[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Notices]
[Pages 50532-50534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20695]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87023; File No. SR-NSCC-2019-002]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Partial Amendment No. 1 and Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified by 
Partial Amendment No. 1, To Amend Procedure VII with Respect to the 
Receipt of CNS Securities and Make Other Changes

September 19, 2019.

I. Introduction

    On July 22, 2019, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2019-002, pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change was published 
for comment in the Federal Register on August 8, 2019.\3\ On September 
16, 2019, NSCC filed Partial Amendment No. 1 to the proposed rule 
change to postpone the implementation date of the proposed rule 
change.\4\ The Commission did not receive any comment letters on the 
proposed rule change. The Commission is publishing this notice to 
solicit comment on Partial Amendment No. 1 from interested persons and 
to approve the proposed rule change, as modified by Partial Amendment 
No. 1 (hereinafter, ``Proposed Rule Change''), on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 86556 (August 2, 2019), 
84 FR 39037 (August 8, 2019) (SR-NSCC-2019-002) (``Notice'').
    \4\ NSCC submitted a courtesy copy of Partial Amendment No. 1 to 
the proposed rule change through the Commission's electronic public 
comment letter mechanism. Accordingly, Partial Amendment No. 1 to 
the proposed rule change has been publicly available on the 
Commission's website since September 16, 2019: https://www.sec.gov/comments/sr-nscc-2019-002/srnscc2019002-6132116-192236.pdf.
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II. Description of the Proposed Rule Change

    The proposed rule change would amend Procedure VII (CNS Accounting 
Operation) of NSCC's Rules & Procedures (``Rules'') \5\ with respect to 
the receipt of securities from NSCC's Continuous Net Settlement 
(``CNS'') System.\6\ Specifically, these amendments would reflect a 
change in the allocation algorithm used during the night cycle used by 
NSCC's CNS System. The proposed rule change would also make technical 
changes to the Rules.
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    \5\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
    \6\ 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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A. 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 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 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.
    CNS relies on an interface with the Depository Trust Company 
(``DTC''), an affiliate of NSCC, for the book-entry movement of 
securities. Procedure VII (CNS Accounting Operation) describes the 
receipt and delivery of CNS Securities. CNS long (buy) 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 CNS System 
algorithm.
    Currently, 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).\7\ The priority requests can be 
submitted for the night cycle, the day cycle, or both. The current 
priority groups are as follows--
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    \7\ Specifically, under 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.
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    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 5.
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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 5.
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    Third, long positions against which Buy-In Intent notices are due 
to expire the following day;
    Fourth, (i) long positions in a receiving ID Net Subscriber's 
agency account established at a Qualified Securities Depository,\10\ 
and (ii) long positions against the component securities of index 
receipts;
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    \10\ 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 5.
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    Fifth, in descending sequence, priority levels as specified by 
Standing Priority Requests and as modified by Priority Overrides.

[[Page 50533]]

    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). 
In addition, when more than one long position in a given CNS Security 
exists within the same priority group and all of those 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. The allocation algorithm currently used for the night and day 
cycles is the same but is computed separately.

B. Proposed Changes to Allocation Algorithm

    Under the current algorithm, approximately 50 percent 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.\11\ NSCC anticipates that the proposal 
would increase the percentage of CNS transactions processed for 
settlement during the night cycle to approximately 65 percent.\12\ NSCC 
is not proposing changes to the allocation algorithm used during the 
day cycle.
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    \11\ See Notice, supra note 3, at 39038-39.
    \12\ Id.
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    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 would 
change 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. Instead, allocation of CNS long positions 
within the same priority group during the night cycle would be 
determined by the DTC settlement optimization algorithm. \13\
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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 
Securities Exchange Act Release No. 86554 (August 2, 2019), 84 FR 
39025 (August 8, 2019) (SR-DTC-2019-005).
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    NSCC represents that 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.\14\ Specifically, according to 
NSCC, 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 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.\15\
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    \14\ See Notice, supra note 3, at 39038-39.
    \15\ Id.
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    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. 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. According to 
NSCC, these changes are being proposed to state 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.\16\
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    \16\ Id.
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    In addition, NSCC is proposing to modify the last paragraph of 
subsection E.4 of Procedure VII to clarify 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.\17\
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    \17\ Id.
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    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.\18\ NSCC is also proposing technical changes to 
correct cross references in subsections E.3 and E.4(a) of Procedure 
VII.
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    \18\ Id.
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C. Description of Partial Amendment No. 1

    In Partial Amendment No. 1, NSCC proposes to amend the 
implementation timeframe of the proposal.\19\ In its original filing 
with the Commission, NSCC previously stated that the proposed rule 
change would be effective by September 26, 2019. Pursuant to Partial 
Amendment No. 1, the Proposed Rule Change would be effective by 
December 6, 2019.
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    \19\ Partial Amendment No. 1, supra note 4.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \20\ 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. After carefully considering the Proposed Rule 
Change, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to DTC. In particular, the Commission 
finds that the Proposed Rule Change is consistent with Section 
17A(b)(3)(F) of the Act.\21\
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    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 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 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\22\ The Commission 
believes that the proposed changes to the allocation algorithm used 
during the night cycle are designed to promote prompt and accurate 
clearance and settlement of securities transactions. 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 should enhance the effectiveness of the

[[Page 50534]]

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 
should help maximize the number of transactions processed for 
settlement during the night cycle. Therefore, the Commission believes 
that the proposed changes to the allocation algorithm used during the 
night cycle are designed to promote the prompt and accurate clearance 
and settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\23\
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    \22\ Id.
    \23\ Id.
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    The Commission also believes that the proposal to make technical 
changes is designed to promote prompt and accurate clearance and 
settlement of securities transactions. 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. The Commission believes that using consist terminology 
and correct cross references would avoid any confusion by Members and 
allow Members to accurately understand NSCC's clearance and settlement 
services. In turn, the Commission believes that the proposal is 
designed to promote prompt and accurate clearance and settlement of 
securities transactions by NSCC. As such, the Commission believes the 
proposal to make technical changes is consistent with Section 
17A(b)(3)(F) of the Act.\24\
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    \24\ Id.
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IV. Solicitation of Comments on Partial Amendment No. 1 to the Proposed 
Rule Change

    Interested persons are invited to submit written data, views and 
arguments concerning whether Partial Amendment No. 1 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 20549-1090.
    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-2019-002 and should be submitted on 
or before October 16, 2019.

V. Accelerated Approval of the Proposed Rule Change, as Modified as 
Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\25\ to approve the proposed rule change prior to the 30th day 
after the date of publication of Partial Amendment No. 1 in the Federal 
Register. As noted above, Partial Amendment No. 1 delays the 
implementation timeframe of the proposal from September 26, 2019 to 
December 6, 2019.\26\ The Commission believes that the Partial 
Amendment is consistent with the Act because it does not raise any 
regulatory issues and would provide more time before the proposal would 
go into effect.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ Partial Amendment No. 1, supra note 4.
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    For the reasons discussed above, the Commission finds that Partial 
Amendment No. 1 is reasonably designed to protect investors and the 
public interest, and consistent with the requirements of the Act. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\27\ to approve the proposed rule change, as 
modified by Partial Amendment No. 1, on an accelerated basis.
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    \27\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Partial Amendment No. 1, is 
consistent with the requirements of the Act and, in particular, with 
the requirements of Section 17A of the Act \28\ and the rules and 
regulations promulgated thereunder.
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    \28\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\29\ that proposed rule change SR-NSCC-2019-002, as modified by 
Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.\30\
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    \29\ 15 U.S.C. 78s(b)(2).
    \30\ In approving the proposed rule change, the Commission 
considered the proposals' 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.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20695 Filed 9-24-19; 8:45 am]
 BILLING CODE 8011-01-P