
[Federal Register Volume 80, Number 198 (Wednesday, October 14, 2015)]
[Notices]
[Pages 61860-61863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26028]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76099; File No. SR-NSCC-2015-004]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change to Require Real-
Time Trade Submission and to Prohibit Pre-Netting Practices through 
NSCC's Correspondent Clearing Service

October 7, 2015.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on September 30, 2015, 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 NSCC. NSCC filed the 
proposed rule change pursuant to Section 19(b)(2) \3\ of the Act. 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)(2).
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') in order to require that trade data submitted to 
NSCC through its Correspondent Clearing service, other than position 
movements between NSCC Members that are Affiliates and Client Custody 
Movements, as described further below, be submitted in real-time, and 
to prohibit pre-netting and other practices that prevent real-time 
trade submission.\4\
---------------------------------------------------------------------------

    \4\ Terms not defined herein are defined in the Rules, available 
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
---------------------------------------------------------------------------

II. Clearing Agency'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 such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose \5\
---------------------------------------------------------------------------

    \5\ Pursuant to a telephone call with NSCC's internal counsel on 
October 1, 2015, staff in the Office of Clearance and Settlement 
added the heading. NSCC inadvertently omitted the heading.
---------------------------------------------------------------------------

    Requiring trades to be submitted in real-time facilitates efficient 
risk management for both NSCC and its Members, enables same-day 
bookkeeping and reconciliation, and, therefore, significantly reduces 
risk to the industry. Receipt of trade data on a real-time basis 
permits NSCC's risk management processes to monitor trades closer to 
trade execution on an intra-day basis, and to identify and risk manage 
any issues relating to exposures earlier in the day. Contract 
information is currently reported out to submitting firms by NSCC's 
Universal Trade Capture (``UTC'') system upon trade comparison and 
validation, and receipt of trade data in real-time enables NSCC

[[Page 61861]]

to report to Members trade data as it is received, thereby promoting 
intra-day reconciliation of transactions at the Member level. The 
majority of trades submitted to NSCC for clearing are currently being 
submitted 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.
    NSCC is proposing to require that trade data submitted through its 
Correspondent Clearing service, as described below, be submitted in 
real-time and to prohibit pre-netting and other practices that prevent 
real-time trade submission (``pre-netting practices''). NSCC would 
exclude from this requirement position movements between NSCC Members 
that are Affiliates and Client Custody Movements, as described below. 
The term ``real-time,'' when used with respect to trade submission, is 
defined in Procedure XIII (Definitions) of the Rules 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.
    NSCC's UTC system receives and validates transactions that are 
submitted to it, reports trade details back out to the submitting firm, 
and prepares those transactions for netting and settlement by routing 
transactions to netting and settlement systems, such as Continuous Net 
Settlement Accounting Operation, the Balance Order Accounting 
Operation, or the Foreign Security Accounting Operation, as applicable. 
Transactions are submitted to UTC either on a locked-in basis by self-
regulatory organizations (including national and regional exchanges and 
marketplaces) (``SROs'') and Qualified Special Representatives 
(``QSRs''),\6\ or are submitted to UTC as a part of NSCC's 
Correspondent Clearing service, which allows for post-execution 
position movements between two clearing firms. Currently all 
transactions submitted to NSCC on a locked-in basis by SROs and QSRs, 
which constitute approximately 95% of all transactions processed at 
NSCC,\7\ are required to be submitted in real-time and may not be pre-
netted or batched prior to submission.\8\
---------------------------------------------------------------------------

    \6\ QSRs are defined in Section 3 of Rule 7 as NSCC Members that 
have applied to NSCC to be a Special Representative, and 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. Rules, supra note 4.
    \7\ Based on data from the second quarter of 2015, which show an 
approximate daily average of 41 million transactions processed at 
NSCC, with an approximate total daily value of an average of $455 
billion; and an approximate average of 1.1 million submissions 
through Correspondent Clearing, with an approximate total daily 
value of an average of $57 billion. The average daily volume of 
submissions through Correspondent Clearing is less than 5% of NSCC's 
overall daily volume.
    \8\ Securities Exchange Act Release No. 69890 (June 28, 2013), 
78 FR 40538 (July 5, 2013) (File No. SR-NSCC-2013-05). See also Rule 
7 (Comparison and Trade Recording Operation), Procedure II (Trade 
Comparison and Recording Service), and Procedure IV (Special 
Representative Service), supra note 4.
---------------------------------------------------------------------------

    NSCC's Correspondent Clearing service is designed to provide an 
automated method by which a Member, acting as a Special Representative, 
may move a position that has been submitted to NSCC for clearing to the 
account of another Member (the submitting Member's correspondent) on 
whose behalf the original trade was executed.\9\ Members participating 
in the Correspondent Clearing service for post-execution position 
movements and those participating as a QSR for submission of original, 
locked-in trades are required to apply for status as a Special 
Representative or as a QSR, and to establish relationships with other 
NSCC Members that will be designated as their correspondents.\10\ While 
NSCC encourages Special Representatives to submit Correspondent 
Clearing submissions to NSCC as soon as possible following execution, 
currently these position movements may be sent to NSCC either in real-
time, intraday, or at the end of the day.
---------------------------------------------------------------------------

    \9\ The term ``original trade'' is used within the Rules 
describing the Correspondent Clearing service solely to distinguish 
between trades executed in the marketplace by the Special 
Representative, and transactions booked for accounting purposes to 
accommodate the movement of positions between Members as provided 
for in Section C of Procedure IV. Original trades may not be 
submitted through NSCC's Correspondent Clearing service. Rules, 
supra note 4.
    \10\ Pursuant to a telephone call with NSCC's internal counsel 
on October 5, 2015, staff in the Office of Clearance and Settlement 
corrected an incorrect statement that Members utilizing the services 
of a QSR are required to apply for status as a Special 
Representative or as a QSR. NSCC intended to state that Members 
participating as a QSR are required to apply for status as a Special 
Representative or as a QSR.
---------------------------------------------------------------------------

    NSCC has continued to engage widely with its Members about the 
benefits of expanding the requirements to submit transactions in real-
time and, as a result of these continuing discussions, is now proposing 
to modify its Rules to require that trade data submitted through its 
Correspondent Clearing service also be submitted in real-time. The 
proposed rule change would also prohibit pre-netting practices that 
prevent real-time trade submission through Correspondent Clearing.
    NSCC's Rules currently prohibit pre-netting practices that preclude 
real-time submission with respect to submissions by QSRs and SROs. Pre-
netting practices that are currently prohibited include 
``summarization'' (a technique in which the clearing broker nets all 
trades in a single CUSIP by the same correspondent broker into fewer 
submitted trades), ``compression'' (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), netting, or any 
other practice that combines two or more trades prior to their 
submission to NSCC.
    NSCC is proposing to extend the prohibition against pre-netting 
practices to submissions through Correspondent Clearing because pre-
netting practices prevent the submission to NSCC of transactions on a 
trade-by-trade basis, and cause Special Representatives to delay 
submission of their trades, thereby undermining the risk mitigation 
benefits of real-time trade submission. Pre-netting practices disrupt 
NSCC's ability to accurately monitor market and credit risks as they 
evolve during the trading day.
    NSCC would exclude from the requirements of this proposal any 
position movements between Members that are Affiliates, as identified 
within NSCC's membership management records. As defined in Rule 4A, 
``Affiliate'' means a person that controls or is controlled by or is 
under common control with another person.\11\ Position movements 
between Affiliates do not introduce the risk management concerns that 
are mitigated by real-time trade submission. As such, Members would not 
be required to submit these position movements in real-time, but would 
continue to be encouraged to do so. Positions movements between 
Affiliates represent fewer than 5% of trade data submitted through 
Correspondent Clearing to NSCC.\12\
---------------------------------------------------------------------------

    \11\ Control of a person means the direct or indirect ownership 
or power to vote more than 50% of any class of the voting securities 
or other voting interests of any person. Rule 4A, supra note 4.
    \12\ Based on data from the second quarter of 2015, which show 
an approximate daily average of 1.1 million submissions through 
Correspondent Clearing at NSCC, with an approximate total daily 
value of an average of $57 billion; and an approximate average of 
52,000 position movements through Correspondent Clearing between 
Affiliates, with an approximate total daily value of an average of 
$13 billion. The average daily volume of position movements through 
Correspondent Clearing between Affiliates is less than 1% of NSCC's 
overall daily volume.
---------------------------------------------------------------------------

    In order to submit trade data through Correspondent Clearing 
outside of the

[[Page 61862]]

real-time trade submission requirements, Special Representatives would 
need to identify a transaction as an Affiliate position movement. NSCC 
would validate the Affiliates' relationship between the counterparties 
by a check against the information within NSCC's membership management 
records as of the time of the trade submission. Members continue to be 
required to provide NSCC with current information regarding their 
corporate ownership structure. If an Affiliate relationship is not 
reflected on NSCC's records at the time of the trade submission, the 
transaction will be rejected.
    NSCC would also exclude from the requirements of this proposal 
position movements that occur between two unaffiliated clearing 
brokers, typically at the end of the day, on behalf of a common 
customer for custody purposes (``Client Custody Movements''). These 
movements, which today represent approximately 1% of submissions 
through Correspondent Clearing, would be exempt from the requirement 
because they necessarily take place at the end of the day, after the 
common client has reviewed its end of day positions and has instructed 
the clearing brokers as to which positions it will move for custody 
purposes.
    NSCC proposes to amend Rule 7 (Comparison and Trade Recording 
Operation), Procedure II (Trade Comparison and Recording Service), and 
Procedure IV (Special Representative Service) to require that trades 
submitted by Special Representatives for trade recording through NSCC's 
Correspondent Clearing service be submitted on a real-time basis and to 
make clear that trade data submitted to NSCC through Correspondent 
Clearing service must be submitted on a trade-by-trade basis, in the 
original form executed, and that pre-netting practices are prohibited. 
The proposed rule change would also make clear that these requirements 
would not apply to position movements between NSCC Members that are 
Affiliates or to Client Custody Movements.

Implementation Timeframe

    Pending Commission approval of this proposed rule change, Members 
would be advised of the implementation date through issuance of an NSCC 
Important Notice. The proposed rule change would not be implemented 
earlier than ten business days from the date of Commission approval.
2. Statutory Basis
    NSCC believes that this proposal is consistent with Section 
17A(b)(3)(F) of the Act, which requires that NSCC's Rules be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions and, in general, to protect investors and the 
public interest.\13\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(F). Pursuant to a telephone call with 
NSCC's internal counsel on October 1, 2015, staff in the Office of 
Clearance and Settlement corrected an incorrect reference to 5 
U.S.C. 78q-1(b)(3)(F). NSCC intended to refer to 15 U.S.C. 78q-
1(b)(3)(F).
---------------------------------------------------------------------------

    The proposal would enable NSCC to monitor trades closer to trade 
execution on an intra-day basis and identify and risk manage any issues 
relating to exposures earlier in the day. Further, receipt of trade 
data in real-time would enable NSCC to report to Members trade data as 
it is received, promoting intra-day reconciliation of transactions at 
the Member level. Therefore, the proposed rule change would promote the 
prompt and accurate clearance and settlement of securities transactions 
by reducing operational, market, and credit risks faced by NSCC and its 
Members, consistent with the requirements of the Act, in particular 
Section 17A(b)(3)(F), as cited above.

(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change would have any 
impact on competition because the proposed requirements would apply an 
existing requirement equally to all Members that submit transactions to 
NSCC through its Correspondent Clearing service.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants, or Others

    NSCC has not received any written comments relating to this 
proposal. NSCC will notify the Commission of any written comments 
received by NSCC.

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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NSCC-2015-004 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NSCC-2015-004. 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 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 Web site 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of NSCC and on 
DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-2015-004 and should be 
submitted on or before November 4, 2015.


[[Page 61863]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-26028 Filed 10-13-15; 8:45 am]
BILLING CODE 8011-01-P


