Federal Register / Vol. 73, No. 196 / Wednesday, October 8, 2008 / Notices 59013 

10 17 CFR 200.30–3(a)(73). 

1 15 U.S.C. 78s(b)(1). 

2Securities Exchange Act Release No. 58314 

(Aug. 5, 2008), 73 FR 46958 (Aug. 12, 2008) [File 

No. SR–NSCC–2008–07]. 

3NSCC’s current processing functions are set 

forth in Procedure II, Section H of NSCC’s Rules. 

4The balancing amount is designed to 

compensate for any difference between the net asset 

value of the Index Receipt and the value of the 

underlying index. Among other reasons, a 

difference in value could result from the fact that 

an Index Receipt cannot contain fractional shares of 

a security. 

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 inspection and copying in 

the Commission’s Public Reference 

Section, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 am and 3 pm. 

Copies of such filing also will be 

available for inspection and copying at 

the principal office of the NFA. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NFA–2008–02 and should 

be submitted on or before October 29, 

2008. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–23840 Filed 10–7–08; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58694; File No. SR–NSCC– 

2008–07] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Order Approving 

Proposed Rule Change To Enhance 

Processing of Exchange-Traded Funds 

September 30, 2008. 

I. Introduction 

On July 22, 2008, the National 

Securities Clearing Corporation 

(‘‘NSCC’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

proposed rule change SR–NSCC–2008– 

07 pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’).1 The proposed rule change was 

published for comment in the Federal 

Register on August 12, 2008.2 No 

comment letters were received on the 

proposal. This order approves the 

proposal. 

II. Description 

The proposed rule change expands 

processing of shares in exchange-traded 

funds (‘‘Index Receipts’’) to allow for 

cash as a sole component of creations 

and redemptions and provides for an 

optional shortened processing cycle for 

creates and redeems of Index Receipts 

and their underlying components. 

A. Current Process 

Currently, on the day before trade 

date (‘‘T–1’’), an Index Receipt agent 

transmits files to NSCC that contain 

information regarding the underlying 

composition of Index Receipts for 

creates and redeems occurring the next 

business day.3 NSCC compiles the 

information that evening and provides 

members with a portfolio composition 

report listing the composition of Index 

Receipts eligible for processing. The 

report displays the proportionate 

amount of underlying stocks that 

compose each Index Receipt and 

contains a cash component, which is an 

estimation of accrued dividends and 

any necessary balancing amount.4 The 

portfolio information contained in this 

report is used for creation and 

redemption processing the next day, 

which is the Trade Date. On Trade Date, 

by such time as established by NSCC, 

the Index Receipt agent, acting on behalf 

of each member placing an Index 

Receipt order, will report to NSCC the 

number of Index Receipts created and 

redeemed that day. Transactions listed 

on the report are locked-in transactions 

between the Index Receipt agent and the 

member. The Index Receipt agent also 

will report the final cash amount and a 

transaction amount that represents the 

Index Receipt agent’s transaction fee. 

On the night of Trade Date, NSCC 

transmits an Index Receipt instruction 

detail report to members that had 

activity on Trade Date. The report serves 

as the contract for the creation and 

redemption activity and lists the 

number of component shares that the 

member, depending upon the 

underlying shares’ CNS eligibility, will 

deliver to or receive on settlement date 

(‘‘T+3’’) from CNS or as an item allotted 

through the Balance Order Accounting 

Operation. On the night of Trade Date, 

each Index Receipt instruction is 

separated into its underlying stock 

components, and these components are 

processed through CNS or the Balance 

Order Accounting Operation and are 

incorporated into the normal equity 

clearance and settlement process. 

Unsettled positions in Index Receipts 

and their component securities are 

currently risk managed as ordinary 

activity and are guaranteed pursuant to 

the provisions of Addendum K of 

NSCC’s rules. 

B. Enhancements 

For the past two years, demand for 

NSCC’s create and redeem service has 

increased significantly each year with 

activity for Index Receipts with nonU.S. equity components increasing the 

most. As more fully described below, 

the proposed enhancements will allow 

members to create Index Receipts that 

(i) have underlying securities other than 

domestic equity securities for cash as 

consideration and (ii) will allow an 

optional shortened settlement cycle for 

creates and redeems and their 

underlying components. 

1. Expand the Index Receipt Process to 

Allow for Cash as Sole Component for 

Creations and Redemptions 

Currently all component securities 

must be CNS eligible to qualify for 

NSCC’s Index Receipt processing. Cash 

is used as a component only for accrued 

dividends and any balancing amount 

but is not used as a separate underlying 

component. 

NSCC is expanding its Index Receipt 

processing to allow for creates and 

redeems using cash as the sole 

underlying component. This 

enhancement will allow members and 

their agent banks to create and redeem 

Index Receipts whose underlying 

components are not currently eligible 

for processing at NSCC (for example, 

commodity Index Receipts). The Index 

Receipt agent would use the cash to 

purchase the components, the 

settlement of which would occur 

outside of NSCC. 

2. T+1 and T+2 Settlement of Creations 

and Redemptions 

NSCC currently supports the creation 

and redemption of Index Receipts with 

underlying components scheduled to 

settle on a T+3 basis. NSCC is 

expanding its Index Receipt processing 

to allow a member to create and redeem 

Index Receipts with a shortened 

settlement cycle. Currently, shortened 

settlement for standard equity CNS 

trades (e.g., next day settlement) is 

reported in the Consolidated Trade 

Summary and guaranteed on the night 


jlentini on PROD1PC65 with NOTICES
59014 Federal Register / Vol. 73, No. 196 / Wednesday, October 8, 2008 / Notices 

5 In order to account for the risk of unknown 

positions, Risk Management performs a look-back 

calculation to estimate shortened settlement 

volumes and values. The shortened settlement 

component is added to a members’ Clearing Fund 

requirement for 21 days after each shortened 

settlement occurs. 

6Most Index Receipts are created and redeemed 

in units of 50,000. In other words, if a member were 

to create six units it would receive 300,000 shares 

of the Index Receipt securities. 

7The CNS day-cycle is typically run at 11:30 a.m. 

Component securities that are not CNS-eligible 

would be processed through the Balance Order 

Accounting Operation. 

8 If Clearing Fund payments are not timely 

collected on T+1, creates and redeems would not 

be processed. 

9 In addition, the transaction must be submitted 

for recording by an Index Receipt agent by such 

cutoff time as designated by the NSCC (pursuant to 

Procedure II). 

10Submission of next-day settling creates and 

redeems will be required by such cut-off time on 

T. 

11The ‘‘20-day look back provision’’ provides for 

a charge based on the average of the member’s three 

highest aggregate calculated charges for daily 

‘‘Specified (shortened cycle) Activity’’ measured 

over the most recent 20 settlement days. 

12 15 U.S.C. 78q–1(b)(3)(F). 

13 15 U.S.C. 78q–1. 

14 15 U.S.C. 78s(b)(2). 

15 In approving the proposed rule change, the 

Commission considered the proposal’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

16 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

of T. NSCC then collects Clearing Fund 

payments at 10 a.m. on T+1. NSCC is 

revising its processing to address the 

timing of the NSCC trade guarantee, 

trade processing, and Clearing Fund 

provisions for such shortened 

settlement Index Receipts. 

Because next day settling trades are 

effectively guaranteed in the CNS night 

cycle prior to margining, NSCC 

currently uses a process that takes that 

uncertainty into consideration by 

collecting a ‘‘look-back’’ premium in the 

Clearing Fund calculation.5 Leveraging 

this existing practice for next-day 

settlement of creates and redeems 

would be cost-prohibitive based on the 

large number of ‘‘in kind’’ shares 6 that 

are exchanged in this process. 

NSCC is therefore delaying the 

processing of next day settling creates 

and redeems and their underlying 

components until the CNS day cycle on 

T+1.7 These transactions would be 

reported on the Second Supplemental 

Consolidated Trade Summary that is 

generally released mid-day. Delayed 

processing should allow NSCC ample 

time to collect Clearing Fund payments 

prior to guaranteeing the transactions 

and thus obviate the need for the lookback Clearing Fund premium.8

In addition, NSCC plans to implement 

a new fee for shortened-cycle creates 

and redeems as more fully described 

below. 

Therefore, NSCC proposes to amend 

its Rules as follows to provide for 

settlement of index receipt transactions 

on T+1 or T+2 on an optional basis: 

(a) Amendment of Addendum K 

regarding guarantee of next day settling 

index receipts 

NSCC is amending Addendum K to 

provide that settlement of creates and 

redeems, including the underlying 

components, on a T+1 basis (including 

T+2 settling as-of creates and redeems 

submitted on T+1) will be guaranteed 

on Settlement Date when NSCC 

determines to complete processing for 

those items in the day cycle (normally, 

11:30 a.m.), provided that the 

transaction is not removed from 

processing as described below.9

(b) Amendment of Procedure II to allow 

for settlement on a shorter than T+3 

basis 

NSCC is amending Procedure II, 

Section H to provide that: (i) The Index 

Receipt agent may elect for settlement of 

the creates and redeems on a T+1 or T+2 

basis; (ii) as-of Index Receipt creates and 

redeems will only be accepted if 

submitted by the cut-off time designated 

by NSCC;10 (iii) NSCC reserves the right 

to remove Index Receipt transactions 

from processing in the event that the 

applicable member has not met a 

Clearing Fund call on settlement date; 

and (iv) next day settling creates and 

redeems (including T+2 settling as-of 

creates and redeems submitted on T+1) 

will be posted to the Second 

Supplemental Consolidated Trade 

Summary and processed in the day 

cycle of the CNS Accounting Operation. 

(c) Amendment of Procedure XV 

(Clearing Fund Formula) 

NSCC is amending Procedure XV to 

provide that creates and redeems of 

Index Receipts and the underlying 

components, will not be subject to the 

‘‘20-day look back provision.’’ 11

(d) Amendment of Addendum A (Fee 

Structure) 

The current fee for regular-way (T+3) 

settlement of creates and redeems is $30 

per create and redeem. To offset 

additional costs associated with 

shortened settlement processing, NSCC 

plans to implement a new fee of $50.00 

per create and redeem with a shortened 

settlement cycle. 

C. Implementation timeframe 

NSCC intends to implement the 

changes set forth in this filing in the 

third quarter of 2008. Members will be 

advised of the implementation date 

through issuance of NSCC Important 

Notices. 

III. Discussion 

The Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to a registered clearing 

agency. In particular, the Commission 

believes the proposal is consistent with 

the requirements of Section 

17A(b)(3)(F),12 which, among other 

things, requires that the rules of a 

clearing agency are designed to remove 

impediments to and perfect the 

mechanisms of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions. 

The Commission finds that the 

proposed rule change, which enhances 

the processing of exchange-traded 

funds, is consistent with those statutory 

obligations. 

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposal is 

consistent with the requirements of the 

Act and in particular with the 

requirements of Section 17A of the 

Act 13 and the rules and regulations 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,14 that the 

proposed rule change (File No. SR– 

NSCC–2008–07) be, and hereby is, 

approved.15

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.16

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–23761 Filed 10–7–08; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58702; File No. SR–NSX– 

2008–16] 

Self-Regulatory Organizations; 

National Stock Exchange, Inc.; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change To Amend 

NSX Rules To Provide for a Minimum 

Execution Quantity Instruction on 

Certain Pegged Zero Display Reserve 

Orders 

October 1, 2008. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on 


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