
[Federal Register Volume 80, Number 225 (Monday, November 23, 2015)]
[Notices]
[Pages 73028-73029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29726]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76458; File No. SR-NSCC-2015-005]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Permit Trades in 
Eligible Fixed Income Securities Scheduled To Settle on Day After Trade 
Date To Be Processed for Settlement at National Securities Clearing 
Corporation

November 17, 2015.
    On October 7, 2015, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2015-005 pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ to allow certain fixed-income securities 
trades that that are scheduled to settle on the day after trade date 
(``T+1'') to settle either through NSCC's Continuous Net Settlement 
(``CNS'') system, or through its Balance Order Accounting Operation on 
a trade-for-trade basis. The proposed rule change was published for 
comment in the Federal Register on October 15, 2015.\3\ The Commission 
did not receive any comment letters on the proposed rule change. For 
the reasons discussed below, the Commission is granting approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76112 (October 8, 
2015), 80 FR 62121 (October 15, 2015) (SR-NSCC-2015-005).
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I. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as 
provided by NSCC:
    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') in order to permit trades in fixed income 
securities (corporate and municipal bonds, and unit investment trusts, 
collectively ``CMU'') that are T+1 to settle either through its CNS 
system, as described below, or through its Balance Order Accounting 
Operation on a trade-for-trade basis, as described below, when eligible 
for settlement through these services.\4\
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    \4\ Terms not defined herein are defined in the Rules, available 
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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Background

    CMU transactions that are effected in the over-the-counter markets 
and submitted to NSCC directly by Members on a bilateral basis are 
processed through NSCC's Real Time Trade Matching (``RTTM'') platform. 
Within RTTM, the buy and sell sides of a transaction are validated and 
matched, resulting in a compared trade that is reported to Members. 
This process is called ``trade comparison.''
    Today, with the exception of CMU trades that are submitted to NSCC 
to settle on a timeframe that is shorter than T+2,\5\ CMU trades 
submitted to NSCC through RTTM are first compared within RTTM, and then 
are processed into NSCC's Universal Trade Capture (``UTC'') system, 
where they are checked for eligibility for settlement either through 
NSCC's CNS system \6\ or through its Balance Order Accounting Operation 
on a trade-for-trade basis.\7\ These CMU trades, those that are 
scheduled to settle on a T+2 or longer timeframe, are then processed 
for settlement through the settlement service for which they are 
eligible, i.e. either the CNS system or the Balance Order Accounting 
Operation on a trade-for-trade basis. If a CMU trade is not eligible 
for settlement through either CNS or the Balance Order Accounting 
Operation, or if it is marked as ``comparison-only'' when it is 
submitted to NSCC, it is only processed for trade comparison through 
RTTM and then it must settle away from NSCC.
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    \5\ The settlement timeframe of a trade, i.e. when the trade 
will settle relative to the trade date, is determined by the 
counterparties to that trade, and is indicated on the trade record 
when the trade is submitted to NSCC.
    \6\ CNS and its operation are described in Rule 11 and Procedure 
VII. Rules, supra note 4. To be eligible for CNS settlement, a 
transaction must be in a security that is eligible for book-entry 
transfer on the books of The Depository Trust Company, and must be 
capable of being processed in the CNS system; for example, 
securities may be ineligible for CNS processing due to certain 
transfer restrictions (e.g., 144A securities) or due to the pendency 
of certain corporate actions.
    \7\ The Balance Order Accounting Operation is described in 
Procedure V. Rules, supra note 4. CMU trades that are processed 
through the Balance Order Accounting Operation are processed on a 
trade-for-trade basis, as described in Section B of Procedure V, 
such that Receive and Deliver Orders, as defined in the Rules, are 
created instructing the counterparties to the transaction to deliver 
or receive a quantity of securities to or from their counterparty to 
that transaction. These transactions are not netted and are not 
subject to NSCC's risk management measures, as NSCC's central 
counterparty guarantee does not attach to these trades.
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    Today, all CMU trades submitted to NSCC through RTTM that are 
scheduled to settle on T+1 are automatically processed as comparison-
only in RTTM, and must settle away from NSCC. T+1 CMU trades are 
processed this way because, historically, NSCC's systems were not able 
to adequately risk manage CMU trades that settled on this shortened 
timeframe. NSCC has proposed to amend its Rules so that, following 
trade comparison through RTTM, T+1 CMU trades will be processed into 
UTC, where they will be checked for eligibility to settle through 
either CNS or the Balance Order Accounting Operation on a trade-for-
trade basis. If eligible, these CMU trades will settle through the 
settlement service for which they are eligible, i.e. either the CNS 
system or the Balance Order Accounting Operation on a trade-for-trade 
basis.
    Pursuant to Addendum K of the Rules, NSCC guarantees the completion 
of CNS settling trades that have reached the later of midnight of T+1 
or midnight of the day they are reported to Members, and guarantees the 
completion of shortened process trades, such as same-day and next-day 
settling trades, upon comparison or trade recording processing.\8\ 
Therefore, for those T+1 CMU trades that are eligible for settlement 
through CNS, NSCC will guarantee the completion of these trades upon 
comparison or trade recording processing. T+1 CMU trades that settle 
through CNS will be subject to all appropriate risk management measures 
and margining, pursuant to the existing risk management methodology and 
policies and procedures, including the Specified Activity charge 
component of its Clearing Fund charges, which applies to trades 
settling at NSCC on a shortened processing cycle.\9\ NSCC estimates 
that CMU trades that are designated to settle on T+1 and will be 
eligible to settle through CNS represent less than half of a percent of 
all CMU trades processed at NSCC, and less than 2% of the total value 
of all CMU trades processed at NSCC.\10\ In order to

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implement this proposed rule change, NSCC will amend Procedure II 
(Trade Comparison and Recording Service). In particular, these 
amendments will provide that CMU T+1 transactions will be handled in 
the same manner as CMU T+2 trades and trades submitted for regular way 
(or T+3) settlement. Procedure II will also be amended to remove 
reference to CMU T+1 transactions from the section that identifies 
those trades that are accepted by NSCC for comparison-only processing.
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    \8\ NSCC guarantees the completion of trades that settle through 
CNS pursuant to Addendum K of the Rules. Rules, supra note 4.
    \9\ The components of NSCC's Clearing Fund are described in 
Procedure XV, and the Specified Activity charge is described in 
Section I(A)(1)(g) for trades settling through CNS. Rules, supra 
note 4.
    \10\ Based on data from the first quarter of 2015, an 
approximate daily average of 45,000 CMU trades are processed at 
NSCC, with an approximate total daily value of an average of $8.3 
billion. Of the approximate daily average of 45,000 CMU trades 
processed at NSCC, an approximate daily average of 200 CMU trades 
are designated to settle on T+1 and are in securities that are 
eligible for settlement in CNS. Of the approximate daily value of an 
average of $8.3 billion in CMU trades processed at NSCC, CMU trades 
that are designated to settle on T+1 and are in securities that are 
eligible for settlement in CNS have an approximate total daily value 
of an average of $145 million. The average daily CMU transaction 
volume is less than 1% of NSCC's overall daily volume.
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Implementation

    The effective date of the proposed rule change will be announced 
via an NSCC Important Notice.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. The Commission believes the proposal is 
consistent with section 17A(b)(3)(F) of the Act.\12\
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, as well 
as, in general, protect investors and the public interest.\13\ By 
permitting T+1 CMU transactions to settle through CNS or the Balance 
Order Accounting Operation, the transactions will receive the benefit 
of NSCC's settlement services, including, in the case of CNS, a trade 
guarantee. Thus, the proposal will protect investors and the public 
interest by mitigating NSCC Members' settlement risk and counterparty 
risk. As such, the Commission believes that the proposal is consistent 
with section 17A(b)(3)(F) of the Act.\14\
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    \13\ Id.
    \14\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of section 17A of the Act \15\ and the 
rules and regulations thereunder.
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    \15\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that proposed rule change SR-NSCC-2015-005 be, and hereby is, 
approved.\16\
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    \16\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29726 Filed 11-20-15; 8:45 am]
 BILLING CODE 8011-01-P


