoring Member would be responsible for (i) submitting data on
its Sponsored Members' SFTs to NSCC or appointing a third-party
approved SFT submitter to do so, (ii) posting to NSCC margins
associated with the SFT activity of its Sponsored Members, (iii)
providing an unconditional guaranty to NSCC for its Sponsored Members'
final settlement and other obligations to NSCC, and (iv) covering any
default loss allocable to its Sponsored Members.
(iii) Agent Clearing Members and Customers
NSCC would establish an agent clearing membership designed to allow
Members to serve as agent and credit intermediary for their
institutional firm clients in clearing. Under the proposal, a Member
that becomes an Agent Clearing Member would be permitted to submit SFTs
executed by it as agent on behalf of its institutional firm clients as
Customers. All Members would be eligible to apply to become Agent
Clearing Members in NSCC subject to specified credit criteria and an
activity limit. An Agent Clearing Member would be responsible for
posting to NSCC margins associated with the activity of its Customers
and covering any default loss allocable to its Customers; however,
unlike a Sponsoring Member, an Agent Clearing Member would not be
required to provide an unconditional guaranty to NSCC for its
Customers' obligations.
III. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \10\ to determine whether the Proposed Rule
Change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the Proposed Rule Change. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the Proposed Rule Change,
providing the Commission with arguments to support the Commission's
analysis as to whether to approve or disapprove the Proposed Rule
Change.
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\10\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\11\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of, and input from commenters with respect to, the Proposed
Rule Change's consistency with Section 17A of the Act,\12\ and the
rules thereunder, including the following provisions:
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\11\ Id.
\12\ 15 U.S.C. 78q-1.
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<bullet> Section 17A(b)(3)(F) of the Act,\13\ which requires, among
other things, that the rules of a clearing agency must be designed 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 and to protect investors and the public interest; and
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
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<bullet> Rule 17Ad-22(e)(7)(i) under the Act,\14\ which requires a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by, at a minimum, maintaining
sufficient liquid resources at the minimum in all relevant currencies
to effect same-day and, where appropriate, intraday and multiday
settlement of payment obligations with a high degree of confidence
under a wide range of foreseeable stress scenarios that
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includes, but is not limited to, the default of the participant family
that would generate the largest aggregate payment obligation for the
covered clearing agency in extreme but plausible market conditions.
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\14\ 17 CFR 240.17Ad-22(e)(7)(i).
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<bullet> Rule 17Ad-22(e)(8) under the Act,\15\ which requires a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to define the point
at which settlement is final to be no later than the end of the day on
which the payment or obligation is due and, where necessary or
appropriate, intraday or in real time.
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\15\ 17 CFR 240.17Ad-22(e)(8).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Proposed Rule Change. In particular, the Commission invites
the written views of interested persons concerning whether the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\16\
Rule 17Ad-22(e)(7)(i) and (e)(8) under the Act,\17\ or any other
provision of the Act, or the rules and regulations thereunder. Although
there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4(g) under the Act,\18\ any request for an opportunity to make an
oral presentation.\19\
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
\17\ 17 CFR 240.17Ad-22(e)(7)(i) and (e)(8).
\18\ 17 CFR 240.19b-4(g).
\19\ Section 19(b)(2) of the Act grants to the Commission
flexibility to determine what type of proceeding--either oral or
notice and opportunity for written comments--is appropriate for
consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the Proposed Rule Change should be approved
or disapproved by December 3, 2021. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
December 17, 2021.
The Commission asks that commenters address the sufficiency of
NSCC's statements in support of the Proposed Rule Change, which are set
forth in the Notice,\20\ in addition to any other comments they may
wish to submit about the Proposed Rule Change.
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\20\ See Notice, supra note 3.
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Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d6a4a3bab3fbb5b9bbbbb3b8a2a596a5b3b5f8b1b9a0"><span class="__cf_email__" data-cfemail="f587809990d8969a9898909b8186b5869096db929a83">[email protected]</span></a>. Please include
File Number SR-NSCC-2021-010 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSCC-2021-010. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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
(<a href="http://dtcc.com/legal/sec-rule-filings.aspx">http://dtcc.com/legal/sec-rule-filings.aspx</a>). 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-2021-010 and should be submitted on
or before December 3, 2021. Rebuttal comments should be submitted by
December 17, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(31).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-24619 Filed 11-10-21; 8:45 am]
BILLING CODE 8011-01-P
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