[Federal Register Volume 89, Number 174 (Monday, September 9, 2024)]
[Notices]
[Pages 73145-73148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-20170]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100897; File No. SR-NSCC-2024-007]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Modify the NSCC Rules & Procedures To Accommodate 
Fractional Share Trading Programs

September 3, 2024.
    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 August 21, 2024, 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. NSCC filed the 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to the NSCC 
Rules & Procedures (``Rules'') to accommodate the Member submission and 
trade recording of certain trades executed in connection with 
fractional share trading programs, as described in greater detail 
below.\5\
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    \5\ Capitalized terms not defined herein shall have the meaning 
assigned to such terms in the Rules, available at www.dtcc.com/legal/rules-and-procedures.
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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 the real-time 
trade submission requirements in NSCC Rule 7 and Procedure II to 
accommodate the Member submission and trade recording of certain trades 
representing transactions from fractional share trading programs. The 
proposed rule change is discussed in detail below.
Background
    NSCC Rule 7, Section 7 requires that trade data submitted to NSCC 
for trade recording be submitted in ``Real-time,'' \6\ and on a trade-
by-trade basis, in the form executed without any form of ``pre-
netting'' of such trades prior to their submission (collectively, the 
``Real-time Trade Submission Requirement''). Cleared contract 
information is then reported out to submitting firms by NSCC's 
Universal Trade Capture (``UTC'') system \7\ upon trade comparison and 
validation. The receipt of trade data in real-time enables NSCC to 
report to Members trade data as it is received, thereby promoting 
intra-day reconciliation of transactions at the Member level, and also 
facilitates efficient risk management for both NSCC and its Members.
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    \6\ NSCC Procedure XIII defines ``Real-time'' to mean the 
``submission of trade data on a trade-by-trade basis promptly after 
trade execution, in any format and by any communication method 
acceptable to [NSCC].'' See NSCC Procedure XIII, supra note 5.
    \7\ NSCC's UTC system validates and reports equity transactions 
that are submitted to NSCC throughout the trading day by an exchange 
or by a Qualified Special Representative that is an NSCC Member.
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    From an operational perspective, NSCC is only able to accept trades 
for clearing in units of full shares. Moreover, stocks do not trade on 
exchanges in units of less than one share, and trades may only be 
reported to a trade reporting facility in multiples

[[Page 73146]]

of one share.\8\ Some broker-dealers, however, offer programs enabling 
their customers to purchase and sell shares on a fractional basis 
(i.e., less than one full share of a stock or other security).\9\ These 
programs vary by broker-dealer and may involve the broker-dealer using 
its own capital to purchase/sell a full share and giving its customer 
the fraction or aggregating customer orders together to form full 
shares.
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    \8\ See ``Trade Reporting Frequently Asked Questions #101.14,'' 
Financial Industry Regulatory Authority, available at www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
    \9\ See ``Staff Report on Equity and Options Market Structure 
Conditions in Early 2021,'' SEC, page 7, available at www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
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    Because NSCC cannot operationally process fractions of shares, 
Members offering fractional share trading programs cannot submit 
certain transactions from fractional share trading programs for 
clearing. Trades in fractional shares may be reported to a trade 
reporting facility in multiples of one share; however, for fractional 
shares this must be done in accordance with certain rounding 
conventions.\10\ NSCC believes that such trades could be similarly 
aggregated into full shares for submission to NSCC as Correspondent 
Clearing transactions.\11\ Section 2(b) of Rule 7 provides that a 
Special Representative \12\ may submit to NSCC transaction data as to 
the rights and obligations of Members which calls for the delivery of 
Cleared Securities and is between Members. This includes Correspondent 
Clearing transactions, which allow NSCC Members to move a position from 
an executing broker (or Special Representative) account to a different 
clearing broker (i.e., correspondent) account. NSCC allows exceptions 
to the Real-time Trade Submission Requirement for Correspondent 
Clearing transactions submitted under Section 2(b) of Rule 7 if the 
trade data is submitted to facilitate a position movement between 
affiliates or is between two unaffiliated clearing brokers on behalf of 
a common client for custody purposes.\13\ NSCC believes a similar 
exception would be appropriate for certain transactions from fractional 
share trading programs.
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    \10\ See supra note 8.
    \11\ The Correspondent Clearing service allows an NSCC Member 
broker-dealer to use one broker-dealer for an execution and another 
for clearance and settlement. See NSCC Procedure IV, Section C, 
supra note 5.
    \12\ A ``Special Representative'' is a Member or a Registered 
Clearing Agency which applies to NSCC for such status and designates 
those Members for which it will act. Special Representatives may 
submit to NSCC for trade recording trade data on any transaction 
calling for delivery of Cleared Securities between it and another 
person. See NSCC Rule 7, Sections 1 and 2(a), supra note 5.
    \13\ See NSCC Rule 7, Section 7, supra note 5. NSCC notes that 
the Real-time Trade Submission Requirement in NSCC Rule 7, Section 7 
also does not apply to transaction data for exchange-traded funds 
submitted pursuant to Section 4(b) of Rule 7.
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Proposed Changes
    NSCC proposes to revise its Rules to allow an exception to the 
Real-time Trade Submission Requirement for Correspondent Clearing 
transactions representing aggregated transactions of fractional shares. 
As described above, NSCC cannot currently process trades on a 
fractional basis. However, NSCC may accept aggregated transactions from 
fractional share trading programs for clearing if such transactions are 
submitted in multiples of one share based on rounding conventions 
similar to those used for reporting such transactions to trade 
reporting facilities.
    For example, a broker-deal (``Broker A'') may receive an order from 
a customer to purchase 6.5 shares of ABC Corp. Broker A may route that 
order to an executing broker (``Broker B'') to purchase 6.5 shares. 
Broker B then executes an order to buy 7 shares of ABC Corp. on a 
trading venue such as an exchange or alternative trading system, which 
only offers trading in full shares. This transaction clears in real-
time at NSCC with Broker B as the buyer versus its contra party. Broker 
B would then submit a Correspondent Clearing transaction \14\ to NSCC 
for 6 shares of ABC Corp., with Broker B as the seller and Broker A as 
the buyer. This transaction would also clear in real-time at NSCC. To 
accommodate the fractional share, Broker A would set up a fail to 
receive of 0.5 shares of ABC Corp. versus Broker B, and Broker B would 
set up fail to deliver of 0.5 shares of ABC Corp. versus Broker A. 
Broker B would take principal ownership of the remaining 0.5 shares of 
ABC Corp. This position would be held in Broker B's omnibus account at 
the broker-dealer until the account accumulates to at least one (1) 
full share.
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    \14\ See supra note 11 and associated text.
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    The following day, Broker A may receive another order from a 
customer to purchase 6.5 shares of ABC Corp. Broker A again routes the 
order to executing Broker B to purchase 6.5 shares. This time, Broker B 
executes an order to buy 6 shares of ABC Corp. on a trading venue. This 
transaction clears in real-time at NSCC with Broker B as buyer versus 
its contra party. Broker B then submits a Correspondent Clearing 
transaction to NSCC for 6 shares of ABC Corp. with Broker B as seller 
and Broker A as buyer. This transaction also clears in real-time at 
NSCC. Broker B then ultimately submits an additional Correspondent 
Clearing transaction to NSCC for 1 share of ABC Corp. with Broker B as 
seller and Broker A as buyer. This transaction clears at NSCC, and 
Broker A and Broker B close-out the fail to receive/deliver with one 
another.
    In the example above, the rounding, aggregation and submission of 
transactions in fractional shares could be interpretated as not 
satisfying the Real-time Trade Submission Requirement. For example, the 
Correspondent Clearing transactions containing aggregated fractional 
shares may not be submitted promptly after execution of the underlying 
trades executed by the executing broker and the aggregated shares may 
not be submitted in the form executed. The Real-time Trade Submission 
Requirement was not designed, however, to prohibit the submission of 
Correspondent Clearing transactions necessary to accommodate the 
clearing of fractional shares. NSCC did not consider fractional share 
trading programs or the clearing of fractional shares when it adopted 
its Real-time Trade Submission Requirement rules and subsequently 
amended those rules to address the Correspondent Clearing service.\15\ 
As a result, NSCC proposes to revise Section 7 of NSCC Rule 7 to allow 
an additional exception from the Real-time Trade Submission Requirement 
for Correspondent Clearing transactions that represent aggregated 
transactions of fractional shares. In addition, NSCC would revise 
Section 7 of NSCC Rule 7 to include a requirement that trade data 
representing aggregated transactions of fractional shares must be 
submitted to NSCC for trade recording in units of full shares and 
should be submitted as promptly as reasonably practical. NSCC also 
proposes to make conforming changes to Section A of Procedure II to 
include trade data representing aggregated transactions of fractional 
shares in the list of exceptions for the Real-time Trade Submission 
Requirement.
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    \15\ See e.g., Securities Exchange Act Release Nos. 69890 (June 
28, 2013), 78 FR 40538 (July 5, 2013) (File No. SR-NSCC-2013-05) and 
76462 (Nov. 17, 2015), 80 FR 73029 (Nov. 23, 2015) (SR-NSCC-2015-
004).
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    The proposed rule change would not require NSCC to make any changes 
to its current operational and risk management processes. As described 
above, NSCC would continue to receive all transactions in units of full 
shares, and from an operational perspective, transactions from 
fractional share trading programs would be recorded and processed in 
the same manner as

[[Page 73147]]

any other transaction submitted for clearing. NSCC also does not 
believe that clearing transactions from fractional share trading 
programs would require any changes to its risk management processes. 
While the Correspondent Clearing portion of such transactions would not 
be subject to the Real-time Trade Submission Requirement, these 
transactions are not expected to constitute a significant volume of 
trades relative to NSCC's total cleared transaction volumes. 
Transactions from fractional share trading programs would be subject to 
the same margining and risk management practices as other equity 
transactions upon trade recording and validation by NSCC, and NSCC does 
not currently plan to make any changes to its risk management processes 
in relation to the clearing of the aggregated shares received from 
fractional share trading programs. NSCC believes that the benefits of 
bringing these transactions into central clearing (e.g., their 
inclusion in Continuous Net Settlement (``CNS'') netting, NSCC risk 
management and NSCC's trade guaranty) would justify the exception for 
such transactions from the Real-time Trade Submission Requirement. As 
noted above, NSCC currently permits other exceptions to the Real-time 
Trade Submission Requirement for Correspondent Clearing transactions, 
such as trade data submitted to facilitate a position movement between 
affiliates or between two unaffiliated clearing brokers on behalf of a 
common client for custody purposes and transaction data concerning 
creation and redemption orders for exchange-traded funds.\16\
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    \16\ See supra note 13 and associated text.
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2. Statutory Basis
    NSCC believes the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Section 17A(b)(3)(F) of the 
Act \17\ requires that the rules of a clearing agency are designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency or for which it is 
responsible, and remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions.
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rule change would provide an additional exception from 
the Real-time Trade Submission Requirement for Correspondent Clearing 
transactions representing aggregated transactions of fractional shares, 
thereby allowing broker-dealers offering or participating in fractional 
share trading programs to submit these fractional shares, on a rounded 
and aggregated basis, to NSCC for clearance and settlement. The 
proposed rule change would not require NSCC to make any changes to its 
current operational and risk management processes and would enable the 
prompt and accurate clearance and settlement of such transactions. The 
proposed rule change would require such transactions to be submitted 
for trade recording in units of full shares and as promptly as 
reasonably practical. Moreover, the proposed rule change would extend 
the benefit of CNS netting, NSCC's risk management and margining 
practices, and NSCC's trade guaranty to these fractional shares, 
thereby safeguarding the securities and funds associated with such 
transactions. For these reasons, NSCC believes the proposed rule change 
would promote the prompt and accurate clearance and settlement of 
securities transactions, assure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency or for 
which it is responsible, and remove impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions in accordance with Section 
17A(b)(3)(F) of the Act.\18\
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    \18\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \19\ requires that the rules of the 
clearing agency do not impose any burden on competition not necessary 
or appropriate in furtherance of the Act. NSCC does not believe the 
proposed rule change would have any impact or burden on competition. 
The proposed rule change would provide an exception to the Real-time 
Trade Submission Requirement for fractional shares and require that 
such transactions be submitted to NSCC in aggregated units of full 
shares as promptly as reasonably practical. The proposed rule change 
would apply to all Members equally and would not otherwise impose any 
requirements on the manner in which Members operate their fractional 
shares programs. Moreover, NSCC would clear and risk manage these 
aggregated shares in the same way as other trades submitted for trade 
recording and clearing. The proposed rule change would not unfairly 
inhibit access to NSCC's services by any Member or advantage or 
disadvantage one Member in relationship to another. NSCC therefore 
believes the proposed rule change would not have any impact or burden 
on competition.
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    \19\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. If any written comments are received by NSCC, they will 
be publicly filed as an Exhibit 2 to this filing, as required by Form 
19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.
    NSCC reserves the right not to respond to any comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder.
    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

[[Page 73148]]

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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NSCC-2024-007 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-2024-007. 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 (https://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 
a.m. and 3 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 (dtcc.com/legal/sec-rule-filings). Do not include personal 
identifiable information in submissions; you should submit only 
information that you wish to make available publicly. We may redact in 
part or withhold entirely from publication submitted material that is 
obscene or subject to copyright protection. All submissions should 
refer to File Number SR-NSCC-2024-007 and should be submitted on or 
before September 30, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-20170 Filed 9-6-24; 8:45 am]
BILLING CODE 8011-01-P