Notice2024-05951
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Accommodate a Shorter Standard Settlement Cycle 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
March 21, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 56 (Thursday, March 21, 2024)</title>
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[Federal Register Volume 89, Number 56 (Thursday, March 21, 2024)]
[Notices]
[Pages 20267-20274]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-05951]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99750; File No. SR-NSCC-2024-002]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Accommodate a
Shorter Standard Settlement Cycle and Make Other Changes
March 15, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on March 8, 2024, National Securities Clearing
Corporation (``NSCC'' or ``Corporation'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II and III below, which Items have been prepared
by the clearing agency. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to the NSCC Rules &
Procedures (``Rules'') to ensure that the Rules are consistent with the
anticipated industry-wide move to a shorter standard settlement cycle
for certain securities from the second business day after the trade
date (``T+2'') to the first business day after the trade date (``T+1'')
(``Shortened Settlement Cycle''), as described in greater detail
below.\3\ The proposed rule change would become effective on May 28,
2024, or such later date as may be announced by the Commission for
compliance with Exchange Act Rules 15c6-1 and 15c6-2.
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\3\ Capitalized terms not defined herein shall have the meaning
assigned to such terms in the Rules, available at <a href="http://www.dtcc.com/legal/rules-and-procedures">www.dtcc.com/legal/rules-and-procedures</a>.
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[[Page 20268]]
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to modify the NSCC Rules
to ensure that the Rules are consistent with the anticipated industry-
wide move to a T+1 standard settlement cycle. The proposed rule change
is discussed in detail below.
(i) Background
The current standard settlement cycle of T+2 has been in place
since 2017, when the Commission amended Exchange Act Rule 15c6-1(a) \4\
to shorten the standard settlement cycle from three business days after
the trade date to two business days after the trade date in an effort
to reduce credit, market, and liquidity risk, and as a result, reduce
systemic risk for U.S. market participants.\5\ In an effort to further
reduce market and counterparty risk, decrease clearing capital
requirements, reduce liquidity demands, and strengthen and modernize
securities settlement in the U.S. financial markets, the financial
services industry has been working on further shortening the standard
settlement cycle from T+2 to T+1. In connection therewith, the
Commission has adopted a rule change to shorten the standard settlement
cycle to T+1.\6\
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\4\ Exchange Act Rule 15c6-1(a), as amended in 2017, required,
with certain exceptions, that a broker or dealer shall not effect or
enter into a contract for the purchase or sale of a security (other
than an exempted security, government security, municipal security,
commercial paper, bankers' acceptances, or commercial bills) that
provides for payment of funds and delivery of securities later than
the second business day after the date of the contract unless
otherwise expressly agreed to by the parties at the time of the
transaction. See 17 CFR 240.15c6-1(a).
\5\ See Securities Exchange Act Release No. 80295 (Mar. 22,
2017), 82 FR 15564 (Mar. 29, 2017).
\6\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (S7-05-22) (Shortening the
Securities Transaction Settlement Cycle) (``T+1 Adopting Release'').
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The NSCC Rules currently consider ``regular way'' settlement as
occurring on T+2 and, as such, would need to be amended in connection
with the Shortened Settlement Cycle. Further, certain timeframes or
cutoff times in the Rules key off the current standard settlement date
of T+2, either expressly or indirectly. In such cases, these timeframes
and cutoff times would also need to be amended in connection with the
Shortened Settlement Cycle. NSCC therefore proposes to make certain
amendments to the Rules to facilitate the anticipated industry-wide
move to the Shortened Settlement Cycle.
(ii) Proposed Changes to the Rules
The primary purpose of the proposed rule change is to modify the
Rules to accommodate the anticipated industry-wide move to the
Shortened Settlement Cycle. While the core functions of NSCC will
generally continue to operate in the same way in the Shortened
Settlement Cycle, NSCC has determined that the move to T+1 would
necessitate certain amendments to the Rules because currently the Rules
are designed to accommodate a T+2 settlement cycle. In particular, NSCC
has identified and is proposing to change (i) rules that have
timeframes and/or cutoff times that are tied to the standard settlement
cycle and (ii) rules affected by process changes relating to the
Shortened Settlement Cycle. In general, these are provisions that (i)
directly track the timeframe and/or Settlement Date of the standard
settlement cycle, (ii) address non-standard settlement cycles or (iii)
provide for timeframes and/or cutoff times that are connected to or are
affected by the timing of the standard settlement cycle and would need
to be changed to accommodate the Shortened Settlement Cycle.
For example, the Rules contain certain provisions that refer to
``T+2'' as the timeframe and Settlement Date of the standard settlement
cycle. These provisions would be updated to reflect ``T+1'' in
conformance with the Shortened Settlement Cycle. Similarly, a number of
provisions in the Rules refer to timeframes and Settlement Dates that
are intended to be shorter/earlier or later, as applicable, than the
timeframe and/or Settlement Date of the standard settlement cycle.
These provisions also must be changed to accommodate the Shortened
Settlement Cycle. Likewise, the length and timing of certain cutoff
times are based on either a standard settlement cycle or a non-standard
settlement cycle. Therefore, when the timeframe and Settlement Date of
the standard settlement cycle and nonstandard settlement cycle are
changed, these cutoff times would also need to be revised accordingly.
The proposed changes to accommodate the Shortened Settlement Cycle
would impact NSCC's Rules regarding: (i) Definitions; (ii) Supplemental
Liquidity Deposits; (iii) Trade Comparison and Recording; (iv) the
Special Representative Service; (v) the Continuous Net Settlement
(``CNS'') System and CNS Accounting Operation; (vi) the Balance Order
Accounting Operation; (vii) the Foreign Security Accounting Operation;
(viii) the ACATS Settlement Accounting Operation; and (ix) the NSCC
guaranty. NSCC would also make other technical, clarifying changes and
corrections to these Rules. The proposed changes are discussed in
detail below.
A. Definitions (Rule 1 and Procedure XIII)
NSCC proposes to add to Rule 1 a new definition of the term
``Regular Way'' to mean ``settlement in accordance with the standard
settlement cycle set forth in Rule 15c6-1(a) of the Exchange Act.'' \7\
The term Regular Way is used throughout the NSCC Rules to refer to
settlement of transactions in accordance with settlement cycle set
forth in Rule 15c6-1(a), and NSCC therefore believes that adding this
definition will provide additional clarity and certainty in its Rules.
NSCC would also revise the definition of ``T'' in Procedure XIII to
state that T+1 is normally the Settlement Date (as opposed to T+1 being
the next Business Date and T+2 being the Settlement Date).
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\7\ See supra note 3 and associated text.
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B. Supplemental Liquidity Deposits (Rule 4A)
NSCC Rule 4A sets forth NSCC's requirements regarding Supplemental
Liquidity Deposits, which are additional cash deposits designed to
cover the heightened liquidity exposure presented by those Members
whose activity would pose the largest liquidity exposure to NSCC. NSCC
proposes to modify Rule 4A to more accurately define certain terms and
definitions used with respect to Supplemental Liquidity Deposits under
the Shortened Settlement Cycle.
NSCC proposes to revise the definition of ``Options Expiration
Activity Period'' to delete references to the ``second Settlement Day''
and replace them with references to the ``Settlement Date'' to align
with the Shortened Settlement Cycle for the equity options it accepts
from The Options Clearing Corporation (``OCC'') under the Stock Options
and Futures
[[Page 20269]]
Settlement Agreement, dated August 5, 2017, between NSCC and OCC.\8\
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\8\ See Securities Exchange Act Release Nos. 81266, 81260 (Jul.
31, 2017) (File Nos. SR-NSCC-2017-007; SR-OCC-2017-013), 82 FR 36484
(Aug. 4, 2017).
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NSCC also proposes to revise the definition of ``Daily Liquidity
Need'' to provide additional clarity for the Supplemental Liquidity
Deposit process more generally. Specifically, NSCC would reframe the
definition of ``Daily Liquidity Need'' in the context of NSCC's
projected payment obligations as opposed to the amount of resources
needed. The revised definition would also remove references to the
``three day settlement cycle'' and more accurately define ``Daily
Liquidity Need'' to mean, on any Business Day, the payment obligations
of NSCC as a central counterparty, as calculated and determined by
NSCC, for all projected same day, intraday and multiday settlement
activity (where appropriate), assuming the default on that day of an
Unaffiliated Member or Affiliated Family. The proposed changes would
not impact the actual determination of the Daily Liquidity Need amount.
Rather, the proposed changes are intended to more accurately describe
NSCC's daily liquidity ``need.'' NSCC thinks it is more appropriate to
describe this definition in terms of NSCC's ``payment obligations'' and
not as an ``amount of resources.'' In addition, the proposed changes
would more closely reflect the language and requirements of Exchange
Act Rule 17Ad-22(e)(7)(i).\9\
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\9\ Exchange Act Rule 17Ad-22(e)(7)(i) requires that each
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
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 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. See 17 CFR 240.17Ad-22(e)(7)(i).
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C. Trade Comparison and Recording (Procedure II)
NSCC offers trade comparison and recording services for eligible
equity and debt securities. NSCC proposes several changes to its trade
comparison and recording procedures in connection with the move to the
Shortened Settlement Cycle.
Procedure II.B.--Equity and Listed Debt Securities--Locked-In Trade
Input
NSCC proposes to modify several sections of Procedure II concerning
the recording of equity securities transactions. Specifically, NSCC
would remove references to ``next day'' trades from the procedures for
recording of non-Regular Way transactions because next day trades will
be Regular Way transactions under the Shortened Settlement Cycle. NSCC
would also revise procedural requirements for certain trades that will
be processed on a trade-for-trade basis to remove a reference to trades
``scheduled to settle between a dividend ex-date and record date'' and
replace it with a reference to trades ``where the trade date and
Settlement Date (which is a cash trade) are the same date as a dividend
ex-date and record date,'' as the dividend ex-date will be the same day
as record date under the Shortened Settlement Cycle. Additionally, NSCC
would relocate a statement concerning the treatment of next day as-of
trades with modifications to clarify that such trades would be
``Regular Way as-of-trades'' under the Shortened Settlement Cycle. NSCC
would also make a technical clean up change to capitalize the defined
term CNS Accounting Operation.
Procedure II.C.--Debt Securities
NSCC proposes to update its procedures for debt security trade
input and comparison and the resolution of uncompared Regular Way debt
securities. Specifically, NSCC would remove Section C.1(o) of Procedure
II concerning the trade input and comparison of transactions for T+1
settlement because such transactions would be addressed by the
procedures for Regular Way transactions under the Shortened Settlement
Cycle and renumber the following sections of Section C.1. to reflect
the removal of this provision. NSCC would also remove a reference to
``Balance Order processing'' from Section C.2(h) of Procedure II
concerning transactions compared after certain cut-off times because
Balance Orders submitted after the cutoff time would not be assigned a
new date (only CNS-eligible transactions and trade-for-trade Special
Trades).
Procedure II.F.--Index Receipts (Exchange-Traded Funds)
NSCC proposes to amend its creation/redemption input and settlement
procedures for exchange-traded funds (``ETF(s),'' also referred to as
``index receipts'' in the Rules). The proposed changes would (i)
reflect that T+1 would be Regular Way settlement under the Shortened
Settlement Cycle; (ii) allow for the creation and redemption of index
receipts on a same-day basis; and (iii) make other clarifications to
the procedures.
NSCC would amend Section F of Procedure II to remove the reference
to ``T+1 or later'' settlement and instead state that Index Receipt
Agents may elect ``same day, Regular Way or extended settlement'' for
index receipts. The proposed rule change would reflect that T+1 would
be Regular Way settlement under the Shortened Settlement Cycle and add
a new election for same-day settlement of index receipts.
NSCC also proposes additional amendments concerning the creation
and redemption of index receipts for same-day settlement. NSCC would
add new rule language to permit Index Receipt Agents to include an
additional cash collateral amount (``Index Receipt Cash Collateral
Amount'') for same-day settling index receipts, which would be subject
to limits established by NSCC from time to time. Changes to the Index
Receipt Cash Collateral Amount limits would be announced to Members by
Important Notice. NSCC would also report any necessary adjustments to
the Index Receipt Cash Collateral Amount based on end of day values
(``Collateral Cash Adjustments'') for non-guaranteed payment order or
money settlement between the Members on the next business day. In
addition, NSCC would amend the procedure to provide that any creation
and redemption instructions for same-day settling index receipts that
exceed the Index Receipt Cash Collateral Amount limitations established
by NSCC would be rejected. NSCC would also require that same-day
settling index receipts, like other index receipts, be received by the
cut-off time as designated by the NSCC from time to time.\10\
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\10\ NSCC processing and cut-off times can be found in the DTCC
Learning Center (e.g., ETF timelines are currently available at
<a href="https://dtcclearning.com/products-and-services/equities-clearing/etf-processing/etf-timeline.html#heading-0">https://dtcclearning.com/products-and-services/equities-clearing/etf-processing/etf-timeline.html#heading-0</a>), in various Member user
guides and requirements documents, and for T+1 specifically, in the
T+1 settlement documentation available on the DTCC website
(available at <a href="https://www.dtcc.com/ust1/documentation">https://www.dtcc.com/ust1/documentation</a>). Changes to
standard CNS and ETF create/redeem cut-off times are generally
announced to Members through Important Notices.
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The adoption of rules for same-day creation/redemption is designed
to allow Authorized Participants to cover short positions in ETF
shares. NSCC's rules currently allow Index Receipt Agents to elect a
Settlement Date of T+1 or later for ETFs. Under the current T+2
settlement cycle, Authorized
[[Page 20270]]
Participants may address short positions through the submission of
creations/redemptions for next-day settlement (i.e., T+1). However,
under the Shortened Settlement Cycle, Authorized Participants would
need to submit creations/redemptions on a same-day basis to cover short
positions scheduled for settlement on T+1.\11\ In the absence of the
proposed same-day cycle, Authorized Participants would need to process
this activity on an ex-clearing basis, which would result in excess
capital expenses. The proposed rule change would also provide Index
Receipt Agents with the option to require an additional Index Receipt
Cash Collateral Amount as part of the creation or redemption to account
for potential market moves in the ETF or underlying components between
the submission of the creation or redemption earlier in the day, which
would be based on the prior day's (i.e., T-1) closing price which
aligns with net asset value, and the settlement of such obligations at
the end of the day (i.e., T) during NSCC's end-of-day settlement cycle.
This ``buffer'' amount would be subject to limits established by NSCC
from time to time.\12\ NSCC would also report and facilitate Collateral
Cash Adjustments amounts based on end of day values to be settled
between Members on the following business day to ``true-up'' the Index
Receipt Cash Collateral Amount amounts.
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\11\ Currently, NSCC allows for same-day settling cash trades in
the secondary market, even in the T+2 environment. The proposed rule
change would allow same-day settling trades in the primary market.
\12\ NSCC would initially establish this limit at 3% of the
contract settlement amount of the order, which would be priced based
on the prior night's net asset value. NSCC will monitor the use and
overall collateral buffer amounts over time and may adjust this
threshold as needed.
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NSCC would also clarify in its ETF settlement procedures that
component securities of index receipts would be netted with all other
CNS and Non-CNS securities and entered into the CNS Accounting
Operation or the Balance Order Accounting Operation for trade-for-trade
settlement, as applicable. The proposed change is not required to
accommodate the move to the Shortened Settlement Cycle but would
provide additional clarity and accuracy in the Rules.
Procedure II.G.--Reports and Output
NSCC would also update its procedures for issuing trade reports and
output to align with the Shortened Settlement Cycle. Specifically, NSCC
proposes to replace references to ``T+1'' with ``T'' and references to
``T+2'' with ``T+1'' to reflect the change in cutoff timeframes
resulting from a one day shortening of the standard settlement cycle.
Procedure II.H.--Consolidated Trade Summaries
NSCC's Consolidated Trade Summary System defines the expected
settlement path for each transaction received by the Universal Trade
Capture (``UTC'') service as CNS or non-CNS eligible. NSCC proposes to
update its procedures concerning the Consolidated Trade Summaries to
reflect anticipated processes under the Shortened Settlement Cycle and
make other clarifying and clean-up changes to the Rules. Specifically,
NSCC would make clarifying changes regarding the reporting of Balance
Order transactions under the Shortened Settlement Cycle to state, more
generally, that each Consolidated Trade Summary would include Receive
and Deliver instructions to each Member to settle directly with its
counterparties. The proposed change is intended to reflect that the
three Consolidated Trade Summaries made available by NSCC will not
include the same information on all three reports (e.g., the first two
cycles would report next-day settling Balance Order transactions while
the third cycle would report same-day settling Balance Order
transactions trades). In addition, NSCC would clarify that, to
facilitate settlement of Balance Order transactions that are trade-for-
trade items, NSCC may aggregate and net Receive and Deliver
instructions for trade-for-trade items between counterparties such that
a Member may have only one net buy obligation or sell obligation, where
applicable, in a particular security on a given day with a given
counterparty. NSCC would also remove a redundant reference to ``trade-
for-trade'' transactions in the first sentence of Section H because
``trade-for-trade'' transactions are a subset of Balance Order
transactions. NSCC would also make a typographical correction to the
procedure.
D. Special Representative Service (Procedure IV)
NSCC's Special Representative Service allows Members that are
authorized by one or more other persons to act on their behalf to
submit transactions in securities to NSCC. As part of this service,
NSCC permits Members to clear and settle transactions executed for them
by other Members acting as their Special Representative to accommodate
(i) a Member with multiple affiliate accounts who wishes to move a
position resulting from an ``original trade'' in the process of
clearance from one affiliate account to another and (ii) a Member that
relies on its Special Representative to execute a trade in any market
on its behalf to enable the resulting position to be moved from the
Special Representative to that Member (the ``Correspondent Clearing
Service'').
NSCC proposes to delete a procedural provision related to the
Correspondent Clearing Service, which states that transactions (other
than cash, or next day fixed-income transactions, or cash equity
transactions received after the Corporation's designated cut-off time)
which are accepted by NSCC are then entered into the Balance Order
Accounting Operation or CNS Accounting Operation which, when processed
through the Balance Order Accounting Operation or CNS Accounting
Operation, effectively net the Special Representative out of the
original trade. NSCC proposes to delete this statement because (i)
under the Shortened Settlement Cycle, there will no longer be next day
fixed-income transactions (i.e., such transactions will be Regular Way)
and (ii) the statement, more generally, is not a rule or procedural
requirement concerning the Correspondent Clearing Service, but rather,
is simply a description of an expected outcome of the service.
E. Continuous Net Settlement System (Rule 11 and Procedure VII)
Rule 11 sets forth requirements for NSCC's CNS system, which is
NSCC's core netting, allotting and fail-control engine. Within CNS,
each security is netted to one position per Member, with NSCC as its
central counterparty. Procedure VII sets forth additional procedural
requirements for the CNS Accounting Operation. NSCC proposes several
changes to Rule 11 and Procedure VII to align certain CNS requirements
with the Shortened Settlement Cycle and make other clarifying and
technical changes to the Rules.
Rule 11--CNS System
NSCC proposes to revise Section 4 of Rule 11 concerning projection
reports to remove rule text related to positions or obligations due to
settle on ``the next settlement day.'' Under the Shortened Settlement
Cycle, the CNS projection report that will be issued on each Settlement
Date will no longer include next day settling positions because it will
only cover obligations for a one-day settlement cycle and will be
issued during early morning hours on the Settlement Date.
NSCC also proposes to revise Section 8(d) of Rule 11 concerning the
treatment
[[Page 20271]]
of ``as of'' trades \13\ subject to corporate actions to replace
references to ``two settlement days'' with ``one settlement day'' and
to replace ``at least one settlement day prior to the Due Bill
Redemption Date'' with ``prior to or on the Due Bill Redemption Date''
to reflect the move to a one-day settlement cycle. Further, NSCC would
update language concerning the cutoff time for ``as of'' trades being
accorded dividend protection in CNS to replace a reference to ``less
than two settlement days or one Business Day, as the case may be, prior
to the payable date or the Due Bill Redemption Date'' with a more
general statement referring to the timeframes specified within Section
8(d) of Rule 11.
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\13\ ``As of'' trades are trades that do not fit standard
industry conventions due to either the trade being submitted after
the trade date or the settlement date being adjusted because it is
past the stated contractual settlement date on the trade.
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Procedure VII.B.--CNS Accounting Operation--Consolidated Trade Summary
As noted above, NSCC's Consolidated Trade Summary System defines
the expected settlement path for each transaction received by the UTC
service as CNS or non-CNS eligible. NSCC proposes to update its
procedures concerning the Consolidated Trade Summary reports to reflect
anticipated CNS processes under the Shortened Settlement Cycle.
NSCC proposes to revise Section B of Procedure VII concerning the
Consolidated Trade Summary reports made available to Members to replace
references to ``T+2'' with ``T+1.'' NSCC would also remove reference to
``T+1 and older as-of trades and next day settling trades not
previously reported on the prior Consolidated Trade Summary'' and
replace that with a statement regarding ``trades compared or recorded
through the Corporation's cutoff time with respect to trades due to
settle on the same settlement day'' because there will no longer be a
distinct concept of ``next day settling trades'' under the Shortened
Settlement Cycle. NSCC also proposes to remove certain descriptive
examples (e.g., references to actions occurring on specific days of the
week) because these provisions (i) would no longer be accurate for the
Shortened Settlement Cycle and (ii) do not constitute rules or
procedural requirements for Consolidated Trade Summaries (rather, they
are only examples of potential occurrences). NSCC would also remove a
sentence stating that each Consolidated Trade Summary issued on each
settlement day reports activity compared or recorded, including cash
trades which are due to settle on that same day for the period
beginning after the cutoff time for the prior Consolidated Trade
Summary and ending on the Corporation's cutoff time for such
Consolidated Trade Summary, because NSCC believes that the timing for
compared and recorded trades to be included on the Consolidated Trade
Summaries would now be adequately summarized by revised provisions
discussed above.
Additionally, NSCC proposes several clean up changes to Procedure
VII.B, which are not required to accommodate the move to the Shortened
Settlement Cycle but would provide additional clarity and accuracy in
the Rules. NSCC would update incorrect references to other NSCC
Procedures, which are currently referred to as ``Section'' II, III and
IV, to clarify that these are references to ``Procedure'' II, III and
IV. NSCC also proposes to remove statements regarding the formatting of
the Consolidated Trade Summaries (i.e., that trade information is
provided in CUSIP order, reported as broad buys and sells by
marketplace or source, netted by issue, quantity and money) because the
Consolidated Trade Summaries are currently made available to Members
through a dashboard in a web-based portal, which is searchable in
multiple formats, rather than provided in one standardized format.
Procedure VII.D.--CNS Accounting Operation--Controlling Deliveries to
CNS
NSCC proposes to modify Section D of Procedure VII, which describes
the process for Members to control the delivery of securities to
satisfy short positions in CNS. Section D of Procedure VII currently
states that Members are required to provide instructions to exempt from
delivery any transaction ``compared or received on SD-1 or thereafter,
including cash or next day transactions, which are processed for next
day or same day settlement'' \14\ and which create or increase a short
position. NSCC would revise this statement to clarify that, under the
Shortened Settlement Cycle, Members must provide instructions to exempt
from delivery any transactions ``compared or received on Settlement
Date,'' which are processed for ``same day settlement'' and which
create or increase a short position. NSCC would also revise the
introductory paragraph of Section D of Procedure VII to clarify that
such instructions are the ``standing'' instructions provided by Members
and make conforming changes throughout the procedure to reflect that
such an exemption would now be referred to as the ``Same Day Settling
Exemption'' (as opposed to the ``One Day Settling Exemption'').
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\14\ ``SD-1'' refers to the date prior to the Settlement Date.
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NSCC also proposes to delete subsection D.1. of Procedure VII
concerning the CNS projection report and other references to projected
positions and the projection report throughout Procedure VII. Under the
Shortened Settlement Cycle, the CNS projection file would no longer be
used for the exemption process because it will be distributed at 2:00AM
ET on Settlement Date, after the night cycle completes. However, NSCC
would clarify in newly renumbered Section D.1(a) that Members may use
other position reporting made available by NSCC to set exemptions and
control deliveries.
In addition, NSCC proposes to modify subsection D.2. of Procedure
VII (newly proposed Section D.1) concerning exemptions. NSCC would
update the exemption override procedures to remove a reference to ``one
day'' settling transactions and make additional conforming changes to
replace references to the ``One Day Settling Exemption'' with the
``Same Day Settling Exemption.'' NSCC would also revise current
subsection D.2(b) of Procedure VII (to be renumbered as subsection
D.1(b)) to replace an incorrect reference to ``four'' types of
qualified activity with ``three'' types of qualified activity and
correct an error in the numbering of the circumstances in which
Standing Exemption instructions would govern all of the Member's short
positions.
Procedure VII.G.--CNS Accounting Operation--CNS Dividend Accounting
NSCC proposes to modify subsection G.2. of Procedure VII concerning
the Dividend Activity Report to update the submission cutoff time for
``as of'' trades being included in the payment calculation from ``two
days prior to payable date'' to ``one Settlement Date prior to payable
date'' to align with the Shortened Settlement Cycle. NSCC also proposes
to revise subsection G.3 of Procedure VII regarding Due Bill Accounting
to reflect that, in the case of stock splits, the Current Market Price
would be adjusted by the rate of the split on the Due Bill Redemption
Date under the Shortened Settlement Cycle as opposed to during the one
day prior to the Due Bill Redemption Date under the current T+2
settlement cycle.
[[Page 20272]]
Procedure VII.H.--CNS Accounting Operation--Miscellaneous CNS Activity
Section H of Procedure VII describes the timeline of actions that
must occur in connection with the processing of eligible corporate
reorganization events. The processing of mandatory reorganizations
occurs automatically; however, the processing of voluntary
reorganizations through the CNS Reorganization Processing System
requires certain actions to be taken by both NSCC and by Members with
positions in the subject security during the period of time leading up
to and following the expiration of the event. This period of time is
referred to in the Rules as the ``protect period'' and is defined by
reference to the expiration date, or ``E,'' of a voluntary
reorganization (e.g., ``E+1'' is one day past the expiration date of
the event). NSCC proposes a number of updates to the Corporate
Reorganization rules in subsection H.4. of Procedure VII to align the
Procedures with the Shortened Settlement Cycle.
NSCC would remove references to the current standard two business
day protect period and replace them with references to the one business
day protect period anticipated under the Shortened Settlement Cycle.
NSCC also proposes to update the processing timeframes for voluntary
reorganizations to reflect the new timeframes under the Shortened
Settlement Cycle. Specifically, the following timeframes will be
changed for T+1.
<bullet> The time for NSCC to advise Members with short positions
of their potential liability will move from ``after the night cycle on
E+1'' to ``on E, prior to the night cycle commencing for E+1.'' (NSCC
would also clarify that any same day settling trade that is received
for processing after the night cycle ``completes'' on E+1 will be
designated a Special Trade.)
<bullet> The time for long position Members to instruct NSCC to
move positions to a CNS Reorganization Sub-Account will move from ``on
E+1'' to ``on E, prior to the night cycle commencing for E+1.''
<bullet> The time for Members to add, adjust, or delete long
positions to be moved to the CNS Reorganization Sub-Account will move
from ``E+2'' to ``E+1.'' (NSCC would also clarify that this time period
is known as the ``CNS End Date'' and/or ``Protect Expiration Date'').
<bullet> The time at which (i) long positions for which proper
instructions have been received are moved to a CNS Reorganization Sub-
Account and (ii) NSCC notifies Members with long positions of their
final protection and Members with short positions of their final
liability will move from ``after day cycle on E+2'' to ``after the day
cycle completes on E+1.''
<bullet> The time at which short positions in the CNS
Reorganization Sub-Account are marked from the Current Market Price to
the voluntary offer price will move from E+3 to E+2.
F. Balance Order Accounting Operation (Procedure V)
NSCC provides a Balance Order Accounting system for securities that
are ineligible for processing in CNS. The Balance Oder Accounting
Operation produces netted and allotted receive and deliver instructions
for NSCC Members. NSCC does not become a counterparty to Balance Order
transactions, but it does provide a trade guaranty to the receive and
deliver parties, which remains effective through the close of business
on the scheduled settlement date.
NSCC proposes to revise Procedure V.B. regarding trade-for-trade
Balance Orders to update the types of transactions that would be
processed on a trade-for-trade basis under the Shortened Settlement
Cycle. Specifically, NSCC would update the rule to reflect that those
transactions compared or otherwise entered to the Balance Order
Accounting Operation on Settlement Date (rather than those transactions
compared or otherwise entered to the Balance Order Accounting Operation
on SD-1 or thereafter) would be processed on a trade-for-trade basis as
there will be no Balance Order netting on Settlement Date under the
Shortened Settlement Cycle. NSCC would also remove next day
transactions from the list because those transactions would be Regular
Way trades under the Shortened Settlement Cycle.
In addition, NSCC would modify Procedure V.E. regarding
Consolidated Trade Summaries for Balance Order transactions to remove
specific references to same day and next day settling Balance Order
transactions and more generally state that any Balance Order
transactions generated by the Corporation will be included on three
separate Consolidated Trade Summaries made available to participants.
Under the Shortened Settlement Cycle, each of the three Consolidated
Trade Summaries would no longer contain information on both same day
and next day settling Balance Orders.
NSCC also proposes clean-up changes to Procedure V.A. to update
incorrect references to other NSCC Procedures, which are currently
referred to as ``Section'' II, III and IV, to clarify that these are
references to ``Procedure'' II, III and IV.
G. Foreign Security Accounting Operation (Procedure VI)
NSCC's Foreign Security Accounting Operation processes transactions
in Foreign Securities and produces Foreign Security receive and deliver
instructions, which identify the receive and deliver obligations of
Members. NSCC would revise Procedure VI to remove a reference to ``SD-1
or thereafter'' because, under the Shortened Settlement Cycle,
transactions submitted on ``SD-1'' would generally be Regular Way
transactions and transactions submitted on Settlement Date would not be
accepted.
NSCC would also revise Procedure VI to clarify that (i) Foreign
Securities may be netted on a Member-to-Member basis or processed on a
trade-for-trade basis; (ii) transactions in Foreign Securities which
are ``submitted'' (as opposed to ``identified'') as Special Trades are
processed on a trade-for-trade basis; and (iii) transactions in Foreign
Securities that are designated by NSCC to be Special Trades may net
only on a Member-to-Member basis. These proposed changes are not
required to accommodate the move to the Shortened Settlement Cycle but
would provide additional clarity and accuracy in the Rules.
H. ACATS Settlement Accounting Operation (Procedure XVIII)
NSCC's Automated Customer Account Transfer Service (``ACATS'')
enables Members and Qualified Securities Depositories (i.e., The
Depository Trust Company), on behalf of their participants, to transfer
accounts of their customers between themselves on an automated basis.
Procedure XVIII sets forth the details of the ACATS Settlement
Accounting Operation.
As discussed in the CNS Accounting Operation procedure sections
above, Members have the ability to elect to deliver all or part of any
short position through the use of Exemptions. Such exemptions may also
be utilized in the ACATS process. NSCC therefore proposes conforming
changes to Procedure XVIII to replace a reference to the ``One Day
Settling Exemption'' with the ``Same Day Settling Exemption'' to align
with processes under the Shortened Settlement Cycle.
I. NSCC's Guaranty (Addendum K)
Finally, Addendum K sets forth the timing for NSCC's assumption of
liability for guaranteed transactions as a
[[Page 20273]]
central counterparty. Addendum K generally provides that CNS and
Balance Order transactions are guaranteed as of the point they have (i)
for bilateral submissions by Members, been validated and compared by
NSCC and (ii) for locked-in submissions, been validated by NSCC. For
Balance Order transactions, this guarantee remains effective through
the close of business on the scheduled settlement date (currently
specified as ``T+2'' in the Rules).
NSCC proposes to update Addendum K concerning NSCC's guaranty for
Balance Order transactions to remove a reference to the current T+2
settlement cycle and replace it with a more general statement that
Balance Order transactions would be guaranteed through the close of
business on their contractual Settlement Date. NSCC would also remove a
reference to ``same day or one day'' settling trades from a statement
concerning the guaranty of transactions from interfacing clearing
corporations because (i) one day settling trades would be Regular Way
trades under the Shortened Settlement Cycle and (ii) this requirement
would apply to transactions generally from an interfacing clearing
corporation and not just same day or one day settling trades.
Implementation Timeframe
The proposed rule change would not become effective until May 28,
2024, or such later date as may be announced by the Commission for
compliance for Exchange Act Rules 15c6-1 and 15c6-2.
2. Statutory Basis
NSCC believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. Section 17A(b)(3)(F) of Act
\15\ requires, in part, that the rules of a clearing agency be designed
to promote the prompt and accurate clearance and settlement of
securities transactions and to remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions. NSCC believes the proposed
rule change is consistent with the requirements of Section 17A(b)(3)(F)
of Act \16\ for the reasons set forth below.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ Id.
---------------------------------------------------------------------------
The proposed rule change would update NSCC's Rules to accommodate
anticipated processing timelines under a Shortened Settlement Cycle.
The proposed rule change would modify the timeframes, cutoff times and/
or associated outputs for certain processes related to NSCC's clearance
and settlement operations, including Rules related to: (i) Definitions;
(ii) Supplemental Liquidity Deposits; (iii) Trade Comparison and
Recording; (iv) the Special Representative Service; (v) the Continuous
Net Settlement (``CNS'') System and CNS Accounting Operation; (vi) the
Balance Order Accounting Operation; (vii) the Foreign Security
Accounting Operation; (viii) the ACATS Settlement Accounting Operation;
and (ix) the NSCC guaranty. These changes are necessary for NSCC to
clear and settle transactions promptly and accurately under the
Shortened Settlement Cycle. NSCC therefore believes the proposed rule
change is designed to promote the prompt and accurate clearance and
settlement of securities transactions and to remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F) of the Act.\17\
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\17\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of Act \18\ requires that the rules of a
clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Act. NSCC does not
believe that the proposed rule change would impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. While the anticipated industry-wide move to the
Shortened Settlement Cycle would likely have an impact on competition
because the cost of required system changes for individual firms to
shift from a T+2 to T+1 settlement cycle may have a disproportionate
impact on those firms with relatively smaller revenue bases, NSCC does
not believe that the proposed rule changes themselves would have a
significant impact on competition because they are operational in
nature and consist of changes to processing timeframes and cutoff times
for NSCC's services. Moreover, NSCC believes that the proposed rule
changes are necessary because they are required to facilitate and
accommodate the anticipated move to the Shortened Settlement Cycle and
facilitate compliance with rules adopted in the T+1 Adopting Release
and are appropriate in that they have been specifically tailored to
conform with the requirements of the Shortened Settlement Cycle and
rules in the T+1 Adopting Release.\19\ Therefore, NSCC does not believe
that the proposed rule changes would impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-1(b)(3)(I).
\19\ See supra note 6 and related discussion.
---------------------------------------------------------------------------
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
<a href="/cdn-cgi/l/email-protection#76020417121f18111718121b17041d1302053605131558111900"><span class="__cf_email__" data-cfemail="b4c0c6d5d0dddad3d5dad0d9d5c6dfd1c0c7f4c7d1d79ad3dbc2">[email protected]</span></a> or 202-551-5777.
NSCC reserves the right not to respond to any comments received.
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.
[[Page 20274]]
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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#80f2f5ece5ade3efedede5eef4f3c0f3e5e3aee7eff6"><span class="__cf_email__" data-cfemail="c6b4b3aaa3eba5a9ababa3a8b2b586b5a3a5e8a1a9b0">[email protected]</span></a>. Please include
file number SR-NSCC-2024-002 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.
All submissions should refer to file number SR-NSCC-2024-002. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 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">dtcc.com/legal/sec-rule-filings</a>). Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-NSCC-2024-002 and should be submitted on or
before April 11, 2024.
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\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05951 Filed 3-20-24; 8:45 am]
BILLING CODE 8011-01-P
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