Notice2022-00774
Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Provide for a Passive Acknowledgment Process, Codify Certain Settlement Processes, and Make Technical and Conforming Changes to the NSCC Rules & Procedures
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
January 18, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 11 (Tuesday, January 18, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 11 (Tuesday, January 18, 2022)]
[Notices]
[Pages 2650-2653]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-00774]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93953; File No. SR-NSCC-2021-013]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Provide for a
Passive Acknowledgment Process, Codify Certain Settlement Processes,
and Make Technical and Conforming Changes to the NSCC Rules &
Procedures
January 11, 2022.
I. Introduction
On November 18, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\
proposed rule change SR-NSCC-2021-013. The proposed rule change was
published for comment in the Federal Register on December 8, 2021.\3\
The Commission did not receive any comment letters on the proposed rule
change. For the reasons discussed below, the Commission is approving
the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 93709 (December 2,
2021), 86 FR 69687 (December 8, 2021) (SR-NSCC-2021-013)
(``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
NSCC proposes to modify its Rules and Procedures (``Rules'') \4\ in
order to (i) provide for a passive acknowledgment process whereby any
settling bank that does not timely acknowledge its intention to pay to
or collect its settlement balance from NSCC), or refuse to settle for
one or more members for which it is the designated settling bank and
has not otherwise been in contact with NSCC, would be deemed to have
acknowledged its settlement balances, (ii) amend the definition of AIP
Settling Bank and remove AIP Settling Bank Only Member as a membership
category, (iii) codify certain settlement processes, and (iv) make
certain technical and conforming changes.
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the
Rules, available at <a href="http://www.dtcc.com/legal/rules-and-procedures">http://www.dtcc.com/legal/rules-and-procedures</a>.
---------------------------------------------------------------------------
A. Current Settlement Process
NSCC membership consists of Members that have access to NSCC's
guaranteed central counterparty services and Limited Members that have
access to NSCC's non-guaranteed services, such as Mutual Fund Services
and Alternative Investment Product Services (``AIP'').\5\ Limited
Members that only have access to AIP are referred to as AIP Members.\6\
AIP Non-Member Funds are entities that are not AIP Members but that
NSCC has approved to settle AIP Payments.\7\
---------------------------------------------------------------------------
\5\ See Section 2 of Rule 2, supra note 4.
\6\ Id.
\7\ See Rule 53, supra note 4. See also definition of ``AIP Non-
Member Fund'' in Rule 1, id.
---------------------------------------------------------------------------
NSCC provides two separate standardized, automated money settlement
processes: (i) End of day settlement for Members and Limited Members
other than AIP Members (``EOD Settlement''), and (ii) daily settlement
for AIP Members and AIP Non-Member Funds (``AIP
[[Page 2651]]
Settlement'').\8\ Each member \9\ designates a settling bank \10\ to
settle its payment obligations with NSCC.\11\ Money settlement is
effected via the Federal Reserve Banks' National Settlement Service
(``NSS'').\12\
---------------------------------------------------------------------------
\8\ See Section 1 of Rule 12 and Section 7 of Rule 53, supra
note 4. All AIP money settlement is effected on a gross basis, where
on the applicable settlement date, AIP debits are collected first,
and then all contra-side credits, where the corresponding debits
have been collected, are paid. See Section 9 of Rule 55, supra note
4.
\9\ The use of ``members'' here refers to any participant that
is required to appoint a Settling Bank or AIP Settling Bank, which
includes Members, Limited Members including AIP Members, and AIP
Non-Member Funds. See Section 1 of Rule 12 and Section 7(h) of Rule
53, supra note 4.
\10\ The use of ``settling banks'' here refers collectively to
Settling Banks and AIP Settling Banks. Settling Banks settle on
behalf of Members and Limited Members with respect to EOD Settlement
and AIP Settling Banks settle on behalf of AIP Members and AIP Non-
Member Funds with respect to AIP Settlement. See Section 1 of Rule
12 and Section 7(g) of Rule 53, supra note 4.
\11\ See Section 1 of Rule 12 and Section 7(h) of Rule 53, supra
note 4.
\12\ See Section D.2 of Procedure VIII of NSCC's Rules, supra
note 4. For a general description of the NSS, see National
Settlement Service, available at <a href="https://www.frbservices.org/financial-services/national-settlement-service/index.html">https://www.frbservices.org/financial-services/national-settlement-service/index.html</a>.
---------------------------------------------------------------------------
The Depository Trust Company (``DTC'') acts as NSCC's Settlement
Agent \13\ for both EOD Settlement and AIP Settlement. On a daily
basis, NSCC calculates settlement payment amounts for EOD Settlement
\14\ and for AIP Settlement and reports to its members and their
respective settling banks, a settlement balance.\15\
---------------------------------------------------------------------------
\13\ ``Settlement Agent'' means the bank or trust company that
NSCC may, from time to time, designate to act as its agent for
purposes of receiving money settlement debit amounts from Settling
Banks and participants and paying money settlement credit amounts to
Settling Banks and participants. See Rule 1, supra note 4.
\14\ For EOD Settlement, NSCC's settlement process is
centralized with DTC's end-of-day money settlement (``DTC
Settlement'') through a netting procedure called a cross-
endorsement, in which each participant's net debit at one
organization is netted against its net credit at the other
organization. See DTC's Settlement Service Guide, available at
https://www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Settlement.pdf.
\15\ For EOD Settlement, NSCC provides Settling Banks a net-net
debit or net-net credit number, where ``net-net'' refers to the end-
of-day net-net settlement balance for each Settling Bank that
settles on behalf of more than one Member is the net of the net
debit and net credit balances of all Members for which that Settling
Bank settles, after cross-endorsement with DTC, including the
Settling Bank's own settlement obligations as a Member if it settles
for itself. See Section 2 of Rule 55, supra note 4; DTC's Settlement
Service Guide, id. For AIP Settlement, NSCC provides each AIP
Settling Bank an aggregate gross debit number and an aggregate gross
credit number with respect to each AIP Member or AIP Non-Member Fund
on whose behalf it settles. See Section 9 of Rule 55, supra note 4.
---------------------------------------------------------------------------
Once the settling banks receive the settlement balances, the
settling banks must submit \16\ either (1) acknowledgment that they
will settle their balances with NSCC, or (2) refusal to settle such
amount on behalf of one or more of their respective members.\17\ The
acknowledgment or refusal submission occurs through a designated
terminal system.\18\ For both EOD Settlement and AIP Settlement, if all
of the NSCC Settling Banks submit acknowledgments of their intent to
settle, then the Settlement Agent will submit the requisite file to the
relevant Federal Reserve Bank (``FRB'') for processing through the
NSS.\19\
---------------------------------------------------------------------------
\16\ NSCC represents that, pursuant to its settlement
procedures, AIP Settling Banks must affirmatively acknowledge or
refuse to settle in the same manner as Settling Banks. See Notice,
supra note 3, at 69688.
\17\ A Settling Bank that is a Member and settles solely for its
own accounts may opt out of the requirement to acknowledge its
settlement balances, which NSCC states is an operational convenience
because the Settling Bank may not refuse to settle for itself. See
Section D.1 of Procedure VIII, supra note 4; Notice, supra note 3,
at 69690 (representing that because Members are required to also be
DTC participants, the Settling Bank Member would be subject to DTC's
rules, which prohibit a Settling Bank from refusing to settle for
itself). The passive acknowledgment process would not apply to such
NSCC Settling Banks that have chosen to opt out of the requirement
to acknowledge its settlement balances. See Notice, supra note 3, at
69690.
\18\ See Section D of Procedure VIII of NSCC's Rules, supra note
4.
\19\ See Section D.2 of Procedure VIII of NSCC's Rules, supra
note 4.
---------------------------------------------------------------------------
If settling bank notifies the Settlement Agent that it refuses to
pay the settlement balance for a member, then NSCC will exclude that
member's settlement balance and the Settlement Agent will provide the
settling bank with a new settlement balance that no longer includes the
excluded amount. The settling bank must then immediately send a message
to the Settlement Agent acknowledging the new amount.\20\ The
Settlement Agent will then submit the requisite file to the FRB for
processing through the NSS.
---------------------------------------------------------------------------
\20\ See Section D.1 of Procedure VIII of NSCC's Rules, supra
note 4.
---------------------------------------------------------------------------
For EOD Settlement, the current deadline for Settling Banks to
acknowledge or refuse net-net settlement balances is the later of 4:15
p.m. or 30 minutes after net-net settlement balances are made available
to the Settling Bank.\21\ For AIP Settlement, the current deadline is
9:30 a.m. for debit acknowledgment or refusal and is 12:30 p.m. for
credit acknowledgment or refusal.\22\ If a settling bank does not
acknowledge or refuse by the applicable deadline, the Settlement Agent
will use the most recent contact information available to contact the
settling bank. If the Settlement Agent is unable to make contact or
does not receive a response from the settling bank as to the
acknowledgment or refusal, NSCC states that it must then determine
whether to request an NSS extension while also determining whether to
remove the settling bank's settlement balance from the NSS file.\23\
---------------------------------------------------------------------------
\21\ The net-net settlement balances are made available at
approximately 3:45 p.m., and the NSS execution time for EOD
Settlement is 4:30 p.m. See DTC's Settlement Service Guide, supra
note 14.
\22\ NSCC has posted AIP Settlement times on its website, which
provide that AIP Settling Banks first pay debits to NSCC at
approximately 11 a.m., and then NSCC pays credits to AIP Settling
Banks at approximately 2 p.m. See NSCC's Transaction Flows (as of
2021-01), available at <a href="https://www.dtcc.com/wealth-management-services/alternative-investment-products/aip">https://www.dtcc.com/wealth-management-services/alternative-investment-products/aip</a>.
\23\ See Notice, supra note 3, at 69689.
---------------------------------------------------------------------------
Under the current process, a settling bank's failure to timely
respond to the Settlement Agent after the Settlement Agent posts final
settlement numbers creates uncertainty with respect to timely
completion of settlement at NSCC. NSCC states that it designed the
proposed rule change to address this issue, as discussed below.\24\
---------------------------------------------------------------------------
\24\ See id.
---------------------------------------------------------------------------
B. Proposed Rule Change
NSCC proposes to establish an ``Acknowledgment Cutoff Time'' for
EOD Settlement and an ``AIP Acknowledgment Cutoff Time'' for AIP
Settlement after which NSCC would apply the passive acknowledgment
process if it is unable to reach a settling bank. NSCC proposes that,
since EOD Settlement is centralized with DTC Settlement,\25\ the
Acknowledgment Cutoff Time will be the Acknowledgment Cutoff Time
established by DTC in its Settlement Service Guide.\26\ The ``AIP
Acknowledgement Cutoff Time'' would be the later of (i) 30 minutes
after the AIP Settling Bank has been notified of its AIP Debit Balance
or AIP Credit Balance, and (ii) 30 minutes prior to the settlement
deadline established by NSCC.\27\
---------------------------------------------------------------------------
\25\ See supra note 13.
\26\ See DTC's Settlement Service Guide, supra note 14. See also
supra text accompanying note 21.
\27\ See supra note 22 and accompanying text. NSCC also proposes
to add a statement to its Rules that it would post the settlement
deadlines for AIP Settlement on the NSCC website as it currently
does.
---------------------------------------------------------------------------
1. Passive Acknowledgement Process
If a settling bank (i) does not submit either (1) an
acknowledgement that it would settle its settlement balance with NSCC,
or (2) a refusal to pay the settlement balance, by the Acknowledgement
Cutoff Time, and (ii) has not been in contact with the
[[Page 2652]]
Settlement Agent,\28\ then the Settlement Agent would attempt to
contact the settling bank. This passive acknowledgement process would
also apply in situations where the settling bank receives a new
settlement balance after such settling bank's refusal to pay a
settlement balance for one or more members. Additionally, to facilitate
the Settlement Agent's ability to contact settling banks, NSCC proposes
to revise the Rules to state that each settling bank must ensure that
it maintains accurate contact details with the Settlement Agent so that
the Settlement Agent may contact the settling bank regarding this
settlement process and any settlement issues.
---------------------------------------------------------------------------
\28\ Passive acknowledgment will not apply if the Settling Bank
has notified the Settlement Agent that it cannot yet acknowledge or
refuse its settlement balance.
---------------------------------------------------------------------------
If the settling bank cannot be reached, then the settling bank
would be deemed to have acknowledged that it will settle such
settlement amounts with NSCC. The settling bank's settlement balance
will then, in the ordinary course of settlement processing, be debited
from or credited to its FRB account through the NSS process along with
the other settling banks.
2. Definition of ``AIP Settling Bank''
NSCC proposes to amend the definition of AIP Settling Bank to
mirror the definition of Settling Bank and remove AIP Settling Bank
Only Member as a membership category. NSCC represents that, since the
inception of AIP, there have been no AIP Members that have acted as AIP
Settling Banks and there have been no entities that have become AIP
Settling Bank Only Members.\29\ In addition, NSCC proposes to maintain
a list of Members and Settling Bank Only Members that have agreed to
act as AIP Settling Banks.
---------------------------------------------------------------------------
\29\ See Notice, supra note 3, at 69691.
---------------------------------------------------------------------------
3. Certain Settlement Processes
NSCC proposes to retain its discretion to remove the settling
bank's settlement balance from the NSS file if: (1) Passive
acknowledgement does not apply because the settling bank has notified
the Settlement Agent that it cannot yet acknowledge or refuse its
settlement balance, and (2) the payment deadline (i.e., the time by
which it must execute settlement via the NSS) \30\ established by NSCC
is approaching. According to NSCC, its discretion in this circumstance
would facilitate timely processing of the NSS file for the other
settling banks.\31\
---------------------------------------------------------------------------
\30\ See supra notes 21-22.
\31\ See Notice, supra note 3, at 69693.
---------------------------------------------------------------------------
In addition, NSCC proposes to codify in its Rules certain AIP
Settlement procedures, which mirror EOD Settlement procedures.\32\ NSCC
will maintain that (i) DTC will act as Settlement Agent for NSCC and
the AIP Settling Banks, and (ii) the AIP acknowledgment \33\ or refusal
submission will occur through a designated terminal system.\34\ NSCC
will also maintain that AIP Settling Bank that cannot send an
acknowledgment or refusal message may contact the Settlement Agent and
instruct the Settlement Agent to act on its behalf.
---------------------------------------------------------------------------
\32\ See supra note 16.
\33\ This requirement will also apply to an AIP Settling Bank's
acknowledgment of new settlement balances following an initial
refusal.
\34\ See supra text accompanying note 18.
---------------------------------------------------------------------------
4. Technical and Conforming Changes
NSCC proposes to make certain technical and conforming changes to
the Rules to enhance clarity. First, NSCC proposes to revise the Rules
to add new defined terms, including (i) ``Acknowledgment Cutoff Time,''
(ii) ``AIP Acknowledgment Cutoff Time,'' (iii) ``FRB,'' (iv) ``FRBNY,''
(v) ``Settlement Balances,'' and (vi) ``Settlement Members.'' \35\
Second, NSCC proposes to revise certain terms to reflect the
appropriate existing defined term, including ``AIP Debit Balance,''
``AIP Credit Balance,'' and ``AIP Refusal.'' \36\ Third, NSCC proposes
to replace certain references to the ``Corporation'' with ``Settlement
Agent'' for accuracy and consistency and to clarify the role of the
Settlement Agent under the relevant Rules.\37\ Fourth, NSCC proposes to
add ``or the Settlement Agent'' in certain provisions to clarify to
role of both NSCC and the Settlement Agent in establishing settlement
procedures.\38\ In addition, NSCC proposes to remove outdated
references to NSCC, the telephone, and a phone number to reflect the
current process in which the settling bank may contact the Settlement
Agent and to move certain current subsections and to revise the
subsection numbers in the relevant Rules to enhance clarity and
accuracy.\39\
---------------------------------------------------------------------------
\35\ See Notice, supra note 3, at 69691-93.
\36\ See id. at 69692-93.
\37\ See id.
\38\ See id. See also, Notice cited supra note 17 Notice, supra
note 3, at 69690 (representing that because Members are required to
also be DTC participants, the Settling Bank Member would be subject
to DTC's rules, including its settlement procedures).
\39\ See id. at 69692-93.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \40\ 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 the rules and regulations thereunder
applicable to such organization. After careful consideration, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to NSCC. In particular, the Commission finds that the
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act
\41\ for the reasons described below.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78s(b)(2)(C).
\41\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\42\ As stated in Section II.A (Background)
above, the failure of a settling bank to timely acknowledge that it
will settle its settlement balance with NSCC or refuse to pay its
settlement balance creates uncertainty with respect to the timely
completion of EOD Settlement and AIP Settlement at NSCC. Additionally,
as discussed in Section II.B.3 (Certain Settlement Processes) above,
circumstances in which a settling bank has notified the Settlement
Agent that it cannot yet acknowledge or refuse its settlement balance
could create uncertainty with respect to the timely completion of EOD
Settlement and AIP Settlement at NSCC via NSS because NSCC would not be
able to submit the NSS file that includes the balance of the settling
bank that has neither passively nor affirmatively acknowledged its
settlement balance.
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
The introduction of a passive acknowledgement process, in which a
settling bank has not responded by the Acknowledgment Cutoff Time or
the AIP Acknowledgment Cutoff Time and cannot be reached by the
Settlement Agent would be deemed to have passively acknowledged its
settlement balance, could enhance settlement certainty because it would
allow NSCC to submit the NSS file for settlement of all settling banks'
obligations despite an unresponsive settling bank. Additionally, the
change to allow NSCC to exclude a settling bank's balance from the NSS
file, where the settling bank has notified the Settlement Agent that it
cannot yet acknowledge or refuse its settlement balance, would allow
NSCC
[[Page 2653]]
to submit the NSS file without the settling bank's balance and thus
complete EOD Settlement or AIP Settlement, as applicable, for all other
settling banks. Therefore, the Commission believes the changes are
designed to promote the prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\43\
---------------------------------------------------------------------------
\43\ Id.
---------------------------------------------------------------------------
Further, as discussed throughout Section II.B (Proposed Rule
Change) above, the proposal to amend the definition of AIP Settling
Bank and remove AIP Settling Bank Only Members as a membership
category, codify certain existing AIP settlement processes, and make
certain technical and conforming changes should ensure that the Rules
are clear and accurate to NSCC's members. Having clear and accurate
Rules should facilitate NSCC members' understanding of those rules and
provide members with increased predictability and certainty regarding
their obligations. Therefore, the Commission believes the proposed
changes would also promote the prompt and accurate clearance and
settlement of securities, consistent with Section 17A(b)(3)(F) of the
Act.\44\
---------------------------------------------------------------------------
\44\ Id.
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act
and, in particular, with the requirements of Section 17A of the Act
\45\ and the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\46\ that proposed rule change SR-NSCC-2021-013, be, and hereby is,
approved.\47\
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78s(b)(2).
\47\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
---------------------------------------------------------------------------
\48\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00774 Filed 1-14-22; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on January 18, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.