
[Federal Register Volume 78, Number 129 (Friday, July 5, 2013)]
[Notices]
[Pages 40525-40527]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16086]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69894; File No. SR-NSCC-2013-805]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection to Advance Notice Filing To Require 
That All Locked-in Trade Data Submitted to It for Trade Recording Be 
Submitted in Real-Time

June 28, 2013.

I. Introduction

    On April 30, 2013, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2013-805 (``Advance Notice'') 
pursuant to Section 806(e) of Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act''),\1\ entitled 
the Payment, Clearing, and Settlement Supervision Act of 2010 
(``Clearing Supervision Act'' or ``Title VIII'') and Rule 19b-4(n) of 
the Securities Exchange Act of 1934 (``Exchange Act''). On May 14, 
2013, NSCC filed with the Commission Amendment No. 1 to the Advance 
Notice.\2\ The Advance Notice was published in the Federal Register on 
June 11, 2013.\3\ The Commission received one comment letter to the 
proposed rule change.\4\ This publication serves as notice of no 
objection to the Advance Notice.
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ In Amendment No. 1, NSCC corrected a typographical error in 
the text of its Rules & Procedures (``Rules'') related to the 
Advance Notice.
    \3\ Release No. 34-69699 (June 5, 2013), 78 FR 35076 (June 11, 
2013). NSCC also filed a proposed rule change pursuant to Section 
19(b)(1) of the Exchange Act on April 30, 2013 seeking Commission 
approval to permit NSCC to change its rules to reflect the proposed 
change described herein. The Commission, through delegated 
authority, published notice of the proposed rule change on May 14, 
2013. Release No. 34-69571 (May 14, 2013), 78 FR 29408 (May 20, 
2013).
    \4\ Comment letter from Kermit Kubitz (``Kubitz'') dated June 
10, 2013, http://www.sec.gov/comments/sr-nscc-2013-05/nscc201305.shtml. Kubitz supports the proposed rule change's 
requirement ``to submit trades without any pre-processing . . .'' 
and believes that, ``any cost associated with submitting higher 
volumes of data from limiting pre-netting is small compared to the 
risks and costs of inaccurate data which might result from 
submission of other than accurate trade data.'' The Commission 
considers all public comments received on the proposed rule change 
as comments to the Advance Notice.
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II. Analysis

    NSCC filed the Advance Notice to require that all locked-in trade 
data submitted to NSCC for trade recording

[[Page 40526]]

be submitted in real-time,\5\ and to prohibit pre-netting \6\ and other 
practices that prevent real-time trade submission, as discussed below.
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    \5\ The term ``real-time,'' when used with respect to trade 
submission, will be defined in Procedure XIII (Definitions) of 
NSCC's Rules as the submission of such data on a trade-by-trade 
basis promptly after trade execution, in any format and by any 
communication method acceptable to NSCC.
    \6\ According to NSCC, any pre-netting practices include: (i) 
``Summarization'' (i.e., a technique in which the clearing broker 
nets all trades in a single CUSIP by the same correspondent broker 
into fewer submitted trades); (ii) ``compression'' (i.e., a 
technique to combine submissions of data for multiple trades to the 
point where the identity of the party actually responsible for the 
trades is masked); (iii) netting; and (iv) any other practice that 
combines two or more trades prior to their submission to NSCC 
(collectively, ``Pre-netting'').
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Proposal Overview

    According to NSCC, the majority of all transactions processed at 
NSCC are submitted on a locked-in basis by self-regulatory 
organizations (``SRO'') (including national and regional exchanges and 
marketplaces), and Qualified Special Representatives (``QSR'').\7\ 
Currently, NSCC data reveals that almost all exchanges \8\ and some 
QSRs submit trades executed on their respective markets in real-time, 
representing approximately 91% of the locked-in trades submitted to 
NSCC today. The rule change will require that all locked-in trades 
submitted for trade recording by SROs and QSRs be submitted to NSCC in 
real-time.\9\
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    \7\ QSRs are NSCC members (``Members'') that either (i) operate 
an automated execution system where they are always the contra side 
of every trade, (ii) are the parent or affiliate of an entity 
operating such an automated system, where they are the contra side 
of every trade, or (iii) clear for a broker-dealer that operates 
such a system and the subscribers to the system acknowledge the 
clearing Member's role in the clearance and settlement of these 
trades.
    \8\ One executing market with very low trade volume does not yet 
submit trades in real-time.
    \9\ Files submitted to NSCC by The Options Clearing Corporation 
(``OCC'') relating to option exercises and assignments (Procedure 
III, Section D--Settlement of Option Exercises and Assignments) will 
not be required to be submitted in real-time. OCC's process of 
assigning option assignments is and will continue to be an end-of-
day process.
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    NSCC will also prohibit Pre-netting practices that preclude real-
time trade submission. NSCC states that typically, Pre-netting is done 
on a bilateral basis between a QSR and its customer, both NSCC Members. 
According to NSCC, Pre-netting practices disrupt NSCC's ability to 
accurately monitor market and credit risks as they evolve during the 
trading day. Therefore, NSCC will prohibit Pre-netting activity on the 
part of entities submitting original trade data on a locked-in 
basis.\10\ The rules of NSCC's affiliate Fixed Income Clearing 
Corporation (``FICC'') currently prohibit such activity, and this rule 
change will align NSCC's trade submission rules with those of FICC.\11\
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    \10\ Trades executed in the normal course of business between a 
Member that clears for other broker-dealers, and its correspondent, 
or between correspondents of the Member, which correspondent(s) is 
not itself a Member and settles such obligations through such 
clearing Member (i.e., ``internalized trades'') are not required to 
be submitted to NSCC and shall not be considered to violate the Pre-
netting prohibition.
    \11\ See, e.g., GSD Rule 11 (Netting System), Section 3 (``All 
trade data required to be submitted to the Corporation under this 
Section must be submitted on a trade-by-trade basis with the 
original terms of the trades unaltered. A Member or any of its 
Affiliates may not engage in the Pre-Netting of Trades prior to 
their submission to the Corporation in contravention of this 
section. In addition, a Member or any of its Affiliates may not 
engage in any practice designed to contravene the prohibition 
against the Pre-Netting of Trades.''), http://dtcc.com/legal/rules_proc/FICC-Government_Security_Division_Rulebook.pdf. See also 
Order Granting Approval of a Proposed Rule Change Relating to Trade 
Submission Requirements and Pre-Netting, Release No. 34-51908 (June 
22, 2005), 70 FR 37450 (June 29, 2005).
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    Further, NSCC does not expect the rule changes to impact trade 
volumes significantly. According to NSCC, the majority of trades are 
currently being submitted to NSCC in real-time on a trade-by-trade 
basis, and NSCC is operationally capable of managing trade volumes that 
are multiple times larger than the historical peak volumes.
    In the wake of recent industry disruptions, industry participants 
have been focused on developing controls to address the risks that 
arise from technology issues. A comment letter submitted to the 
Commission in advance of its Technology and Trading Roundtable, held in 
October 2012, and signed by a number of industry participants including 
SROs, broker-dealers, and buy-side firms, supported this rule change as 
a crucial component of the industry controls that could increase market 
transparency and ultimately mitigate risks associated with high-
frequency trading and related technology.\12\
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    \12\ See Market Technology Roundtable Comment Letter dated Sept. 
28, 2012, available at http://www.sec.gov/comments/4-652/4652-17.pdf.
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Implementation Timeframe

    NSCC will advise Members of the implementation date of the rule 
change through issuance of an NSCC Important Notice. The rule change 
will not be implemented earlier than seven (7) months from the date of 
Commission approval.

III. Discussion

    Although Title VIII does not specify a standard of review for an 
Advance Notice, the stated purpose of Title VIII is instructive.\13\ 
The stated purpose of Title VIII is to mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for systemically-
important financial market utilities (``FMU'') and providing an 
enhanced role for the Board of Governors of the Federal Reserve System 
(``Federal Reserve'') in the supervision of risk management standards 
for systemically-important FMUs.\14\
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    \13\ 12 U.S.C. 5461(b).
    \14\ Id.
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    Section 805(a)(2) of the Clearing Supervision Act \15\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities and 
financial institutions engaged in designated activities for which it is 
the supervisory agency or the appropriate financial regulator. Section 
805(b) of the Clearing Supervision Act \16\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \15\ 12 U.S.C. 5464(a)(2).
    \16\ 12 U.S.C. 5464(b).
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     promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act on October 22, 2012 
(``Clearing Agency Standards'').\17\ The Clearing Agency Standards 
became effective on January 2, 2013 and require clearing agencies that 
perform central counterparty (``CCP'') services to establish, 
implement, maintain, and enforce written policies and procedures that 
are reasonably designed to meet certain minimum requirements for their 
operations and risk management practices on an ongoing basis.\18\ As 
such, it is appropriate for the Commission to review Advance Notices 
against these risk management standards that the Commission promulgated 
under Section 805(a) and the objectives and principles of these

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risk management standards as described in Section 805(b).
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    \17\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 
2012).
    \18\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Board of Governors 
governing the operations of designated FMUs that are not clearing 
entities and financial institutions engaged in designated activities 
for which the Commission or the Commodity Futures Trading Commission 
is the Supervisory Agency. See Financial Market Utilities, 77 FR 
45907 (Aug. 2, 2012).
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    Consistent with Section 805(a), the Commission believes NSCC's 
proposal promotes robust risk management, as well as the safety and 
soundness of NSCC's operations, while reducing systemic risks and 
supporting the stability of the broader financial system. As discussed 
above, the rule change will allow NSCC to mitigate the operational risk 
that results from locked-in trade data not being submitted to NSCC in 
real-time.
    Commission Rule 17Ad-22(d)(4) regarding identification and 
mitigation of operational risk,\19\ adopted as part of the Clearing 
Agency Standards,\20\ requires clearing agencies to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to: ``[i]dentify sources of operational risk and 
minimize them through the development of appropriate systems, controls, 
and procedures . . . .'' \21\ The Commission believes that the receipt 
of locked-in trade data on a real-time basis will permit NSCC's risk 
management processes to monitor trades closer to trade execution on an 
intra-day basis and identify and manage any issues relating to 
excessive risk exposure earlier on a closer to real-time basis, thereby 
potentially minimizing a source of operational risk.
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    \19\ 17 CFR 240.17Ad-22(d)(4).
    \20\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 
2012).
    \21\ 17 CFR 240.17Ad-22(d)(4).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\22\ that the Commission does not object to 
the proposed rule change described in the Advance Notice (File No. SR-
NSCC-2013-805) and that NSCC be and hereby is authorized to implement 
the proposed rule change as of the date of this notice or the date of 
the ``Order Approving Proposed Rule Change to Require that All Locked-
in Trade Data Submitted to It for Trade Recording be Submitted in Real-
time,'' \23\ whichever is later.
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    \22\ 12 U.S.C. 5465(e)(1)(I).
    \23\ Release No. 34-69890 (June 28, 2013).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16086 Filed 7-3-13; 8:45 am]
BILLING CODE 8011-01-P


