Notice2024-05832
Self-Regulatory Organizations; The National Securities Clearing Corporation; Order Granting Approval of Proposed Rule Change, as Modified by Partial Amendment No. 1 and Amendment No. 2, To Modify the Amended and Restated Stock Options and Futures Settlement Agreement and Make Certain Revisions to the NSCC Rules
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
March 20, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 55 (Wednesday, March 20, 2024)</title>
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[Federal Register Volume 89, Number 55 (Wednesday, March 20, 2024)]
[Notices]
[Pages 19896-19901]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-05832]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99733; File Nos. SR-NSCC-2023-007]
Self-Regulatory Organizations; The National Securities Clearing
Corporation; Order Granting Approval of Proposed Rule Change, as
Modified by Partial Amendment No. 1 and Amendment No. 2, To Modify the
Amended and Restated Stock Options and Futures Settlement Agreement and
Make Certain Revisions to the NSCC Rules
March 14, 2024.
I. Introduction
On August 10, 2023, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2023-007 (``Proposed Rule
Change'') pursuant to section 19(b) of the Securities Exchange Act of
1934 (``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to change
terms related to the physical settlement of equities arising out of
certain futures and options contracts.\3\ On August 30, 2023, the
Proposed Rule Change was published for public comment in the Federal
Register.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, at 88 FR 59968.
\4\ Securities Exchange Act Release No. 98213 (Aug. 24, 2023),
88 FR 59968 (Aug. 30, 2023) (File No. SR-NSCC-2023-007) (``Notice of
Filing'').
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On September 25, 2023, pursuant to section 19(b)(2) of the Exchange
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\
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\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 98508 (Sep. 25, 2023),
88 FR 67407 (Sep. 29, 2023) (File No. SR-NSCC-2023-007).
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On November 8, 2023, NSCC filed Partial Amendment No. 1 to the
Proposed Rule Change.\7\ On November 14, 2023, the Commission published
notice of Partial Amendment No. 1 and instituted proceedings, pursuant
to section 19(b)(2)(B) of the Exchange Act,\8\ to determine whether to
approve or disapprove the proposed rule change, as modified by the
Partial Amendment No. 1.\9\ On January 24, 2024, NSCC filed Amendment
No. 2 to the Proposed Rule Change, which was published in the Federal
Register for public comment on January 31, 2024.\10\ The Commission has
received public comment regarding the Proposed Rule Change.\11\ On
February 20, 2024, the Commission designated a longer period for
Commission action on the proceedings to determine whether to approve or
disapprove the Proposed Rule Change.\12\
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\7\ Partial Amendment No. 1 delays implementation of the
proposed change. In Partial Amendment No. 1, NSCC proposes to
implement the proposed rule change within 90 days of receiving all
necessary regulatory approvals and would announce the specific date
of implementation on its public website at least 14 days prior to
implementation. The delay is proposed in light of the technical
system changes that are required to implement the liquidity stress
testing enhancements and to be able to provide sufficient notice to
Clearing Members following receipt of approval.
\8\ 15 U.S.C. 78s(b)(2)(B).
\9\ Securities Exchange Act Release No. 98930 (Nov. 14, 2023),
88 FR 80790 (Nov. 20, 2023) (File No. SR-NSCC-2023-007).
\10\ Securities Exchange Act Release No. 99432 (Jan. 25, 2024),
89 FR 6140 (Jan. 31, 2024) (File No. SR-NSCC-2023-007) (``Notice of
Amendment''). Amendment No. 2 adds a second phase of changes to the
proposed rule change. The changes added in Phase 2 include improved
information sharing between OCC and NSCC and are designed to
facilitate the shortening of the standard settlement cycle for most
broker-dealer transactions from T+2 to T+1. See Securities Exchange
Act Release No. 96930 (Feb. 15, 2023), 88 FR 13872 (Mar. 6, 2023)
(File No. S7-05-22).
\11\ Comments on the Proposed Rule Change are available at
<a href="https://www.sec.gov/comments/sr-nscc-2023-007/srnscc2023007.htm">https://www.sec.gov/comments/sr-nscc-2023-007/srnscc2023007.htm</a>. The
Commission received comments on the proposed rule change that
express concerns unrelated to the substance of the filing. See,
e.g., comment from JT Clark (Oct. 10, 2024) (general concern about
corruption in the markets) and comment from Anthony LaBree (Oct. 12,
2024) (concerns about OCC's business practices).
\12\ Securities Exchange Act Release No. 99567 (Feb. 20, 2024),
89 FR 14122 (Feb. 26, 2024) (File No. SR-NSCC-2023-007).
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This order approves the Proposed Rule Change as modified by Partial
Amendment No. 1 and Amendment No. 2 (hereinafter defined as ``Proposed
Rule Change'').
II. Background
NSCC is a clearing agency that provides clearing, settlement, risk
management, and central counterparty services for trades involving
equity securities. The Options Clearing
[[Page 19897]]
Corporation (``OCC'') is the sole clearing agency for standardized
equity options listed on national securities exchanges registered with
the Commission, including options that contemplate the physical
delivery of equities cleared by NSCC in exchange for cash (``physically
settled'' options).\13\ OCC also clears certain futures contracts that,
at maturity, require the delivery of equity securities cleared by NSCC
in exchange for cash. As a result, the exercise and assignment of
certain options or maturation of certain futures cleared by OCC
effectively results in stock settlement obligations to be cleared by
NSCC (``Exercise and Assignment Activity'' or ``E&A Activity''). NSCC
and OCC maintain a legal agreement, generally referred to by the
parties as the ``Accord,'' that governs the processing of such E&A
Activity for firms that are members of both OCC and NSCC (``Common
Members'').
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\13\ The term ``physically-settled'' as used throughout the OCC
Rulebook, refers to cleared contracts that settle into their
underlying interest (i.e., options or futures contracts that are not
cash-settled). The OCC By-Laws and OCC Rules are available at
<a href="http://www.theocc.com/company-information/documents-and-archives/by-laws-and-rules">www.theocc.com/company-information/documents-and-archives/by-laws-and-rules</a>. When a contract settles into its underlying interest,
shares of stock are sent (i.e., delivered) to contract holders who
have the right to receive the shares from contract holders who are
obligated to deliver the shares at the time of exercise/assignment
in the case of an option and at the time of maturity in the case of
a future.
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Under certain circumstances, the Accord currently allows NSCC not
to guaranty the settlement of securities arising out of E&A Activity
for a Common Member for whom NSCC has ceased to act (e.g., due to a
default by that member). To the extent NSCC chooses not to guaranty
such transactions of a defaulting Clearing Member, OCC would have to
engage in an alternate method of settlement outside of NSCC to manage
the default. This presents two issues. First, based on historical data,
the cash required for such alternative settlement could be as much as
$300 billion.\14\ Second, because NSCC's netting process dramatically
decreases the volume of securities settlement obligations that must be
addressed, settlement of physically-settled options and futures outside
of NSCC introduces significant operational complexities. Specifically,
without NSCC's netting process, OCC would have to coordinate a
significantly increased number of transactions on a broker-to-broker
basis rather than through a single central counterparty, and the total
value of settlement obligations that would need to be processed would
be significantly higher.\15\
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\14\ See Notice of Filing, 88 FR at 59969.
\15\ For example, in 2022 it is estimated that netting through
NSCC's continuous net settlement (``CNS'') accounting system reduced
the value of CNS settlement obligations from $519 trillion to $9
trillion, an approximately 98 percent reduction. See id.
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NSCC proposes to revise the Accord to address these liquidity and
operational issues. In particular, OCC and NSCC have agreed to modify
the Accord to require NSCC to accept E&A Activity from OCC (i.e.,
guaranty the positions of a defaulting Common Member), provided that
OCC makes a payment to NSCC called the ``Guaranty Substitution
Payment,'' or ``GSP.'' The GSP is designed to cover OCC's share of the
incremental risk to NSCC posed by the defaulting Common Member's
positions. The total risk posed to NSCC by a defaulting Common Member
would be the sum of (i) the defaulter's unpaid deposit to the NSCC
Clearing Fund (``Required Fund Deposit''),\16\ and (ii) the defaulter's
unpaid Supplemental Liquidity Deposit (``SLD'').\17\ If OCC pays the
GSP to NSCC, NSCC would be obligated under the amended Accord to accept
that member's E&A activity from OCC and conduct settlement through
NSCC's netting process and systems. NSCC would calculate how much of
the defaulting Common Member's Required Fund Deposit and SLD are
attributable to the E&A Activity that OCC sends to NSCC, and that
amount would be the GSP. Based on historical data, OCC's GSP could be
as much as $6 billion, which is significantly less than the potential
$300 billion that could be required for alternative settlement outside
of NSCC.\18\
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\16\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules. See Notice of Filing, 88 FR at 59971,
n.26.
\17\ Under the NSCC Rules, in certain circumstances, NSCC
collects the Supplemental Liquidity Deposit, which is an additional
cash deposit from each of those Members who would generate the
largest settlement debits in stressed market conditions. See Rule 4A
of the NSCC Rules. See also Notice of Filing, 88 FR at 59971, n.27.
\18\ See Notice of Filing, 88 FR at 59969.
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As noted above, NSCC amended the Proposed Rule Change after filing.
The primary purposes of the Amendment No. 2 were to provide for
improved information sharing between OCC and NSCC, and ensure that the
new process and timing for NSCC to calculate the GSP and OCC to pay the
GSP will be consistent with relevant process and timing requirements
necessitated by the industry transitions to a T+1 settlement cycle for
securities.\19\ NSCC has labeled the proposed changes included in the
initial filing to allow OCC to pay the GSP to NSCC as Phase 1 of the
proposed changes, and the additional changes in the amendment to
enhance information sharing and facilitate the transition to T+1 as
Phase 2.\20\
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\19\ On February 15, 2023, the Commission adopted rules to
shorten the standard settlement cycle for most broker-dealer
transactions from T+2 to T+1. See Securities Exchange Act Release
No. 96930 (Feb. 15, 2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-
05-22).
\20\ NSCC has proposed a two-step implementation based on the
categorization of changes as part of Phase 1 and Phase 2. See Notice
of Amendment, 89 FR at 6151.
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NSCC also proposes to make conforming changes to its Rules &
Procedures (``NSCC Rules'') to facilitate the proposed changes to the
Accord.\21\
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\21\ Capitalized terms not defined herein are defined in the
NSCC Rules. The NSCC Rules are available at <a href="http://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf">www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf</a>.
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A. Information Sharing and the Guaranty Substitution Payment
The proposed revisions to the Accord designed to introduce and
facilitate the new GSP include the following: changes designed to
facilitate improved information sharing between OCC and NSCC; changes
that would define the calculation of the GSP; changes that would define
the process and timing by which guaranty of the E&A Activity would
transfer from OCC to NSCC; \22\ and additional conforming changes to
the Accord to support these and the other changes described in more
detail below.
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\22\ Here, the ``transfer'' of the guaranty refers to the point
at which OCC's settlement guaranty with respect to E&A Activity ends
and NSCC's settlement guaranty begins.
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Improved Information Sharing. Currently, NSCC sends a file daily to
OCC defining which securities are eligible to settle through NSCC. OCC
then delivers to NSCC a file identifying securities to be physically
settled at NSCC as a result of E&A Activity. This process would
continue under the proposal, however, as part of Phase 1 NSCC would
also communicate the GSP daily to OCC.\23\ In Phase 2, NSCC would
continue to communicate the GSP daily to OCC, but the calculation would
differ, as described in more detail below.
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\23\ NSCC would communicate both the total amount of collateral
required to cover the risk presented by each common clearing member
and what percentage of that risk is attributable to OCC (i.e., the
GSP) and therefore OCC would need to pay to require NSCC to guaranty
the positions of a Common Member for whom NSCC has ceased to act.
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Also in Phase 2, OCC and NSCC would share additional information
beyond the daily exchange of position files and communication of the
GSP. Specifically, NSCC would communicate
[[Page 19898]]
to OCC daily the single largest GSP observed in the prior 12 months
(the ``Historical Peak GSP''), which would in turn provide a data point
for discussion between OCC and NSCC to confirm that OCC will likely be
in a position to commit to paying the actual GSP in the event of the
default of a Common Member.\24\ NSCC would also communicate a set of
margin and liquidity-related data to OCC daily (the ``GSP Monitoring
Data''). The GSP Monitoring Data would be for informational purposes
and would facilitate OCC's daily assessment of its ability to commit to
pay the actual GSP in the event of the default of a Common Member.
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\24\ NSCC would provide the Historical Peak GSP to OCC daily,
and OCC would communicate to NSCC whether OCC has Clearing Fund cash
in excess of the Historical Peak GSP. If OCC does not have
sufficient cash in the Clearing Fund, this would allow OCC and NSCC
to escalate discussion of whether OCC will likely be in a position
to commit to paying the actual GSP (e.g., what other resources OCC
has, whether the actual GSP is likely to be as large as the
historical peak). The comparison of OCC's resources to the
Historical Peak GSP would not affect whether OCC is permitted to
send E&A Activity to NSCC.
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The Guaranty Substitution Payment. As described above, NSCC would
communicate to OCC the GSP amount each day. In the event of a Common
Member default, this is the amount OCC would need to pay to require
NSCC to guaranty the positions of the defaulting Common Member. Under
both Phases 1 and 2, the GSP for a given member would be the amount
necessary to cover the risk posed by the member's E&A Activity, and
would be calculated by determining the portion of the defaulting
Clearing Member's Required Fund Deposit and SLD that the member owes to
NSCC that is attributable to the member's E&A Activity at OCC. The
calculation of OCC's portion of the Required Fund Deposit obligation
would differ between Phases 1 and 2, with a precise calculation in
Phase 2 replacing a proxy from Phase 1.
In Phase 1, NSCC would approximate the percentage of the member's
Required Fund Deposit attributable to E&A Activity by referencing the
day-over-day change in gross market value of the Common Member's
positions at NSCC. NSCC acknowledges that this gross market value proxy
methodology overestimates or underestimates the Required Fund Deposit
attributable to a Common Member's E&A Activity, but states that current
technology constraints prohibit NSCC from performing a precise
calculation of the GSP on a daily basis for every Common Member.\25\
The Phase 2 changes to the Accord would introduce a more precise
allocation of the Required Fund Deposit portion of the GSP, which would
help eliminate the potential over- or under-estimation of OCC's portion
of the Required Fund Deposit.\26\ Specifically, in Phase 2, NSCC would
calculate OCC's portion of the Required Fund Deposit as a difference
between the Required Fund Deposit of the Common Member's entire
portfolio and the Required Fund Deposit of the Common Member's
portfolio prior to the submission of E&A Activity. This more precise
calculation would completely replace the Phase 1 gross market value
proxy. Under both Phases 1 and 2, the SLD portion of the GSP would be
the Common Member's unpaid SLD associated with any E&A Activity.
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\25\ See Notice of Amendment, 89 FR at 6144.
\26\ See id. OCC and NSCC agreed that performing the necessary
technology build during Phase 1 would delay the implementation of
the proposal. NSCC will incorporate those technology updates in
connection with Phase 2 of this proposal. Id.
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Guaranty Transfer. As described above, the purpose of the proposed
changes is to increase the circumstances under which NSCC must assume
the obligation to guaranty E&A Activity. Currently, the guaranty for
such transactions transfers from OCC to NSCC after NSCC has received
Required Fund Deposits from the Common Members. The guaranty would not
transfer if a member fails to satisfy its obligations to NSCC. Under
the proposed changes, the guaranty would transfer after NSCC has
received Required Fund Deposits from the Common Members or at such time
that OCC pays the GSP if a Common Member fails to satisfy its
obligations to NSCC.
B. Phase 1 Changes to the NSCC Rules
NSCC is also proposing changes to its Rules in connection with the
proposed changes to the Existing Accord. First, NSCC would amend Rule
18 (Procedures for When the Corporation Ceases to Act), which describes
how NSCC handles a Member's transactions after NSCC ceases to act for
that Member.\27\ Specifically, newly-added section 9(a) would specify
that following a Member default, NSCC may continue to act and provide
the NSCC Guaranty pursuant to a ``Close-Out Agreement'' such as the
Existing Accord (as it is proposed to be amended).\28\ A new section
9(b) would specify that any transactions undertaken pursuant to a
Close-Out Agreement would be treated as having been received, provided
or undertaken for the account of the Member for which NSCC has ceased
to act, but that any deposit, payment, financial assurance or other
accommodation provided to NSCC pursuant to a Close-Out Agreement shall
be returned or released as provided for in the agreement. A new section
9(c) would provide that NSCC shall have a lien upon, and may apply, any
property of the defaulting Member in satisfaction of any obligation,
liability or loss that relates to a transaction undertaken or service
provided pursuant to a Close-Out Agreement. NSCC would also propose
clarifications to Sections 4, 6(b)(iii)(B) and 8 of Rule 18 to use more
precise references to the legal entity described in those sections of
this Rule.
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\27\ See supra note 21.
\28\ The Existing Accord is currently the only agreement that
would be considered a ``Close-Out Agreement'' under this new Section
9(b). See Notice of Amendment, 89 FR at 6147, n.54.
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Second, NSCC would amend Section B of Procedure III and Addendum K
of the NSCC Rules to provide that the NSCC Guaranty would not attach to
Defaulted NSCC Member Transactions except as provided for in the
Existing Accord (as it is proposed to be amended), and that the NSCC
Guaranty attaches, with respect to obligations arising from the
exercise or assignment of OCC options settled at NSCC or stock futures
contracts cleared by OCC, as provided for in the Existing Accord (as it
is proposed to be amended) or other arrangement with OCC. Finally, the
proposed changes to Procedure III would clarify that Guaranty
Substitution occurs when NSCC receives both the Required Fund Deposit
SLD, consistent with the proposed revisions to Section 5 of the Current
Accord. As noted above, the proposed collection of the SLD in
connection with the Guaranty Substitution reflect OCC and NSCC's
agreement that both amounts are components of the Guaranty Substitution
Payment. NSCC also proposes to make a number of non-substantive clean
up changes to Procedure III, such as correcting references to NSCC's
``guaranty.''
NSCC states that these proposed changes would establish and clarify
the rights of both NSCC and a Member for which NSCC has ceased to act
and the operation and applicability of any Close-Out Agreement, and
would make it clear that any payments received pursuant to a Close-Out
Agreement and NSCC's acceptance of a Mutually Suspended Member's
transactions for clearance and settlement pursuant to a Close-Out
Agreement are intended to fall within the Bankruptcy Code and
Securities Investor Protection Act ``safe harbors.'' \29\
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\29\ See id. at 6147-48.
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[[Page 19899]]
C. Transition to T+1
Phase 1 of the proposed changes are primarily designed to provide
OCC the right to require NSCC to accept and guaranty the E&A Activity
of a Common Member even if that member has not met its obligations to
NSCC. The mechanism by which OCC would exercise that right would be the
payment of the GSP to NSCC, and OCC would account for such payment as a
potential liquidity demand that it must manage. Phase 1 does not,
however, materially change the time at which OCC would cease (and NSCC
would start) to guaranty the E&A Activity.\30\
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\30\ The Commission described the current timing and process
under which OCC's guaranty ceases and NSCC's guaranty attaches in a
prior order. See Securities Exchange Act Release No. 81266 (July 31,
2017), 82 FR 36484, 36486-87 (Aug. 4, 2017) (File No. SR-OCC-2017-
013).
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Under the current Accord, NSCC's guaranty attaches (and OCC's
ceases) when NSCC has received all Required Fund Deposits taking into
account the E&A Activity.\31\ Currently, NSCC's guaranty would not
attach if a Common Member defaults on its obligations to NSCC. Under
Phase 1 of the proposed changes, however, OCC would have the
opportunity to pay the GSP to NSCC as an effective substitution for the
defaulted member's obligations with respect to the E&A Activity. Phase
1, therefore, allows for a change in who pays NSCC, but does not alter
the timing of payment.
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\31\ See id. at 36487.
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Phase 2 will alter the timing of payment, primarily to accommodate
the transition from a T+2 settlement cycle to a T+1 settlement
cycle.\32\ Under the current process, which takes place in a T+2
settlement cycle, there is sufficient time after expiration for NSCC
and OCC to determine whether a member has defaulted before NSCC begins
to process settlement of the E&A Activity. However, in a T+1 settlement
cycle, settlement processing could begin before NSCC or OCC become
aware of a member default. Thus, in a T+1 environment, the timing and
process by which OCC's guaranty would cease (and NSCC's would attach)
would need to shift.
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\32\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
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Specifically, under Phase 2, OCC would commit to payment of the GSP
(regardless of whether a member has defaulted) prior to NSCC's
acceptance of E&A Activity. If OCC is unable to commit to pay the GSP,
NSCC would be permitted, but not required, to reject the E&A Activity.
The process would vary slightly between expirations occurring on a
Friday and expirations occurring Monday through Thursday. For a Friday
expiration, NSCC would communicate the GSP to OCC and OCC would
subsequently commit to pay the GSP on Saturday morning. For Monday
through Thursday expirations, OCC's transmission of the E&A Activity
itself to NSCC would constitute a commitment by OCC to pay the GSP
related to that E&A Activity.\33\ For all expirations, OCC would send
the E&A Activity to NSCC by 1 a.m. the morning after expiration (e.g.,
1 a.m. Saturday for a Friday expiration). This would help ensure that,
in a T+1 settlement environment, NSCC has OCC's commitment to pay the
GSP before NSCC must begin processing any E&A Activity from OCC.
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\33\ The requirement to commit prior to calculation of the final
GSP for E&A Activity arising Monday through Thursday highlights the
importance of the improved information sharing described above.
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D. Phase 2 Changes to the NSCC Rules
NSCC is also proposing conforming changes to its Rules to align
with the Phase 2 Accord. Specifically, NSCC would amend Section B of
Procedure III of the NSCC to remove references to Balance Order
Securities and the Balance Order Accounting Operation in Procedure III
to align with the removal of Balance Order transactions from the types
of Eligible Securities under the Phase 2 Accord. NSCC would also update
a reference to the Settlement Date for OCC E&A/Delivery Transactions to
reflect that it would be one business day (rather than two business
days) after exercise/assignment under the forthcoming T+1 settlement
cycle. In addition, NSCC would clarify in Procedure III that E&A/
Delivery Transactions that are indicated in a report or Consolidated
Trade Summary will have no impact on NSCC's guaranty or a Member's
ultimate obligation to deliver or pay for the receipt of such
securities unless and until such transactions have satisfied all
requirements for the NSCC's guaranty under Addendum K and the new
Accord (unless NSCC notifies Members to the contrary). NSCC would also
clarify that E&A/Delivery Transactions indicated in a report or
Consolidated Trade Summary for which the NSCC's guaranty does become
effective will be canceled and thereafter null and void and such
cancelation will be reflected in the next available report or
Consolidated Trade Summary. The proposed changes are intended to
reflect the timing of the receipt and processing of E&A/Delivery
Transactions under the T+1 settlement cycle and the ultimate Guaranty
Substitution and Guaranty Substitution Time under the Phase 2
Accord.\34\
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\34\ See Notice of Amendment, 89 FR at 6151.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act 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 Exchange Act and the rules and regulations
thereunder applicable to such organization.\35\ After carefully
considering the Proposed Rule Change, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to
NSCC. More specifically, the Commission finds that the Proposed Rule
Change is consistent with section 17A(b)(3)(F) of the Exchange Act,\36\
and Rules 17Ad-22(e)(1), (e)(7), and (e)(20) \37\ thereunder, as
described in detail below.
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\35\ 15 U.S.C. 78s(b)(2)(C).
\36\ 15 U.S.C. 78q-1(b)(3)(A).
\37\ 17 CFR 240.17Ad-22(e)(1); 17 CFR 240.17Ad-22(e)(7); and 17
CFR 240.17Ad-22(e)(20).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange 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, to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions,
and, in general, to protect investors and the public interest.\38\
Based on its review of the record, and for the reasons described below,
allowing NSCC to make the changes described above is consistent with
promoting prompt and accurate clearance and settlement of securities
transactions, fostering cooperation and coordination between with
persons engaged in the clearance and settlement of securities
transactions, and, in general, the protection of investors and the
public interest.
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\38\ 15 U.S.C. 78q-1(b)(3)(F).
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By providing OCC with the ability to make a Guarantee Substitution
Payment to NSCC for any unmet obligations of a Mutually Suspended
Member, the proposed changes to the Accord and conforming changes to
the NSCC Rules would allow NSCC to continue to accept E&A Activity
during a Common Member default while ensuring that it has sufficient
liquid resources to address the
[[Page 19900]]
credit and liquidity risks that the defaulting Common Member would pose
to NSCC. Processing E&A Activity through NSCC's netting system would
also significantly reduce the risk posed by such E&A Activity by
reducing the volume and value of settlement obligations.\39\ Further,
the information sharing contemplated under the proposed changes would
allow NSCC to better understand and monitor its exposures and provide
for more dialogue between NSCC and OCC, which could, in turn, allow
them to better manage the processing of E&A Activity. Therefore, the
Proposed Rule Change should promote the prompt and accurate clearance
and settlement of securities transactions, consistent with the
requirements of section 17A(b)(3)(F) of the Exchange Act.\40\
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\39\ As noted above, it is estimated that, in 2022, netting
through NSCC's CNS accounting system reduced the value of CNS
settlement obligations by approximately 98 percent or $510 trillion
from $519 trillion to $9 trillion. See Notice of Filing, 88 FR at
59969.
\40\ 15 U.S.C. 78q-1(b)(3)(F).
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Phase 2 contemplates further enhancement of information sharing
between two clearing agencies as well as updating the Accord to support
the shortening of the standard settlement cycle for most broker-dealer
transactions from T+2 to T+1. Enhanced information sharing would
support closer coordination and cooperation between OCC and NSCC
through frequent dialogue. For example, the communication of the
Historical Peak GSP would allow OCC to assess its liquidity resources
and facilitate discussion of whether OCC will likely be in a position
to commit to paying the actual GSP. The changes to support the
shortening of the standard settlement cycle would allow OCC and NSCC to
coordinate as they seek to comply with the relevant rulemaking adopted
by the Commission under the Exchange Act consistent with the
requirements of section 17A(b)(3)(F) of the Exchange Act.\41\
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\41\ 15 U.S.C. 78q-1(b)(3)(F).
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Finally, the ability for OCC to make a Guarantee Substitution
Payment to NSCC for any unmet obligations of a Mutually Suspended
Member would allow NSCC to continue to accept E&A Activity during a
Common Member default while ensuring that it has sufficient liquid
resources to address the credit and liquidity risks that the defaulting
Common Member would pose to NSCC and also reducing the risk of
significant liquidity or credit problems spreading among market
participants that rely on OCC's central role in the options market.\42\
The Proposed Rule Change would, therefore, generally support the
protection of investors and the public interest, consistent with the
requirements of section 17A(b)(3)(F) of the Exchange Act,\43\ because
it would reduce systemic risk.
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\42\ OCC has been designated as a systemically important
financial market utility, in part, because its failure or disruption
could increase the risk of significant liquidity or credit problems
spreading among financial institutions or markets. See Financial
Stability Oversight Council (``FSOC'') 2012 Annual Report, Appendix
A, <a href="https://home.treasury.gov/system/files/261/here.pdf">https://home.treasury.gov/system/files/261/here.pdf</a> (last visited
Feb. 17, 2022).
\43\ 15 U.S.C. 78q-1(b)(3)(F).
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Accordingly, and for the reasons stated above, the Proposed Rule
Change is consistent with the requirements of section 17A(b)(3)(F) of
the Exchange Act.\44\
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\44\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1) Under the Exchange Act
Rule 17Ad-22(e)(1) under the Exchange Act requires, in part, that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for a
well-founded, clear, transparent, and enforceable legal basis for each
aspect of its activities in all relevant jurisdictions.\45\ In adopting
Rule 17Ad-22(e)(1), the Commission provided guidance that a covered
clearing agency generally should consider in establishing and
maintaining policies and procedures that address legal risk.\46\ The
Commission stated that a covered clearing agency should consider, inter
alia, whether its contracts are consistent with relevant laws and
regulations.\47\
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\45\ 17 CFR 240.17Ad-22(e)(1).
\46\ See Securities Exchange Act Release No. 78961 (Sept. 28,
2016), 81 FR 70786, 70802 (Oct. 13, 2016) (S7-03-14) (``Covered
Clearing Agency Standards'').
\47\ See id.
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On February 15, 2023, the Commission adopted a final rule to
shorten the standard settlement cycle for most broker-dealer
transactions from two business days after the trade date to one
business day after the trade date.\48\ Currently, and under Phase 1,
the terms of the Accord are designed for consistency with a T+2
settlement cycle. As described above, the terms of the Accord under
Phase 2, which NSCC intends to implement on the T+1 compliance date
established by the Commission,\49\ would be designed for consistency
with a T+1 settlement cycle.
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\48\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
\49\ See Notice of Amendment, 89 FR at 6152.
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Accordingly, the proposal to amend the Accord to conform to a T+1
settlement cycle is consistent with Rule 17Ad-22(e)(1) under the
Exchange Act.\50\
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\50\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act
Rule 17Ad-22(e)(7) under the Exchange Act requires that 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.\51\ In adopting Rule 17Ad-
22(e)(7), the Commission provided guidance that a covered clearing
agency generally should consider in establishing and maintaining
policies and procedures that address liquidity risk.\52\ The Commission
stated that a covered clearing agency should consider, inter alia,
whether it maintains sufficient liquid resources in all relevant
currencies to settle securities-related payments and meet other payment
obligations on time with a high degree of confidence under a wide range
of stress scenarios.\53\
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\51\ 17 CFR 240.17Ad-22(e)(7).
\52\ See Covered Clearing Agency Standards, 81 FR at 70823.
\53\ See id.
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The proposed changes to the Accord would provide OCC with the
ability to make a cash payment to NSCC (i.e., the GSP) for any unmet
obligations of a Mutually Suspended Member. As a result, the GSP would
allow NSCC to accept E&A Activity during a Common Member default while
ensuring that it has sufficient liquid resources to address the credit
and liquidity risks that the defaulting Common Member would pose to
NSCC. As a result, the proposed changes would facilitate the NSCC's
management of its liquidity risks posed by E&A Activity because, any
increase to NSCC's liquidity needs that may be created by applying the
NSCC Guaranty to Defaulted Member Transactions would occur with a
simultaneous increase to its liquidity resources in the form of the
Guaranty Substitution Payment.
Accordingly, the proposed changes to the Accord and NSCC's Rules
are consistent with Rule 17Ad-22(e)(7) under the Exchange Act.\54\
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\54\ 17 CFR 240.17Ad-22(e)(7).
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[[Page 19901]]
D. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act
Rule 17Ad-22(e)(20) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to identify, monitor, and
manage risks related to any link the covered clearing agency
establishes with one or more other clearing agencies, financial market
utilities, or trading markets.\55\ For the purposes of Rule 17Ad-
22(e)(20), ``link'' means, among other things, a set of contractual and
operational arrangements between two or more clearing agencies,
financial market utilities, or trading markets that connect them
directly or indirectly for the purpose of participating in
settlement.\56\
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\55\ 17 CFR 240.17Ad-22(e)(20).
\56\ 17 CFR 240.17Ad-22(a)(8).
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In adopting Rule 17Ad-22(e)(20), the Commission provided guidance
that a covered clearing agency generally should consider in
establishing and maintaining policies and procedures that address
links.\57\ Notably, the Commission stated that a covered clearing
agency should consider whether a link has a well-founded legal basis,
in all relevant jurisdictions, that supports its design and provides
adequate protection to the covered clearing agencies involved in the
link.\58\
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\57\ See Covered Clearing Agency Standards, 81 FR at 70841.
\58\ Id.
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As described above, the Accord is a contractual arrangement between
NSCC and OCC that governs the processing of E&A Activity, which
consists of settlement obligations arising out of certain products
cleared by OCC. The Accord, therefore, is a link for the purposes of
Rule 17Ad-22(e)(20). The specific legal basis for the Accord to conform
to a T+1 settlement cycle was discussed above in section III.B.
Likewise, Section II discussed the ways the Accord provides adequate
protection to both OCC and NSCC by introducing the GSP, enhancing
information sharing between OCC and NSCC, and ensuring that OCC and
NSCC have the tools and information they need to monitor the potential
liquidity need posed by the GSP.
For the reasons discussed in those sections, the Accord between OCC
and NSCC has a well-founded legal basis that supports its design and
provides adequate protection to the covered clearing agencies involved
in the Accord. Accordingly, the proposed changes to the Accord and
NSCC's Rules are consistent with Rule 17Ad-22(e)(20) under the Exchange
Act.\59\
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\59\ 17 CFR 240.17Ad-22(e)(20).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change, as modified by Partial Amendment No. 1 and
Amendment No. 2, is consistent with the requirements of the Exchange
Act, and in particular, the requirements of section 17A of the Exchange
Act \60\ and the rules and regulations thereunder.
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\60\ In approving the Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to section 19(b)(2) of the
Exchange Act,\61\ that the Proposed Rule Change, as modified by Partial
Amendment No. 1 and Amendment No. 2, (SR-NSCC-2023-007) be, and hereby
is, approved.
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\61\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
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\62\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05832 Filed 3-19-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on March 20, 2024.
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.