

[Federal Register: May 8, 2006 (Volume 71, Number 88)]
[Notices]               
[Page 26804-26807]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my06-75]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53742; File No. SR-NSCC-2006-04]

 
Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to Trade 
Submission Requirements and Fees and Pre-Netting

April 28, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ notice is hereby given that on March 15, 2006, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on March 22, 
2006, amended the proposed rule change described in Items I, II, and 
III below, which items have been prepared primarily by NSCC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NSCC is seeking to: (1) Require that all locked-in trade data 
submitted to NSCC for trade recording be submitted on a real-time 
basis; (2) prohibit pre-netting and other practices that prevent real-
time trade submissions; and (3) establish a new fee model for equity 
trade recording and netting services.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Real-Time Trade Submission
    NSCC processes approximately 25 million transaction sides per day 
with a gross value of nearly $500 billion.\3\ These transactions are 
submitted primarily on a locked-in basis by self-regulatory 
organizations (``SROs'') (such as the New York Stock Exchange, American 
Stock Exchange, Nasdaq Stock Market Inc., and the regional exchanges) 
and Qualified Special Representatives (``QSRs''). Generally a QSR is a 
member that (i) operates an automated execution system where the member 
is always the contra side to every trade, (ii) has a parent corporation 
or an affiliated corporation that operates an automated execution 
system where the member is always the contra side to every trade, or 
(iii) clear for a broker-dealer that operates an automated execution 
system where the broker-dealer is always the contra side to every trade 
and the subscribers to the system enter into an agreement with the 
broker-dealer and the member that acknowledges the member's role in the 
clearance and settlement of trades executed on the system.\4\
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    \3\ Data based upon second quarter, 2005, volumes.
    \4\ The remaining original trade data received by NSCC is 
submitted by members for trade comparison and consists of OTC equity 
trades and OTC fixed income trades submitted through the Fixed 
Income Clearing Corporation (``FICC'') Real-Time Trade Matching 
System. In 2005, an average of approximately 43,000 equity and fixed 
income sides per day were submitted to NSCC for trade comparison.
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    The New York Stock Exchange, the American Stock Exchange, and The 
Nasdaq Stock Market Inc., currently submit trades executed on their 
respective markets to NSCC on a real-time basis. Archipelago Exchange 
is scheduled to begin submitting locked-in trades on a real-time basis 
before the end of 2006. Accordingly, before the end of 2006, more than 
70% of the trades submitted to NSCC for trade recording will be 
submitted on a real-time basis. However, the remaining regional 
exchanges and most of the QSRs currently submit their trades either on 
a multi-batch or end-of-day basis. NSCC understands that some of these 
exchanges and QSRs are in the process of developing real-time trade 
submission capabilities.
    The proposed rule change would modify NSCC's Procedure II (Trade 
Comparison and Recording Service) to require that all locked-in trades 
submitted for trade recording by SROs and QSRs be submitted on a real-
time

[[Page 26805]]

basis.\5\ The term ``real-time'' when used with respect to trade data 
submission will be defined in Procedure XIII (Definitions) as 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.\6\
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    \5\ NSCC is not at this time modifying Procedure III (Trade 
Recording Service (Interface Clearing Procedures)), so files 
submitted to NSCC by The Options Clearing Corporation relating to 
option exercises and assignments will not be required to be 
submitted on a real time basis. OCC's process of assigning option 
assignments is and will continue to be an end-of-day process.
    \6\ As part of the proposal, Addendum N (Interpretation of the 
Board of Directors: Locked-In Data From Qualified Special 
Representatives) would be deleted as it would no longer be relevant.
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    This requirement will reduce systemic risk for a number of reasons, 
including the following:

    (1) Business Continuity. Requiring real-time submission of 
locked-in trade data reduces operational risk and promotes business 
continuity by promoting safe storage of transaction data at the 
clearing agency level. Without real-time submission, should an event 
occur after trade execution that disrupts trade input, submission of 
trade data could be significantly delayed or trade data could be 
lost.
    (2) Straight through processing. Real-time trade submission 
promotes straight through processing and will support the movement 
by the securities industry to shortened settlement cycles.
    (3) Risk Mitigation. Receipt of trade data on a real-time basis 
permits NSCC's Risk Management staff to begin analysis of trades 
earlier and thereby monitor members' market risks as they evolve 
during the trading day.
    (4) Trade Reconciliation. Receipt of trade data on a real-time 
basis will enable NSCC to record and report to its members trade 
data earlier in the day thereby promoting intraday reconciliation of 
transactions at the member level.

2. Prohibition of Pre-Netting and Clarification of Correspondent 
Clearing Service
    In order to effectively move to a real-time trade input 
environment, practices that prevent real-time submission would also be 
prohibited. Among such practices that NSCC has identified are the 
practice of ``pre-netting'' and the inappropriate use of its 
Correspondent Clearing Service. A review of QSR trade practices 
indicates that certain QSRs ``pre-net'' trades before they submit trade 
data to NSCC on a locked-in basis. Pre-netting is done on a bilateral 
basis between a QSR and its customer, both NSCC members. In addition, 
any pre-netting practices, whether being ``summarization'' (combining 
like-sided trades by executing/correspondent broker), ``compression'' 
(combining like-sided trades by clearing broker), netting, or any other 
practice that combines two or more trades prior to their submission to 
NSCC, prevent the submission to NSCC of transactions on a trade-by-
trade basis and cause submitting firms to delay submission of their 
trades. Delayed submission of trade data creates business continuity 
risk for members and their users and settlement risk for NSCC should 
some event occur that subsequently disrupts trade input and prevents 
NSCC from monitoring market risks as they evolve during the trading 
day. For these reasons, NSCC is proposing to require real-time trade 
submission and to prohibit pre-netting activity by members submitting 
trade data on a locked-in basis.\7\
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    \7\ The Commission has approved a proposed rule change filed by 
FICC that allowed FICC to adopt a similar requirement. Securities 
Exchange Act Release No. 51908 (June 22, 2005), 70 FR 37450 (June 
29, 2005). See FICC GSD Rules 11 (Netting System), Section 3 
(Obligation to Submit Trades) and 18 (Special Provisions For Repo 
Transactions), Section 3 (Collateral Substitution).
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    Accordingly, NSCC proposes to amend Rule 7 (Comparison and Trade 
Recording Operation) to make clear that locked-in trade data from SROs 
and QSRs must be submitted on a trade-by-trade basis in the original 
form in which the trades are executed and to make clear that pre-
netting is prohibited.\8\
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    \8\ Trades executed in the normal course of business between a 
clearing member and its correspondent or between correspondents of 
the clearing member, which correspondent(s) is not itself a member 
and settles such obligations through such clearing member 
(``internalized trades'') are not required to be submitted to NSCC 
and shall not be considered to violate the ``pre-netting'' 
prohibition.
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    For these same reasons, NSCC is modifying its Procedure IV (Special 
Representative Service) to clarify its appropriate use. The Special 
Representative Service (the Correspondent Clearing Service of the 
Special Representative Service in particular) is designed to provide an 
automated vehicle by which a member, acting as a Special 
Representative, may ``move'' a trade that is in the process of being 
cleared and settled at NSCC to the account of another member (its 
correspondent) on whose behalf the trade was executed. For example, 
Member A sells securities for Member B (Member A's correspondent) on 
the NYSE. The transaction is submitted to NSCC by the NYSE. As a 
result, Member A has a CNS obligation to deliver the shares sold. 
Acting as Special Representative for Member B, its correspondent, 
Member A then submits new transaction data to NSCC showing itself as a 
buyer of the securities and Member B, its correspondent, as the seller. 
As a result, the Special Representative, Member A, nets out in the CNS 
System, and Member B, the correspondent, has a CNS obligation to 
deliver. In other words, the service provides a method whereby the 
correspondent's obligation can be substituted for that of the Special 
Representative.\9\
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    \9\ This is generally referred to as a ``position movement'' to 
distinguish it from an actual trade.
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    The Correspondent Clearing Service was not designed as a mechanism 
to permit a Special Representative, acting as a QSR or otherwise, to 
submit original locked-in trade data. Therefore, NSCC is not requiring 
that Special Representative/Correspondent Clearing input be submitted 
on a real-time, trade for trade basis. Furthermore, the rule change 
adds language to Procedure IV to make it clear that the Correspondent 
Clearing Service is limited to position movements only and may not be 
used to submit original locked-in trade data.
3. Technical Clarifications
    At this time, as part of updating its Rules and Procedures relative 
to the Trade Recording and Special Representative Services, NSCC is 
proposing to also make certain technical corrections, clarifications, 
and organizational changes. These include the following:

    (1) Moving the definitions of ``Special Representative,'' 
``Qualified Special Representative,'' and ``Index Receipt Agent'' 
from Rule 39 to Rule 7 (where these terms are first used) and 
titling Rules 7 and 39 accordingly;
    (2) amending Procedure II to (i) clarify the procedures NSCC 
uses to confirm locked-in trade data (as opposed to editing and 
comparing trades submitted for comparison directly by members) and 
(ii) add back language relating to receipt of locked-in trade data 
from QSRs that was erroneously deleted in File No. SR-NSCC-2003-12; 
\10\ and
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    \10\ Securities Exchange Act Release No. 48141 (July 8, 2003), 
68 FR 42153 (July 16, 2003) [File No. SR-NSCC-2003-12].
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    (3) amending the definition of ``Registered Clearing Agency'' in 
Rule 1 (Definitions) to include an entity that provides electronic 
trade confirmation or central matching services pursuant to an 
exemption from registration and to make corresponding changes to 
applicable cross-references.

4. New Fee Model
    In conjunction with the implementation of the real-time trade 
submission requirement, NSCC plans to implement a new fee model to 
address certain economic factors that it believes have influenced 
firms' trade submission practices described above. The proposed new fee 
model is designed to respond to trading activity trends, to mitigate 
the anticipated impact of the proposed real-time submission 
requirement, and to

[[Page 26806]]

realign fees with service benefits. The scope of the new fee model 
includes revised fees for equity Trade Recording, Correspondent 
Clearing, and Flip Trades, and a new fee structure for trade clearance 
(i.e., Netting Fee).
    The relevant portion of NSCC's proposed revised fee structure is 
set forth below. Language proposed to be added is italicized, and 
language proposed to be deleted is in brackets.

Addendum A--National Securities Clearing Corporation Fee Structure

I. Trade Comparison and Recording Service Fees
* * * * *
    C. Trade recording fees will be charged as follows on those items 
originally compared by other parties, but cleared through the 
Corporation:\11\
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    \11\ Trade Recording Fees will be charged for all OCS and IDC 
input except for sides originally submitted correctly to the 
Corporation's comparison system.
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    1. Each side of each stock, warrant or right item entered for 
settlement, but not compared by the Corporation--[$.0015 per 100 
shares, with a minimum fee of $.0045 and a maximum fee of $.09] the sum 
of a) a fixed fee of $.0025, and b) a fee of $.0006 per 100 shares, 
with a minimum fee of $.0006 per 100 shares and a maximum fee of $0.60 
per 100,000 shares being applicable.
    2. Each side of each bond item entered for settlement, but not 
compared by the Corporation--$1.00 per side.
    3. Each side of a foreign security trade entered for settlement, 
but not compared by the Corporation--$.75 per side.
* * * * *
    II. TRADE CLEARANCE FEES--represents fees for netting, issuance of 
instructions to receive or deliver, effecting book-entry deliveries, 
and related activity.
* * * * *
    E. Trade Netting [Clearance (netting)]--The sum of $[.007] .003 per 
side, plus 1) a ``value into the net'' fee of $.19 per million dollars 
of processed value (i.e. for CNS and Balance Order netting, the sum of 
the contract amount and any CNS fail value), and 2) a ``value out of 
the net'' fee of $.69 per million dollars of settling value (i.e. the 
absolute value of the CNS Long and Short Positions).
    F. Designated valued deliveries\12\ (transaction processing) 
entered into the clearance system through special representative 
procedures--$[.05] .0125 per side.
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    \12\ A designated value delivery is an instruction from a 
Special Representative to CNS to transfer a valued position from one 
participant to another participant or to a non-participant through a 
clearing interface.
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    G. Flip Trades--$[.005] .0025 per side.
* * * * *
    These proposed fee changes are the result of an extensive analysis 
of the business practices, rules, fee structure, and the associated 
revenue flows for NSCC's clearing services. The current clearing fee 
schedule has a legacy that fundamentally dates back more than two 
decades and is primarily based on a transaction count. The bias towards 
transaction counting has led to a disproportionate growth in revenues 
as transaction activity has grown. In addition, analysis of transaction 
input shows a clear trend over time to smaller trade sizes. This trend 
is a function of decimalization, increased algorithmic trading 
activities, and the proliferation of new trading platforms. As a 
result, approximately 70% of equity trades currently submitted to NSCC 
are for 300 shares or less.
    While the proposed fee changes are designed to be revenue-neutral 
to NSCC, the mixture of these fees will change. Trade Recording, 
Correspondent Clearing, and Flip Trade fees will be reduced. The 
current trade clearance fee will be replaced with a new Netting Fee. 
The current trade clearance fee is a flat transaction fee that neither 
factors in the netting benefits of NSCC's CNS and Balance Order systems 
nor reflects the relative risk of members' netted obligations to NSCC. 
The new Netting Fee will reflect both the value of NSCC's netting and 
the relative risk presented thereby. Collectively, these fees are less 
volume sensitive and establish a fair and consistent pricing philosophy 
for all participants that encourages real-time capture of trade input.
    The Trade Recording fee would be modified to: (1) Establish a two-
element fee based on sides and shares; (2) institute a fixed charge per 
side; (3) decrease the share minimum per trade from 300 shares to 100 
shares; (4) increase share maximum per trade from 6,000 shares to 
100,000 shares; and (5) reduce overall fees for the Trade Recording 
service. The Netting Fee would be modified to establish a multi-element 
fee based on items and values, including: (1) A fixed fee per side; (2) 
an ``into-the-net'' fee based on items and gross value (i.e., the sum 
of the contract amount and fail value) processed in the CNS and Balance 
Order nets; and (3) an ``out-of-the-net'' fee based on the absolute 
value of the CNS Long and Short Positions. Finally, the ``per item'' 
fee for Correspondent Clearing and Flip Trades would be reduced.
5. Implementation Timeframe
    NSCC plans to implement all these proposed rule changes, other than 
the requirement to submit locked-in trade data on a real-time basis, on 
July 1, 2006, subject to Commission approval. Recognizing that 
requiring exchanges and QSRs to submit locked-in trade data on a real-
time basis will require some of these organizations to make systems 
changes, NSCC proposes that the requirement to submit locked-in trade 
data on a real-time basis and corresponding changes (i.e., adding the 
definition of ``Real-time'' to Procedure XIII and the deletion of 
Addendum N, which requires QSRs to submit locked-in trade data on trade 
date) would become effective on January 1, 2007, in order to provide 
time for those affected organizations to implement the necessary 
changes. The proposed rules will note these time frames accordingly.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act\13\ and the rules and 
regulations thereunder applicable to NSCC because it should promote the 
prompt and accurate clearance and settlement of securities transactions 
by requiring that all locked-in trade data submitted to NSCC for trade 
recording be submitted on a real-time basis and by prohibit pre-netting 
and other practices that prevent real-time trade submissions. In 
addition, the proposed rule change should provide for the equitable 
allocation of reasonable dues, fees, and other charges among NSCC's 
members.
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    \13\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    NSCC has not solicited or received any written comments on this 
proposal. NSCC will notify the Commission of any written comments it 
receives.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or

[[Page 26807]]

(ii) as to which the self-regulatory organization consents, the 
Commission will:
    (A) By order approve 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
) or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NSCC-2006-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NSCC-2006-04. This 
file number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/sro.shtml
). 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 inspection 
and copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of NSCC and on 
NSCC's Web site at http://www.nscc.com/legal. All comments received will be 

posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2006-04 and should be submitted on 
or before May 30, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-6910 Filed 5-5-06; 8:45 am]

BILLING CODE 8010-01-P
