[Federal Register Volume 89, Number 215 (Wednesday, November 6, 2024)]
[Notices]
[Pages 88100-88102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25727]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101487; File No. SR-NSCC-2024-008]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving of Proposed Rule Change To Decommission 
the ID Net Service

October 31, 2024.

I. Introduction

    On September 12, 2024, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2024-008 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ to amend the NSCC 
Rules & Procedures (``Rules'') to decommission the ID Net service (``ID 
Net Service'' or ``ID Net'').\3\ The Proposed Rule Change was published 
for comment in the Federal Register on September 27, 2024.\4\ 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\ Capitalized terms not defined herein are defined in the 
Rules, available at www.dtcc.com/legal/rules-and-procedures.aspx.
    \4\ See Securities Exchange Act Release No. 101131 (Sept. 23, 
2024), 89 FR 79324 (Sept. 27, 2024) (File No. SR-NSCC-2024-008) 
(``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. 
Within NSCC's Continuous Net Settlement system (``CNS''), which is 
NSCC's system for accounting and settling CNS-eligible securities,\5\ 
all eligible compared and recorded transactions for a particular 
settlement date are netted by issue into one net long (buy), net short 
(sell) or flat position for each Member, and those positions are 
further netted with positions of the same issue that remain open after 
their originally scheduled settlement date. As central counterparty, 
NSCC becomes the contra-party for settlement purposes, assuming the 
obligation of its Members that are receiving securities to receive and 
pay for those securities and the obligation of Members that are 
delivering securities to make the delivery. CNS netting thus reduces 
the number of securities movements required to settle transactions.
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    \5\ See NSCC Rule 11 (describing the CNS System) and Procedure 
VII (describing the CNS Accounting Operation), supra note 3. To be 
CNS-eligible, a security must be eligible for book-entry transfer on 
the books of DTC and must be capable of being processed in the CNS 
system.
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    The ID Net Service is a joint service offering of NSCC and its 
affiliate, The Depository Trust Company (``DTC''), available on a 
voluntary basis to broker/dealers that are participants of both NSCC 
and DTC and banks that are participants of DTC.\6\ ID Net allows 
broker/dealer users to net their affirmed institutional transactions 
(``Affirmed Transactions'') with their CNS transactions.
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    \6\ DTC also filed a proposed rule change with the Commission in 
connection with decommissioning the ID Net Service. See Securities 
Exchange Act Release No. 101132 (Sept. 23, 2024), 89 FR 79320 (Sept. 
27, 2024) (File No. SR-DTC-2024-010).
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    An institutional transaction is one between a broker/dealer and its 
institutional customer. Such institutional customers are not 
Participants of DTC. Unlike exchange trades and most prime broker 
trades, most institutional delivery transactions do not currently flow 
through CNS but instead settle at DTC on a trade-for-trade basis.\7\ 
DTC may accept Affirmed Transactions submitted by a utility that 
provides a matching service (``Matching Utility'').\8\ The 
counterparties on an Affirmed Transaction submitted by a Matching 
Utility to DTC are a (i) DTC Participant, acting as clearing broker to 
the Affirmed Transaction and a (ii) DTC Participant bank, acting as the 
custodian for an institutional customer. The Affirmed Transaction is 
processed on a trade-for-trade basis at DTC unless it is designated for 
ID Net processing by the Matching Utility and meets certain eligibility 
requirements. In order for an Affirmed Transaction to be eligible for 
processing in ID Net, (i) both counterparties to the Affirmed 
Transaction must be a Member of NSCC and a Participant of DTC, or a 
bank that is a Participant of DTC, that has subscribed to ID Net and 
(ii) the

[[Page 88101]]

transaction must be (a) in a security eligible for processing through 
CNS and (b) affirmed within established timeframes set forth in the DTC 
Settlement Service Guide.\9\
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    \7\ See DTC Settlement Service Guide, available at www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Settlement.pdf.
    \8\ The Matching Utility must be (i) a clearing agency 
registered with the Commission, (ii) an entity that has obtained an 
exemption from such registration from the Commission, or (iii) a 
``qualified vendor'' for trade confirmation/affirmation services as 
defined by the rules of a self-regulatory organization. See DTC 
Settlement Service Guide, supra note 7, at 40. TCC ITP Matching (US) 
LLC (``ITP''), an NSCC and DTC affiliate, is currently the only 
Matching Utility that submits Affirmed Transactions to DTC. See 
Notice of Filing, supra note 4, at 79325 n.6.
    \9\ See DTC Settlement Service Guide, supra note 7, at 40-41.
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    If an Affirmed Transaction is designated for ID Net and meets the 
eligibility criteria, then DTC will direct the transaction to ID Net, 
which facilitates the netting of a broker/dealer's side of an Affirmed 
Transaction with that broker/dealer's CNS activity, via omnibus 
accounts that are maintained by NSCC at DTC and designated for ID Net 
activity. If a bank is a counterparty to the ID Net-eligible Affirmed 
Transaction, then it will either receive or deliver the subject shares 
versus payment, on a trade-for-trade basis, via the ID Net omnibus 
accounts.
    While ID Net allows broker/dealers to realize the benefit of 
netting for Affirmed Transactions by allowing the broker/dealer to net 
its ID Net-eligible Affirmed Transactions with its transactions in CNS, 
banks using ID Net settle ID Net transactions on a trade-for-trade 
basis as they would for other Affirmed Transactions. In this regard, 
NSCC states that ID Net's main benefit is to streamline clearance and 
settlement of ID Net-eligible Affirmed Transactions for broker/
dealers.\10\
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    \10\ See Notice of Filing, supra note 4, at 79325.
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III. Description of the Proposed Rule Change

    NSCC states that as part of NSCC's and DTC's continuous evaluations 
to the efficiency and effectiveness of the services they provide and in 
order to streamline and simplify their services and processes, NSCC and 
DTC have identified ID Net as an underused service that may be 
eliminated as part of modernization efforts.\11\ They each propose to 
decommission the ID Net Service due to factors including: (i) limited 
uptake and usage of the service since its adoption; (ii) the 
operational complexity of maintaining the service, which also connects 
with and impacts other core clearance and settlement processes; \12\ 
and (iii) the prior elimination of the NSCC Clearing Fund offset for ID 
Net transactions.\13\
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    \11\ Id.
    \12\ NSCC states that this complexity includes (i) special 
eligibility checks versus the ID Net eligibility criteria and (ii) 
leveraging of the omnibus accounts to simultaneously allow (a) a 
bank to process ID Net-eligible transactions on a trade-for-trade 
basis and (b) the broker/dealer side of an ID Net-eligible 
transaction to settle via CNS. Notice of Filing, supra note 4, at 
79325 n.9.
    \13\ In 2021, NSCC adopted a proposed rule change to remove 
transactions processed through the ID Net Service from the 
calculation of Members' Required Deposits to the Clearing Fund. See 
Securities Exchange Act Release No. 93070 (Sep. 20, 2021), 86 FR 
53125 (Sep. 24, 2021) (SR-NSCC-2021-011).
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    To implement the proposed change, NSCC would remove Rule 65 and 
Procedure XVI from the Rules and make other conforming changes 
throughout the Rules to reflect the decommission of the service. The ID 
Net Service is primarily described in NSCC Rule 65 and Procedure XVI of 
the Rules, and these would no longer be necessary or relevant upon the 
decommission of the ID Net Service. As a result, Rule 65 and Procedure 
XVI would be deleted in their entirety and would be reserved for future 
use by NSCC.
    NSCC also proposes removing associated defined terms ``Eligible ID 
Net Security'' and ``ID Net Subscriber'' from Rule 1 and remove a 
reference to ID Net transactions from the definition of ``Net Unsettled 
Position'' in Rule 1. In addition, NSCC would remove Section 1(f) of 
Rule 3, concerning certain lists required to be maintained by NSCC, to 
reflect that NSCC would no longer be required to maintain a list of 
Eligible ID Net Securities and would make a conforming change to 
renumber existing Section 1(g) of Rule 3 to Section 1(f). NSCC would 
also remove Section 2(a)(vii) of Rule 18, which concerns procedures for 
when NSCC ceases to act for a Member, to reflect that uncompleted ID 
Net Service transactions would no longer be considered for purposes of 
determining excluded transactions in a cease to act scenario.
    Additionally, NSCC proposes modifying Procedure VII, concerning its 
CNS Accounting Operation, to remove various references to the ID Net 
Service and ID Net transactions. Specifically, NSCC would revise the 
Introduction in Section A to remove a reference to Eligible ID Net 
Securities being included in CNS Securities for purpose of Procedure 
VII. NSCC would also modify Section D.1., concerning the process for 
exemptions from deliveries, to remove a statement regarding the 
treatment of securities available in an agency account established at a 
Qualified Securities Depository for the processing of transactions 
through the ID Net Service. In addition, NSCC would modify Section E.4, 
concerning the allocation algorithm for CNS deliveries, to remove a 
statement regarding the treatment of long positions in a receiving ID 
Net Subscriber's agency account established at a Qualified Securities 
Depository. NSCC would also delete Section H.5. of Procedure VII 
concerning the reporting of ID Net transactions on NSCC's Miscellaneous 
Activity Report and make conforming changes to renumber subsequent 
rules in Section H.
    Finally, NSCC proposes updating Section I.(A)(1)(b) of Procedure 
XV, concerning NSCC's Clearing Fund calculations, to remove a reference 
to ID Net transactions from the Mark-to-Market component of the 
Clearing Fund formula.
    NSCC believes that the decommission of the ID Net Service would 
have minimal impact on its Members, as only 13 broker/dealers and 20 
banks are subscribed to the ID Net Service and the service is not used 
by all of those broker/dealers and banks.\14\ Furthermore, without ID 
Net, Affirmed Transactions can simply settle trade-for-trade, directly 
between the counterparties like they already do. NSCC also notes that 
there would be minimal impact to risk management from both an NSCC and 
Member perspective given that the ID Net Service is a non-guaranteed 
service of NSCC \15\ and there is no longer a Clearing Fund offset for 
ID Net transactions.\16\
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    \14\ NSCC states that active users of the ID Net service 
constitute less than 10% of NSCC's full-service Members. NSCC 
believes that ID Net usage has been limited since its implementation 
in 2008 because, in part, the service needs both parties to an ID 
Net transaction to be subscribers of ID Net, which is not always the 
case. See Notice of Filing, supra note 4, at 79325 n.10.
    \15\ See NSCC Rule 65, Section 5(c), supra note 3.
    \16\ See supra note 13.
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    NSCC states that it has performed direct outreach to Members that 
use the ID Net Service and has also announced its plans to decommission 
the ID Net Service in an Important Notice, and that there have been no 
material objections or concerns raised by Members.\17\
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    \17\ See Notice of Filing, supra note 4, at 79326; see also NSCC 
Important Notice regarding decommission of the ID Net Service, 
available at https://www.dtcc.com/-/media/Files/pdf/2023/8/8/a9327.pdf.
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IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \18\ 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

[[Page 88102]]

Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act.\19\
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    \18\ 15 U.S.C. 78s(b)(2)(C).
    \19\ 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, such as NSCC, be designed to, among other things, 
promote the prompt and accurate clearance and settlement of securities 
transactions.\20\ 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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    \20\ Id.
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    The Proposed Rule Change would modify the NSCC Rules to reflect the 
decommission of the ID Net Service. As discussed in Parts II and III, 
ID Net is an underused service that is operationally complex to 
maintain, and its main benefit is to broker/dealers' streamline 
clearance and settlement of ID Net-eligible Affirmed Transactions, 
which may otherwise settle on a trade-for-trade basis. As such, ID 
Net's decommission would have minimal impact on NSCC and its Members 
considering its limited usage. Affirmed Transactions that would have 
otherwise been directed to ID Net will settle trade-for-trade directly 
between counterparties, like most other Affirmed Transactions currently 
do. Therefore, these transactions will continue to settle promptly and 
accurately, as other Affirmed Transactions do, outside of the ID Net 
Service. For these reasons, the Commission finds that the Proposed Rule 
Change should continue to support NSCC's ability to provide prompt and 
accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.\21\
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    \21\ 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 \22\ 
and the rules and regulations promulgated thereunder.
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    \22\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\23\ that proposed rule change SR-NSCC-2024-008, be, and hereby is, 
approved.\24\
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ 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.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-25727 Filed 11-5-24; 8:45 am]
BILLING CODE 8011-01-P