[Federal Register Volume 71, Number 231 (Friday, December 1, 2006)]
[Notices]
[Pages 69604-69605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-20309]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54816; File No. SR-NSCC-2006-09]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Allow Cash, Next 
Day, and Seller's Option Equity Trades To Be Processed in the 
Continuous Net Settlement System and To Modify the Clearing Fund 
Formula To Mitigate the Risk Associated With the Shorter Settlement 
Cycle of Cash and Next Day Settling Trades

November 27, 2006.

I. Introduction

    On July 24, 2006, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2006-09 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on 
September 29, 2006.\2\ The Commission received no comment letters. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54482 (September 22, 
2006), 71 FR 57588.
---------------------------------------------------------------------------

II. Description

    NSCC seeks to modify its procedures for equity trade processing to 
enable cash,\3\ next day,\4\ and seller's option \5\ equity trades 
received on a locked-in basis from self-regulatory organizations 
(``SROs'') and Qualified Special Representatives (``QSRs'') to be 
processed in NSCC's Continuous Net Settlement (``CNS'') system.\6\ NSCC 
is also proposing to add a new element to its clearing fund formula to 
cover trades, such as cash and next day settling CNS trades, that 
settle in less than three days.\7\
---------------------------------------------------------------------------

    \3\ A ``cash trade'' is a trade that settles on the same day as 
the trade.
    \4\ A ``next day trade'' is a trade that settles on the day 
after the trade (``T+1'').
    \5\ A ``seller's option trade'' is a trade that gives the seller 
the right to deliver the securities on a specified date ranging from 
not less than two but not more than 180 days after the trade.
    \6\ Cash and next day trades in debt securities are compared but 
are not settled through NSCC. NSCC is not at this time seeking to 
make such trades eligible for CNS.
    \7\ NSCC plans to implement the proposed rule change in the 
first quarter of 2007. NSCC will notify the Commission and issue an 
Important Notice when it is prepared to implement the proposed rule 
change.
---------------------------------------------------------------------------

A. Cash, Next Day, and Seller's Option Equity Trades Processed in CNS

    Currently, cash, next day, and seller's option equity trades are 
recorded or compared, as applicable, and are reported by NSCC to its 
members but are not settled through NSCC's facilities. Instead these 
trades currently settle on a trade-for-trade basis directly between 
counterparties.
    When NSCC updated and revised CNS in 2004 (referred to as the ``CNS 
Rewrite''), a major aspect included a new platform for the system that 
accommodates real-time updates, including the capacity to add trades to 
the settlement process on a real-time basis for late input into CNS 
until noon of settlement day.\8\ At that time, rule changes were made 
to permit as-of regular way equity trades, i.e., trades settling on a 
T+3 basis that are either recorded or compared after trade date, to be 
submitted to NSCC up to the cut-off time designated by NSCC on T+3 for 
processing in CNS for settlement on their originally designated 
settlement dates. Given the system's real-time capabilities, members 
would now also like to have cash, next day, and seller's option equity 
trades in CNS-eligible CUSIPS made eligible for processing in CNS. This 
would provide members with the benefits of netting, automated trade 
processing, and NSCC's trade guaranty. Accordingly, NSCC proposes to 
amend its Procedure II (Trade Comparison and Recording Service) to 
permit cash, next day, and seller's option equity transactions 
submitted by SROs and QSRs on behalf of members to be processed for 
settlement through the facilities of NSCC.
---------------------------------------------------------------------------

    \8\ Securities Exchange Act Release No. 50026 (July 15, 2004), 
69 FR 43650 [File No. SR-NSCC-2004-01].
---------------------------------------------------------------------------

    Cash trades submitted after the cut-off time designated by NSCC, 
which is currently 11:30 a.m., would only be recorded and reported by 
NSCC and would, as is the current situation, have to be settled 
directly between the parties outside of NSCC.\9\ Next day as-of trades 
if received prior to the applicable cut-off time, would be processed 
for settlement on their originally designated settlement date.\10\ If 
such trades were received after the applicable cut-off time, the trade 
would be assigned the next settlement day for settlement. Seller's 
option equity trades would be accepted for processing so long as the 
parties' designated settlement date is not more than 180 days beyond 
the trade date. Finally, trades that are (i) designated ``special 
trades,'' \11\ (ii) in non-CNS eligible securities, (iii) in securities 
undergoing corporate actions, or (iv) scheduled to settle between the 
ex-dividend date and the record date would continue to be processed on 
a trade-for-trade basis outside NSCC's facilities.
---------------------------------------------------------------------------

    \9\ NSCC announced the 11:30 a.m. cut-off time in its Important 
Notice A6220, P&S5790 (March 23, 2006), which is 
the same as the current cut-off time for receipt of next day as-of 
trade input. Any changes to the cut-off times would be announced by 
NSCC through an Important Notice.
    \10\ Id.
    \11\ A ``special trade'' is defined in NSCC's rules to mean a 
transaction reported to NSCC involving a security either which the 
parties thereto agree to settle on a member-to-member basis or which 
NSCC designates as settling on a member-to-member basis.
---------------------------------------------------------------------------

    Conforming changes as needed are also being made to Procedure IV 
(Special Representative Service), Procedure V (Balance Order Accounting 
Operation), and Procedure VII (CNS Accounting Operation).

B. Shortened Process Trade Component in the Clearing Fund Formula

    NSCC is also proposing to modify its clearing fund formula 
(Procedure XV) by including an additional component that is intended to 
mitigate the risk associated with trades that are processed on a 
settlement cycle shorter than three days such as cash and next day 
settling CNS trades. Because NSCC's trade guaranty would attach to 
these trades prior to the scheduled collection of clearing fund monies, 
the proposed new additional component is intended to mitigate risk by 
calculating an average clearing fund requirement for this type of 
activity (referred to in the proposed rules and this release as 
``Specified Activity'') based upon historical activity.\12\
---------------------------------------------------------------------------

    \12\ This component is also being added to Appendix 1.
---------------------------------------------------------------------------

    Specified Activity positions would be isolated and a charge would 
be applied using not less than two standard deviations. The new 
component would equal the average of a member's charges for Specified 
Activity on the three highest days with the Special Activity charges 
calculated over the most recent

[[Page 69605]]

20-day period. Specified Activity includes cash trades, next day 
settling trades, as-of trades compared or recorded on T+3 (including 
trades received after the applicable T+2 cut-off time), and other 
similar transactions.

III. Discussion

    Section 19(b) of the Act 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 the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(F) of the Act requires that the rules 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in its custody or 
control or for which it is responsible.\13\ The Commission believes 
that NSCC's rule change is consistent with this section because it 
should facilitate the prompt and accurate clearance and settlement of 
securities by expanding the types of trades eligible for inclusion in 
settlement through CNS. In addition, the proposed rule change should 
help assure the safeguarding of securities and funds in NSCC's custody 
or control or for which it is responsible by enabling NSCC to more 
accurately determine and collect collateral to cover the potential 
additional exposures resulting from trades that are processed on a 
settlement cycle shorter than three days.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-2006-09) be and hereby 
is approved. 

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

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

Nancy M. Morris,
Secretary.
 [FR Doc. E6-20309 Filed 11-30-06; 8:45 am]
BILLING CODE 8011-01-P