[Federal Register Volume 87, Number 11 (Tuesday, January 18, 2022)]
[Notices]
[Pages 2650-2653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-00774]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93953; File No. SR-NSCC-2021-013]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Provide for a 
Passive Acknowledgment Process, Codify Certain Settlement Processes, 
and Make Technical and Conforming Changes to the NSCC Rules & 
Procedures

January 11, 2022.

I. Introduction

    On November 18, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule change SR-NSCC-2021-013. The proposed rule change was 
published for comment in the Federal Register on December 8, 2021.\3\ 
The Commission did not receive any comment letters 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\ Securities Exchange Act Release No. 93709 (December 2, 
2021), 86 FR 69687 (December 8, 2021) (SR-NSCC-2021-013) 
(``Notice'').
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II. Description of the Proposed Rule Change

    NSCC proposes to modify its Rules and Procedures (``Rules'') \4\ in 
order to (i) provide for a passive acknowledgment process whereby any 
settling bank that does not timely acknowledge its intention to pay to 
or collect its settlement balance from NSCC), or refuse to settle for 
one or more members for which it is the designated settling bank and 
has not otherwise been in contact with NSCC, would be deemed to have 
acknowledged its settlement balances, (ii) amend the definition of AIP 
Settling Bank and remove AIP Settling Bank Only Member as a membership 
category, (iii) codify certain settlement processes, and (iv) make 
certain technical and conforming changes.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
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A. Current Settlement Process

    NSCC membership consists of Members that have access to NSCC's 
guaranteed central counterparty services and Limited Members that have 
access to NSCC's non-guaranteed services, such as Mutual Fund Services 
and Alternative Investment Product Services (``AIP'').\5\ Limited 
Members that only have access to AIP are referred to as AIP Members.\6\ 
AIP Non-Member Funds are entities that are not AIP Members but that 
NSCC has approved to settle AIP Payments.\7\
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    \5\ See Section 2 of Rule 2, supra note 4.
    \6\ Id.
    \7\ See Rule 53, supra note 4. See also definition of ``AIP Non-
Member Fund'' in Rule 1, id.
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    NSCC provides two separate standardized, automated money settlement 
processes: (i) End of day settlement for Members and Limited Members 
other than AIP Members (``EOD Settlement''), and (ii) daily settlement 
for AIP Members and AIP Non-Member Funds (``AIP

[[Page 2651]]

Settlement'').\8\ Each member \9\ designates a settling bank \10\ to 
settle its payment obligations with NSCC.\11\ Money settlement is 
effected via the Federal Reserve Banks' National Settlement Service 
(``NSS'').\12\
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    \8\ See Section 1 of Rule 12 and Section 7 of Rule 53, supra 
note 4. All AIP money settlement is effected on a gross basis, where 
on the applicable settlement date, AIP debits are collected first, 
and then all contra-side credits, where the corresponding debits 
have been collected, are paid. See Section 9 of Rule 55, supra note 
4.
    \9\ The use of ``members'' here refers to any participant that 
is required to appoint a Settling Bank or AIP Settling Bank, which 
includes Members, Limited Members including AIP Members, and AIP 
Non-Member Funds. See Section 1 of Rule 12 and Section 7(h) of Rule 
53, supra note 4.
    \10\ The use of ``settling banks'' here refers collectively to 
Settling Banks and AIP Settling Banks. Settling Banks settle on 
behalf of Members and Limited Members with respect to EOD Settlement 
and AIP Settling Banks settle on behalf of AIP Members and AIP Non-
Member Funds with respect to AIP Settlement. See Section 1 of Rule 
12 and Section 7(g) of Rule 53, supra note 4.
    \11\ See Section 1 of Rule 12 and Section 7(h) of Rule 53, supra 
note 4.
    \12\ See Section D.2 of Procedure VIII of NSCC's Rules, supra 
note 4. For a general description of the NSS, see National 
Settlement Service, available at https://www.frbservices.org/financial-services/national-settlement-service/index.html.
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    The Depository Trust Company (``DTC'') acts as NSCC's Settlement 
Agent \13\ for both EOD Settlement and AIP Settlement. On a daily 
basis, NSCC calculates settlement payment amounts for EOD Settlement 
\14\ and for AIP Settlement and reports to its members and their 
respective settling banks, a settlement balance.\15\
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    \13\ ``Settlement Agent'' means the bank or trust company that 
NSCC may, from time to time, designate to act as its agent for 
purposes of receiving money settlement debit amounts from Settling 
Banks and participants and paying money settlement credit amounts to 
Settling Banks and participants. See Rule 1, supra note 4.
    \14\ For EOD Settlement, NSCC's settlement process is 
centralized with DTC's end-of-day money settlement (``DTC 
Settlement'') through a netting procedure called a cross-
endorsement, in which each participant's net debit at one 
organization is netted against its net credit at the other 
organization. See DTC's Settlement Service Guide, available at 
https://www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Settlement.pdf.
    \15\ For EOD Settlement, NSCC provides Settling Banks a net-net 
debit or net-net credit number, where ``net-net'' refers to the end-
of-day net-net settlement balance for each Settling Bank that 
settles on behalf of more than one Member is the net of the net 
debit and net credit balances of all Members for which that Settling 
Bank settles, after cross-endorsement with DTC, including the 
Settling Bank's own settlement obligations as a Member if it settles 
for itself. See Section 2 of Rule 55, supra note 4; DTC's Settlement 
Service Guide, id. For AIP Settlement, NSCC provides each AIP 
Settling Bank an aggregate gross debit number and an aggregate gross 
credit number with respect to each AIP Member or AIP Non-Member Fund 
on whose behalf it settles. See Section 9 of Rule 55, supra note 4.
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    Once the settling banks receive the settlement balances, the 
settling banks must submit \16\ either (1) acknowledgment that they 
will settle their balances with NSCC, or (2) refusal to settle such 
amount on behalf of one or more of their respective members.\17\ The 
acknowledgment or refusal submission occurs through a designated 
terminal system.\18\ For both EOD Settlement and AIP Settlement, if all 
of the NSCC Settling Banks submit acknowledgments of their intent to 
settle, then the Settlement Agent will submit the requisite file to the 
relevant Federal Reserve Bank (``FRB'') for processing through the 
NSS.\19\
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    \16\ NSCC represents that, pursuant to its settlement 
procedures, AIP Settling Banks must affirmatively acknowledge or 
refuse to settle in the same manner as Settling Banks. See Notice, 
supra note 3, at 69688.
    \17\ A Settling Bank that is a Member and settles solely for its 
own accounts may opt out of the requirement to acknowledge its 
settlement balances, which NSCC states is an operational convenience 
because the Settling Bank may not refuse to settle for itself. See 
Section D.1 of Procedure VIII, supra note 4; Notice, supra note 3, 
at 69690 (representing that because Members are required to also be 
DTC participants, the Settling Bank Member would be subject to DTC's 
rules, which prohibit a Settling Bank from refusing to settle for 
itself). The passive acknowledgment process would not apply to such 
NSCC Settling Banks that have chosen to opt out of the requirement 
to acknowledge its settlement balances. See Notice, supra note 3, at 
69690.
    \18\ See Section D of Procedure VIII of NSCC's Rules, supra note 
4.
    \19\ See Section D.2 of Procedure VIII of NSCC's Rules, supra 
note 4.
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    If settling bank notifies the Settlement Agent that it refuses to 
pay the settlement balance for a member, then NSCC will exclude that 
member's settlement balance and the Settlement Agent will provide the 
settling bank with a new settlement balance that no longer includes the 
excluded amount. The settling bank must then immediately send a message 
to the Settlement Agent acknowledging the new amount.\20\ The 
Settlement Agent will then submit the requisite file to the FRB for 
processing through the NSS.
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    \20\ See Section D.1 of Procedure VIII of NSCC's Rules, supra 
note 4.
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    For EOD Settlement, the current deadline for Settling Banks to 
acknowledge or refuse net-net settlement balances is the later of 4:15 
p.m. or 30 minutes after net-net settlement balances are made available 
to the Settling Bank.\21\ For AIP Settlement, the current deadline is 
9:30 a.m. for debit acknowledgment or refusal and is 12:30 p.m. for 
credit acknowledgment or refusal.\22\ If a settling bank does not 
acknowledge or refuse by the applicable deadline, the Settlement Agent 
will use the most recent contact information available to contact the 
settling bank. If the Settlement Agent is unable to make contact or 
does not receive a response from the settling bank as to the 
acknowledgment or refusal, NSCC states that it must then determine 
whether to request an NSS extension while also determining whether to 
remove the settling bank's settlement balance from the NSS file.\23\
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    \21\ The net-net settlement balances are made available at 
approximately 3:45 p.m., and the NSS execution time for EOD 
Settlement is 4:30 p.m. See DTC's Settlement Service Guide, supra 
note 14.
    \22\ NSCC has posted AIP Settlement times on its website, which 
provide that AIP Settling Banks first pay debits to NSCC at 
approximately 11 a.m., and then NSCC pays credits to AIP Settling 
Banks at approximately 2 p.m. See NSCC's Transaction Flows (as of 
2021-01), available at https://www.dtcc.com/wealth-management-services/alternative-investment-products/aip.
    \23\ See Notice, supra note 3, at 69689.
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    Under the current process, a settling bank's failure to timely 
respond to the Settlement Agent after the Settlement Agent posts final 
settlement numbers creates uncertainty with respect to timely 
completion of settlement at NSCC. NSCC states that it designed the 
proposed rule change to address this issue, as discussed below.\24\
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    \24\ See id.
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B. Proposed Rule Change

    NSCC proposes to establish an ``Acknowledgment Cutoff Time'' for 
EOD Settlement and an ``AIP Acknowledgment Cutoff Time'' for AIP 
Settlement after which NSCC would apply the passive acknowledgment 
process if it is unable to reach a settling bank. NSCC proposes that, 
since EOD Settlement is centralized with DTC Settlement,\25\ the 
Acknowledgment Cutoff Time will be the Acknowledgment Cutoff Time 
established by DTC in its Settlement Service Guide.\26\ The ``AIP 
Acknowledgement Cutoff Time'' would be the later of (i) 30 minutes 
after the AIP Settling Bank has been notified of its AIP Debit Balance 
or AIP Credit Balance, and (ii) 30 minutes prior to the settlement 
deadline established by NSCC.\27\
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    \25\ See supra note 13.
    \26\ See DTC's Settlement Service Guide, supra note 14. See also 
supra text accompanying note 21.
    \27\ See supra note 22 and accompanying text. NSCC also proposes 
to add a statement to its Rules that it would post the settlement 
deadlines for AIP Settlement on the NSCC website as it currently 
does.
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1. Passive Acknowledgement Process
    If a settling bank (i) does not submit either (1) an 
acknowledgement that it would settle its settlement balance with NSCC, 
or (2) a refusal to pay the settlement balance, by the Acknowledgement 
Cutoff Time, and (ii) has not been in contact with the

[[Page 2652]]

Settlement Agent,\28\ then the Settlement Agent would attempt to 
contact the settling bank. This passive acknowledgement process would 
also apply in situations where the settling bank receives a new 
settlement balance after such settling bank's refusal to pay a 
settlement balance for one or more members. Additionally, to facilitate 
the Settlement Agent's ability to contact settling banks, NSCC proposes 
to revise the Rules to state that each settling bank must ensure that 
it maintains accurate contact details with the Settlement Agent so that 
the Settlement Agent may contact the settling bank regarding this 
settlement process and any settlement issues.
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    \28\ Passive acknowledgment will not apply if the Settling Bank 
has notified the Settlement Agent that it cannot yet acknowledge or 
refuse its settlement balance.
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    If the settling bank cannot be reached, then the settling bank 
would be deemed to have acknowledged that it will settle such 
settlement amounts with NSCC. The settling bank's settlement balance 
will then, in the ordinary course of settlement processing, be debited 
from or credited to its FRB account through the NSS process along with 
the other settling banks.
2. Definition of ``AIP Settling Bank''
    NSCC proposes to amend the definition of AIP Settling Bank to 
mirror the definition of Settling Bank and remove AIP Settling Bank 
Only Member as a membership category. NSCC represents that, since the 
inception of AIP, there have been no AIP Members that have acted as AIP 
Settling Banks and there have been no entities that have become AIP 
Settling Bank Only Members.\29\ In addition, NSCC proposes to maintain 
a list of Members and Settling Bank Only Members that have agreed to 
act as AIP Settling Banks.
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    \29\ See Notice, supra note 3, at 69691.
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3. Certain Settlement Processes
    NSCC proposes to retain its discretion to remove the settling 
bank's settlement balance from the NSS file if: (1) Passive 
acknowledgement does not apply because the settling bank has notified 
the Settlement Agent that it cannot yet acknowledge or refuse its 
settlement balance, and (2) the payment deadline (i.e., the time by 
which it must execute settlement via the NSS) \30\ established by NSCC 
is approaching. According to NSCC, its discretion in this circumstance 
would facilitate timely processing of the NSS file for the other 
settling banks.\31\
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    \30\ See supra notes 21-22.
    \31\ See Notice, supra note 3, at 69693.
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    In addition, NSCC proposes to codify in its Rules certain AIP 
Settlement procedures, which mirror EOD Settlement procedures.\32\ NSCC 
will maintain that (i) DTC will act as Settlement Agent for NSCC and 
the AIP Settling Banks, and (ii) the AIP acknowledgment \33\ or refusal 
submission will occur through a designated terminal system.\34\ NSCC 
will also maintain that AIP Settling Bank that cannot send an 
acknowledgment or refusal message may contact the Settlement Agent and 
instruct the Settlement Agent to act on its behalf.
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    \32\ See supra note 16.
    \33\ This requirement will also apply to an AIP Settling Bank's 
acknowledgment of new settlement balances following an initial 
refusal.
    \34\ See supra text accompanying note 18.
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4. Technical and Conforming Changes
    NSCC proposes to make certain technical and conforming changes to 
the Rules to enhance clarity. First, NSCC proposes to revise the Rules 
to add new defined terms, including (i) ``Acknowledgment Cutoff Time,'' 
(ii) ``AIP Acknowledgment Cutoff Time,'' (iii) ``FRB,'' (iv) ``FRBNY,'' 
(v) ``Settlement Balances,'' and (vi) ``Settlement Members.'' \35\ 
Second, NSCC proposes to revise certain terms to reflect the 
appropriate existing defined term, including ``AIP Debit Balance,'' 
``AIP Credit Balance,'' and ``AIP Refusal.'' \36\ Third, NSCC proposes 
to replace certain references to the ``Corporation'' with ``Settlement 
Agent'' for accuracy and consistency and to clarify the role of the 
Settlement Agent under the relevant Rules.\37\ Fourth, NSCC proposes to 
add ``or the Settlement Agent'' in certain provisions to clarify to 
role of both NSCC and the Settlement Agent in establishing settlement 
procedures.\38\ In addition, NSCC proposes to remove outdated 
references to NSCC, the telephone, and a phone number to reflect the 
current process in which the settling bank may contact the Settlement 
Agent and to move certain current subsections and to revise the 
subsection numbers in the relevant Rules to enhance clarity and 
accuracy.\39\
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    \35\ See Notice, supra note 3, at 69691-93.
    \36\ See id. at 69692-93.
    \37\ See id.
    \38\ See id. See also, Notice cited supra note 17 Notice, supra 
note 3, at 69690 (representing that because Members are required to 
also be DTC participants, the Settling Bank Member would be subject 
to DTC's rules, including its settlement procedures).
    \39\ See id. at 69692-93.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \40\ 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 the rules and regulations thereunder 
applicable to such organization. After careful consideration, 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 
\41\ for the reasons described below.
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    \40\ 15 U.S.C. 78s(b)(2)(C).
    \41\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions.\42\ As stated in Section II.A (Background) 
above, the failure of a settling bank to timely acknowledge that it 
will settle its settlement balance with NSCC or refuse to pay its 
settlement balance creates uncertainty with respect to the timely 
completion of EOD Settlement and AIP Settlement at NSCC. Additionally, 
as discussed in Section II.B.3 (Certain Settlement Processes) above, 
circumstances in which a settling bank has notified the Settlement 
Agent that it cannot yet acknowledge or refuse its settlement balance 
could create uncertainty with respect to the timely completion of EOD 
Settlement and AIP Settlement at NSCC via NSS because NSCC would not be 
able to submit the NSS file that includes the balance of the settling 
bank that has neither passively nor affirmatively acknowledged its 
settlement balance.
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    \42\ Id.
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    The introduction of a passive acknowledgement process, in which a 
settling bank has not responded by the Acknowledgment Cutoff Time or 
the AIP Acknowledgment Cutoff Time and cannot be reached by the 
Settlement Agent would be deemed to have passively acknowledged its 
settlement balance, could enhance settlement certainty because it would 
allow NSCC to submit the NSS file for settlement of all settling banks' 
obligations despite an unresponsive settling bank. Additionally, the 
change to allow NSCC to exclude a settling bank's balance from the NSS 
file, where the settling bank has notified the Settlement Agent that it 
cannot yet acknowledge or refuse its settlement balance, would allow 
NSCC

[[Page 2653]]

to submit the NSS file without the settling bank's balance and thus 
complete EOD Settlement or AIP Settlement, as applicable, for all other 
settling banks. Therefore, the Commission believes the changes are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\43\
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    \43\ Id.
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    Further, as discussed throughout Section II.B (Proposed Rule 
Change) above, the proposal to amend the definition of AIP Settling 
Bank and remove AIP Settling Bank Only Members as a membership 
category, codify certain existing AIP settlement processes, and make 
certain technical and conforming changes should ensure that the Rules 
are clear and accurate to NSCC's members. Having clear and accurate 
Rules should facilitate NSCC members' understanding of those rules and 
provide members with increased predictability and certainty regarding 
their obligations. Therefore, the Commission believes the proposed 
changes would also promote the prompt and accurate clearance and 
settlement of securities, consistent with Section 17A(b)(3)(F) of the 
Act.\44\
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    \44\ Id.
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IV. 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 
\45\ and the rules and regulations promulgated thereunder.
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    \45\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\46\ that proposed rule change SR-NSCC-2021-013, be, and hereby is, 
approved.\47\
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    \46\ 15 U.S.C. 78s(b)(2).
    \47\ In approving the proposed rule change, the Commission 
considered the proposals' 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.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00774 Filed 1-14-22; 8:45 am]
BILLING CODE 8011-01-P