Notice2024-20170
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the NSCC Rules & Procedures To Accommodate Fractional Share Trading Programs
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
September 9, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 174 (Monday, September 9, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 174 (Monday, September 9, 2024)]
[Notices]
[Pages 73145-73148]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-20170]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100897; File No. SR-NSCC-2024-007]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Modify the NSCC Rules & Procedures To Accommodate
Fractional Share Trading Programs
September 3, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 21, 2024, National Securities Clearing Corporation (``NSCC'')
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. NSCC filed the
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and
Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to the NSCC
Rules & Procedures (``Rules'') to accommodate the Member submission and
trade recording of certain trades executed in connection with
fractional share trading programs, as described in greater detail
below.\5\
---------------------------------------------------------------------------
\5\ 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>.
---------------------------------------------------------------------------
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 this proposed rule change is to amend the real-time
trade submission requirements in NSCC Rule 7 and Procedure II to
accommodate the Member submission and trade recording of certain trades
representing transactions from fractional share trading programs. The
proposed rule change is discussed in detail below.
Background
NSCC Rule 7, Section 7 requires that trade data submitted to NSCC
for trade recording be submitted in ``Real-time,'' \6\ and on a trade-
by-trade basis, in the form executed without any form of ``pre-
netting'' of such trades prior to their submission (collectively, the
``Real-time Trade Submission Requirement''). Cleared contract
information is then reported out to submitting firms by NSCC's
Universal Trade Capture (``UTC'') system \7\ upon trade comparison and
validation. The receipt of trade data in real-time enables NSCC to
report to Members trade data as it is received, thereby promoting
intra-day reconciliation of transactions at the Member level, and also
facilitates efficient risk management for both NSCC and its Members.
---------------------------------------------------------------------------
\6\ NSCC Procedure XIII defines ``Real-time'' to mean the
``submission of trade data on a trade-by-trade basis promptly after
trade execution, in any format and by any communication method
acceptable to [NSCC].'' See NSCC Procedure XIII, supra note 5.
\7\ NSCC's UTC system validates and reports equity transactions
that are submitted to NSCC throughout the trading day by an exchange
or by a Qualified Special Representative that is an NSCC Member.
---------------------------------------------------------------------------
From an operational perspective, NSCC is only able to accept trades
for clearing in units of full shares. Moreover, stocks do not trade on
exchanges in units of less than one share, and trades may only be
reported to a trade reporting facility in multiples
[[Page 73146]]
of one share.\8\ Some broker-dealers, however, offer programs enabling
their customers to purchase and sell shares on a fractional basis
(i.e., less than one full share of a stock or other security).\9\ These
programs vary by broker-dealer and may involve the broker-dealer using
its own capital to purchase/sell a full share and giving its customer
the fraction or aggregating customer orders together to form full
shares.
---------------------------------------------------------------------------
\8\ See ``Trade Reporting Frequently Asked Questions #101.14,''
Financial Industry Regulatory Authority, available at <a href="http://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq">www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq</a>.
\9\ See ``Staff Report on Equity and Options Market Structure
Conditions in Early 2021,'' SEC, page 7, available at <a href="http://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf">www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf</a>.
---------------------------------------------------------------------------
Because NSCC cannot operationally process fractions of shares,
Members offering fractional share trading programs cannot submit
certain transactions from fractional share trading programs for
clearing. Trades in fractional shares may be reported to a trade
reporting facility in multiples of one share; however, for fractional
shares this must be done in accordance with certain rounding
conventions.\10\ NSCC believes that such trades could be similarly
aggregated into full shares for submission to NSCC as Correspondent
Clearing transactions.\11\ Section 2(b) of Rule 7 provides that a
Special Representative \12\ may submit to NSCC transaction data as to
the rights and obligations of Members which calls for the delivery of
Cleared Securities and is between Members. This includes Correspondent
Clearing transactions, which allow NSCC Members to move a position from
an executing broker (or Special Representative) account to a different
clearing broker (i.e., correspondent) account. NSCC allows exceptions
to the Real-time Trade Submission Requirement for Correspondent
Clearing transactions submitted under Section 2(b) of Rule 7 if the
trade data is submitted to facilitate a position movement between
affiliates or is between two unaffiliated clearing brokers on behalf of
a common client for custody purposes.\13\ NSCC believes a similar
exception would be appropriate for certain transactions from fractional
share trading programs.
---------------------------------------------------------------------------
\10\ See supra note 8.
\11\ The Correspondent Clearing service allows an NSCC Member
broker-dealer to use one broker-dealer for an execution and another
for clearance and settlement. See NSCC Procedure IV, Section C,
supra note 5.
\12\ A ``Special Representative'' is a Member or a Registered
Clearing Agency which applies to NSCC for such status and designates
those Members for which it will act. Special Representatives may
submit to NSCC for trade recording trade data on any transaction
calling for delivery of Cleared Securities between it and another
person. See NSCC Rule 7, Sections 1 and 2(a), supra note 5.
\13\ See NSCC Rule 7, Section 7, supra note 5. NSCC notes that
the Real-time Trade Submission Requirement in NSCC Rule 7, Section 7
also does not apply to transaction data for exchange-traded funds
submitted pursuant to Section 4(b) of Rule 7.
---------------------------------------------------------------------------
Proposed Changes
NSCC proposes to revise its Rules to allow an exception to the
Real-time Trade Submission Requirement for Correspondent Clearing
transactions representing aggregated transactions of fractional shares.
As described above, NSCC cannot currently process trades on a
fractional basis. However, NSCC may accept aggregated transactions from
fractional share trading programs for clearing if such transactions are
submitted in multiples of one share based on rounding conventions
similar to those used for reporting such transactions to trade
reporting facilities.
For example, a broker-deal (``Broker A'') may receive an order from
a customer to purchase 6.5 shares of ABC Corp. Broker A may route that
order to an executing broker (``Broker B'') to purchase 6.5 shares.
Broker B then executes an order to buy 7 shares of ABC Corp. on a
trading venue such as an exchange or alternative trading system, which
only offers trading in full shares. This transaction clears in real-
time at NSCC with Broker B as the buyer versus its contra party. Broker
B would then submit a Correspondent Clearing transaction \14\ to NSCC
for 6 shares of ABC Corp., with Broker B as the seller and Broker A as
the buyer. This transaction would also clear in real-time at NSCC. To
accommodate the fractional share, Broker A would set up a fail to
receive of 0.5 shares of ABC Corp. versus Broker B, and Broker B would
set up fail to deliver of 0.5 shares of ABC Corp. versus Broker A.
Broker B would take principal ownership of the remaining 0.5 shares of
ABC Corp. This position would be held in Broker B's omnibus account at
the broker-dealer until the account accumulates to at least one (1)
full share.
---------------------------------------------------------------------------
\14\ See supra note 11 and associated text.
---------------------------------------------------------------------------
The following day, Broker A may receive another order from a
customer to purchase 6.5 shares of ABC Corp. Broker A again routes the
order to executing Broker B to purchase 6.5 shares. This time, Broker B
executes an order to buy 6 shares of ABC Corp. on a trading venue. This
transaction clears in real-time at NSCC with Broker B as buyer versus
its contra party. Broker B then submits a Correspondent Clearing
transaction to NSCC for 6 shares of ABC Corp. with Broker B as seller
and Broker A as buyer. This transaction also clears in real-time at
NSCC. Broker B then ultimately submits an additional Correspondent
Clearing transaction to NSCC for 1 share of ABC Corp. with Broker B as
seller and Broker A as buyer. This transaction clears at NSCC, and
Broker A and Broker B close-out the fail to receive/deliver with one
another.
In the example above, the rounding, aggregation and submission of
transactions in fractional shares could be interpretated as not
satisfying the Real-time Trade Submission Requirement. For example, the
Correspondent Clearing transactions containing aggregated fractional
shares may not be submitted promptly after execution of the underlying
trades executed by the executing broker and the aggregated shares may
not be submitted in the form executed. The Real-time Trade Submission
Requirement was not designed, however, to prohibit the submission of
Correspondent Clearing transactions necessary to accommodate the
clearing of fractional shares. NSCC did not consider fractional share
trading programs or the clearing of fractional shares when it adopted
its Real-time Trade Submission Requirement rules and subsequently
amended those rules to address the Correspondent Clearing service.\15\
As a result, NSCC proposes to revise Section 7 of NSCC Rule 7 to allow
an additional exception from the Real-time Trade Submission Requirement
for Correspondent Clearing transactions that represent aggregated
transactions of fractional shares. In addition, NSCC would revise
Section 7 of NSCC Rule 7 to include a requirement that trade data
representing aggregated transactions of fractional shares must be
submitted to NSCC for trade recording in units of full shares and
should be submitted as promptly as reasonably practical. NSCC also
proposes to make conforming changes to Section A of Procedure II to
include trade data representing aggregated transactions of fractional
shares in the list of exceptions for the Real-time Trade Submission
Requirement.
---------------------------------------------------------------------------
\15\ See e.g., Securities Exchange Act Release Nos. 69890 (June
28, 2013), 78 FR 40538 (July 5, 2013) (File No. SR-NSCC-2013-05) and
76462 (Nov. 17, 2015), 80 FR 73029 (Nov. 23, 2015) (SR-NSCC-2015-
004).
---------------------------------------------------------------------------
The proposed rule change would not require NSCC to make any changes
to its current operational and risk management processes. As described
above, NSCC would continue to receive all transactions in units of full
shares, and from an operational perspective, transactions from
fractional share trading programs would be recorded and processed in
the same manner as
[[Page 73147]]
any other transaction submitted for clearing. NSCC also does not
believe that clearing transactions from fractional share trading
programs would require any changes to its risk management processes.
While the Correspondent Clearing portion of such transactions would not
be subject to the Real-time Trade Submission Requirement, these
transactions are not expected to constitute a significant volume of
trades relative to NSCC's total cleared transaction volumes.
Transactions from fractional share trading programs would be subject to
the same margining and risk management practices as other equity
transactions upon trade recording and validation by NSCC, and NSCC does
not currently plan to make any changes to its risk management processes
in relation to the clearing of the aggregated shares received from
fractional share trading programs. NSCC believes that the benefits of
bringing these transactions into central clearing (e.g., their
inclusion in Continuous Net Settlement (``CNS'') netting, NSCC risk
management and NSCC's trade guaranty) would justify the exception for
such transactions from the Real-time Trade Submission Requirement. As
noted above, NSCC currently permits other exceptions to the Real-time
Trade Submission Requirement for Correspondent Clearing transactions,
such as trade data submitted to facilitate a position movement between
affiliates or between two unaffiliated clearing brokers on behalf of a
common client for custody purposes and transaction data concerning
creation and redemption orders for exchange-traded funds.\16\
---------------------------------------------------------------------------
\16\ See supra note 13 and associated text.
---------------------------------------------------------------------------
2. Statutory Basis
NSCC believes 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 the
Act \17\ requires that the rules of a clearing agency are designed to
promote the prompt and accurate clearance and settlement of securities
transactions, assure the safeguarding of securities and funds which are
in the custody or control of the clearing agency or for which it is
responsible, and remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The proposed rule change would provide an additional exception from
the Real-time Trade Submission Requirement for Correspondent Clearing
transactions representing aggregated transactions of fractional shares,
thereby allowing broker-dealers offering or participating in fractional
share trading programs to submit these fractional shares, on a rounded
and aggregated basis, to NSCC for clearance and settlement. The
proposed rule change would not require NSCC to make any changes to its
current operational and risk management processes and would enable the
prompt and accurate clearance and settlement of such transactions. The
proposed rule change would require such transactions to be submitted
for trade recording in units of full shares and as promptly as
reasonably practical. Moreover, the proposed rule change would extend
the benefit of CNS netting, NSCC's risk management and margining
practices, and NSCC's trade guaranty to these fractional shares,
thereby safeguarding the securities and funds associated with such
transactions. For these reasons, NSCC believes the proposed rule change
would promote the prompt and accurate clearance and settlement of
securities transactions, assure the safeguarding of securities and
funds which are in the custody or control of the clearing agency or for
which it is responsible, and remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions in accordance with Section
17A(b)(3)(F) of the Act.\18\
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \19\ requires that the rules of the
clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the Act. NSCC does not believe the
proposed rule change would have any impact or burden on competition.
The proposed rule change would provide an exception to the Real-time
Trade Submission Requirement for fractional shares and require that
such transactions be submitted to NSCC in aggregated units of full
shares as promptly as reasonably practical. The proposed rule change
would apply to all Members equally and would not otherwise impose any
requirements on the manner in which Members operate their fractional
shares programs. Moreover, NSCC would clear and risk manage these
aggregated shares in the same way as other trades submitted for trade
recording and clearing. The proposed rule change would not unfairly
inhibit access to NSCC's services by any Member or advantage or
disadvantage one Member in relationship to another. NSCC therefore
believes the proposed rule change would not have any impact or burden
on competition.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
(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 by NSCC, 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#e99d9b888d80878e88878d84889b828c9d9aa99a8c8ac78e869f"><span class="__cf_email__" data-cfemail="0a7e786b6e63646d6b646e676b78616f7e794a796f69246d657c">[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
Because the foregoing proposed rule change does not:
(i) significantly affect the protection of investors or the public
interest;
(ii) impose any significant burden on competition; and
(iii) become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act and Rule
19b-4(f)(6) thereunder.
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
[[Page 73148]]
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#1b696e777e36787476767e756f685b687e78357c746d"><span class="__cf_email__" data-cfemail="f082859c95dd939f9d9d959e8483b0839593de979f86">[email protected]</span></a>. Please include
file number SR-NSCC-2024-007 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-2024-007. 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-2024-007 and should be submitted on or
before September 30, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
---------------------------------------------------------------------------
\20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-20170 Filed 9-6-24; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on September 9, 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.