[Federal Register Volume 89, Number 90 (Wednesday, May 8, 2024)]
[Notices]
[Pages 38929-38932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10001]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100048; File No. SR-NSCC-2024-002]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving of Proposed Rule Change To Accommodate a
Shorter Standard Settlement Cycle and Make Other Changes
May 2, 2024.
I. Introduction
On March 8, 2024, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2024-002 (``Proposed Rule
Change'') 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 March 21,
2024.\3\ The Commission has received no comments on the Proposed Rule
Change. For the reasons discussed below, the Commission is approving
the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99750 (Mar. 15,
2024), 89 FR 20267 (Mar. 21, 2024) (File No. SR-NSCC-2024-002)
(``Notice of Filing'').
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II. Background
NSCC provides central counterparty services, including clearing,
settlement, risk management, and a guarantee of completion, for
virtually all broker-to-broker trades involving equity securities,
corporate and municipal debt securities, and certain other securities.
NSCC's Rules \4\ consider the current standard settlement cycle of
two business days after the trade date (``T+2'') as ``regular way''
settlement, and as such, are currently designed to accommodate this
settlement cycle. The T+2 settlement cycle has been in place since 2017
when the Commission amended Exchange Act Rule 15c6-1(a) \5\
[[Page 38930]]
to shorten the standard settlement cycle from three business days after
the trade date, in an effort to reduce credit, market, and liquidity
risk, and as a result, reduce systemic risk for U.S. market
participants.\6\ In an effort to further promote investor protection,
reduce risk in the financial system, and increase operational and
capital efficiency in the securities market, the Commission has adopted
a rule change shortening the standard settlement cycle from T+2 to one
business day after the trade date (``T+1'') (``Shortened Settlement
Cycle''), with a compliance date of May 28, 2024.\7\
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\4\ Capitalized terms not defined herein are defined in the
Rules and Procedures of NSCC (``Rules''), available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
\5\ Exchange Act Rule 15c6-1(a), as amended in 2017, required,
with certain exceptions, that a broker or dealer shall not effect or
enter into a contract for the purchase or sale of a security (other
than an exempted security, government security, municipal security,
commercial paper, bankers' acceptances, or commercial bills) that
provides for payment of funds and delivery of securities later than
the second business day after the date of the contract unless
otherwise expressly agreed to by the parties at the time of the
transaction. See 17 CFR 240.15c6-1(a).
\6\ See Securities Exchange Act Release No. 80295 (Mar. 22,
2017), 82 FR 15564 (Mar. 29, 2017).
\7\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (S7-05-22) (Shortening the
Securities Transaction Settlement Cycle) (``T+1 Adopting Release'').
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NSCC is proposing to amend the Rules to be consistent with this
upcoming industry-wide move to the Shortened Settlement Cycle. However,
NSCC states that the core functions of NSCC will generally continue to
operate in the same way in the Shortened Settlement Cycle.\8\
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\8\ See Notice of Filing, supra note 3, at 20268.
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III. Description of the Proposed Rule Change
NSCC proposes changes to address two categories of rules: (A) rules
that have timeframes and/or cutoff times that are tied to the standard
settlement cycle, and (B) rules affected by process changes being made
to accommodate the Shortened Settlement Cycle. In general, these
provisions either directly track the timeframe and/or Settlement Date
of the standard settlement cycle, address non-standard settlement
cycles, or provide for timeframes and/or cutoff times that are
connected to or are affected by the timing of the standard settlement
cycle and would need to be changed to accommodate the Shortened
Settlement Cycle. The proposed changes to accommodate the upcoming move
to the Shortened Settlement Cycle would impact the following NSCC
Rules: Definitions (Rule 1 and Procedure XIII); Supplemental Liquidity
Deposits (Rule 4A); Trade Comparison and Recording (Procedure II); the
Special Representative Service (Procedure IV); the Continuous Net
Settlement (``CNS'') System and CNS Accounting Operation (Rule 11 and
Procedure VII); the Balance Order Accounting Operation (Procedure V);
the Foreign Security Accounting Operation (Procedure VI); the ACATS
Settlement Accounting Operation (Procedure XVIII); and the NSCC
Guaranty (Addendum K).\9\ These proposed changes are discussed below.
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\9\ For more detailed discussion of each specific edit to the
Rules, please refer to the Notice of Filing. See id. at 20268-73
(describing specific changes to each of the relevant sections of the
Rules).
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NSCC is also proposing other technical changes and corrections to
the Rules that are not required to accommodate the move to the
Shortened Settlement Cycle but would provide additional clarity and
accuracy in the Rules.\10\
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\10\ See id. at 20269-72 (Subparagraphs B, C (concerning Index
Receipts (Procedure II.F), E (concerning Consolidated Trade Summary
(Procedure VII.B)), and G). See also infra note 9.
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A. Changes to Timeframes and/or Cut-off Times Tied to the Standard
Settlement Cycle
The Rules contain certain provisions that refer to ``T+2'' as the
timeframe and Settlement Date of the standard settlement cycle and
consider this as ``regular way'' settlement. These provisions would be
updated to reflect the change to ``T+1'' and that T+1 would be Regular
Way settlement under the Shortened Settlement Cycle.\11\ Similarly, a
number of provisions in the Rules refer to timeframes and/or Settlement
Dates that are intended to be shorter/earlier or later, as applicable,
than the timeframe and/or Settlement Date of the standard settlement
cycle. These provisions also must be changed to accommodate the
Shortened Settlement Cycle.\12\ Likewise, the length and timing of
certain cutoff times are based on either a standard settlement cycle or
a non-standard settlement cycle. Therefore, when the timeframe and
Settlement Date of the standard settlement cycle and nonstandard
settlement cycle are changed, these cutoff times would also need to be
revised accordingly.\13\
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\11\ See id. (Subparagraphs A, C (concerning Equity and Listed
Debt Securities (Procedure II.B), Debt Securities (Procedure II.C),
Index Receipts (Procedure II.F), Reports and Output (Procedure
II.G)), E (concerning Consolidated Trade Summary (Procedure VII.B)),
and G).
\12\ See id. (Subparagraphs B, E (concerning CNS System (Rule
11), Consolidated Trade Summary (Procedure VII.B), Controlling
Deliveries to CNS (Procedure VII.D)), F, H, and I).
\13\ See id. (Subparagraphs C (concerning Debt Securities
(Procedure II.C)), and E (concerning CNS System (Rule 11),
Consolidated Trade Summary (Procedure VII.B), CNS Dividend
Accounting (Procedure VII.G)).
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B. Changes to Process Relating to the Shortened Settlement Cycle
Some of the Rules would require process changes to accommodate the
Shortened Settlement Cycle, as described below.\14\
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\14\ See infra note 9.
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Changes to Procedure II.F.--Index Receipts (Exchange-Traded Funds)
NSCC proposes to amend its creation/redemption input and settlement
procedures for exchange-traded funds (``ETF(s),'' also referred to as
``index receipts'' in the Rules). Aside from proposed changes to
reflect that T+1 would be Regular Way settlement under the Shortened
Settlement Cycle, NSCC also proposes additional amendments to allow for
the creation and redemption of index receipts for same-day settlement.
NSCC would add new rule language to allow Index Receipt Agents to
include an additional cash collateral amount (``Index Receipt Cash
Collateral Amount'') for same-day settling index receipts, which would
be subject to limits established by NSCC.\15\ NSCC would also report
any necessary adjustments to the Index Receipt Cash Collateral Amount
based on end of day values (``Collateral Cash Adjustments'') for non-
guaranteed payment order or money settlement between the Members on the
next business day to ``true-up'' the Index Receipt Cash Collateral
Amount amounts. In addition, NSCC would amend the procedure to provide
that any creation and redemption instructions for same-day settling
index receipts that exceed the Index Receipt Cash Collateral Amount
limitations established by NSCC would be rejected.
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\15\ NSCC would initially establish this limit at 3% of the
contract settlement amount of the order, which would be priced based
on the prior night's net asset value. NSCC will monitor the use and
overall collateral buffer amounts over time and may adjust this
threshold as needed. Changes to these limits would be announced to
Members by Important Notice. See Notice of Filing, supra note 3, at
20269.
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NSCC states that these proposed rules for same-day creation/
redemption are designed to allow Authorized Participants to cover short
positions in ETF shares.\16\ The Rules currently allow Index Receipt
Agents to elect a Settlement Date of T+1 or later for ETFs. Under the
current T+2 settlement cycle, Authorized Participants may address short
positions through the submission of creations/redemptions for next-day
settlement (i.e., T+1). However, under the Shortened Settlement Cycle,
Authorized Participants may need to submit creations/redemptions on a
same-day basis to cover short positions scheduled for settlement on
T+1.\17\ NSCC states that in the absence of the proposed same-day
cycle, Authorized Participants would need to process this
[[Page 38931]]
activity on an ex-clearing basis, which would result in excess capital
expenses.\18\ As stated above, the proposed rule change would also
provide Index Receipt Agents with the option to require an additional
Index Receipt Cash Collateral Amount as part of the creation or
redemption to act as a ``buffer'' and account for potential market
moves in the ETF or underlying components between the submission of the
creation or redemption earlier in the day (based on the prior day's
closing price which aligns with net asset value) and the settlement of
such obligations at the end of the day during NSCC's end-of-day
settlement cycle. These same-day create/redeem transactions would be
subject to NSCC's risk management, consistent with its risk management
of other ETF create/redeem orders.
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\16\ See id.
\17\ Currently, NSCC allows for same-day settling cash trades in
the secondary market, even in the T+2 environment. The proposed rule
change would allow same-day settling trades in the primary market.
\18\ See Notice of Filing, supra note 3, at 20270.
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Changes to Procedure II.H.--Consolidated Trade Summaries.
NSCC proposes to update its procedures concerning Consolidated
Trade Summaries to reflect processes under the Shortened Settlement
Cycle. NSCC's Consolidated Trade Summary System defines the expected
settlement path for each transaction received by the Universal Trade
Capture (``UTC'') service as CNS or non-CNS eligible.\19\ NSCC would
make changes regarding the reporting of Balance Order transactions
under the Shortened Settlement Cycle to state, more generally, that
each Consolidated Trade Summary would include Receive and Deliver
instructions to each Member to settle directly with its counterparties.
NSCC states that the proposed change is intended to reflect that the
three Consolidated Trade Summaries made available by NSCC will not
include the same information on all three reports (e.g., the first two
cycles would report next-day settling Balance Order transactions while
the third cycle would report same-day settling Balance Order
transactions trades).\20\
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\19\ NSCC's CNS system is NSCC's core netting, allotting, and
fail-control engine in which each security is netted to one position
per Member with NSCC as its central counterparty. See id. See also
Rule 11, supra note 4.
\20\ See Notice of Filing, supra note 3, at 20270.
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Changes to Procedure IV--Special Representative Service
NSCC proposes to delete a provision related to the Correspondent
Clearing Service,\21\ which states that transactions (other than cash,
next day fixed-income transactions, or cash equity transactions
received after the Corporation's designated cut-off time) which are
accepted by NSCC are then entered into the Balance Order Accounting
Operation or CNS Accounting Operation which, when processed through the
Balance Order Accounting Operation or CNS Accounting Operation,
effectively net the Special Representative out of the original trade.
NSCC proposes to delete this statement because (i) under the Shortened
Settlement Cycle, there will no longer be next day fixed-income
transactions (i.e., such transactions will be Regular Way) and (ii) the
statement, more generally, is not a rule or procedural requirement
concerning the Correspondent Clearing Service, but rather, is simply a
description of an expected outcome of the service.\22\
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\21\ NSCC's Special Representative Service allows Members that
are authorized by one or more other persons to act on their behalf
to submit transactions in securities to NSCC. See id. As part of
this, the Correspondent Clearing Service permits Members to clear
and settle transactions executed for them by other Members acting as
their Special Representative to accommodate (i) a Member with
multiple affiliate accounts who wishes to move a position resulting
from an ``original trade'' in the process of clearance from one
affiliate account to another or(?) (ii) a Member that relies on its
Special Representative to execute a trade in any market on its
behalf to enable the resulting position to be moved from the Special
Representative to that Member. Id.; see also Procedure IV, supra
note 4.
\22\ See Notice of Filing, supra note 3, at 20270.
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Changes to Procedure VII--CNS Accounting Operation
NSCC proposes changes to Rule 11 and Procedure VII concerning
projection reports. Under the Shortened Settlement Cycle, the CNS
projection report that will be issued on each Settlement Date will no
longer include next day settling positions because it will only cover
obligations for a one-day settlement cycle and will be issued during
early morning hours on the Settlement Date. NSCC proposes to revise
Section 4 of Rule 11 to remove rule text related to positions or
obligations due to settle on ``the next settlement day.'' NSCC proposes
to delete subsection D.1. of Procedure VII \23\ concerning the CNS
projection report and other references to it throughout Procedure VII.
Under the Shortened Settlement Cycle, the CNS projection report would
no longer be used for the exemption process because it will be
distributed at 2:00 a.m. ET on Settlement Date, after the night cycle
completes.\24\ However, NSCC would clarify in the newly renumbered
Section D.1(a) that Members may use other position reporting made
available by NSCC to set exemptions and control deliveries.
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\23\ Section D of Procedure VII describes the process for
Members to control the delivery of securities to satisfy short
positions in NSCC's CNS system. See id. at 20271.
\24\ See id.
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NSCC also proposes changes to Section H of Procedure VII describing
the timeline of actions that must occur in connection with the
processing of eligible corporate reorganization events to align with
the Shortened Settlement Cycle. While the processing of mandatory
reorganizations occurs automatically, the processing of voluntary
reorganizations through the CNS Reorganization Processing System
requires certain actions to be taken by both NSCC and Members with
positions in the subject security during the period of time leading up
to and following the expiration of the event. This period of time is
referred to in the Rules as the ``protect period'' and is defined by
reference to the expiration date, or ``E,'' of a voluntary
reorganization (e.g., ``E+1'' is one day past the expiration date of
the event). NSCC would remove references to the current standard two
business day protect period and replace them with references to the one
business day protect period anticipated under the Shortened Settlement
Cycle. NSCC also proposes to update the processing timeframes for
voluntary reorganizations to reflect the new timeframes under the
Shortened Settlement Cycle.\25\
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\25\ For specific changes in processing timeframes for voluntary
reorganizations, please refer to the Notice of Filing. See id. at
20272.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \26\ 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 careful review of 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 NSCC. In particular, the Commission finds that the
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the
Act.\27\
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\26\ 15 U.S.C. 78s(b)(2)(C).
\27\ 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency with Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to, among other things, promote the prompt
and accurate clearance and settlement of securities transactions and to
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and
[[Page 38932]]
settlement of securities transactions.\28\ The Commission believes that
the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the
Act for the reasons stated below.
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\28\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed in Part II, the Commission has adopted a rule change
shortening the standard settlement cycle from T+2 to T+1, with a
compliance date of May 28, 2024. The Proposed Rule Change would align
NSCC's Rules with this upcoming industry-wide move and update NSCC's
Rules to accommodate anticipated processing timelines under a Shortened
Settlement Cycle. The Proposed Rule Change would modify the timeframes,
cutoff times, and associated outputs for certain processes related to
NSCC's clearance and settlement operations for a T+1 environment,
including Rules related to: Definitions (Rule 1 and Procedure XIII);
Supplemental Liquidity Deposits (Rule 4A); Trade Comparison and
Recording (Procedure II); the Special Representative Service (Procedure
IV); the Continuous Net Settlement (``CNS'') System and CNS Accounting
Operation (Rule 11 and Procedure VII); the Balance Order Accounting
Operation (Procedure V); the Foreign Security Accounting Operation
(Procedure VI); the ACATS Settlement Accounting Operation (Procedure
XVIII); and the NSCC Guaranty (Addendum K).
The Commission has reviewed and analyzed the filing materials, and
agrees that these changes are necessary for NSCC to clear and settle
transactions promptly and accurately under the Shortened Settlement
Cycle. As described in Part III.A, the changes to update and modify
timeframes and cutoff times to reflect a Shortened Settlement Cycle
should help ensure that NSCC's operations and Rules are consistent with
the Shortened Settlement Cycle. Similarly, the changes to modify
existing processes such that they occur within the Shortened Settlement
Cycle, as described in Part III.B, should also help ensure that NSCC's
functions are consistent with and accommodate the Shortened Settlement
Cycle. Therefore, the Commission finds that the Proposed Rule Change
should support NSCC's ability to provide prompt and accurate clearance
and settlement of securities transactions and to remove impediments to
and perfect the mechanism of a national system for the prompt and
accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.\29\ Regarding the
technical changes and corrections to the Rules not required to
accommodate the move to T+1, as also described in Part III, the
Commission finds these changes also consistent with Section
17A(b)(3)(F) of the Act \30\ because the technical updates would
provide additional clarity and accuracy in the Rules for Members that
rely on them.
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\29\ Id.
\30\ Id.
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A of the Act \31\
and the rules and regulations promulgated thereunder.
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\31\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\32\ that proposed rule change SR-NSCC-2024-002, be, and hereby is,
approved.\33\
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\32\ 15 U.S.C. 78s(b)(2).
\33\ In approving the Proposed Rule Change, the Commission
considered its 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.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-10001 Filed 5-7-24; 8:45 am]
BILLING CODE 8011-01-P