[Federal Register Volume 78, Number 129 (Friday, July 5, 2013)]
[Pages 40538-40539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16088]



[Release No. 34-69890; File No. SR-NSCC-2013-05]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Require That All 
Locked-In Trade Data Submitted to It for Trade Recording Be Submitted 
in Real-time

June 28, 2013.

I. Introduction

    On April 30, 2013, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-NSCC-2013-05 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ On May 14, 2013, NSCC filed with the 
Commission Amendment No. 1 to the proposed rule change.\3\ The proposed 
rule change was published for comment in the Federal Register on May 
20, 2013.\4\ The Commission received one comment letter to the proposed 
rule change.\5\ For the reasons discussed below, the Commission is 
granting approval of the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, NSCC corrected a typographical error in 
the text of its Rules & Procedures (``Rules'') related to the 
proposed rule change.
    \4\ Release No. 34-69571 (May 14, 2013), 78 FR 29408 (May 20, 
    \5\ Comment letter from Kermit Kubitz dated June 10, 2013, 
http://www.sec.gov/comments/sr-nscc-2013-05/nscc201305.shtml. The 
commenter supports the proposed rule change's requirement ``to 
submit trades without any pre-processing . . .'' and believes that, 
``any cost associated with submitting higher volumes of data from 
limiting pre-netting is small compared to the risks and costs of 
inaccurate data which might result from submission of other than 
accurate trade data.''

II. Description

    NSCC filed the proposed rule change to require that all locked-in 
trade data submitted to NSCC for trade recording be submitted in real-
time,\6\ and to prohibit pre-netting \7\ and other practices that 
prevent real-time trade submission, as discussed below.

    \6\ The term ``real-time,'' when used with respect to trade 
submission, will be defined in Procedure XIII (Definitions) of 
NSCC's Rules as the submission of such data on a trade-by-trade 
basis promptly after trade execution, in any format and by any 
communication method acceptable to NSCC.
    \7\ According to NSCC, any pre-netting practices include: (i) 
``summarization'' (i.e., a technique in which the clearing broker 
nets all trades in a single CUSIP by the same correspondent broker 
into fewer submitted trades); (ii) ``compression'' (i.e., a 
technique to combine submissions of data for multiple trades to the 
point where the identity of the party actually responsible for the 
trades is masked); (iii) netting; and (iv) any other practice that 
combines two or more trades prior to their submission to NSCC 
(collectively, ``Pre-netting'').

Proposal Overview

    According to NSCC, the majority of all transactions processed at 
NSCC are submitted on a locked-in basis by self-regulatory 
organizations (``SRO'') (including national and regional exchanges and 
marketplaces), and Qualified Special Representatives (``QSR'').\8\ 
Currently, NSCC data reveals that almost all exchanges \9\ and some 
QSRs submit trades executed on their respective markets in real-time, 
representing approximately 91% of the locked-in trades submitted to 
NSCC today. The rule change will require that all locked-in trades 
submitted for trade recording by SROs and QSRs be submitted to NSCC in 

    \8\ QSRs are NSCC members (``Members'') that either (i) operate 
an automated execution system where they are always the contra side 
of every trade, (ii) are the parent or affiliate of an entity 
operating such an automated system, where they are the contra side 
of every trade, or (iii) clear for a broker-dealer that operates 
such a system and the subscribers to the system acknowledge the 
clearing Member's role in the clearance and settlement of these 
    \9\ One executing market with very low trade volume does not yet 
submit trades in real-time.
    \10\ Files submitted to NSCC by The Options Clearing Corporation 
(``OCC'') relating to option exercises and assignments (Procedure 
III, Section D--Settlement of Option Exercises and Assignments) will 
not be required to be submitted in real-time. OCC's process of 
assigning option assignments is and will continue to be an end-of-
day process.

    NSCC will also prohibit Pre-netting practices that preclude real-
time trade submission. NSCC states that typically, Pre-netting is done 
on a bilateral basis between a QSR and its customer, both NSCC Members. 
According to NSCC, Pre-netting practices disrupt NSCC's ability to 
accurately monitor market and credit risks as they evolve during the 
trading day. Therefore, NSCC will prohibit Pre-netting activity on the 
part of entities submitting original trade data on a locked-in 
basis.\11\ The rules of NSCC's affiliate Fixed Income Clearing 
Corporation (``FICC'') currently prohibit such activity, and this rule 
change will align NSCC's trade submission rules with those of FICC.\12\

    \11\ Trades executed in the normal course of business between a 
Member that clears for other broker-dealers, and its correspondent, 
or between correspondents of the Member, which correspondent(s) is 
not itself a Member and settles such obligations through such 
clearing Member (i.e., ``internalized trades'') are not required to 
be submitted to NSCC and shall not be considered to violate the Pre-
netting prohibition.
    \12\ See, e.g., GSD Rule 11 (Netting System), Section 3 (``All 
trade data required to be submitted to the Corporation under this 
Section must be submitted on a trade-by-trade basis with the 
original terms of the trades unaltered. A Member or any of its 
Affiliates may not engage in the Pre-Netting of Trades prior to 
their submission to the Corporation in contravention of this 
section. In addition, a Member or any of its Affiliates may not 
engage in any practice designed to contravene the prohibition 
against the Pre-Netting of Trades.''), http://dtcc.com/legal/rules_proc/FICC-Government_Security_Division_Rulebook.pdf. See also 
Order Granting Approval of a Proposed Rule Change Relating to Trade 
Submission Requirements and Pre-Netting, Release No. 34-51908 (June 
22, 2005), 70 FR 37450 (June 29, 2005).


[[Page 40539]]

    Further, NSCC does not expect the rule changes to impact trade 
volumes significantly. According to NSCC, the majority of trades are 
currently being submitted to NSCC in real-time on a trade-by-trade 
basis, and NSCC is operationally capable of managing trade volumes that 
are multiple times larger than the historical peak volumes.
    In the wake of recent industry disruptions, industry participants 
have been focused on developing controls to address the risks that 
arise from technology issues. A comment letter submitted to the 
Commission in advance of its Technology and Trading Roundtable, held in 
October 2012, and signed by a number of industry participants including 
SROs, broker-dealers, and buy-side firms, supported this rule change as 
a crucial component of the industry controls that could increase market 
transparency and ultimately mitigate risks associated with high-
frequency trading and related technology.\13\

    \13\ See Market Technology Roundtable Comment Letter dated Sept. 
28, 2012, available at http://www.sec.gov/comments/4-652/4652-17.pdf.

Implementation Timeframe

    NSCC will advise Members of the implementation date of the rule 
change through issuance of an NSCC Important Notice. The rule change 
will not be implemented earlier than seven (7) months from the date of 
Commission approval.

III. Discussion

    Section 19(b)(2)(C) of the Act \14\ 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. Section 17A(b)(3)(F) of the Act \15\ 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. The Commission finds that the rule change is consistent 
with these requirements because the receipt of locked-in trade data on 
a real-time basis should permit NSCC's risk management processes to 
monitor trades closer to trade execution on an intra-day basis and 
identify and manage any issues relating to excessive risk exposure 
earlier on a closer to real-time basis, thereby potentially minimizing 
a source of operational risk and facilitating the prompt and accurate 
clearance and settlement of securities transactions.

    \14\ 15 U.S.C. 78s(b)(2)(C).
    \15\ 15 U.S.C. 78q-1(b)(3)(F).

IV. 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 \16\ and the 
rules and regulations thereunder.

    \16\ 15 U.S.C. 78q-1.

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (File No. SR-NSCC-2013-05) be, 
and hereby is, approved.\18\

    \17\ 15 U.S.C. 78s(b)(2).
    \18\ In approving the proposed rule change, the Commission 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\19\

    \19\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16088 Filed 7-3-13; 8:45 am]