[Federal Register Volume 84, Number 153 (Thursday, August 8, 2019)]
[Notices]
[Pages 39037-39041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16940]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86556; File No. SR-NSCC-2019-002]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change To Amend
Procedure VII With Respect to the Receipt of CNS Securities and Make
Other Changes
August 2, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 22, 2019, National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change would amend Procedure VII of NSCC's Rules
& Procedures (``Rules'') \3\ with respect to the receipt of securities
from NSCC's Continuous Net Settlement (``CNS'') System \4\ and make
technical changes, as described in greater detail below.
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\3\ Capitalized terms not defined herein are defined in the
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
\4\ The CNS System and its operation are described in Rule 11
(CNS System) and Procedure VII (CNS Accounting Operation) of the
Rules. Id.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to amend Procedure VII
(CNS Accounting Operation) with respect to the receipt of securities
from the CNS System in order to reflect a change in the allocation
algorithm used during the night cycle.\5\ The proposed rule change
would also make technical changes.
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\5\ Night cycle is sometimes also referred to as ``evening
cycle'' in the Rules. To ensure consistent terminology usage, NSCC
is proposing technical changes to replace references to ``evening
cycle'' with ``night cycle'' as described in greater detail below.
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(i) Background
NSCC's CNS System is an automated accounting and securities
settlement system that centralizes and nets the settlement of compared
and recorded securities transactions and maintains an orderly flow of
security and money balances. The CNS System provides clearance for
equities, corporate bonds,
[[Page 39038]]
unit investment trusts, and municipal bonds that are eligible for book-
entry transfer at The Depository Trust Company (``DTC''), an NSCC
affiliate.
Under the CNS System, all eligible compared and recorded
transactions for a particular settlement date are netted by CUSIP \6\
number into one position per Member. The position can be net long
(buy), net short (sell) or flat. As a continuous net system, those
positions are further netted with positions of the same CUSIP number
that remain open after their original scheduled settlement date
(usually two business days after the trade date or T+2), so that
transactions scheduled to settle on any day are netted with fail
positions (i.e., positions that have failed in delivery or receipt on
the settlement date), which results in a single deliver or receive
obligation for each Member for each CUSIP number in which the Member
has activity.
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\6\ CUSIP is a registered trademark of the American Bankers
Association. The term ``CUSIP number'' refers to the Committee on
Uniform Securities Identification Procedures identifying number.
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CNS relies on an interface with DTC for the book-entry movement of
securities. Procedure VII (CNS Accounting Operation) describes the
receipt and delivery of CNS Securities. CNS short positions are
compared against Members' DTC accounts to determine availability of
securities for delivery. If securities are available, they are
transferred from the Member's account at DTC to NSCC's account at DTC
to cover the Member's short obligations to CNS. In contrast, the
allocation of CNS long positions to receiving Members is processed in
an order determined by an algorithm built into the system. CNS long
positions are allocated to Members as the securities are received by
NSCC, i.e., CNS long positions are transferred from the NSCC account at
DTC to the accounts of NSCC Members at DTC, in accordance with the
algorithm.
For CNS Securities, NSCC uses a modified delivery versus payment
mechanism in that when a Member delivers securities to CNS, the Member
receives a credit, and when NSCC delivers securities to the long
receiving Member (a long allocation), the securities deliveries/
movements are not final until the ``effective time'' occurs pursuant to
Rule 12 (Settlement).\7\ Specifically, under the Rules, a CNS delivery
transaction is complete and final as to the delivering Member once the
securities are debited from the delivering Member's account at DTC and
credited to NSCC's CNS account at DTC; however, a CNS delivery
transaction does not become final as to the receiving ``long'' Member
until the ``effective time.''
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\7\ Pursuant to Rule 12 (Settlement), the ``effective time''
generally occurs when it is clear that NSCC has either been paid, or
is in a credit position with respect to a Member or its Settling
Bank, and NSCC has no obligation due with respect to a Member
pursuant to the Clearing Agency Cross-Guaranty Agreement. Until the
effective time has occurred in accordance with the Rules, NSCC
retains ownership rights in the long allocations. Supra note 3.
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The current settlement processing cycle spans two business days,
with a night cycle that begins at approximately 8:30 p.m. Eastern Time
(``ET'') on the day prior to settlement date and runs until
approximately 10 p.m. ET, and a day cycle that begins at approximately
6:30 a.m. ET on settlement date and runs until approximately 3:10 p.m.
ET. The night cycle and the day cycle settlement processes are
essentially the same, except that the night cycle settlement process
runs in batches and the day cycle settlement process runs continuously.
Transactions that do not get processed for settlement during the night
cycle are carried into the following day cycle for settlement
processing.
Current Allocation Algorithm
NSCC employs an algorithm to determine the order in which Members
with long allocations receive positions from CNS; however, Members can
submit priority requests that override NSCC's algorithm when they have
special needs to receive securities owed to them (e.g., the security is
undergoing a corporate action or the Member has an urgent customer
delivery). The priority requests can be submitted for the night cycle,
the day cycle, or both.
Pursuant to Procedure VII, subsection E (Influencing Receipts from
CNS), Members can request that they receive priority for some or all
issues on a standing or override basis. NSCC's Rules also permit a
Member to buy-in long positions that have not been delivered to it by
the close of business on the scheduled settlement date. Submission of
buy-in notices and other specified activity will also affect the
priority of a Member's long position.
The current priority groups are as follows--
First, long positions in a CNS Reorganization Sub-Account
established pursuant to paragraph H.4 of Procedure VII of the Rules;
\8\
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\8\ Supra note 3.
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Second, long positions against which Buy-In Intent \9\ notices are
due to expire that day but which were not filled the previous day;
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\9\ Section 7 of Rule 11 (CNS System) and subsection J of
Procedure VII (CNS Accounting Operation) of the Rules provide that
in the event a Member has a Long Position in a CNS Security, the
Member may demand immediate delivery thereof by submitting to NSCC a
Buy-In Intent notice in such form and within such times as
determined by NSCC. Supra note 3.
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Third, long positions against which Buy-In Intent \10\ notices are
due to expire the following day;
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\10\ Id.
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Fourth, (i) long positions in a receiving ID Net Subscriber's
agency account established at a Qualified Securities Depository,\11\
and (ii) long positions against the component securities of index
receipts;
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\11\ ID Net Service and its operation are described in Rule 65
(ID Net Service) and Procedure XVI (ID Net Service) of the Rules.
Supra note 3.
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Fifth, in descending sequence, priority levels as specified by
Standing Priority Requests and as modified by Priority Overrides.
Currently, when more than one long position in a given CNS Security
exists within the same priority group, the positions are allocated
based on their age, i.e., the ``oldest'' position is allocated
first.\12\ In addition, when more than one long position in a given CNS
Security exists within the same priority group all of which have been
long the same number of consecutive days (i.e., within the same age
group), the allocation rank is determined by a computer generated
random number.
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\12\ Age is defined in Procedure VII, subsection E, as the
number of consecutive days during which the position has been long,
irrespective of quantity. Supra note 3.
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The allocation algorithm currently used for the night and day
cycles is the same but is computed separately.
(ii) Proposed Changes to Allocation Algorithm
NSCC, together with DTC,\13\ is looking to improve processing
efficiency and maximize the number of securities transactions processed
for settlement during the night cycle.
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\13\ On July 22, 2019, DTC submitted a proposed rule change to
implement a new algorithm to optimize its settlement processing of
transactions during the night cycle (``DTC settlement optimization
algorithm''). The proposal is designed to maximize the number of
transactions processed for settlement during the night cycle. See
SR-DTC-2019-005, which was filed with the Commission. A copy of the
proposed rule change is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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Currently, approximately 50 percent (50%) of the CNS transactions
are processed for settlement during the night cycle. In order to
improve processing efficiency and maximize the number of CNS
transactions that would get processed for settlement during the night
cycle, NSCC is proposing a modification to the allocation algorithm
used during the night cycle. NSCC anticipates that the proposal would
increase the percentage of CNS
[[Page 39039]]
transactions processed for settlement during the night cycle to
approximately 65 percent (65%).
As described above, the current allocation sequence for day cycle
and night cycle is as follows: priority groups, age of positions, and
random number within an age group. Under the proposal, NSCC is
proposing changes to the allocation algorithm so that age of positions
and random number within an age group would no longer be considered as
factors when allocating CNS long positions within the same priority
group during the night cycle.\14\ Instead, allocation of CNS long
positions within the same priority group during the night cycle would
be determined by the DTC settlement optimization algorithm.\15\
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\14\ Based on data from January through April 2019, aged
positions (i.e., positions that have failed in delivery or receipt
on their respective scheduled settlement dates for one or more days)
comprised approximately 0.21 percent of the value of all
transactions received before netting.
\15\ Supra note 13.
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NSCC believes eliminating the age of positions and random number
within an age group from being considered as factors when allocating
CNS long positions within the same priority group during the night
cycle would help maximize the number of transactions processed for
settlement during the night cycle. Specifically, removing the
requirement to process transactions for settlement during the night
cycle in an order based on the age of positions and random number
within an age group would help the DTC settlement optimization
algorithm\16\ perform more effectively in identifying the optimal order
by which transactions are processed for settlement, which in turn would
help maximize the number of transactions processed for settlement
during the night cycle.
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\16\ Id.
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NSCC is not proposing changes to the allocation algorithm used
during the day cycle.
(iii) Proposed Rule Changes
NSCC is proposing to add a clause to subsection C.4 of Procedure
VII (CNS Accounting Operation) to make it clear that there would be
differences in the allocation algorithm used for receipts from CNS
between the day cycle and the night cycle processes. NSCC is also
proposing to add a parenthetical regarding subsection E of Procedure
VII for ease of reference.
In order to reflect the proposed elimination of random number
within an age group as a factor when allocating CNS long positions
within the same priority group during the night cycle, NSCC is
proposing to modify the first paragraph of subsection E of Procedure
VII by deleting the references to an algorithm which changes daily.
NSCC is also proposing to revise subsection E.4 of Procedure VII to
reflect the proposed changes to the allocation algorithm used during
the night cycle by adding (i) ``and, for the day cycle only,'' to the
first paragraph in subsection E.4 and (ii) ``For the day cycle only,''
to the third and fourth paragraphs of subsection E.4. These changes are
being proposed in order to make it clear that age of positions and
random number within an age group would only be considered as factors
when allocating CNS long positions during the day cycle.
In addition, NSCC is proposing to modify the last paragraph of
subsection E.4 of Procedure VII to make it clear that the allocation
algorithm used for the night and day cycles is computed separately to
allow for the use of different allocation factors in those respective
cycles.
NSCC is proposing technical changes by replacing references to
``evening cycle'' with ``night cycle'' in subsections A, C.3, E.1, E.2,
E.4, E.5, and H.5 of Procedure VII. Similarly, NSCC is proposing to
replace references to (i) ``evening allocation'' with ``night
allocation'' in subsections C.3, C.4, and J.1 of Procedure VII, (ii)
``evening and day delivery cycles'' with ``night and day delivery
cycles'' in subsection E.4 of Procedure VII and (iii) ``evening
allocation cycle'' with ``night cycle'' in Section I of Addendum G.
These changes are being proposed to ensure consistency in terminology
usage in the Rules. NSCC is also proposing technical changes to correct
cross references in subsections E.3 and E.4(a) of Procedure VII.
(iv) Member Outreach
Beginning in March 2018, NSCC has conducted ongoing outreach with
Members in order to provide them with notice of the proposed changes.
As of the date of this filing, no written comments relating to the
proposed changes have been received in response to this outreach. The
Commission will be notified of any written comments received.
(v) Implementation Timeframe
Pending Commission approval, NSCC expects to implement this
proposal by September 26, 2019 and would announce the effective date of
the proposed change by an Important Notice posted to its website. As
proposed, a legend would be added to Procedure VII and Addendum G
stating there are changes that have been approved by the Commission but
have not yet been implemented. Each proposed legend also would include
a date by which such changes would be implemented and the file number
of this proposal, and state that, once this proposal is implemented,
the legend would automatically be removed from Procedure VII and
Addendum G, as applicable.
2. Statutory Basis
NSCC believes this proposal is consistent with the requirements of
the Act, and the rules and regulations thereunder applicable to a
registered clearing agency. Specifically, NSCC believes this proposal
is consistent with Section 17A(b)(3)(F) \17\ of the Act for the reasons
described below.
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\18\ NSCC believes that the proposed changes
to the allocation algorithm used during the night cycle would promote
prompt and accurate clearance and settlement of securities
transactions. This is because the proposed changes would remove the
requirement to process transactions for settlement during the night
cycle in an order based on the age of positions and random number
within an age group. Eliminating the requirement to process
transactions in an order based on the age of positions and random
number within an age group would help enhance the effectiveness of the
DTC settlement optimization algorithm in identifying the optimal order
to process transactions for settlement. Being able to effectively
identify the optimal order to process transactions for settlement would
help maximize the number of transactions processed for settlement
during the night cycle. Therefore, NSCC believes that the proposed
changes to the allocation algorithm used during the night cycle would
promote the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.
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\18\ Id.
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NSCC also believes that the proposal to make technical changes
would promote prompt and accurate clearance and settlement of
securities transactions. This is because the proposed technical changes
would help ensure consistency in terminology usage and correct cross
references in the Rules, both of which would ensure the Rules are clear
and accurate. Having clear and accurate Rules would help Members to
better understand their
[[Page 39040]]
rights and obligations regarding NSCC's clearance and settlement
services. NSCC believes that when Members better understand their
rights and obligations regarding NSCC's clearance and settlement
services, they can act in accordance with the Rules. NSCC believes that
better enabling Members to comply with the Rules would promote the
prompt and accurate clearance and settlement of securities transactions
by NSCC. As such, NSCC believes the proposal to make technical changes
is consistent with Section 17A(b)(3)(F) of the Act.\19\
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\19\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC believes the proposed changes to the allocation algorithm used
during the night cycle could burden competition. This is because by
eliminating the age of positions and random number within an age group
from being considered as factors when allocating CNS long positions
during the night cycle, Members with the oldest positions would no
longer receive priority during the night cycle. While Members with aged
positions would no longer be prioritized over other Members within the
same priority group, NSCC does not believe such change in priority
would in and of itself mean that the burden on competition is
significant. This is because, as described above, aged positions only
comprised approximately 0.21 percent of the value of all transactions
received before netting. Accordingly, NSCC does not believe the burden
on competition would be significant.
Regardless of whether the burden on competition is deemed
significant, NSCC believes any burden on competition that is created by
these proposed changes would be necessary and appropriate in
furtherance of the purposes of the Act, as permitted by Section
17A(b)(3)(I) of the Act.\20\
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\20\ 15 U.S.C. 78q-1(b)(3)(I).
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The proposed changes to the allocation algorithm used during the
night cycle would be necessary in furtherance of the purposes of the
Act because the Rules must be designed to promote the prompt and
accurate clearance and settlement of securities transactions.\21\ As
described above, NSCC believes that the proposed changes would promote
the prompt and accurate clearance and settlement of securities
transactions by maximizing the number of transactions processed for
settlement during the night cycle. As such, NSCC believes these
proposed changes would be necessary in furtherance of the purposes of
the Act, as permitted by Section 17A(b)(3)(I) of the Act.\22\
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\21\ 15 U.S.C. 78q-1(b)(3)(F).
\22\ 15 U.S.C. 78q-1(b)(3)(I).
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NSCC believes any burden on competition that is created by the
proposed changes to the allocation algorithm used during the night
cycle would also be appropriate in furtherance of the purposes of the
Act. The proposed changes would eliminate the age of positions and
random number within an age group from being considered as factors when
allocating CNS long positions within the same priority group during the
night cycle, which would in turn enhance the effectiveness of the DTC
settlement optimization algorithm in identifying the optimal order by
which to process transactions for settlement during the night cycle.
Being able to effectively identify the optimal order by which to
process transactions for settlement during the night cycle would in
turn help maximize the number of transactions processed for settlement
during the night cycle. As such, NSCC believes these proposed changes
would be appropriate in furtherance of the purposes of the Act, as
permitted by Section 17A(b)(3)(I) of the Act.\23\
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\23\ Id.
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NSCC does not believe the proposal to make technical changes would
impact competition. These changes are being proposed to ensure
consistency in terminology usage in the Rules and to correct cross
references. They would not change NSCC's current practices or affect
Members' rights and obligations. As such, NSCC believes the proposal to
make technical changes would not have any impact on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments relating to this proposed rule change have not
been solicited or received. NSCC will notify the Commission of any
written comments received by NSCC.
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 up to 90 days (i) as the
Commission may designate 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
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-2019-002 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2019-002. 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-
[[Page 39041]]
2019-002 and should be submitted on or before August 29, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16940 Filed 8-7-19; 8:45 am]
BILLING CODE 8011-01-P