Notice2024-22127
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Decommission the ID Net Service
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 27, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 188 (Friday, September 27, 2024)</title>
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[Federal Register Volume 89, Number 188 (Friday, September 27, 2024)]
[Notices]
[Pages 79324-79327]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-22127]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101131; File No. SR-NSCC-2024-008]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Decommission
the ID Net Service
September 23, 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 September 12, 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.
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 decommission the ID Net service (``ID Net
Service'' or
[[Page 79325]]
``ID Net''), as described in greater detail below.\3\
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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.aspx">www.dtcc.com/legal/rules-and-procedures.aspx</a>.
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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 NSCC Rules
to permit NSCC to decommission the ID Net Service, a joint service of
NSCC and its affiliate, The Depository Trust Company (``DTC''). The
proposed rule change is discussed in detail below.
(i) Background
The ID Net Service is a joint service offering of NSCC and DTC that
allows broker/dealer users to net their affirmed institutional equity
trades with other trades that they may have in NSCC's Continuous Net
Settlement system (``CNS'').\4\ CNS is NSCC's system for accounting and
settling CNS-eligible securities.\5\ To be CNS-eligible, a security
must be eligible for book-entry transfer on the books of DTC and must
be capable of being processed in the CNS system. All eligible compared
and recorded transactions for a particular settlement date are netted
by issue into one net long (buy), net short (sell) or flat position for
each Member. As a continuous net system, those positions are further
netted with positions of the same issue that remain open after their
originally scheduled settlement date. NSCC, as central counterparty,
becomes the contra-party for settlement purposes, assuming the
obligation of its Members that are receiving securities to receive and
pay for those securities, and the obligation of Members that are
delivering securities to make the delivery. CNS netting thus reduces
the costs associated with securities transfers by reducing the number
of securities movements required to settle transactions. ID Net is a
voluntary service available to broker/dealers that are participants of
both NSCC and DTC and banks that are participants of DTC.
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\4\ DTC also filed a proposed rule change with the Commission in
connection with the retirement of the ID Net Service. See DTC filing
SR-DTC-2024-010.
\5\ See NSCC Rule 11 (describing the CNS System) and Procedure
VII (describing the CNS Accounting Operation), supra note 3.
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DTC may accept affirmed institutional transactions \6\ (``Affirmed
Transactions'') from a matching utility (``Matching Utility'').\7\ An
Affirmed Transaction submitted to DTC is processed on a trade-for-trade
basis at DTC, unless it is designated for ID Net processing by the
Matching Utility and meets certain eligibility requirements, as
described below.
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\6\ An institutional transaction is one between a broker/dealer
and its institutional customer. Such institutional customers are not
Participants of DTC. Therefore, the counterparties on an Affirmed
Transaction submitted by a Matching Utility to DTC are a (i) DTC
Participant, acting as clearing broker to the Affirmed Transaction
and (ii) DTC Participant bank, acting as the custodian for an
institutional customer.
\7\ The Matching Utility must be (i) a clearing agency
registered with the Commission (ii) an entity that has obtained an
exemption from such registration from the Commission, or (iii) a
``qualified vendor'' for trade confirmation/affirmation services as
defined by the rules of a self-regulatory organization. See DTC
Settlement Service Guide at 38, available at <a href="http://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Settlement.pdf">www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Settlement.pdf</a>. DTCC ITP
Matching (US) LLC (``ITP''), an NSCC and DTC affiliate, is currently
the only Matching Utility that submits Affirmed Transactions to DTC.
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In order for an Affirmed Transaction to be eligible for processing
in ID Net, (i) both counterparties to the Affirmed Transaction must be
a Member of NSCC and a Participant of DTC, or a bank that is a
Participant of DTC, that has subscribed to ID Net and (ii) the
transaction must be (a) in a security eligible for processing through
CNS and (b) affirmed within established timeframes set forth in the DTC
Settlement Service Guide.\8\
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\8\ See DTC Settlement Service Guide, supra note 7 at 40-41.
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If an Affirmed Transaction is designated for ID Net and meets the
eligibility criteria described above, then DTC will direct the
transaction to ID Net, which facilitates the netting of a broker/
dealer's side of an Affirmed Transaction with that broker/dealer's CNS
activity, via omnibus accounts, that are maintained by NSCC at DTC and
designated for ID Net activity. If a bank is a counterparty to the ID
Net-eligible Affirmed Transaction, then it will either receive or
deliver the subject shares versus payment, on a trade-for-trade basis,
via the ID Net omnibus accounts.
While ID Net was designed to allow broker/dealers to realize the
benefit of netting for Affirmed Transactions by allowing the broker/
dealer to net its ID Net-eligible Affirmed Transactions with its
transactions in CNS, banks using ID Net settle ID Net transactions on a
trade-for-trade basis as they would for other Affirmed Transactions, as
described above. In this regard, ID Net's main benefit is to streamline
clearance and settlement of ID Net-eligible Affirmed Transactions for
broker/dealers.
The ID Net Service is primarily described in NSCC Rule 65 and
Procedure XVI of the Rules.
(ii) Proposed Changes to the Rules
NSCC and DTC continually evaluate the efficiency and effectiveness
of the services they each provide. As part of these evaluations, and in
furtherance of their ongoing modernization efforts, NSCC and DTC are
seeking to streamline and simplify their services and processes,
including through the elimination of underutilized services. NSCC and
DTC have identified ID Net as an underused service that may be
eliminated as part of these modernization efforts. They each propose to
retire the ID Net Service due to a number of factors, which include:
(i) limited uptake and usage of the service since its adoption; (ii)
the operational complexity of maintaining the service, which also
connects with and impacts other core clearance and settlement
processes; \9\ and (iii) the prior elimination of the NSCC Clearing
Fund offset for ID Net transactions.\10\
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\9\ This complexity includes (i) special eligibility checks
versus the ID Net eligibility criteria described above and (ii)
leveraging of the above-mentioned omnibus accounts to simultaneously
allow (a) a bank to process ID Net-eligible transactions on a trade-
for-trade basis and (b) the broker/dealer side of an ID Net-eligible
transaction to settle CNS.
\10\ In 2021, NSCC adopted a proposed rule change to remove
transactions processed through the ID Net Service from the
calculation of Members' Required Deposits to the Clearing Fund. See
Securities Exchange Act Release No. 93070 (Sep. 20, 2021), 86 FR
53125 (Sep. 24, 2021) (SR-NSCC-2021-011).
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To implement the proposed change, NSCC would remove Rule 65 and
Procedure XVI from the Rules and make other conforming changes
throughout the Rules to reflect the retirement of the service. The ID
Net Service is primarily described in NSCC Rule 65 and Procedure XVI,
and these rules would no longer be necessary or relevant upon the
retirement of the ID Net Service. As a result, Rule 65 and Procedure
XVI would be deleted in their entirety and would be reserved for future
use by NSCC.
[[Page 79326]]
NSCC would also remove associated defined terms ``Eligible ID Net
Security'' and ``ID Net Subscriber'' from Rule 1 and remove a reference
to ID Net transactions from the definition of ``Net Unsettled
Position'' in Rule 1. In addition, NSCC would remove Section 1(f) of
Rule 3, concerning certain lists required to be maintained by NSCC, to
reflect that NSCC would no longer be required to maintain a list of
Eligible ID Net Securities and would make a conforming change to
renumber existing Section 1(g) of Rule 3 to Section 1(f). NSCC would
also remove Section 2(a)(vii) of Rule 18, which concerns procedures for
when NSCC ceases to act for a Member, to reflect that uncompleted ID
Net Service transactions would no longer be considered for purposes of
determining excluded transactions in a cease to act scenario.
Additionally, NSCC would modify Procedure VII, concerning its CNS
Accounting Operation, to remove various references to the ID Net
Service and ID Net transactions. Specifically, NSCC would revise the
Introduction in Section A to remove a reference to Eligible ID Net
Securities being included in CNS Securities for purpose of Procedure
VII. NSCC would also modify Section D.1., concerning the process for
exemptions from deliveries, to remove a statement regarding the
treatment of securities available in an agency account established at a
Qualified Securities Depository for the processing of transactions
through the ID Net Service. In addition, NSCC would modify Section E.4,
concerning the allocation algorithm for CNS deliveries, to remove a
statement regarding the treatment of long positions in a receiving ID
Net Subscriber's agency account established at a Qualified Securities
Depository. NSCC would also delete Section H.5. of Procedure VII
concerning the reporting of ID Net transactions on NSCC's Miscellaneous
Activity Report and make conforming changes to renumber subsequent
rules in Section H.
Finally, NSCC would update Section I.(A)(1)(b) of Procedure XV,
concerning NSCC's Clearing Fund calculations, to remove a reference to
ID Net transactions from the Mark-to-Market component of the Clearing
Fund formula.
NSCC believes that the retirement of the ID Net Service would have
minimal impact on its Members. Only 13 broker/dealers and 20 banks are
subscribed to the ID Net Service, and the service is not used by all of
those broker/dealers and banks.\11\ Furthermore, Affirmed Transactions
can simply settle trade-for-trade, directly between the counterparties,
if not eligible for ID Net, like they do today. NSCC also notes that
there would be minimal impact to risk management from both an NSCC and
Member perspective given that the ID Net Service is a non-guaranteed
service of NSCC \12\ and there is no longer a Clearing Fund offset for
ID Net transactions.\13\
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\11\ Active users of the ID Net service constitute less than 10%
of NSCC's full-service Members. NSCC believes that ID Net usage has
been limited since its implementation in 2008 because, in part, the
service needs both parties to an ID Net transaction to be
subscribers of ID Net, as described above, which is not always the
case.
\12\ See NSCC Rule 65, Section 5(c), supra note 3.
\13\ See supra note 10.
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NSCC has performed direct outreach to Members that use the ID Net
Service and has also announced its plans to decommission the ID Net
Service through Important Notice. There have been no material
objections or concerns raised by Members.
Implementation Timeframe
Subject to approval by the Commission, DTC and NSCC would implement
the proposed rule change using a phased approach. First, DTC
Participants and NSCC Members have been informed that they may be
unsubscribed from ID Net voluntarily at any time prior to termination
of the service on November 15, 2024. Second, upon approval of the
proposed rule change by the Commission prior to November 15, 2024, any
DTC Participants and NSCC Members that have been inactive in the
service for at least the last twelve (12) months will be offboarded
from the service. Finally, NSCC and DTC will continue to fully support
ID Net processing for any remaining active users until November 15,
2024, at which time the service will be fully retired. NSCC and DTC
will work with their respective Members and Participants to support all
required offboarding activities.
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 the
Act \14\ requires that the rules of a clearing agency be designed to,
among other things, promote 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
the Act for the reasons stated below.
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change would modify the NSCC Rules to
decommission the ID Net Service because the service is hardly used yet
challenging to maintain. As discussed above, NSCC believes that the
retirement of the ID Net Service would have minimal impact on its
Members, particularly given the limited usage of the service.
Furthermore, Affirmed Transactions that would have otherwise been
directed to ID Net can simply settle trade-for-trade, directly between
the counterparties, like most other Affirmed Transactions do today. As
a result, these transactions would continue to settle promptly and
accurately, as other Affirmed Transactions do, outside of the ID Net
Service. For these reasons, NSCC believes its Rules would continue to
promote the prompt and accurate clearance and settlement of securities
transactions in accordance with Section 17A(b)(3)(F) of the Act.\15\
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\15\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \16\ 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 present a burden on competition. While there
may be some operational impact to the small segment of Members using
the ID Net Service, NSCC believes the operational impact to these
Members and their clients would be minimal. While broker/dealer Members
using the service may see some reduced netting benefit from eligible
Affirmed Transactions being processed through CNS, NSCC does not
believe the elimination of this service would rise to the level of a
burden on Members given the limited usage of the service. Meanwhile,
banks using ID Net would continue to process affected Affirmed
Transactions trade-for-trade, albeit directly with their counterparties
rather than the ID Net omnibus accounts, described above. Furthermore,
NSCC notes that there would be no risk management impact for the
proposed rule change given that the ID Net Service is a non-guaranteed
service of NSCC and there is no Clearing Fund offset for ID Net
transactions.\17\ NSCC therefore believes the proposed rule change
would not present any burden on competition.
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\16\ 15 U.S.C. 78q-1(b)(3)(I).
\17\ See supra notes 10 and 12.
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[[Page 79327]]
(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="http://www.sec.gov/regulatory-actions/how-to-submit-comments">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#daaea8bbbeb3b4bdbbb4beb7bba8b1bfaea99aa9bfb9f4bdb5ac"><span class="__cf_email__" data-cfemail="b9cdcbd8ddd0d7ded8d7ddd4d8cbd2dccdcaf9cadcda97ded6cf">[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.
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#1e6c6b727b337d7173737b706a6d5e6d7b7d30797168"><span class="__cf_email__" data-cfemail="88fafde4eda5ebe7e5e5ede6fcfbc8fbedeba6efe7fe">[email protected]</span></a>. Please include
file number SR-NSCC-2024-008 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-2024-008. 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://www.dtcc.com/legal/sec-rule-filings">www.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-2024-008 and should be submitted on or
before October 18, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22127 Filed 9-26-24; 8:45 am]
BILLING CODE 8011-01-P
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