[Federal Register Volume 91, Number 51 (Tuesday, March 17, 2026)]
[Notices]
[Pages 12866-12869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-05128]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104981; File No. SR-NSCC-2026-001]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change Concerning the
Clearing of Exchange-Traded Funds With Options as Underlying Components
March 12, 2026.
I. Introduction
On January 16, 2026, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2026-001, 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 would amend the
NSCC Rules & Procedures (``NSCC Rules'') to facilitate clearing for the
primary market creation and redemption of exchange-traded funds
(``ETFs'') that have options as underlying components by implementing
new messaging connectivity between NSCC and The Options Clearing
Corporation (``OCC'') and allowing NSCC to submit instructions to OCC
on behalf of their participants.\3\ The proposed rule change was
published for comment in the Federal Register on January 29, 2026.\4\
The Commission has received one comment on the changes proposed.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms not defined herein shall have the meaning
assigned to such terms in the NSCC Rules, available at www.dtcc.com/legal/rules-and-procedures.
\4\ See Securities Exchange Act Release No. 104687 (Jan. 26,
2026). 91 FR 3938 (Jan. 29, 2026) (File No. SR-NSCC-2026-001)
(``Notice of Filing'').
\5\ Comment on the proposed rule change is available at https://www.sec.gov/rules-regulations/public-comments/sr-nscc-2026-001.
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For the reasons discussed below, the Commission is approving the
proposed rule change.
II. Background
ETFs (referred to as ``index receipts'' in the NSCC Rules) are
marketable securities that track stock indices, commodities, bonds, or
baskets of assets. Shares of ETFs are created and redeemed in the
primary market and are traded on listed exchanges in the secondary
market. Each share of an ETF represents an undivided interest in the
underlying assets of the ETF.
NSCC facilitates central counterparty (``CCP'') clearing and
settlement of the
[[Page 12867]]
creation and redemption of ETF shares in the primary market, as well as
central clearing of ETF trades in the secondary market. The
participants in the ETF primary market typically consist of the issuers
of ETFs (``ETF Sponsors''), custodian banks (``ETF Agents,'' also
referred to as ``Index Receipt Agents'' in the NSCC Rules), and
brokers/dealers that have agreements directly with ETF Sponsors to
allow the brokers/dealers to place orders for the creation and
redemption of ETF shares (``Authorized Participants'' or ``APs'').\6\
Both the ETF Agents and APs are Members of NSCC.\7\
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\6\ See Notice of Filing, supra note 4, at 3938.
\7\ Id.
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In general, APs create and redeem ETF shares from the ETF Sponsors
in blocks called ``creation units.'' An AP that purchases a creation
unit of ETF shares delivers a ``basket'' of securities and other assets
to the ETF Agent and then receives the creation unit of ETF shares in
return for those assets. The redemption process is the reverse of the
creation process: the AP redeems a creation unit of ETF shares in
exchange for a basket of securities and other assets. These creation
and redemption baskets are referred to as ``trading baskets.''
NSCC supports the creation and redemption of ETFs on both a ``cash-
only'' and ``in-kind'' basis.\8\ In a ``cash-only'' transaction, ETF
shares are exchanged for cash; in an ``in-kind'' transaction, ETF
shares are exchanged for the component securities and other assets in
the trading basket.\9\
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\8\ Id.
\9\ Id.
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NSCC facilitates ``in-kind'' creation and redemption of ETFs with
trading baskets comprised of underlying securities that are cleared by
NSCC and settled by its affiliate clearing agency, The Depository Trust
Company (``DTC'').\10\ NSCC states, however, that some ETFs have
trading baskets containing securities that are not eligible for
clearing at NSCC, such as listed options, which are cleared and settled
by OCC.\11\ NSCC further states that, while the creation of ETF units
with underlying option components may currently be done on a ``cash-
only'' basis at NSCC, ETF market participants typically handle the
redemption of such ETFs on an ``ex-clearing'' basis (e.g., outside of
traditional clearing mechanisms and NSCC).\12\
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\10\ Id.
\11\ Id. OCC is the sole clearing agency for standardized equity
options listed on national securities exchanges registered with the
Commission.
\12\ Id.
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NSCC states that APs and ETF Agents have raised concerns regarding
the existing processes for clearing ETFs that have option components in
their trading baskets.\13\ NSCC states that the current ETF creation
process requires ETF market participants to create the ETF shares at
NSCC and effectuate the simultaneous transfer or adjustment of the
associated underlying option components at OCC.\14\ Specifically, APs
and ETF Agents must initiate a ``cash-only'' creation at NSCC, and the
ETF Agent uses the cash received from the order to purchase the
necessary underlying options components for the ETF through a prime
broker, which options components are cleared by OCC.\15\
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\13\ Id.
\14\ Id.
\15\ Id.
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NSCC states that, conversely, the entire redemption process is
generally managed ex-clearing, requiring multiple manual steps to
ensure completion, including the tracking, pricing, validation and
ultimate execution of options positions transfers at OCC by the APs,
ETF Agents and prime brokers, which are required in connection with the
redemption process.\16\ NSCC states that this process, as it stands, is
fragmented and heavily dependent on manual intervention, which
increases the potential for errors and operational risk, and this lack
of integration and automation has been identified as a significant pain
point by industry participants.\17\ NSCC also states that the
processing of these transactions outside of clearing, and without the
benefit of NSCC's CCP guaranty, can introduce counterparty credit risks
among participants, and that the bilateral processing of these
transactions outside a CCP model may result in additional balance sheet
costs to APs.\18\
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\16\ Id.
\17\ Id. at 3939.
\18\ Id.
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NSCC states that it has closely collaborated with OCC and key
industry stakeholders to design a new industry messaging interface
between NSCC, OCC, and ETF market participants to facilitate the ``in-
kind'' creation and redemption of ETFs with option components at NSCC,
mitigating the aforementioned current challenges.\19\ While the
proposed rule change would provide ETF industry participants with the
ability to process both ``in-kind'' creations and redemptions of ETFs
with option components, NSCC states that it understands that industry
participants would initially use this new functionality primarily for
ETF redemption orders, which currently present the largest challenges
for industry participants.\20\ NSCC states that addressing industry
concerns and reducing operational burdens associated with the
redemption of ETFs with option components may in turn promote and
facilitate primary market creation and redemption activity more broadly
for such ETFs.\21\
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\19\ Id.
\20\ Id.
\21\ Id.
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III. Description of the Proposed Rule Change
The proposed rule change would amend the NSCC Rules to facilitate
clearing for the primary market creation and redemption of ETFs with
options as underlying components, and particularly the ``in-kind''
redemption of such ETFs. Under the proposal, NSCC would process the
intake of ETF creation/redemption orders and any underlying securities
that are cleared by NSCC and settled by DTC. For underlying option
components that are ineligible for clearance through NSCC, such as FLEX
options and covered call options, NSCC would route instructions to OCC
for the processing of any option position transfers or adjustments
associated with the creation/redemption order. NSCC states that it is
working with OCC and other stakeholders to develop a messaging
interface that would operate similar to the existing messaging
interface between NSCC and OCC used for NSCC's Automated Customer
Account Transfer Service (``ACATS'') in transmitting such instructions
to OCC.\22\ NSCC would guarantee settlement of the ETFs as well as any
underlying components eligible for clearance and settlement at
NSCC.\23\ However, NSCC would not guarantee position transfers,
position adjustments or related activity concerning the underlying
option components at OCC.
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\22\ Id. at 3939.
\23\ Id. ACATS is a non-guaranteed service provided by NSCC that
enables Members to effect transfers of customer accounts among
themselves. See Rule 50 (Automated Customer Account Transfer
Service) and Procedure XVIII (ACATS Settlement Accounting Operation)
of the NSCC Rules, supra note 3.
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NSCC would adopt new rules in Section F of Procedure II, including
new sub-section 3 of Section F, to describe additional requirements
related to the creation and redemption of ETFs with option components.
The proposed rule change would provide that ETF component securities
that are options (``Index Receipt Option Components'') that are not
eligible for settlement or processing through the facilities of
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NSCC may be eligible for position transfer or adjustments through
another Registered Clearing Agency or derivatives clearing organization
(an ``Options Clearing Organization,'' such as OCC). The proposed rule
change would further state that NSCC may provide instructions to the
applicable Options Clearing Organization concerning position transfers
or adjustment of Index Receipt Option Components in connection with the
creation and redemption of Index Receipts, and that any transactions,
position transfers, position adjustments, or settlements related to
Index Receipt Option Components shall be governed by and subject to
rules of the applicable Options Clearing Organization. These
instructions would be created by using the daily portfolio composition
files provided to NSCC by the ETF Agents to identify the underlying
option components within the fund to be transferred at OCC.\24\
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\24\ See Section F.1. of Procedure II (Trade Comparison and
Recording Service) of the NSCC Rules, supra note 3.
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In addition, the proposed rule change would provide that NSCC would
not be responsible for the completeness or accuracy of any instruction
received from an Index Receipt Agent and transmitted to an Options
Clearing Organization with respect to Index Receipt Option Components
and would not be responsible for any action taken, or any delay or
failure to take any action by the Options Clearing Organization, in
connection with the transfer or adjustment of such Index Receipt Option
Components. The proposed rule change would also clarify that NSCC's
guaranty would not apply to position transfers, position adjustments or
any associated settlements for Index Receipt Option Components and that
NSCC would not be liable for any obligations of any Options Clearing
Organization transferring such Index Receipt Option Components nor
shall the Clearing Fund or other assets of NSCC be available to such
Options Clearing Organization. As noted above, NSCC would only
guarantee the settlement of ETFs and underlying components that are
eligible for clearing at NSCC.\25\
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\25\ See Notice of Filing, supra note 4, at 3939.
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The proposed rule change would also allow NSCC to automatically
process payment orders between APs and ETF Agents to offset CNS \26\
cash debit amounts associated with the value of the option components
that have been instructed for position movement at such Options
Clearing Organization. For example, in a redemption scenario, CNS
credits the ETF Agent the ETF shares and debits the ETF Agent the value
of the ETF shares.\27\ In the case of an ETF with option components,
NSCC states that this would create exposure for the ETF Agent as they
are debited for the value of the entire ETF when they have already
instructed for the underlying option components to be transferred at
the OCC.\28\ Through industry discussions, NSCC states that ETF market
participants have agreed that the AP should issue a credit through a
special payment order to the ETF Agent to offset their CNS debit,
reducing ETF Agent's exposure on the order.\29\ NSCC states that the
proposed rule change would automate the processing of such payment
orders.\30\
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\26\ CNS is NSCC's 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. CNS provides clearance
for equities, ETFs, corporate bonds, unit investment trusts, and
municipal bonds that are eligible for book-entry transfer at DTC.
Within CNS, all eligible compared and recorded transactions for a
particular settlement date are netted by issue into one position per
Member. The position can be net long (buy), net short (sell) or
flat. As a continuous net system, those positions are further netted
with positions of the same issue that remain open after their
original scheduled settlement date (usually one business day after
the trade date or T+1), so that transactions scheduled to settle on
any day are netted with fail positions (i.e., positions that have
failed in delivery or receipt on the settlement date), which results
in a single deliver or receive obligation for each Member for each
issue in which the Member has activity. Id. at 3939.
\27\ Id.
\28\ Id.
\29\ Id.
\30\ Id.
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Accordingly, NSCC proposes to add new rules to provide that, with
respect to the redemption of index receipts containing Index Receipt
Option Components, Authorized Participants may be required to make a
cash payment to the Index Receipt Agents, which will be facilitated by
NSCC, equal to the value of the Index Receipt Option Components.
Alternatively, for the creation of index receipts containing Index
Receipt Option Components, Index Receipt Agents may be required to make
a cash payment to the Authorized Participant, which will be facilitated
by NSCC, equal to the value of the Index Receipt Option Components.
These cash payments are intended to offset corresponding debits in CNS
for the value of the Index Receipt Option Components transferred
through an Options Clearing Organization.
Finally, NSCC would amend existing Section F.1. of Procedure II to
incorporate the inclusion of certain information regarding Index
Receipt Option Components in the submission and reporting of the
composition of ETFs for creations and redemptions. Specifically, the
proposed rule change would require that Index Receipt Agents include in
portfolio composition files information concerning any component
securities that are Index Receipt Option Components to be transferred
through an Options Clearing Organization (e.g., the shares and their
associated quantities). The proposed rule change would also clarify
that the Portfolio Reports made available to Members by NSCC would
include information regarding Index Receipt Option Components. The
composition data within these Portfolio Reports may be used by NSCC to
process index receipt creations and redemptions on the next Business
Day.
NSCC states that the proposed rule change would address industry
concerns and reduce operational burdens by allowing NSCC to function as
the central hub for creation and redemption order processing for ETFs
with option components.\31\ NSCC also states that the proposal would
alleviate the operational burdens currently placed on APs, ETF Agents,
and prime brokers, reduce bilateral counterparty risks by applying
NSCC's guaranty to these transactions, and reduce balance sheet costs
for APs.\32\ Accordingly, NSCC states that the proposed rule change
would improve the overall efficiency of the creation/redemption process
for ETFs with option components and reduce risk between counterparties
and across the industry.\33\
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\31\ Id. at 3940.
\32\ Id.
\33\ Id.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \34\ 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.\35\ In particular, the Commission finds that the
proposed
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rule change is consistent with Section 17A(b)(3)(F) of the Act.\36\
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\34\ 15 U.S.C. 78s(b)(2)(C).
\35\ The Commission received one comment letter from The
Security Traders Association (``STA'') recommending that the
Commission approve the proposed rule change. See Letter from Kevin
Skarbek, Chairman of the Board, STA, and James Toes, President &
CEO, STA, dated March 4, 2026 (``STA Letter'').
\36\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency, such as DTC, be designed to, among other things,
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 foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions.\37\
The proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act for the reasons stated below.
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\37\ Id.
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As described in Sections II and III above, the proposed rule change
will expand NSCC's ETF clearing services to facilitate the ``in-kind''
creation and redemption of ETFs with options as underlying components
by establishing new messaging connectivity between NSCC and OCC and
allowing NSCC to submit instructions to OCC on behalf of their
participants. Market participants primarily manage this process outside
of NSCC today (i.e., ex-clearing) through fragmented and manual
workflows, and without the benefit of NSCC's CCP guaranty, which
introduces operational and counterparty credit risks among market
participants and may result in additional balance sheet costs to APs.
The proposed rule change should address these challenges by allowing
NSCC to function as the central hub for creation and redemption order
processing for ETFs with option components.\38\ Specifically, the
proposed rule change would apply NSCC's CCP guaranty for transactions
involving ETFs and eligible underlying components that are currently
processed ex-clearing. By guaranteeing settlement of these
transactions, the proposed rule change should reduce bilateral
counterparty credit risks among participants, which should reduce
systemic risks during periods of market stress and thereby promote the
safeguarding of securities and funds.\39\ Further, by automating the
routing of instructions for underlying options components to OCC, the
proposed rule change should reduce the reliance on manual processes and
the potential for settlement failures, errors, and operational
disruptions, thereby promoting the prompt and accurate clearance and
settlement of securities transactions.\40\ Finally, establishing a
standardized messaging interface between NSCC and OCC, which was
developed in collaboration with key industry stakeholders, should
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions.\41\ For these
reasons, the proposed rule change is consistent with Section
17A(b)(3)(F) of the Act.
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\38\ See STA Letter, supra note 35, at 4 (stating that
automating this process and bringing it into a CCP environment may
facilitate ``in-kind'' transactions in more types of options-based
ETFs and reduce operational complexities).
\39\ Id. (``Without CCP involvement in redemptions, participants
face direct counterparty exposure, which can amplify systemic risks
during periods of market stress. NSCC's role as a CCP would extend
its guaranty to the settlement of the ETFs as well as any underlying
components eligible for clearance and settlement at NSCC. This is
particularly important for ETFs with option components, which may
involve volatile assets and require precise position adjustments'').
\40\ Id., at 2 and 4-5 (stating that the proposed rule change
would minimize operational risks such as miscommunications or delays
that could lead to failed trades by reducing reliance on manual
processes, represents a critical step forward in modernizing ETF
clearing processes, reduces operational risks and enhances market
efficiency, would support competition without unfair discrimination,
and enables more APs to participate by reducing operational
complexity).
\41\ Id. at 4-5 (stating that the proposal could promote market
growth and innovation).
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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 \42\
and the rules and regulations promulgated thereunder.
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\42\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\43\ that proposed rule change SR-NSCC-2026-001, be, and hereby is,
approved.\44\
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\43\ 15 U.S.C. 78s(b)(2).
\44\ 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.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-05128 Filed 3-16-26; 8:45 am]
BILLING CODE 8011-01-P