[Federal Register Volume 86, Number 216 (Friday, November 12, 2021)]
[Notices]
[Pages 62851-62853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24619]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93532; File No. SR-NSCC-2021-010]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Establish the 
Securities Financing Transaction Clearing Service and Make Other 
Changes

November 5, 2021.

I. Introduction

    On July 22, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2021-010 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule 
Change was published for comment in the Federal Register on August 12, 
2021.\3\ The Commission has received comment letters on the Proposed 
Rule Change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 92570 (August 5, 2021), 
86 FR 44482 (August 12, 2021) (SR-NSCC-2021-010) (``Notice''). NSCC 
also filed the proposal contained in the Proposed Rule Change as 
advance notice SR-NSCC-2021-803 (``Advance Notice'') with the 
Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act''). 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i). 
Notice of filing of the Advance Notice was published for comment in 
the Federal Register on August 12, 2021. Securities Exchange Act 
Release No. 92568 (August 5, 2021), 86 FR 44530 (August 12, 2021) 
(SR-NSCC-2021-803). The proposal contained in the Proposed Rule 
Change and the Advance Notice shall not take effect until all 
regulatory actions required with respect to the proposal are 
completed.
    \4\ Comment letters are available at https://www.sec.gov/comments/sr-nscc-2021-010/srnscc2021-010.htm.
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    On September 2, 2021, pursuant to Section 19(b)(2) of the Act,\5\ 
the Commission designated a longer period within which to approve, 
disapprove, or institute proceedings to determine whether to approve or 
disapprove the Proposed Rule Change.\6\ This order institutes 
proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\ to 
determine whether to approve or disapprove the Proposed Rule Change.
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 92860 (September 2, 
2021), 86 FR 50569 (September 9, 2021) (SR-NSCC-2021-010).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    As described in the Notice,\8\ NSCC proposes to (i) establish the 
securities financing transaction clearing service (``SFT Clearing 
Service'') to make central clearing available at NSCC for equity 
securities financing transactions, which are, broadly speaking, 
transactions where the parties exchange equity securities against cash 
and simultaneously agree to exchange the same securities and cash, plus 
or minus a rate payment, on a future date (collectively, ``SFTs''), 
(ii) establish new membership categories and requirements for 
sponsoring members and sponsored members whereby existing Members would 
be permitted to sponsor certain institutional firms into membership, 
(iii) establish a new membership category and requirements for agent 
clearing members whereby existing Members would be permitted to submit, 
on behalf of their customers, transactions to NSCC for novation, and 
(iv) make other amendments and clarifications to the Rules, as 
described in greater detail below.
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    \8\ The description of the Proposed Rule Change is based on the 
statements prepared by NSCC in the Notice. See Notice, supra note 3. 
Capitalized terms used herein and not otherwise defined herein are 
defined in NSCC's Rules & Procedures, available at www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf, and the Notice.
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(i) Key Parameters of the Proposed SFT Clearing Service

    NSCC proposes central clearing for SFTs with a one business day 
term in eligible equity securities that are entered into by Members, 
Sponsored Members that are sponsored into NSCC by Sponsoring Members 
(as described below), or Agent Clearing Members on behalf of Customers 
(as described below). NSCC will maintain eligibility criteria for the 
securities that may underlie an SFT that NSCC will accept for novation. 
NSCC would, as an initial matter, provide the proposed SFT Clearing 
Service for only those SFTs where the underlying securities are CNS-
eligible equity securities that have a per share price of $5 or more, 
although NSCC may modify eligible equity at a later date.
    The final settlement obligations of each SFT, other than a 
Sponsored Member transaction, that is novated to NSCC would settle 
receive-versus-payment/delivery-versus-payment at The Depository Trust 
Company (``DTC''). SFT deliver orders would be processed in accordance 
with DTC's

[[Page 62852]]

rules and procedures, including provisions relating to risk controls. 
DTC would accept delivery instructions for an SFT from NSCC, as agent 
for DTC participants that are SFT Members.\9\
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    \9\ On July 22, 2021, DTC submitted a proposed rule change to 
provide DTC participants that are also NSCC Members with settlement 
services in connection with NSCC's proposed SFT Clearing Service. 
See Securities Exchange Act Release No. 92572 (August 5, 2021), 86 
FR 44077 (August 11, 2021) (SR-DTC-2021-014).
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    A securities lender would have the right to submit a recall notice 
to NSCC in respect of a novated SFT for which Final Settlement 
obligations have not yet been satisfied. If a securities borrower does 
not return the lent securities by the recall date specified in such 
notice, the securities lender would be eligible to buy-in, in 
accordance with such timeframes and deadlines as established by NSCC 
for such purpose, such securities. Buy-in would allow a securities 
lender to purchase securities equivalent to the borrowed securities in 
the market and charge a securities borrower for the cost of this 
purchase. Similarly, a securities borrower would have the right to 
accelerate the scheduled final settlement of a novated SFT and return 
the borrowed securities earlier than the scheduled final settlement and 
settle the transaction.
    SFT activity would be risk managed by NSCC in a manner consistent 
with Members' CNS positions but would be margined independently of the 
Member's CNS positions. NSCC would collect margin (referred to as the 
Required SFT Deposit) for all SFT activities, subject to a $250,000 
minimum deposit. NSCC would also require an additional premium for non-
returned SFTs. In addition, NSCC would require that (i) a minimum of 
40% of an SFT Member's margin for SFT consist of a combination of cash 
and certain treasury securities, and (ii) the lesser of $5,000,000 or 
10% of an SFT Member's margin for SFT (but not less than $250,000) 
consist of cash. NSCC would also have the discretion to raise the 
minimum cash deposit required.
    In a case of an SFT Member default, NSCC would be able to delay its 
satisfaction of final settlement obligations to non-defaulting SFT 
Members beyond the normal settlement cycle for the purchase or sale of 
securities to the extent NSCC determines that taking market action to 
close-out some or all of the defaulted SFT Member's novated SFT 
Positions would create a disorderly market in the relevant SFT 
Securities. In such a situation, non-defaulting SFT Members would not 
be able to effect a recall or an associated buy-in or accelerate the 
delayed final settlement obligations. During any such delay, NSCC would 
continue paying to and receiving from non-defaulting SFT Members the 
payment for the change in market value of the securities with respect 
to their novated SFTs.

(ii) Sponsoring Members and Sponsored Members

    NSCC would establish a sponsored membership program to allow 
Members to serve as the pre-novation counterparty and credit 
intermediary for their institutional firm clients in clearing. Under 
the proposal, all Members would be eligible to apply to become 
Sponsoring Members in NSCC, subject to specified credit criteria. A 
Member whose application to become a Sponsoring Member has been 
approved would be permitted to sponsor their institutional firm clients 
into membership as Sponsored Members. Such Sponsoring Members would 
then be able to facilitate their institutional firm clients' cleared 
activity, and such transactions would be eligible for novation to NSCC.
    A Sponsoring Member would be responsible for (i) submitting data on 
its Sponsored Members' SFTs to NSCC or appointing a third-party 
approved SFT submitter to do so, (ii) posting to NSCC margins 
associated with the SFT activity of its Sponsored Members, (iii) 
providing an unconditional guaranty to NSCC for its Sponsored Members' 
final settlement and other obligations to NSCC, and (iv) covering any 
default loss allocable to its Sponsored Members.

(iii) Agent Clearing Members and Customers

    NSCC would establish an agent clearing membership designed to allow 
Members to serve as agent and credit intermediary for their 
institutional firm clients in clearing. Under the proposal, a Member 
that becomes an Agent Clearing Member would be permitted to submit SFTs 
executed by it as agent on behalf of its institutional firm clients as 
Customers. All Members would be eligible to apply to become Agent 
Clearing Members in NSCC subject to specified credit criteria and an 
activity limit. An Agent Clearing Member would be responsible for 
posting to NSCC margins associated with the activity of its Customers 
and covering any default loss allocable to its Customers; however, 
unlike a Sponsoring Member, an Agent Clearing Member would not be 
required to provide an unconditional guaranty to NSCC for its 
Customers' obligations.

III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \10\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
providing the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \10\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\11\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\12\ and the 
rules thereunder, including the following provisions:
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    \11\ Id.
    \12\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\13\ which requires, among 
other things, that the rules of a clearing agency must be designed to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible and to protect investors and the public interest; and
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(7)(i) under the Act,\14\ which requires a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor, and manage the liquidity risk that arises in or is 
borne by the covered clearing agency, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity by, at a minimum, maintaining 
sufficient liquid resources at the minimum in all relevant currencies 
to effect same-day and, where appropriate, intraday and multiday 
settlement of payment obligations with a high degree of confidence 
under a wide range of foreseeable stress scenarios that

[[Page 62853]]

includes, but is not limited to, the default of the participant family 
that would generate the largest aggregate payment obligation for the 
covered clearing agency in extreme but plausible market conditions.
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    \14\ 17 CFR 240.17Ad-22(e)(7)(i).
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     Rule 17Ad-22(e)(8) under the Act,\15\ which requires a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to define the point 
at which settlement is final to be no later than the end of the day on 
which the payment or obligation is due and, where necessary or 
appropriate, intraday or in real time.
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    \15\ 17 CFR 240.17Ad-22(e)(8).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\16\ 
Rule 17Ad-22(e)(7)(i) and (e)(8) under the Act,\17\ or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4(g) under the Act,\18\ any request for an opportunity to make an 
oral presentation.\19\
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(e)(7)(i) and (e)(8).
    \18\ 17 CFR 240.19b-4(g).
    \19\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by December 3, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 17, 2021.
    The Commission asks that commenters address the sufficiency of 
NSCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\20\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \20\ See Notice, supra note 3.
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    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 [email protected]. Please include 
File Number SR-NSCC-2021-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2021-010. 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 website (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 website 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 website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2021-010 and should be submitted on 
or before December 3, 2021. Rebuttal comments should be submitted by 
December 17, 2021.

    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)(31).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-24619 Filed 11-10-21; 8:45 am]
BILLING CODE 8011-01-P


