
[Federal Register Volume 82, Number 31 (Thursday, February 16, 2017)]
[Notices]
[Pages 10924-10926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03103]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80013; File No. SR-NASDAQ-2016-183]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of a Proposed Rule Change To Conform to Proposed 
Amendment to Rule 15c6-1(a) Under the Securities Exchange Act of 1934 
To Shorten the Standard Settlement Cycle From Three Business Days After 
the Trade Date to Two Business Days After the Trade Date

February 10, 2017.

I. Introduction

    On December 22, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities

[[Page 10925]]

and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to conform its rules to an 
amendment proposed by the Commission to Rule 15c6-1(a) under the Act to 
shorten the standard settlement cycle for most broker-dealer 
transactions from three business days after the trade date (``T+3'') to 
two business days after the trade date (``T+2'').\3\ The proposed rule 
change was published for comment in the Federal Register on December 
30, 2016.\4\ The Commission received two comment letters on the 
proposed rule change.\5\ This order approves 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. 78962 (Sep. 28, 
2016), 81 FR 69240 (Oct. 5, 2016) (Amendment to Securities 
Transaction Settlement Cycle) (File No. S7-22-16) (``T+2 Proposing 
Release'').
    \4\ See Securities Exchange Act Release No. 79687 (Dec. 23, 
2016), 81 FR 96545.
    \5\ See Letters to Brent J. Fields, Secretary, Commission from 
Manisha Kimmel, Chief Regulatory Officer, Wealth Management, Thomson 
Reuters, dated Jan. 19, 2017 and Thomas F. Price, Managing Director, 
Operations, Technology & BCP, Securities Industry and Financial 
Markets Association (``SIFMA''), dated Jan. 19, 2017 (``SIFMA 
Letter'').
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II. Description of the Proposal

    The Exchange proposes to amend Exchange Rules 11140 (Transactions 
in Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-Warrants''), 11150 
(Transactions ``Ex-Interest'' in Bonds Which Are Dealt in ``Flat''), 
11210 (Sent by Each Party), 11320 (Dates of Delivery), 11620 
(Computation of Interest), and IM-11810 (Sample Buy-In Forms), to 
conform to the Commission's proposed amendment to Rule 15c6-1(a) under 
the Act that would shorten the standard settlement cycle for most 
broker-dealer transactions from T+3 to T+2.
    Exchange Rule 11140(b)(1) concerns the determination of normal ex-
dividend and ex-warrants dates for certain types of dividends and 
distributions. Currently, with respect to cash dividends or 
distributions, or stock dividends, and the issuance or distribution of 
warrants, which are less than 25% of the value of the subject security, 
if the definitive information is received sufficiently in advance of 
the record date, the date designated as the ``ex-dividend date'' is the 
second business day preceding the record date if the record date falls 
on a business day, or the third business day preceding the record date 
if the record date falls on a day designated by Nasdaq Regulation as a 
non-delivery day. Under the proposal, the ``ex-dividend date'' would be 
the first business day preceding the record date if the record date 
falls on a business day, or the second business day preceding the 
record date if the record date falls on a day designated by Nasdaq 
Regulation as a non-delivery date.
    Exchange Rule 11150(a) concerns the determination of normal ex-
interest dates for certain types of transactions. Currently, all 
transactions, except ``cash'' transactions, in bonds or similar 
evidences of indebtedness which are traded ``flat'' are ``ex-interest'' 
on the second business day preceding the record date if the record date 
falls on a business day, on the third business day preceding the record 
date if the record date falls on a day other than a business day, and 
on the third business day preceding the date on which an interest 
payment is to be made if no record date has been fixed. Under the 
proposal, these transactions would be ``ex-interest'' on the first 
business day preceding the record date if the record date falls on a 
business day, on the second business day preceding the record date if 
the record date falls on a day other than a business day, and on the 
second business day preceding the date on which an interest payment is 
to be made if no record date has been fixed.
    Exchange Rules 11210(c) and (d) set forth ``DK'' procedures using 
``Don't Know Notices'' and other forms of notices, respectively.\6\ 
Exchange Rule 11210(c) currently provides that, when a party to a 
transaction sends a comparison or confirmation of a trade, but does not 
receive a comparison or confirmation or a signed DK from the contra-
member by the close of four business days following the trade date of 
the transaction, the party may use the procedures set forth in the 
rule. The Exchange proposes to shorten the ``four business days'' time 
period to one business day. Exchange Rule 11210(c)(2)(A) currently 
provides that a contra-member has four business days after the ``Don't 
Know Notice'' is received to either confirm or DK the transaction in 
accordance with Exchange Rule 11210(c)(2)(B) or (C). The Exchange 
proposes to shorten the ``four business days'' time period to two 
business days.\7\ Exchange Rule 11210(c)(3) currently provides that if 
the confirming member does not receive a response from the contra-
member by the close of four business days after receipt by the 
confirming member the fourth copy of the ``Don't Know Notice'' if 
delivered by messenger, or the post office receipt if delivered by 
mail, such shall constitute a DK and the confirming member shall have 
no further liability for the trade. The Exchange proposes to shorten 
the ``four business days'' time period to two business days.
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    \6\ Exchange Rule 11210 does not apply to transactions that 
clear through the National Securities Clearing Corporation or other 
clearing organizations registered under the Act. See Exchange Rule 
11210(a)(4).
    \7\ The Exchange also proposes to make non-substantive, 
formatting changes to Exchange Rule 11210(c)(2)(A).
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    The Exchange proposes similar changes to Exchange Rule 11210(d). 
Exchange Rule 11210(d) currently provides that, when a party to a 
transaction sends a comparison or confirmation of a trade, but does not 
receive a comparison or confirmation or a signed DK from the contra-
member by the close of four business days following the date of the 
transaction, the party may use the procedures set forth in the rule. 
The Exchange proposes to shorten the ``four business days'' time period 
to one business day. Exchange Rule 11210(d)(5) currently provides that 
if the confirming member does not receive a response in the form of a 
notice from the contra-member by the close of four business days after 
receipt of the confirming member's notice, such shall constitute a DK 
and the confirming member shall have no further liability. The Exchange 
proposes to shorten the ``four business days'' time period to two 
business days.
    Exchange Rule 11320 prescribes delivery dates for various types of 
transactions. Exchange Rule 11320(b) currently provides that in 
connection with a transaction ``regular way,'' delivery is made at the 
office of the purchaser on, but not before, the third business day 
following the date of the transaction. Under the proposal, delivery 
would be required to be made on, but not before, the second business 
day following the date of the transaction. Exchange Rule 11320(c) 
currently provides in part that, in connection with a transaction 
``seller's option,'' delivery may be made by the seller on any business 
day after the third business day following the date of transaction and 
prior to the expiration of the option, provided the seller delivers at 
the office of the purchaser, on a business day preceding the day of 
delivery, written notice of intention to deliver. Under the proposal, 
delivery may be made by the seller on any business day after the second 
business day following the date of the transaction and prior to 
expiration of the option.\8\
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    \8\ The Exchange also proposes to make a non-substantive change 
to Exchange Rule 11320(c).

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[[Page 10926]]

    Exchange Rule 11620 governs the computation of interest. Exchange 
Rule 11620(a) currently provides in part that, in the settlement of 
contracts in interest-paying securities other than for ``cash,'' there 
shall be added to the dollar price interest at the rate specified in 
the security, which shall be computed up to but not including the third 
business day following the date of the transaction. Under the proposal, 
the interest would be computed up to but not including the second 
business day following the date of the transaction.\9\
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    \9\ The Exchange also proposes to capitalize certain words in 
the title of Exchange Rule 11620(a).
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    Exchange Rule IM-11810(i)(1)(A) sets forth the circumstances under 
which a receiving member may deliver a Liability Notice to the 
delivering member as an alternative to the close-out procedures set 
forth in Exchange Rule IM-11810(a)-(g). Currently, when the parties to 
a contract are not both participants in a registered clearing agency 
that has an automated service for notifying a failing party of the 
liability that will be attendant to a failure to deliver, the notice 
must be issued using written or comparable electronic media having 
immediate receipt capabilities ``no later than one business day prior 
to the latest time and the date of the offer or other event'' in order 
to obtain the protection provided by the rule. Under the proposal, the 
notice must be ``sent as soon as practicable but not later than two 
hours prior to the cutoff time set forth in the instructions on a 
specific offer or other event'' in order to obtain the protection 
provided by the rule.
    The Exchange represents that it will announce the effective date of 
the proposed rule change in an Equity Regulatory Alert, which date 
would correspond with the industry-led transition to a T+2 standard 
settlement, and the effective date of the Commission's proposed 
amendment to Rule 15c6-1(a) under the Act.\10\
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    \10\ See supra note 3.
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III. Discussion and Commission's Findings

    After careful review of the proposed rule change and the comments, 
the Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange.\11\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\12\ which requires that the rules of a 
national securities exchange be designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and to protect 
investors and the public interest. As noted above, the Commission 
received two comment letters on the proposed rule change.\13\ Both 
comment letters express support for Commission approval of the proposed 
rule change.\14\
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See supra note 5.
    \14\ One of the commenters requests guidance from the Exchange 
with respect to Exchange Rule 11210(c) to permit the use of 
electronic means to communicate DK notices. The commenter notes 
that, currently, Exchange Rule 11210(c)(1) requires that such 
notices be sent ``by certified mail, return receipt requested, or 
messenger.'' See SIFMA Letter, at 3. The Commission notes that this 
request is beyond the scope of the current proposed rule change. 
However, the Commission notes that the Exchange could work with the 
commenter and other market participants to determine whether changes 
to the communication methods specified in Exchange Rule 11210(c) 
would be appropriate.
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    The Commission notes that the proposal would amend Exchange rules 
to conform to the amendment that the Commission has proposed to Rule 
15c6-1(a) under the Act \15\ and support a move to a T+2 standard 
settlement cycle. In the T+2 Proposing Release the Commission stated 
its preliminary belief that shortening the standard settlement cycle 
from T+3 to T+2 will result in a reduction of credit, market, and 
liquidity risk,\16\ and as a result a reduction in systemic risk for 
U.S. market participants.\17\ The Commission also notes that it has not 
yet adopted the proposed amendment to Rule 15c6-1(a), and that the 
Exchange has, accordingly, not proposed to make its amended rules 
effective at present. Instead, the Exchange has proposed to announce 
the effective date of the proposed rule change in an Equity Regulatory 
Alert. The Commission expects that the effective date of the proposed 
rule change would correspond with the compliance date of any amendment 
to Rule 15c6-1(a) that is adopted by the Commission. The Commission 
notes that, in October 2014, Depository Trust and Clearing Corporation 
(``DTCC''), in collaboration with the Investment Company Institute, 
SIFMA, and other market participants, formed an Industry Steering Group 
(``ISC'') and an industry working group to facilitate the transition to 
a T+2 settlement cycle for U.S. trades in equities, corporate and 
municipal bonds, and unit investment trusts.\18\ The ISC has identified 
September 5, 2017, as the target date for the transition to a T+2 
settlement cycle to occur.\19\
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    \15\ See supra note 3.
    \16\ Credit risk refers to the risk that the credit quality of 
one party to a transaction will deteriorate to the extent that it is 
unable to fulfill its obligations to its counterparty on settlement 
date. Market risk refers to the risk that the value of securities 
bought and sold will change between trade execution and settlement 
such that the completion of the trade would result in a financial 
loss. Liquidity risk describes the risk that an entity will be 
unable to meet financial obligations on time due to an inability to 
deliver funds or securities in the form required though it may 
possess sufficient financial resources in other forms. See T+2 
Proposing Release, supra note 3, 81 FR at 69241 n. 3.
    \17\ See id., 81 FR at 69241.
    \18\ See Press Release, DTCC, Industry Steering Committee and 
Working Group Formed to Drive Implementation of T+2 in the U.S. 
(Oct. 2014), http://www.dtcc.com/news/2014/october/16/ust2.aspx.
    \19\ See Press Release, ISC, US T+2 ISC Recommends Move to 
Shorter Settlement Cycle On September 5, 2017 (Mar. 7, 2016), http://www.ust2.com/pdfs/T2-ISC-recommends-shorter-settlement-030716.pdf.
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    For the reasons noted above, the Commission finds that the proposal 
is consistent with the requirements of the Act and would foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and protect investors and the public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-NASDAQ-2016-183), be and 
hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03103 Filed 2-15-17; 8:45 am]
BILLING CODE 8011-01-P


