Notice2026-01739
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change Concerning the Clearing of Exchange-Trade Funds With Options as Underlying Components
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Published
January 29, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 19 (Thursday, January 29, 2026)</title>
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[Federal Register Volume 91, Number 19 (Thursday, January 29, 2026)]
[Notices]
[Pages 3938-3941]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-01739]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104687; File No. SR-NSCC-2026-001]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change Concerning the
Clearing of Exchange-Trade Funds With Options as Underlying Components
January 26, 2026.
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 January 16, 2026, 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 (``NSCC Rules'') to facilitate clearing for the primary
market creation and redemption of exchange-traded funds (``ETFs'') that
have options as underlying components.\3\
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\3\ Capitalized terms not defined herein shall have the meaning
assigned to such terms in the NSCC 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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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 primary purpose of the proposed rule change is to amend the
NSCC Rules to facilitate clearing for the primary market creation and
redemption of ETFs that have options as underlying components.
Specifically, the proposed rule change would implement new messaging
connectivity between NSCC and The Options Clearing Corporation
(``OCC'') and allow NSCC to submit instructions to OCC on behalf of
their participants concerning position transfers or adjustments of ETF
option components in connection with ``in-kind'' ETF creation and
redemption orders. The proposed rule change is discussed in detail
below.
Background
ETFs (referred to as ``index receipts'' in the NSCC Rules) are
marketable securities that track stock indices, commodities, bonds, or
baskets of assets. ETFs are listed on exchanges and are traded
throughout the trading day. Shares of ETFs are created and redeemed in
the primary market and are traded on listed exchanges in the secondary
market. Each share of an ETF represents an undivided interest in the
underlying assets of the ETF.
NSCC facilitates central counterparty (``CCP'') clearing and
settlement of the creation and redemption of ETF shares in the primary
market as well as clearing of ETF trades in the secondary market. The
participants in the ETF primary market typically consist of the issuers
of ETFs (``ETF Sponsors''), custodian banks (``ETF Agents,'' also
referred to as ``Index Receipt Agents'' in the NSCC Rules), and
brokers/dealers that have agreements directly with ETF Sponsors to
allow the brokers/dealers to place orders for the creation and
redemption of ETF shares (``Authorized Participants'' or ``APs''). Both
the ETF Agents and APs are Members of NSCC.
In general, APs create and redeem ETF shares from the ETF Sponsors
in blocks called ``creation units.'' An AP that purchases a creation
unit of ETF shares delivers a ``basket'' of securities and other assets
to the ETF Agent, and then receives the creation unit of ETF shares in
return for those assets. The redemption process is the reverse of the
creation process: the AP redeems a creation unit of ETF shares in
exchange for a basket of securities and other assets. These creation
and redemption baskets are referred to as ``trading baskets.''
NSCC supports the creation and redemption of ETFs on both a ``cash-
only'' and ``in-kind'' basis. ``Cash-only'' creations and redemptions
represent an exchange of ETF shares for cash rather than for the
component securities and other assets in the trading basket. ``In-
kind'' ETF creations and redemptions represent an exchange of ETF
shares for the component securities and other assets in the trading
basket.
NSCC facilitates ``in-kind'' creation and redemption of ETFs with
trading baskets comprised of underlying securities that are cleared by
NSCC and settled by its affiliate clearing agency, The Depository Trust
Company (``DTC''). However, some ETFs have trading baskets containing
securities that are not eligible for clearing at NSCC, such as listed
options, which are cleared and settled by OCC.\4\ While the creation of
ETF units with underlying option components may currently be done on a
``cash-only'' basis at NSCC, ETF market participants typically handle
the redemption of such ETFs on an ``ex-clearing'' basis (e.g., outside
of traditional clearing mechanisms and NSCC).
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\4\ OCC is the world's largest equity derivatives clearing
organization and the sole clearing agency for standardized equity
options listed on national securities exchanges registered with the
Commission.
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APs and ETF Agents have raised concerns regarding the existing
processes for clearing ETFs that have option components in their
trading baskets. The current ETF creation process requires ETF market
participants to create the ETF shares at NSCC and effectuate the
simultaneous transfer or adjustment of the associated underlying option
components at OCC. Specifically, APs and ETF Agents must initiate a
``cash-only'' creation at NSCC, and the ETF Agent uses the cash
received from the order to purchase the necessary underlying options
components for the ETF through a prime broker, which are cleared by
OCC. Conversely, the entire redemption process is generally managed ex-
clearing, requiring multiple manual steps to ensure completion,
including the tracking, pricing, validation and ultimate execution of
options positions transfers at OCC by the APs, ETF Agents and primer
brokers, which are required in connection with the redemption process.
This process, as it stands, is fragmented and heavily dependent on
manual intervention, which increases the potential for errors and
operational
[[Page 3939]]
risk. This lack of integration and automation has been identified as a
significant pain point by industry participants. In addition, the
processing of these transactions outside of clearing, and without the
benefit of NSCC's CCP guaranty, can introduce counterparty credit risks
among participants. NSCC also understands that the bilateral processing
of these transactions outside a CCP model may result in additional
balance sheet costs to APs.
NSCC, OCC, and key industry stakeholders have closely collaborated
to design a new industry messaging interface between NSCC, OCC and ETF
market participants to facilitate the ``in-kind'' creation and
redemption of ETFs with option components at NSCC, mitigating the
aforementioned current state challenges. While the proposed rule change
would provide ETF industry participants with the ability to process
both ``in-kind'' creations and redemptions of ETFs with option
components, NSCC understands that industry participants would initially
use this new functionality primarily for ETF redemption orders, which
currently present the largest challenges for industry participants.
However, NSCC believes that by addressing industry concerns and
reducing operational burdens associated with the redemption of ETFs
with option components, this may in turn promote and facilitate primary
market creation and redemption activity more broadly for such ETFs.
Proposed Changes
NSCC proposes to amend the NSCC Rules to facilitate clearing for
the primary market creation and redemption of ETFs with options as
underlying components, and particularly the ``in-kind'' redemption of
such ETFs. Under the proposal, NSCC would process the intake of ETF
creation/redemption orders and any underlying securities that are
cleared by NSCC and settled by DTC. For underlying option components
that are ineligible for clearance through NSCC, such as FLEX options
and covered call options, NSCC would seamlessly route instructions to
OCC for the processing of any option position transfers or adjustments
associated with the creation/redemption order.\5\ NSCC is working with
OCC and other stakeholders to develop a messaging interface that would
operate similar to the existing messaging interface between NSCC and
OCC used for NSCC's Automated Customer Account Transfer Service
(``ACATS'') in transmitting such instructions to OCC.\6\ NSCC would
guarantee settlement of the ETFs as well as any underlying components
eligible for clearance and settlement at NSCC. However, NSCC would not
guarantee position transfers, position adjustments or related activity
concerning the underlying option components at OCC.
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\5\ OCC recently amended the OCC By-Laws to provide its Clearing
Members with additional certainty regarding the circumstances under
which they may submit adjustments to their positions with OCC by
aligning OCC's By-Laws with Exchange rules regarding off-floor
transfers of options positions. The rule change was intended, in
part, to remove any uncertainty about whether adjustment of options
positions at OCC is permissible to support ETF creations and
redemptions. See Securities Exchange Act Release No. 103521 (July
22, 2025), 90 FR 35322 (July 25, 2025) (File No. SR-OCC-2025-010).
\6\ ACATS is a non-guaranteed service provided by NSCC that
enables Members to effect transfers of customer accounts among
themselves. See Rule 50 (Automated Customer Account Transfer
Service) and Procedure XVIII (ACATS Settlement Accounting Operation)
of the NSCC Rules, supra note 3.
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NSCC proposes to adopt new rules in Section F of Procedure II,
including new sub-section 3 of Section F, to describe additional
requirements related to the creation and redemption of ETFs with option
components. The proposed rules would provide that ETF component
securities that are options (``Index Receipt Option Components'') that
are not eligible for settlement or processing through the facilities of
NSCC may be eligible for position transfer or adjustments through
another Registered Clearing Agency or derivatives clearing organization
(an ``Options Clearing Organization,'' such as OCC). The proposed rule
would further state that NSCC may provide instructions to the
applicable Options Clearing Organization concerning position transfers
or adjustment of Index Receipt Option Components in connection with the
creation and redemption of Index Receipts, and that any transactions,
position transfers, position adjustments, or settlements related to
Index Receipt Option Components shall be governed by and subject to
rules of the applicable Options Clearing Organization. These
instructions would be created by using the daily portfolio composition
files provided to NSCC by the ETF Agents to identify the underlying
option components within the fund to be transferred at OCC.\7\
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\7\ See Section F.1. of Procedure II (Trade Comparison and
Recording Service) of the NSCC Rules, supra note 3.
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In addition, the proposed rule would provide that NSCC would not be
responsible for the completeness or accuracy of any instruction
received from an Index Receipt Agent and transmitted to an Options
Clearing Organization with respect to Index Receipt Option Components
and would not be responsible for any action taken, or any delay or
failure to take any action by the Options Clearing Organization, in
connection with the transfer or adjustment of such Index Receipt Option
Components. The proposed rules would also clarify that NSCC's guaranty
would not apply to position transfers, position adjustments or any
associated settlements for Index Receipt Option Components and that
NSCC would not be liable for any obligations of any Options Clearing
Organization transferring such Index Receipt Option Components nor
shall the Clearing Fund or other assets of NSCC be available to such
Options Clearing Organization. As noted above, NSCC would only
guarantee the settlement of ETFs and underlying components that are
eligible for clearing at NSCC.
The proposed rule change would also allow NSCC to automatically
process payment orders between APs and ETF Agents to offset CNS \8\
cash debit amounts associated with the value of the option components
that have been instructed for position movement at OCC. For example, in
a redemption scenario, CNS credits the ETF Agent the ETF shares and
debits the ETF Agent the value of the ETF shares. In the case of an ETF
with option components, this would create exposure for the ETF Agent as
they are debited for the value of the entire ETF when they have already
instructed for the underlying option components to be transferred at
the OCC. Through industry discussions, ETF market participants have
agreed that the AP should issue a credit through a special payment
order to the ETF Agent to offset their CNS debit, reducing ETF Agent's
exposure on the order. NSCC would automate the processing of such
payment orders.
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\8\ CNS is NSCC's automated accounting and securities settlement
system that centralizes and nets the settlement of compared and
recorded securities transactions and maintains an orderly flow of
security and money balances. CNS provides clearance for equities,
ETFs, corporate bonds, unit investment trusts, and municipal bonds
that are eligible for book-entry transfer at DTC. Within CNS, all
eligible compared and recorded transactions for a particular
settlement date are netted by issue into one position per Member.
The position can be net long (buy), net short (sell) or flat. As a
continuous net system, those positions are further netted with
positions of the same issue that remain open after their original
scheduled settlement date (usually one business day after the trade
date or T+1), so that transactions scheduled to settle on any day
are netted with fail positions (i.e., positions that have failed in
delivery or receipt on the settlement date), which results in a
single deliver or receive obligation for each Member for each issue
in which the Member has activity.
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Accordingly, NSCC proposes to add new rules to provide that, with
respect to the redemption of index receipts containing Index Receipt
Option Components, Authorized Participants may be required to make a
cash payment to the Index Receipt Agents, which will be facilitated by
NSCC, equal to the value of the Index Receipt Option Components.
Alternatively, for the creation of index receipts containing Index
Receipt Option Components, Index Receipt Agents may be required to make
a cash payment to the Authorized Participant, which will be facilitated
by NSCC, equal to the value of the Index Receipt Option Components.
These cash payments are intended to offset corresponding debits in CNS
for the value of the Index Receipt Option Components transferred
through an Options Clearing Organization.
Finally, NSCC would amend existing Section F.1. of Procedure II to
incorporate the inclusion of certain information regarding Index
Receipt Option Components in the submission and reporting of the
composition of ETFs for creations and redemptions. Specifically, the
proposed rule change would require that Index Receipt Agents include in
portfolio composition files information concerning any component
securities that are Index Receipt Option Components to be transferred
through an Options Clearing Organization (e.g., the shares and their
associated quantities). The proposed rule change would also clarify
that the Portfolio Reports made available to Members by NSCC would
include information regarding Index Receipt Option Components. The
composition data within these Portfolio Reports may be used by NSCC to
process index receipt creations and redemptions on the next Business
Day.
The proposed rule change would address industry concerns and reduce
operational burdens by allowing NSCC to function as the central hub for
creation and redemption order processing for ETFs with option
components. The proposal would alleviate the operational burdens
currently placed on APs, ETF Agents, and prime brokers, reduce
bilateral counterparty risks by applying NSCC's guaranty to these
transactions, and reduce balance sheet costs for APs. Accordingly, the
proposed rule change would improve the overall efficiency of the
creation/redemption process for ETFs with option components and reduce
risk between counterparties and across the industry.
Implementation Timeframe
NSCC would implement the proposed rule change by no later than 60
Business Days after the approval of the proposed rule change by the
Commission. NSCC would announce the effective date of the proposed
changes by an Important Notice posted to its website.
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. Specifically, NSCC believes
that the proposed changes are consistent with Section 17A(b)(3)(F) of
the Act \9\ for the reasons set forth below.
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of Act \10\ 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 foster
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions. The proposed rule change is
designed to facilitate clearing for the primary market in-kind creation
and redemption of ETFs with options as underlying components. Under the
proposal, NSCC would expand its ETF clearing services to include the
processing of in-kind ETF creation/redemption orders for ETFs with
options as underlying components. NSCC would guarantee settlement of
such ETFs as well as any underlying components of such ETFs that are
eligible for clearance and settlement at NSCC and would seamlessly
route instructions concerning the underlying option components to OCC
for the processing of any option position transfers or adjustments
associated with the creation/redemption order (which would not be
guaranteed and settled by NSCC). As described above, market
participants primarily manage this process outside of NSCC today (i.e.,
ex-clearing) through fragmented and cumbersome manual workflows, and
without the benefit of NSCC's CCP guaranty, which introduces
operational and counterparty credit risks among market participants.
NSCC also understands that the bilateral processing of these
transactions outside of a CCP model may result in additional balance
sheet costs to APs. The proposed rule change would address industry
concerns and reduce operational burdens by allowing NSCC to function as
the central hub for creation and redemption order processing for ETFs
with option components, with NSCC guaranteeing settlement of these ETFs
as well as any underlying components eligible for clearing at NSCC and
routing instructions concerning the underlying option components to
OCC. In this way, the proposed rule change would alleviate the
operational burdens currently placed on APs, ETF Agents, and Prime
Brokers, reduce bilateral counterparty risks by applying NSCC's
guaranty to these transactions, and reduce balance sheet costs for APs.
Accordingly, the proposed rule change would improve the overall
efficiency of the creation/redemption process for ETFs with option
components and reduce risk between counterparties and across the
industry. NSCC therefore believes that the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions and foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions in
accordance with Section 17A(b)(3)(F) of Act.
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\10\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of Act \11\ 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 the proposed rule change would present any burden or have any
impact on competition. The proposed rule change is designed to
facilitate clearing for the primary market creation and redemption of
ETFs with options as underlying components. The proposed rule change
would enable NSCC to function as the central hub for creation and
redemption order processing for ETFs with option components,
alleviating the operational burden currently placed on APs, ETF Agents,
and prime brokers, while also enhancing overall efficiency and reducing
risk between counterparties and across the industry. The proposed ETF
service enhancement would be available to all Members and market
participants using NSCC's ETF clearing services and would not advantage
or disadvantage any particular participant or user of NSCC's services
or unfairly inhibit access to NSCC's services. 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.
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\11\ 15 U.S.C. 78q-1(b)(3)(I).
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(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/rules-regulations/how-submit-comment">www.sec.gov/rules-regulations/how-submit-comment</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#3e4a4c5f5a5750595f505a535f4c555b4a4d7e4d5b5d10595148"><span class="__cf_email__" data-cfemail="f6828497929f98919798929b97849d938285b6859395d8919980">[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#453730292068262a2828202b3136053620266b222a33"><span class="__cf_email__" data-cfemail="e795928b82ca84888a8a82899394a7948284c9808891">[email protected]</span></a>. Please include
file number SR-NSCC-2026-001 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-2026-001. 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 filing will be available for inspection and
copying at the principal office of NSCC and on DTCC's website (<a href="https://dtcc.com/legal/sec-rule-filings.aspx">https://dtcc.com/legal/sec-rule-filings.aspx</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-2026-001 and should be submitted on or
before February 19, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-01739 Filed 1-28-26; 8:45 am]
BILLING CODE 8011-01-P
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