[Federal Register Volume 89, Number 55 (Wednesday, March 20, 2024)]
[Notices]
[Pages 19896-19901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05832]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99733; File Nos. SR-NSCC-2023-007]


Self-Regulatory Organizations; The National Securities Clearing 
Corporation; Order Granting Approval of Proposed Rule Change, as 
Modified by Partial Amendment No. 1 and Amendment No. 2, To Modify the 
Amended and Restated Stock Options and Futures Settlement Agreement and 
Make Certain Revisions to the NSCC Rules

March 14, 2024.

I. Introduction

    On August 10, 2023, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2023-007 (``Proposed Rule 
Change'') pursuant to section 19(b) of the Securities Exchange Act of 
1934 (``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to change 
terms related to the physical settlement of equities arising out of 
certain futures and options contracts.\3\ On August 30, 2023, the 
Proposed Rule Change was published for public comment in the Federal 
Register.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, at 88 FR 59968.
    \4\ Securities Exchange Act Release No. 98213 (Aug. 24, 2023), 
88 FR 59968 (Aug. 30, 2023) (File No. SR-NSCC-2023-007) (``Notice of 
Filing'').
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    On September 25, 2023, pursuant to section 19(b)(2) of the Exchange 
Act,\5\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\6\
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 98508 (Sep. 25, 2023), 
88 FR 67407 (Sep. 29, 2023) (File No. SR-NSCC-2023-007).
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    On November 8, 2023, NSCC filed Partial Amendment No. 1 to the 
Proposed Rule Change.\7\ On November 14, 2023, the Commission published 
notice of Partial Amendment No. 1 and instituted proceedings, pursuant 
to section 19(b)(2)(B) of the Exchange Act,\8\ to determine whether to 
approve or disapprove the proposed rule change, as modified by the 
Partial Amendment No. 1.\9\ On January 24, 2024, NSCC filed Amendment 
No. 2 to the Proposed Rule Change, which was published in the Federal 
Register for public comment on January 31, 2024.\10\ The Commission has 
received public comment regarding the Proposed Rule Change.\11\ On 
February 20, 2024, the Commission designated a longer period for 
Commission action on the proceedings to determine whether to approve or 
disapprove the Proposed Rule Change.\12\
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    \7\ Partial Amendment No. 1 delays implementation of the 
proposed change. In Partial Amendment No. 1, NSCC proposes to 
implement the proposed rule change within 90 days of receiving all 
necessary regulatory approvals and would announce the specific date 
of implementation on its public website at least 14 days prior to 
implementation. The delay is proposed in light of the technical 
system changes that are required to implement the liquidity stress 
testing enhancements and to be able to provide sufficient notice to 
Clearing Members following receipt of approval.
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ Securities Exchange Act Release No. 98930 (Nov. 14, 2023), 
88 FR 80790 (Nov. 20, 2023) (File No. SR-NSCC-2023-007).
    \10\ Securities Exchange Act Release No. 99432 (Jan. 25, 2024), 
89 FR 6140 (Jan. 31, 2024) (File No. SR-NSCC-2023-007) (``Notice of 
Amendment''). Amendment No. 2 adds a second phase of changes to the 
proposed rule change. The changes added in Phase 2 include improved 
information sharing between OCC and NSCC and are designed to 
facilitate the shortening of the standard settlement cycle for most 
broker-dealer transactions from T+2 to T+1. See Securities Exchange 
Act Release No. 96930 (Feb. 15, 2023), 88 FR 13872 (Mar. 6, 2023) 
(File No. S7-05-22).
    \11\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-nscc-2023-007/srnscc2023007.htm. The 
Commission received comments on the proposed rule change that 
express concerns unrelated to the substance of the filing. See, 
e.g., comment from JT Clark (Oct. 10, 2024) (general concern about 
corruption in the markets) and comment from Anthony LaBree (Oct. 12, 
2024) (concerns about OCC's business practices).
    \12\ Securities Exchange Act Release No. 99567 (Feb. 20, 2024), 
89 FR 14122 (Feb. 26, 2024) (File No. SR-NSCC-2023-007).
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    This order approves the Proposed Rule Change as modified by Partial 
Amendment No. 1 and Amendment No. 2 (hereinafter defined as ``Proposed 
Rule Change'').

II. Background

    NSCC is a clearing agency that provides clearing, settlement, risk 
management, and central counterparty services for trades involving 
equity securities. The Options Clearing

[[Page 19897]]

Corporation (``OCC'') is the sole clearing agency for standardized 
equity options listed on national securities exchanges registered with 
the Commission, including options that contemplate the physical 
delivery of equities cleared by NSCC in exchange for cash (``physically 
settled'' options).\13\ OCC also clears certain futures contracts that, 
at maturity, require the delivery of equity securities cleared by NSCC 
in exchange for cash. As a result, the exercise and assignment of 
certain options or maturation of certain futures cleared by OCC 
effectively results in stock settlement obligations to be cleared by 
NSCC (``Exercise and Assignment Activity'' or ``E&A Activity''). NSCC 
and OCC maintain a legal agreement, generally referred to by the 
parties as the ``Accord,'' that governs the processing of such E&A 
Activity for firms that are members of both OCC and NSCC (``Common 
Members'').
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    \13\ The term ``physically-settled'' as used throughout the OCC 
Rulebook, refers to cleared contracts that settle into their 
underlying interest (i.e., options or futures contracts that are not 
cash-settled). The OCC By-Laws and OCC Rules are available at 
www.theocc.com/company-information/documents-and-archives/by-laws-and-rules. When a contract settles into its underlying interest, 
shares of stock are sent (i.e., delivered) to contract holders who 
have the right to receive the shares from contract holders who are 
obligated to deliver the shares at the time of exercise/assignment 
in the case of an option and at the time of maturity in the case of 
a future.
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    Under certain circumstances, the Accord currently allows NSCC not 
to guaranty the settlement of securities arising out of E&A Activity 
for a Common Member for whom NSCC has ceased to act (e.g., due to a 
default by that member). To the extent NSCC chooses not to guaranty 
such transactions of a defaulting Clearing Member, OCC would have to 
engage in an alternate method of settlement outside of NSCC to manage 
the default. This presents two issues. First, based on historical data, 
the cash required for such alternative settlement could be as much as 
$300 billion.\14\ Second, because NSCC's netting process dramatically 
decreases the volume of securities settlement obligations that must be 
addressed, settlement of physically-settled options and futures outside 
of NSCC introduces significant operational complexities. Specifically, 
without NSCC's netting process, OCC would have to coordinate a 
significantly increased number of transactions on a broker-to-broker 
basis rather than through a single central counterparty, and the total 
value of settlement obligations that would need to be processed would 
be significantly higher.\15\
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    \14\ See Notice of Filing, 88 FR at 59969.
    \15\ For example, in 2022 it is estimated that netting through 
NSCC's continuous net settlement (``CNS'') accounting system reduced 
the value of CNS settlement obligations from $519 trillion to $9 
trillion, an approximately 98 percent reduction. See id.
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    NSCC proposes to revise the Accord to address these liquidity and 
operational issues. In particular, OCC and NSCC have agreed to modify 
the Accord to require NSCC to accept E&A Activity from OCC (i.e., 
guaranty the positions of a defaulting Common Member), provided that 
OCC makes a payment to NSCC called the ``Guaranty Substitution 
Payment,'' or ``GSP.'' The GSP is designed to cover OCC's share of the 
incremental risk to NSCC posed by the defaulting Common Member's 
positions. The total risk posed to NSCC by a defaulting Common Member 
would be the sum of (i) the defaulter's unpaid deposit to the NSCC 
Clearing Fund (``Required Fund Deposit''),\16\ and (ii) the defaulter's 
unpaid Supplemental Liquidity Deposit (``SLD'').\17\ If OCC pays the 
GSP to NSCC, NSCC would be obligated under the amended Accord to accept 
that member's E&A activity from OCC and conduct settlement through 
NSCC's netting process and systems. NSCC would calculate how much of 
the defaulting Common Member's Required Fund Deposit and SLD are 
attributable to the E&A Activity that OCC sends to NSCC, and that 
amount would be the GSP. Based on historical data, OCC's GSP could be 
as much as $6 billion, which is significantly less than the potential 
$300 billion that could be required for alternative settlement outside 
of NSCC.\18\
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    \16\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules. See Notice of Filing, 88 FR at 59971, 
n.26.
    \17\ Under the NSCC Rules, in certain circumstances, NSCC 
collects the Supplemental Liquidity Deposit, which is an additional 
cash deposit from each of those Members who would generate the 
largest settlement debits in stressed market conditions. See Rule 4A 
of the NSCC Rules. See also Notice of Filing, 88 FR at 59971, n.27.
    \18\ See Notice of Filing, 88 FR at 59969.
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    As noted above, NSCC amended the Proposed Rule Change after filing. 
The primary purposes of the Amendment No. 2 were to provide for 
improved information sharing between OCC and NSCC, and ensure that the 
new process and timing for NSCC to calculate the GSP and OCC to pay the 
GSP will be consistent with relevant process and timing requirements 
necessitated by the industry transitions to a T+1 settlement cycle for 
securities.\19\ NSCC has labeled the proposed changes included in the 
initial filing to allow OCC to pay the GSP to NSCC as Phase 1 of the 
proposed changes, and the additional changes in the amendment to 
enhance information sharing and facilitate the transition to T+1 as 
Phase 2.\20\
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    \19\ On February 15, 2023, the Commission adopted rules to 
shorten the standard settlement cycle for most broker-dealer 
transactions from T+2 to T+1. See Securities Exchange Act Release 
No. 96930 (Feb. 15, 2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-
05-22).
    \20\ NSCC has proposed a two-step implementation based on the 
categorization of changes as part of Phase 1 and Phase 2. See Notice 
of Amendment, 89 FR at 6151.
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    NSCC also proposes to make conforming changes to its Rules & 
Procedures (``NSCC Rules'') to facilitate the proposed changes to the 
Accord.\21\
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    \21\ Capitalized terms not defined herein are defined in the 
NSCC Rules. The NSCC Rules are available at www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
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A. Information Sharing and the Guaranty Substitution Payment

    The proposed revisions to the Accord designed to introduce and 
facilitate the new GSP include the following: changes designed to 
facilitate improved information sharing between OCC and NSCC; changes 
that would define the calculation of the GSP; changes that would define 
the process and timing by which guaranty of the E&A Activity would 
transfer from OCC to NSCC; \22\ and additional conforming changes to 
the Accord to support these and the other changes described in more 
detail below.
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    \22\ Here, the ``transfer'' of the guaranty refers to the point 
at which OCC's settlement guaranty with respect to E&A Activity ends 
and NSCC's settlement guaranty begins.
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    Improved Information Sharing. Currently, NSCC sends a file daily to 
OCC defining which securities are eligible to settle through NSCC. OCC 
then delivers to NSCC a file identifying securities to be physically 
settled at NSCC as a result of E&A Activity. This process would 
continue under the proposal, however, as part of Phase 1 NSCC would 
also communicate the GSP daily to OCC.\23\ In Phase 2, NSCC would 
continue to communicate the GSP daily to OCC, but the calculation would 
differ, as described in more detail below.
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    \23\ NSCC would communicate both the total amount of collateral 
required to cover the risk presented by each common clearing member 
and what percentage of that risk is attributable to OCC (i.e., the 
GSP) and therefore OCC would need to pay to require NSCC to guaranty 
the positions of a Common Member for whom NSCC has ceased to act.
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    Also in Phase 2, OCC and NSCC would share additional information 
beyond the daily exchange of position files and communication of the 
GSP. Specifically, NSCC would communicate

[[Page 19898]]

to OCC daily the single largest GSP observed in the prior 12 months 
(the ``Historical Peak GSP''), which would in turn provide a data point 
for discussion between OCC and NSCC to confirm that OCC will likely be 
in a position to commit to paying the actual GSP in the event of the 
default of a Common Member.\24\ NSCC would also communicate a set of 
margin and liquidity-related data to OCC daily (the ``GSP Monitoring 
Data''). The GSP Monitoring Data would be for informational purposes 
and would facilitate OCC's daily assessment of its ability to commit to 
pay the actual GSP in the event of the default of a Common Member.
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    \24\ NSCC would provide the Historical Peak GSP to OCC daily, 
and OCC would communicate to NSCC whether OCC has Clearing Fund cash 
in excess of the Historical Peak GSP. If OCC does not have 
sufficient cash in the Clearing Fund, this would allow OCC and NSCC 
to escalate discussion of whether OCC will likely be in a position 
to commit to paying the actual GSP (e.g., what other resources OCC 
has, whether the actual GSP is likely to be as large as the 
historical peak). The comparison of OCC's resources to the 
Historical Peak GSP would not affect whether OCC is permitted to 
send E&A Activity to NSCC.
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    The Guaranty Substitution Payment. As described above, NSCC would 
communicate to OCC the GSP amount each day. In the event of a Common 
Member default, this is the amount OCC would need to pay to require 
NSCC to guaranty the positions of the defaulting Common Member. Under 
both Phases 1 and 2, the GSP for a given member would be the amount 
necessary to cover the risk posed by the member's E&A Activity, and 
would be calculated by determining the portion of the defaulting 
Clearing Member's Required Fund Deposit and SLD that the member owes to 
NSCC that is attributable to the member's E&A Activity at OCC. The 
calculation of OCC's portion of the Required Fund Deposit obligation 
would differ between Phases 1 and 2, with a precise calculation in 
Phase 2 replacing a proxy from Phase 1.
    In Phase 1, NSCC would approximate the percentage of the member's 
Required Fund Deposit attributable to E&A Activity by referencing the 
day-over-day change in gross market value of the Common Member's 
positions at NSCC. NSCC acknowledges that this gross market value proxy 
methodology overestimates or underestimates the Required Fund Deposit 
attributable to a Common Member's E&A Activity, but states that current 
technology constraints prohibit NSCC from performing a precise 
calculation of the GSP on a daily basis for every Common Member.\25\ 
The Phase 2 changes to the Accord would introduce a more precise 
allocation of the Required Fund Deposit portion of the GSP, which would 
help eliminate the potential over- or under-estimation of OCC's portion 
of the Required Fund Deposit.\26\ Specifically, in Phase 2, NSCC would 
calculate OCC's portion of the Required Fund Deposit as a difference 
between the Required Fund Deposit of the Common Member's entire 
portfolio and the Required Fund Deposit of the Common Member's 
portfolio prior to the submission of E&A Activity. This more precise 
calculation would completely replace the Phase 1 gross market value 
proxy. Under both Phases 1 and 2, the SLD portion of the GSP would be 
the Common Member's unpaid SLD associated with any E&A Activity.
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    \25\ See Notice of Amendment, 89 FR at 6144.
    \26\ See id. OCC and NSCC agreed that performing the necessary 
technology build during Phase 1 would delay the implementation of 
the proposal. NSCC will incorporate those technology updates in 
connection with Phase 2 of this proposal. Id.
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    Guaranty Transfer. As described above, the purpose of the proposed 
changes is to increase the circumstances under which NSCC must assume 
the obligation to guaranty E&A Activity. Currently, the guaranty for 
such transactions transfers from OCC to NSCC after NSCC has received 
Required Fund Deposits from the Common Members. The guaranty would not 
transfer if a member fails to satisfy its obligations to NSCC. Under 
the proposed changes, the guaranty would transfer after NSCC has 
received Required Fund Deposits from the Common Members or at such time 
that OCC pays the GSP if a Common Member fails to satisfy its 
obligations to NSCC.

B. Phase 1 Changes to the NSCC Rules

    NSCC is also proposing changes to its Rules in connection with the 
proposed changes to the Existing Accord. First, NSCC would amend Rule 
18 (Procedures for When the Corporation Ceases to Act), which describes 
how NSCC handles a Member's transactions after NSCC ceases to act for 
that Member.\27\ Specifically, newly-added section 9(a) would specify 
that following a Member default, NSCC may continue to act and provide 
the NSCC Guaranty pursuant to a ``Close-Out Agreement'' such as the 
Existing Accord (as it is proposed to be amended).\28\ A new section 
9(b) would specify that any transactions undertaken pursuant to a 
Close-Out Agreement would be treated as having been received, provided 
or undertaken for the account of the Member for which NSCC has ceased 
to act, but that any deposit, payment, financial assurance or other 
accommodation provided to NSCC pursuant to a Close-Out Agreement shall 
be returned or released as provided for in the agreement. A new section 
9(c) would provide that NSCC shall have a lien upon, and may apply, any 
property of the defaulting Member in satisfaction of any obligation, 
liability or loss that relates to a transaction undertaken or service 
provided pursuant to a Close-Out Agreement. NSCC would also propose 
clarifications to Sections 4, 6(b)(iii)(B) and 8 of Rule 18 to use more 
precise references to the legal entity described in those sections of 
this Rule.
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    \27\ See supra note 21.
    \28\ The Existing Accord is currently the only agreement that 
would be considered a ``Close-Out Agreement'' under this new Section 
9(b). See Notice of Amendment, 89 FR at 6147, n.54.
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    Second, NSCC would amend Section B of Procedure III and Addendum K 
of the NSCC Rules to provide that the NSCC Guaranty would not attach to 
Defaulted NSCC Member Transactions except as provided for in the 
Existing Accord (as it is proposed to be amended), and that the NSCC 
Guaranty attaches, with respect to obligations arising from the 
exercise or assignment of OCC options settled at NSCC or stock futures 
contracts cleared by OCC, as provided for in the Existing Accord (as it 
is proposed to be amended) or other arrangement with OCC. Finally, the 
proposed changes to Procedure III would clarify that Guaranty 
Substitution occurs when NSCC receives both the Required Fund Deposit 
SLD, consistent with the proposed revisions to Section 5 of the Current 
Accord. As noted above, the proposed collection of the SLD in 
connection with the Guaranty Substitution reflect OCC and NSCC's 
agreement that both amounts are components of the Guaranty Substitution 
Payment. NSCC also proposes to make a number of non-substantive clean 
up changes to Procedure III, such as correcting references to NSCC's 
``guaranty.''
    NSCC states that these proposed changes would establish and clarify 
the rights of both NSCC and a Member for which NSCC has ceased to act 
and the operation and applicability of any Close-Out Agreement, and 
would make it clear that any payments received pursuant to a Close-Out 
Agreement and NSCC's acceptance of a Mutually Suspended Member's 
transactions for clearance and settlement pursuant to a Close-Out 
Agreement are intended to fall within the Bankruptcy Code and 
Securities Investor Protection Act ``safe harbors.'' \29\
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    \29\ See id. at 6147-48.

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[[Page 19899]]

C. Transition to T+1

    Phase 1 of the proposed changes are primarily designed to provide 
OCC the right to require NSCC to accept and guaranty the E&A Activity 
of a Common Member even if that member has not met its obligations to 
NSCC. The mechanism by which OCC would exercise that right would be the 
payment of the GSP to NSCC, and OCC would account for such payment as a 
potential liquidity demand that it must manage. Phase 1 does not, 
however, materially change the time at which OCC would cease (and NSCC 
would start) to guaranty the E&A Activity.\30\
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    \30\ The Commission described the current timing and process 
under which OCC's guaranty ceases and NSCC's guaranty attaches in a 
prior order. See Securities Exchange Act Release No. 81266 (July 31, 
2017), 82 FR 36484, 36486-87 (Aug. 4, 2017) (File No. SR-OCC-2017-
013).
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    Under the current Accord, NSCC's guaranty attaches (and OCC's 
ceases) when NSCC has received all Required Fund Deposits taking into 
account the E&A Activity.\31\ Currently, NSCC's guaranty would not 
attach if a Common Member defaults on its obligations to NSCC. Under 
Phase 1 of the proposed changes, however, OCC would have the 
opportunity to pay the GSP to NSCC as an effective substitution for the 
defaulted member's obligations with respect to the E&A Activity. Phase 
1, therefore, allows for a change in who pays NSCC, but does not alter 
the timing of payment.
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    \31\ See id. at 36487.
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    Phase 2 will alter the timing of payment, primarily to accommodate 
the transition from a T+2 settlement cycle to a T+1 settlement 
cycle.\32\ Under the current process, which takes place in a T+2 
settlement cycle, there is sufficient time after expiration for NSCC 
and OCC to determine whether a member has defaulted before NSCC begins 
to process settlement of the E&A Activity. However, in a T+1 settlement 
cycle, settlement processing could begin before NSCC or OCC become 
aware of a member default. Thus, in a T+1 environment, the timing and 
process by which OCC's guaranty would cease (and NSCC's would attach) 
would need to shift.
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    \32\ See Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
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    Specifically, under Phase 2, OCC would commit to payment of the GSP 
(regardless of whether a member has defaulted) prior to NSCC's 
acceptance of E&A Activity. If OCC is unable to commit to pay the GSP, 
NSCC would be permitted, but not required, to reject the E&A Activity. 
The process would vary slightly between expirations occurring on a 
Friday and expirations occurring Monday through Thursday. For a Friday 
expiration, NSCC would communicate the GSP to OCC and OCC would 
subsequently commit to pay the GSP on Saturday morning. For Monday 
through Thursday expirations, OCC's transmission of the E&A Activity 
itself to NSCC would constitute a commitment by OCC to pay the GSP 
related to that E&A Activity.\33\ For all expirations, OCC would send 
the E&A Activity to NSCC by 1 a.m. the morning after expiration (e.g., 
1 a.m. Saturday for a Friday expiration). This would help ensure that, 
in a T+1 settlement environment, NSCC has OCC's commitment to pay the 
GSP before NSCC must begin processing any E&A Activity from OCC.
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    \33\ The requirement to commit prior to calculation of the final 
GSP for E&A Activity arising Monday through Thursday highlights the 
importance of the improved information sharing described above.
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D. Phase 2 Changes to the NSCC Rules

    NSCC is also proposing conforming changes to its Rules to align 
with the Phase 2 Accord. Specifically, NSCC would amend Section B of 
Procedure III of the NSCC to remove references to Balance Order 
Securities and the Balance Order Accounting Operation in Procedure III 
to align with the removal of Balance Order transactions from the types 
of Eligible Securities under the Phase 2 Accord. NSCC would also update 
a reference to the Settlement Date for OCC E&A/Delivery Transactions to 
reflect that it would be one business day (rather than two business 
days) after exercise/assignment under the forthcoming T+1 settlement 
cycle. In addition, NSCC would clarify in Procedure III that E&A/
Delivery Transactions that are indicated in a report or Consolidated 
Trade Summary will have no impact on NSCC's guaranty or a Member's 
ultimate obligation to deliver or pay for the receipt of such 
securities unless and until such transactions have satisfied all 
requirements for the NSCC's guaranty under Addendum K and the new 
Accord (unless NSCC notifies Members to the contrary). NSCC would also 
clarify that E&A/Delivery Transactions indicated in a report or 
Consolidated Trade Summary for which the NSCC's guaranty does become 
effective will be canceled and thereafter null and void and such 
cancelation will be reflected in the next available report or 
Consolidated Trade Summary. The proposed changes are intended to 
reflect the timing of the receipt and processing of E&A/Delivery 
Transactions under the T+1 settlement cycle and the ultimate Guaranty 
Substitution and Guaranty Substitution Time under the Phase 2 
Accord.\34\
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    \34\ See Notice of Amendment, 89 FR at 6151.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act 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 Exchange Act and the rules and regulations 
thereunder applicable to such organization.\35\ After carefully 
considering the Proposed Rule Change, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to 
NSCC. More specifically, the Commission finds that the Proposed Rule 
Change is consistent with section 17A(b)(3)(F) of the Exchange Act,\36\ 
and Rules 17Ad-22(e)(1), (e)(7), and (e)(20) \37\ thereunder, as 
described in detail below.
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    \35\ 15 U.S.C. 78s(b)(2)(C).
    \36\ 15 U.S.C. 78q-1(b)(3)(A).
    \37\ 17 CFR 240.17Ad-22(e)(1); 17 CFR 240.17Ad-22(e)(7); and 17 
CFR 240.17Ad-22(e)(20).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange 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, to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions, 
and, in general, to protect investors and the public interest.\38\ 
Based on its review of the record, and for the reasons described below, 
allowing NSCC to make the changes described above is consistent with 
promoting prompt and accurate clearance and settlement of securities 
transactions, fostering cooperation and coordination between with 
persons engaged in the clearance and settlement of securities 
transactions, and, in general, the protection of investors and the 
public interest.
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
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    By providing OCC with the ability to make a Guarantee Substitution 
Payment to NSCC for any unmet obligations of a Mutually Suspended 
Member, the proposed changes to the Accord and conforming changes to 
the NSCC Rules would allow NSCC to continue to accept E&A Activity 
during a Common Member default while ensuring that it has sufficient 
liquid resources to address the

[[Page 19900]]

credit and liquidity risks that the defaulting Common Member would pose 
to NSCC. Processing E&A Activity through NSCC's netting system would 
also significantly reduce the risk posed by such E&A Activity by 
reducing the volume and value of settlement obligations.\39\ Further, 
the information sharing contemplated under the proposed changes would 
allow NSCC to better understand and monitor its exposures and provide 
for more dialogue between NSCC and OCC, which could, in turn, allow 
them to better manage the processing of E&A Activity. Therefore, the 
Proposed Rule Change should promote the prompt and accurate clearance 
and settlement of securities transactions, consistent with the 
requirements of section 17A(b)(3)(F) of the Exchange Act.\40\
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    \39\ As noted above, it is estimated that, in 2022, netting 
through NSCC's CNS accounting system reduced the value of CNS 
settlement obligations by approximately 98 percent or $510 trillion 
from $519 trillion to $9 trillion. See Notice of Filing, 88 FR at 
59969.
    \40\ 15 U.S.C. 78q-1(b)(3)(F).
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    Phase 2 contemplates further enhancement of information sharing 
between two clearing agencies as well as updating the Accord to support 
the shortening of the standard settlement cycle for most broker-dealer 
transactions from T+2 to T+1. Enhanced information sharing would 
support closer coordination and cooperation between OCC and NSCC 
through frequent dialogue. For example, the communication of the 
Historical Peak GSP would allow OCC to assess its liquidity resources 
and facilitate discussion of whether OCC will likely be in a position 
to commit to paying the actual GSP. The changes to support the 
shortening of the standard settlement cycle would allow OCC and NSCC to 
coordinate as they seek to comply with the relevant rulemaking adopted 
by the Commission under the Exchange Act consistent with the 
requirements of section 17A(b)(3)(F) of the Exchange Act.\41\
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    \41\ 15 U.S.C. 78q-1(b)(3)(F).
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    Finally, the ability for OCC to make a Guarantee Substitution 
Payment to NSCC for any unmet obligations of a Mutually Suspended 
Member would allow NSCC to continue to accept E&A Activity during a 
Common Member default while ensuring that it has sufficient liquid 
resources to address the credit and liquidity risks that the defaulting 
Common Member would pose to NSCC and also reducing the risk of 
significant liquidity or credit problems spreading among market 
participants that rely on OCC's central role in the options market.\42\ 
The Proposed Rule Change would, therefore, generally support the 
protection of investors and the public interest, consistent with the 
requirements of section 17A(b)(3)(F) of the Exchange Act,\43\ because 
it would reduce systemic risk.
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    \42\ OCC has been designated as a systemically important 
financial market utility, in part, because its failure or disruption 
could increase the risk of significant liquidity or credit problems 
spreading among financial institutions or markets. See Financial 
Stability Oversight Council (``FSOC'') 2012 Annual Report, Appendix 
A, https://home.treasury.gov/system/files/261/here.pdf (last visited 
Feb. 17, 2022).
    \43\ 15 U.S.C. 78q-1(b)(3)(F).
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    Accordingly, and for the reasons stated above, the Proposed Rule 
Change is consistent with the requirements of section 17A(b)(3)(F) of 
the Exchange Act.\44\
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    \44\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1) Under the Exchange Act

    Rule 17Ad-22(e)(1) under the Exchange Act requires, in part, that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for a 
well-founded, clear, transparent, and enforceable legal basis for each 
aspect of its activities in all relevant jurisdictions.\45\ In adopting 
Rule 17Ad-22(e)(1), the Commission provided guidance that a covered 
clearing agency generally should consider in establishing and 
maintaining policies and procedures that address legal risk.\46\ The 
Commission stated that a covered clearing agency should consider, inter 
alia, whether its contracts are consistent with relevant laws and 
regulations.\47\
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    \45\ 17 CFR 240.17Ad-22(e)(1).
    \46\ See Securities Exchange Act Release No. 78961 (Sept. 28, 
2016), 81 FR 70786, 70802 (Oct. 13, 2016) (S7-03-14) (``Covered 
Clearing Agency Standards'').
    \47\ See id.
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    On February 15, 2023, the Commission adopted a final rule to 
shorten the standard settlement cycle for most broker-dealer 
transactions from two business days after the trade date to one 
business day after the trade date.\48\ Currently, and under Phase 1, 
the terms of the Accord are designed for consistency with a T+2 
settlement cycle. As described above, the terms of the Accord under 
Phase 2, which NSCC intends to implement on the T+1 compliance date 
established by the Commission,\49\ would be designed for consistency 
with a T+1 settlement cycle.
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    \48\ See Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
    \49\ See Notice of Amendment, 89 FR at 6152.
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    Accordingly, the proposal to amend the Accord to conform to a T+1 
settlement cycle is consistent with Rule 17Ad-22(e)(1) under the 
Exchange Act.\50\
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    \50\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act

    Rule 17Ad-22(e)(7) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to effectively measure, 
monitor, and manage the liquidity risk that arises in or is borne by 
the covered clearing agency, including measuring, monitoring, and 
managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity.\51\ In adopting Rule 17Ad-
22(e)(7), the Commission provided guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address liquidity risk.\52\ The Commission 
stated that a covered clearing agency should consider, inter alia, 
whether it maintains sufficient liquid resources in all relevant 
currencies to settle securities-related payments and meet other payment 
obligations on time with a high degree of confidence under a wide range 
of stress scenarios.\53\
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    \51\ 17 CFR 240.17Ad-22(e)(7).
    \52\ See Covered Clearing Agency Standards, 81 FR at 70823.
    \53\ See id.
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    The proposed changes to the Accord would provide OCC with the 
ability to make a cash payment to NSCC (i.e., the GSP) for any unmet 
obligations of a Mutually Suspended Member. As a result, the GSP would 
allow NSCC to accept E&A Activity during a Common Member default while 
ensuring that it has sufficient liquid resources to address the credit 
and liquidity risks that the defaulting Common Member would pose to 
NSCC. As a result, the proposed changes would facilitate the NSCC's 
management of its liquidity risks posed by E&A Activity because, any 
increase to NSCC's liquidity needs that may be created by applying the 
NSCC Guaranty to Defaulted Member Transactions would occur with a 
simultaneous increase to its liquidity resources in the form of the 
Guaranty Substitution Payment.
    Accordingly, the proposed changes to the Accord and NSCC's Rules 
are consistent with Rule 17Ad-22(e)(7) under the Exchange Act.\54\
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    \54\ 17 CFR 240.17Ad-22(e)(7).

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[[Page 19901]]

D. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act

    Rule 17Ad-22(e)(20) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to identify, monitor, and 
manage risks related to any link the covered clearing agency 
establishes with one or more other clearing agencies, financial market 
utilities, or trading markets.\55\ For the purposes of Rule 17Ad-
22(e)(20), ``link'' means, among other things, a set of contractual and 
operational arrangements between two or more clearing agencies, 
financial market utilities, or trading markets that connect them 
directly or indirectly for the purpose of participating in 
settlement.\56\
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    \55\ 17 CFR 240.17Ad-22(e)(20).
    \56\ 17 CFR 240.17Ad-22(a)(8).
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    In adopting Rule 17Ad-22(e)(20), the Commission provided guidance 
that a covered clearing agency generally should consider in 
establishing and maintaining policies and procedures that address 
links.\57\ Notably, the Commission stated that a covered clearing 
agency should consider whether a link has a well-founded legal basis, 
in all relevant jurisdictions, that supports its design and provides 
adequate protection to the covered clearing agencies involved in the 
link.\58\
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    \57\ See Covered Clearing Agency Standards, 81 FR at 70841.
    \58\ Id.
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    As described above, the Accord is a contractual arrangement between 
NSCC and OCC that governs the processing of E&A Activity, which 
consists of settlement obligations arising out of certain products 
cleared by OCC. The Accord, therefore, is a link for the purposes of 
Rule 17Ad-22(e)(20). The specific legal basis for the Accord to conform 
to a T+1 settlement cycle was discussed above in section III.B. 
Likewise, Section II discussed the ways the Accord provides adequate 
protection to both OCC and NSCC by introducing the GSP, enhancing 
information sharing between OCC and NSCC, and ensuring that OCC and 
NSCC have the tools and information they need to monitor the potential 
liquidity need posed by the GSP.
    For the reasons discussed in those sections, the Accord between OCC 
and NSCC has a well-founded legal basis that supports its design and 
provides adequate protection to the covered clearing agencies involved 
in the Accord. Accordingly, the proposed changes to the Accord and 
NSCC's Rules are consistent with Rule 17Ad-22(e)(20) under the Exchange 
Act.\59\
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    \59\ 17 CFR 240.17Ad-22(e)(20).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change, as modified by Partial Amendment No. 1 and 
Amendment No. 2, is consistent with the requirements of the Exchange 
Act, and in particular, the requirements of section 17A of the Exchange 
Act \60\ and the rules and regulations thereunder.
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    \60\ In approving the Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\61\ that the Proposed Rule Change, as modified by Partial 
Amendment No. 1 and Amendment No. 2, (SR-NSCC-2023-007) be, and hereby 
is, approved.
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    \61\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05832 Filed 3-19-24; 8:45 am]
BILLING CODE 8011-01-P