[Federal Register Volume 80, Number 225 (Monday, November 23, 2015)]
[Notices]
[Pages 73029-73031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29728]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76462; File No. SR-NSCC-2015-004]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Require Real-Time 
Trade Submission and To Prohibit Pre-Netting Practices Through NSCC's 
Correspondent Clearing Service

November 17, 2015.
    On September 30, 2015, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2015-004 pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ to require correspondent clearing trades 
to be submitted in real-time. The proposed rule change was published 
for comment in the Federal Register on October 14, 2015.\3\ The 
Commission did not receive comment letters regarding the proposed 
change. For the reasons discussed below, the Commission is granting 
approval of 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. 76099 (October 7, 
2015), 80 FR 61860 (October 14, 2015) (SR-NSCC-2015-004).
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I. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as 
provided by NSCC:
    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') in order to require that trade data submitted to 
NSCC through its Correspondent Clearing service, other than position 
movements between NSCC Members that are Affiliates and Client Custody 
Movements, as described further below, be submitted in real-time, and 
to prohibit pre-netting and other practices that prevent real-time 
trade submission.\4\
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    \4\ Terms not defined herein are defined in the Rules, available 
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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Background

    Requiring trades to be submitted in real-time facilitates efficient 
risk management for both NSCC and its Members, enables same-day 
bookkeeping and reconciliation, and, therefore, significantly reduces 
risk to the industry. Receipt of trade data on a real-time basis 
permits NSCC's risk management processes to monitor trades closer to 
trade execution on an intra-day basis, and to identify and risk manage 
any issues relating to exposures earlier in the day. Contract 
information is currently reported out to submitting firms by NSCC's 
Universal Trade Capture (``UTC'') system upon trade comparison and 
validation, and receipt of trade data in real-time enables NSCC to 
report to Members trade data as it is received, thereby promoting 
intra-day reconciliation of transactions at the Member level. The 
majority of trades submitted to NSCC for clearing are currently being 
submitted 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.
    NSCC will require that trade data submitted through its 
Correspondent Clearing service, as described below, be submitted in 
real-time and to prohibit pre-netting and other practices that prevent 
real-time trade submission (``pre-netting practices''). NSCC will 
exclude from this requirement position movements between NSCC Members 
that are Affiliates and Client Custody Movements, as described below. 
The term ``real-time,'' when used with respect to trade submission, is 
defined in Procedure XIII (Definitions) of the Rules as the submission 
of trade data on a trade-by-trade basis promptly after trade execution, 
in any format and by any communication method acceptable to NSCC.
    NSCC's UTC system receives and validates transactions that are 
submitted to it, reports trade details back out to the submitting firm, 
and prepares those transactions for netting and settlement by routing 
transactions to netting and settlement systems, such as Continuous Net 
Settlement Accounting Operation, the Balance Order Accounting 
Operation, or the Foreign Security Accounting Operation, as applicable. 
Transactions are submitted to UTC

[[Page 73030]]

either on a locked-in basis by self-regulatory organizations (including 
national and regional exchanges and marketplaces) (``SROs'') and 
Qualified Special Representatives (``QSRs''),\5\ or are submitted to 
UTC as a part of NSCC's Correspondent Clearing service, which allows 
for post-execution position movements between two clearing firms. 
Currently all transactions submitted to NSCC on a locked-in basis by 
SROs and QSRs, which constitute approximately 95% of all transactions 
processed at NSCC,\6\ are required to be submitted in real-time and may 
not be pre-netted or batched prior to submission.\7\
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    \5\ QSRs are defined in section 3 of Rule 7 as NSCC Members that 
have applied to NSCC to be a Special Representative, and 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 
trades. Rules, supra note 4.
    \6\ Based on data from the second quarter of 2015, which show an 
approximate daily average of 41 million transactions processed at 
NSCC, with an approximate total daily value of an average of $455 
billion; and an approximate average of 1.1 million submissions 
through Correspondent Clearing, with an approximate total daily 
value of an average of $57 billion. The average daily volume of 
submissions through Correspondent Clearing is less than 5% of NSCC's 
overall daily volume.
    \7\ Securities Exchange Act Release No. 69890 (June 28, 2013), 
78 FR 40538 (July 5, 2013) (File No. SR-NSCC-2013-05). See also Rule 
7 (Comparison and Trade Recording Operation), Procedure II (Trade 
Comparison and Recording Service), and Procedure IV (Special 
Representative Service), supra note 4.
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    NSCC's Correspondent Clearing service is designed to provide an 
automated method by which a Member, acting as a Special Representative, 
may move a position that has been submitted to NSCC for clearing to the 
account of another Member (the submitting Member's correspondent) on 
whose behalf the original trade was executed.\8\ Members participating 
in the Correspondent Clearing service for post-execution position 
movements and those participating as a QSR for submission of original, 
locked-in trades are required to apply for status as a Special 
Representative or as a QSR, and to establish relationships with other 
NSCC Members that will be designated as their correspondents. While 
NSCC encourages Special Representatives to submit Correspondent 
Clearing submissions to NSCC as soon as possible following execution, 
currently these position movements may be sent to NSCC either in real-
time, intraday, or at the end of the day.
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    \8\ The term ``original trade'' is used within the Rules 
describing the Correspondent Clearing service 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 Section C of Procedure IV. Original trades may not be 
submitted through NSCC's Correspondent Clearing service. Rules, 
supra note 4.
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    NSCC has continued to engage widely with its Members about the 
benefits of expanding the requirements to submit transactions in real-
time and, as a result of these continuing discussions, will modify its 
Rules to require that trade data submitted through its Correspondent 
Clearing service also be submitted in real-time. The proposed rule 
change will also prohibit pre-netting practices that prevent real-time 
trade submission through Correspondent Clearing.
    NSCC's Rules currently prohibit pre-netting practices that preclude 
real-time submission with respect to submissions by QSRs and SROs. Pre-
netting practices that are currently prohibited include 
``summarization'' (a technique in which the clearing broker nets all 
trades in a single CUSIP by the same correspondent broker into fewer 
submitted trades), ``compression'' (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), netting, or any 
other practice that combines two or more trades prior to their 
submission to NSCC.
    NSCC will extend the prohibition against pre-netting practices to 
submissions through Correspondent Clearing because pre-netting 
practices prevent the submission to NSCC of transactions on a trade-by-
trade basis, and cause Special Representatives to delay submission of 
their trades, thereby undermining the risk mitigation benefits of real-
time trade submission. Pre-netting practices disrupt NSCC's ability to 
accurately monitor market and credit risks as they evolve during the 
trading day.
    NSCC will exclude from the requirements of this proposal any 
position movements between Members that are Affiliates, as identified 
within NSCC's membership management records. As defined in Rule 4A, 
``Affiliate'' means a person that controls or is controlled by or is 
under common control with another person.\9\ Position movements between 
Affiliates do not introduce the risk management concerns that are 
mitigated by real-time trade submission. As such, Members will not be 
required to submit these position movements in real-time, but will 
continue to be encouraged to do so. Positions movements between 
Affiliates represent fewer than 5% of trade data submitted through 
Correspondent Clearing to NSCC.\10\
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    \9\ Control of a person means the direct or indirect ownership 
or power to vote more than 50% of any class of the voting securities 
or other voting interests of any person. Rule 4A, supra note 4.
    \10\ Based on data from the second quarter of 2015, which show 
an approximate daily average of 1.1 million submissions through 
Correspondent Clearing at NSCC, with an approximate total daily 
value of an average of $57 billion; and an approximate average of 
52,000 position movements through Correspondent Clearing between 
Affiliates, with an approximate total daily value of an average of 
$13 billion. The average daily volume of position movements through 
Correspondent Clearing between Affiliates is less than 1% of NSCC's 
overall daily volume.
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    In order to submit trade data through Correspondent Clearing 
outside of the real-time trade submission requirements, Special 
Representatives will need to identify a transaction as an Affiliate 
position movement. NSCC will validate the Affiliates' relationship 
between the counterparties by a check against the information within 
NSCC's membership management records as of the time of the trade 
submission. Members continue to be required to provide NSCC with 
current information regarding their corporate ownership structure. If 
an Affiliate relationship is not reflected on NSCC's records at the 
time of the trade submission, the transaction will be rejected.
    NSCC will also exclude from the requirements of this proposal 
position movements that occur between two unaffiliated clearing 
brokers, typically at the end of the day, on behalf of a common 
customer for custody purposes (``Client Custody Movements''). These 
movements, which today represent approximately 1% of submissions 
through Correspondent Clearing, will be exempt from the requirement 
because they necessarily take place at the end of the day, after the 
common client has reviewed its end of day positions and has instructed 
the clearing brokers as to which positions it will move for custody 
purposes.
    NSCC will amend Rule 7 (Comparison and Trade Recording Operation), 
Procedure II (Trade Comparison and Recording Service), and Procedure IV 
(Special Representative Service) to require that trades submitted by 
Special Representatives for trade recording through NSCC's 
Correspondent Clearing service be submitted on a real-time basis and to 
make clear that trade data submitted to NSCC through Correspondent 
Clearing service must be submitted on a trade-by-trade basis, in the 
original form executed, and that pre-netting practices are prohibited. 
The proposed rule change will also make clear that these requirements 
will not

[[Page 73031]]

apply to position movements between NSCC Members that are Affiliates or 
to Client Custody Movements.

Implementation

    The effective date of the proposed rule change will be announced 
via a NSCC Important Notice. The proposed rule change will not be 
implemented earlier than ten business days from the date of Commission 
approval.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \11\ 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. The Commission believes the proposal is 
consistent with section 17A(b)(3)(F) of the Act \12\ and Rule 17Ad-
22(d)(4) \13\ under the Act, as described in detail below.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(4).
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    Consistency with Section 17A(b)(3)(F) of the Act. Section 
17A(b)(3)(F) of the Act 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, as well as, in 
general, protect investors and the public interest.\14\ The Commission 
believes that the receipt of locked-in trade data on a real-time basis 
through NSCC's Correspondent Clearing service will enable NSCC's risk 
management processes to monitor such trades closer to trade execution 
and, thus, better identify and manage related risk exposure on an 
intra-day basis. Further, receiving such transactions in real-time will 
promote intra-day reconciliation and, in return, more timely reporting 
of Member transactions back to Members, thereby enabling Members to 
manage their exposure to certain operational, market, and credit risks, 
all of which helps facilitate the prompt and accurate clearance and 
settlement of securities transactions. As such, the Commission believes 
that the proposal is consistent with section 17A(b)(3)(F) of the 
Act.\15\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ Id.
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    Consistency with Rule 17Ad-22(d)(4). Rule 17Ad-22(d)(4) under the 
Act requires a central counterparty, such as NSCC, to ``establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to . . . [i]dentify sources of operational risk and 
minimize them through the development of appropriate systems, controls, 
and procedures . . . .'' \16\ As stated above, the Commission believes 
that the receipt of locked-in trade data on a real-time basis through 
NSCC's Correspondent Clearing service will enable NSCC's risk 
management processes to monitor such trades closer to trade execution, 
on an intra-day basis, and, thus, identify and manage related risk 
exposure earlier, thereby potentially minimizing a source of 
operational risk. As such, the Commission believes that the proposal is 
consistent with Rule 17Ad-22(d)(4).\17\
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    \16\ 17 CFR 240.17Ad-22(d)(4).
    \17\ Id.
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III. 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 \18\ and the 
rules and regulations thereunder.
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    \18\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that proposed rule change SR-NSCC-2015-004 be, and hereby is, 
Approved.\19\
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    \19\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29728 Filed 11-20-15; 8:45 am]
 BILLING CODE 8011-01-P