[Federal Register Volume 75, Number 181 (Monday, September 20, 2010)]
[Notices]
[Pages 57318-57321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23372]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62882; File No. SR-NSCC-2010-09]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Regarding the 
Creation of a Universal Trade Capture Application and Automated Special 
Representative Facility

September 10, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 30, 2010, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on September 9, 
2010, amended the proposed rule change described in Items I and II 
below, which Items have been prepared primarily by NSCC. The Commission 
is publishing this notice to solicit comments on the rule change from 
interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would modify NSCC's rules and procedures 
regarding the creation of a Universal Trade Capture application and an 
automated Special Representative facility.

[[Page 57319]]

II. Self-Regulatory Organization'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 these statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Universal Trade Capture (``UTC'')
i. Background
    Since the 1970s, NSCC has provided a framework for the clearance 
and settlement of transactions executed on national securities 
exchanges and in the over-the-counter (``OTC'') market through its 
``Comparison and Trade Recording Operation.'' \2\ A Regional Interface 
Operation (the ``Interregional Interface Service'' or ``RIO'') was 
established in 1974 through National Clearing Corporation (one of 
NSCC's predecessor organizations) that permitted participating 
registered clearing corporations to provide for settlement of 
transactions in listed securities in the OTC market.\3\ Due to efforts 
to promote straight-through processing, markets have assumed 
responsibility for trade comparison (i.e., matching the buy and sell 
side of a securities transaction) at the point of trade and submit the 
compared transaction to NSCC for trade recording purposes (i.e., the 
transaction details have already been compared and the transaction is 
submitted to NSCC on a ``locked-in'' basis).
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    \2\ On separate platforms, NSCC also provides services 
supporting mutual funds, alternative investments, and insurance 
products in addition to providing various other services.
    \3\ In 1983, the service was further expanded to facilitate the 
settlement of transactions that had been confirmed and affirmed 
through the facilities of a registered securities depository.
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ii. Trade Comparison and Recording Operation
    Transaction data is for the compared trades submitted to NSCC on a 
locked-in basis by self-regulatory organizations (``SROs'') and 
Qualified Special Representatives (``QSRs'') on behalf of their members 
for the purpose of trade recording with purchaser and seller trade 
details compared by the SRO or QSR prior to submitting the information 
to NSCC. NSCC validates and records the transaction and reports the 
details back to the SRO, QSR, and member, as appropriate. NSCC also 
provides a Comparison Operation for its members whereby the 
purchasering and selling members may submit transactions that NSCC 
validates, compares, and reports back to the members. Compared and 
recorded trades are subsequently routed to the Continuous Net 
Settlement (``CNS'') Accounting Operation, the Balance Order Accounting 
Operation, or the Foreign Security Accounting Operation, as applicable. 
NSCC makes transaction details available to members, SROs, and QSRs on 
either a real-time, intra-day, or end-of-day basis.
    As NSCC's systems for receipt of input and generation of output 
have developed, depending upon the transaction and the originating 
entity, different reporting formats for both input and output may be 
utilized. There is currently no standard common record that is utilized 
by all market places or members.
iii. Regional Interface Operation
    Originally, each participating clearing corporation had the 
opportunity to provide its own system for comparison. Inter-clearing 
corporation (``RIO'') trades had to be compared by one of the two 
clearing corporations involved in the RIO transaction, and an inter-
clearing corporation had to be one side to each RIO trade. Over time, 
as organizations discontinued providing clearance and settlement 
services for their members and as those members ultimately became 
direct NSCC members or entered into clearing arrangements with other 
NSCC members, the reporting and settlement of trades submitted to NSCC 
changed.
    With the discontinuance of the RIO service, NSCC nevertheless 
continued to accept trade input from regional exchanges and other 
marketplaces using the RIO formats. The formats used by regional 
exchanges for the submission of transaction data to NSCC are generally 
the same as the formats that had been used for information processed 
through the interface operation and continue to commonly be referred to 
as ``RIO.'' Consequently, references today to ``RIO'' are not in 
reference to services previously provided under the interface service 
but rather to information received by NSCC in connection with NSCC's 
trade recording and trade reporting.
iv. Proposed Changes
    The proposed rule change will amend NSCC's rules to accommodate the 
UTC application, which will standardize, streamline, consolidate, and 
modernize NSCC's existing legacy trade capture applications 
(specifically, with respect to trade recording applications within 
NSCC's Trade Comparison and Recording Operation) to create a more 
efficient and centralized process. The UTC application will accept and 
process a common input record from all marketplaces and will provide 
for receipt and reporting of data in both real-time and intraday-batch 
submissions to and from members and SROs.
    UTC will replace all current locked-in OTC and listed trade capture 
applications with one central real-time validation and reporting 
process. UTC will have the capability to accept or reject, validate, 
process, and send contract output to members in real-time. Members will 
only have to support one standardized input and output format.
    As further described below, trade data will be received from 
markets in real-time and in batch. NSCC will convert the existing input 
format to the new UTC input record format, which will enable the UTC to 
provide members and SROs with their trade output in the format of their 
choice (new or old).\4\
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    \4\ See below, Section II.A.4. ``Implementation Timeframe.''
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    As part of this effort, NSCC will also provide for enhancements to 
its Correspondent Clearing Service and QSR processing as further 
described below.
2. Automated Special Representative Facility for Special 
Representatives and Qualified Special Representatives
i. Background
    NSCC's Correspondent Clearing Service is designed to provide an 
automated method by which a member acting as a Special Representative 
may move an obligation (a position) that is in the process of clearance 
at NSCC to the account of another member (its correspondent) on whose 
behalf the original trade was executed.\5\
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    \5\ The term ``original trade'' is used within Correspondent 
Clearing 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 NSCC Procedure IV. Correspondent 
Clearing is not a mechanism for original trade submission.
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ii. Proposed Changes
(a) Expanding Permitted Use of Service
    Currently, NSCC's rules provide the Correspondent Clearing Service 
may only be used in the following situations: (a) To accommodate a 
member with

[[Page 57320]]

multiple affiliate accounts that wishes to move a position resulting 
from an ``original trade'' in the process of clearance from one 
affiliate account to another and (b) to accommodate a member that 
relies on its Special Representative to execute a trade in a market 
that the member is precluded due to membership requirements (e.g., 
membership requirement for access to markets) or applicable regulation 
in order to enable the resulting position to be moved from the Special 
Representative to that member.
    Since it is not uncommon that members utilize the services of other 
broker-dealers to execute trades in markets where they are members in 
order to facilitate their trading strategies, NSCC proposes to modify 
its rules to provide that the Correspondent Clearing Service may be 
utilized by members to accommodate a member that relies on its Special 
Representative to execute a trade in any market regardless of whether 
that member maintains direct access to that market to enable the 
resulting position to be moved from the Special Representative to that 
member.
(b) Creation of an Automated Special Representative Facility
    Historically, members participating in the Correspondent Clearing 
Service and those utilizing the services of a QSR for the submission of 
original, locked-in trade data have been required to complete and remit 
to NSCC specific agreements for each relationship established. For 
example, in Correspondent Clearing, one member completes documentation 
(commonly referred to as Form 9a--Application for Status as a Special 
Representative) by which it applies to NSCC for status as a Special 
Representative to submit transactions on behalf of a specified member, 
i.e., the Correspondent. The Correspondent must also complete and 
submit to NSCC documentation (commonly referred to as a Form 9b--
Special Representative Consent) by which it consents to the 
establishment of that relationship. For QSR relationships, members 
submit Forms 9a and Form 9b along with an additional form that is 
specific to the QSR system being utilized (commonly referred to as an 
``Attachment 1''). NSCC then establishes these relationships on its 
internal masterfile. NSCC subsequently terminates these relationships 
at the direction of either party.
    To assist members in controlling and monitoring their Special 
Representative and Qualified Special Representative relationships, NSCC 
proposes to create an automated, online, and secure facility by which 
members themselves may establish, monitor, and maintain these 
relationships. Both the Special Representative Member and the 
Correspondent Member would have to submit matching instructions within 
the facility in order for the relationship to be established. Either 
party could submit a single entry to retire the relationship.
    Members will be reminded, through formatting within the facility, 
of their existing and unchanged obligations under NSCC's rules with 
respect to utilizing these services--namely, that by establishing the 
relationship within the facility both members continue to be bound by 
NSCC's rules, the Correspondent is bound by the details of all 
transactions submitted on their behalf by the Qualified Special 
Representative (or Special Representative as the case may be), and any 
errors or omissions or disputes relating to such relationships and 
related transactions must be resolved directly between the parties.
    The establishment of relationships through the automated facility 
shall meet the written notice requirements for such services as 
otherwise set forth within NSCC's rules and procedures. Members will no 
longer be required to submit signed forms to NSCC for these processes.
3. Rule Modifications
    As the UTC functionality will provide for processing of a common 
input or output record from or to all marketplaces (validating the 
transaction and providing for real-time message output to members and 
SROs), NSCC proposes to modify its rules to make conforming changes to 
reflect a single procedure or process for the submission and reporting 
of transaction data to and from SROs and members. References and 
provisions within the rules that pertained to the now obsolete RIO 
Service will be eliminated. In addition, NSCC will modify its rules to 
provide for an automated online functionality for the establishment and 
retirement of Special Representative and Qualified Special 
Representative relationships.
    Accordingly, NSCC proposes to amend the following rules and 
procedures as set forth in Exhibit 5 to its filing: Rule 7 (Comparison 
and Trade Recording Operation); Rule 40 (Interregional Interface 
Service); Procedure II (Trade Comparison and Recording Service); 
Procedure III (Trade Recording Service--Interface Clearing Procedures); 
and Procedure IV (Special Representative Service).\6\
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    \6\ In addition, the following Rules and Procedures will be 
generally modified to make conforming changes: Procedure VII (CNS 
Accounting Operation)--modified to conform an existing rule cross 
reference to a renamed Procedure; Procedure X (Execution of Buy-Ins) 
modified to eliminate references to regional accounts; Procedure 
XIII (Definitions), modified to remove a defined and now obsolete 
term ``Qualified Non-Participant;'' Procedure V (Balance Order 
Accounting Operation); Procedure VI (Foreign Security Accounting 
Operation); Addendum A (Fee Schedule)--modified to delete obsolete 
regional/inter-clearing corporation references; Addendum J 
(Statement of Policy--Locked-In Data from Service Bureaus)--modified 
to correct a preexisting erroneous reference to Section 5 of Rule 7 
where it should have referenced Section 6 of that Rule; Addendum K 
(Interpretation of the Board of Directors--Application of Clearing 
Fund)- modified to reflect specific reference to T Contracts, and 
Addendum N (Interpretation of the Board of Directors--Locked-In Data 
from Qualified Special Representatives)--modified to conform an 
existing rule cross reference to renumbered procedure subsection.
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4. Implementation Time Frame
    Subject to Commission approval, NSCC will implement the above 
changes by January 31, 2011.
    With respect to UTC changes and to support the migration period, 
NSCC will provide a conversation process to support those markets that 
are not yet ready to submit transaction data in the new common input 
format (i.e., NSCC will accept data in the old format and convert data 
into the new UTC format). The conversion process will enable NSCC to 
offer members and SROs the new output format regardless of whether the 
market has converted to the new standard. UTC will continue to support 
all existing interfaces with markets, members, and SROs with respect to 
trade input and output.
    To support maximum flexibility in allowing firms to migrate to the 
new input and output formats according to their own schedules, NSCC 
will continue to support all existing interfaces with markets, 
Member's, SRO's and regulatory agencies for a period of time after UTC 
is implemented.
    NSCC will establish a plan for the retirement of all legacy input 
and output formats and by the end of the first quarter of 2012 will 
reassess the status of those firms utilizing legacy formats. At that 
time, NSCC will work with any members, SROs, and regulatory agencies 
that have not yet converted from legacy reporting, thereby affording 
such firms sufficient lead time for migration.
    NSCC states that the proposed rule change will provide for 
additional efficiencies to NSCC and its participants while maintaining 
safe and secure operation and that the proposed rule change facilitates 
the prompt and

[[Page 57321]]

accurate clearance and settlement of securities. NSCC further states 
that the proposal is consistent with the CPSS/IOSCO Recommendations for 
Central Counterparties (specifically Recommendation 12) in that in 
addition to the additional efficiencies noted above, the UTC will also 
provide for cost-effectively meeting the requirements of NSCC's 
members.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC believes that the proposed rule change will not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    NSCC has not solicited or received written comments relating to the 
proposed rule change. NSCC will notify the Commission of any written 
comments it receives.

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 (i) as the Commission may 
designate up to 90 days of such date 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 may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an e-mail to [email protected]. Please include 
File No. SR-NSCC-2010-09 on the subject line.
     Paper comments should be sent in triplicate to Elizabeth 
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington DC 20549-1090.

All submissions should refer to File No. SR-NSCC-2010-09. This file 
number should be included on the subject line if e-mail 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at NSCC's principal office and NSCC's Web site 
(http://www.dtcc.com/legal/rule_filings/nscc/2010.php). 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 No. SR-NSCC-2010-09 and should be 
submitted October 12, 2010.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-23372 Filed 9-17-10; 8:45 am]
BILLING CODE 8010-01-P