Document ID: SEC-2018-1141-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2018-07-23T04:00Z

[Federal Register Volume 83, Number 141 (Monday, July 23, 2018)]
[Notices]
[Pages 34901-34907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15646]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83654; File No. SR-NSCC-2018-003]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of and Immediate Effectiveness of a 
Proposed Rule Change To Clarify and Enhance Rules Related to the CNS 
Reorganization Processing System and NSCC's Authority To Reveal the 
Identity of Counterparties in Certain Circumstances

July 17, 2018.
    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 July 9, 2018, 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)(4) 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)(4).
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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 Rules and 
Procedures of NSCC (``Rules'') \5\ in order to (1) clarify, correct, 
and enhance the description of the procedures by which NSCC processes 
transactions in securities that are eligible for its Continuous Net 
Settlement (``CNS'') system (``CNS Securities'') \6\ and are subject to 
a corporate reorganization event through the CNS Reorganization 
Processing System; and (2) describe NSCC's authority to identify to 
Members their counterparties for their positions in a subject security 
as of the critical date of an applicable payment or event, as described 
in greater detail below.
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    \5\ The Rules are available at http://www.dtcc.com/legal/rules-and-procedures. Capitalized terms used herein and not otherwise 
defined shall have the meaning assigned to such terms in the Rules.
    \6\ CNS and its operation are described in Rule 11 and Procedure 
VII of the Rules. Id.
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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
    NSCC is proposing to make certain revisions to Procedure VII, 
Section H of the Rules, which describes, among other matters, NSCC's 
CNS Reorganization Processing System.
    First, the proposed changes would clarify, correct, and enhance the 
description of the CNS Reorganization Processing System by (1) revising 
the description of the scope of corporate reorganization events that 
may be processed through the CNS Reorganization Processing System; (2) 
revising the description of the processing of voluntary reorganizations 
through the CNS Reorganization Processing System; and (3) making 
technical revisions to Section H of

[[Page 34902]]

Procedure VII of the Rules, including correcting the use of defined 
terms and typographical and other drafting errors. NSCC believes these 
proposed changes would improve the clarity and transparency of these 
procedures.
    Second, the proposed changes would add a new subsection to 
Procedure VII, Section H of the Rules to describe that NSCC may (1) at 
its discretion, apply asset servicing events \7\ to transactions in CNS 
Securities; (2) determine that such asset servicing events be processed 
outside its facilities; and (3) assist its Members in processing 
certain asset servicing events by identifying to those Members their 
respective counterparties for their positions in the subject security 
as of the critical date of that event.
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    \7\ For purposes of this filing, an ``asset servicing event'' 
refers to asset servicing or other events that may or may not relate 
to corporate reorganizations or payments, for example, payments 
pursuant to litigation or other disputes, distributions on class 
actions, bankruptcy payments, consent solicitations, other 
distributions, claims or fees.
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i. Overview of the CNS Reorganization Processing System and Section H 
of Procedure VII of the Rules
    Under the CNS system, 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 per Member. As a 
continuous net system, those positions are further netted with 
positions of the same issue that remain open after their originally 
scheduled settlement date (usually T+2), so that trades scheduled to 
settle on any day are netted with fail positions which results in a 
single deliver or receive obligation for each Member for each issue in 
which the Member has activity.
    Through the CNS Reorganization Processing System, NSCC may apply 
eligible corporate reorganization events to its Members' positions in 
CNS Securities when such events occur during the settlement cycle. 
Corporate reorganization events that NSCC may apply to these 
transactions in the subject securities include (1) mandatory 
reorganizations (for example, mergers, full redemptions, liquidations, 
reverse splits, and name changes); and (2) voluntary reorganizations 
(for example, mergers with elections, tender offers, and exchange 
offers). As set forth in Section H of Procedure VII of the Rules, NSCC 
has the discretion to (1) exclude certain corporate reorganization 
events (including those for which operational difficulties would 
prevent the processing through the CNS Reorganization Processing 
System); and (2) process corporate reorganization events that would 
otherwise be ineligible if NSCC determines that it has the capability 
to do so.
    Section H of Procedure VII of the Rules describes the timeline of 
actions that must occur in connection with the processing of eligible 
corporate reorganization events, and states that NSCC would provide 
Members with notice detailing how corporate reorganization events would 
be processed if they would otherwise be ineligible for processing. As 
described in the Rules, the processing of mandatory reorganizations 
occurs automatically. The processing of voluntary reorganizations 
through the CNS Reorganization Processing System, however, requires 
certain actions to be taken by both NSCC and by Members with positions 
in the subject security during the period of time leading up to and 
following the expiration of the event. This period of time is referred 
to in the Rules as the ``protect period'' and is defined by reference 
to the expiration date, or ``E,'' of a voluntary reorganization (e.g., 
``E+1'' is one day past the expiration date of the event). Currently, 
Section H of Procedure VII of the Rules describes the rules and actions 
applicable to voluntary reorganizations with a protect period of two 
days in roughly chronological order. A table within Section H of 
Procedure VII of the Rules identifies the timeline of rules and actions 
applicable to voluntary reorganizations that have a protect period of 
one day or that do not have a protect period.
    NSCC may assist its Members by applying to CNS Securities 
applicable asset servicing events. NSCC may also determine that 
operational difficulties prevent it from applying certain asset 
servicing events, in which case, Members must work directly with each 
other to process those asset servicing events. As a result of CNS 
netting, counterparties to obligations are not known to each other. 
Therefore, in order to process asset servicing events away from NSCC, 
Members occasionally request that NSCC identify their counterparty to a 
particular obligation over the critical event date (e.g., the record 
date or the position capture date). In these circumstances, NSCC 
applies a random allocation procedure (utilizing the same allocation 
procedure described in Procedure VII, Section H, 1 of the Rules) to 
match counterparties. After matching counterparties through this 
allocation procedure, NSCC contacts each of the counterparties via 
email or telephone to receive authority to identify the counterparties 
to the requesting Member.
ii. Rationale for Proposed Rule Changes
    In connection with a review of its Rules, NSCC identified 
opportunities to improve Section H of Procedure VII of the Rules in 
order to more clearly describe the operation of the CNS Reorganization 
Processing System. NSCC also determined that this section of the Rules 
should be revised to correct drafting errors in, and make other 
technical corrections to, the current descriptions within the Rules.
    Currently, the Rules do not address the application of asset 
servicing events, which are applied automatically by NSCC and do not 
require any action by Members. However, NSCC believes it would improve 
the transparency of the Rules to include a section in Procedure VII, 
Section H of the Rules that would describe NSCC's authority to apply 
asset servicing events, identify examples of asset servicing events 
that it may not apply, and describe how NSCC may assist Members to 
process asset servicing events outside of its facilities, as described 
further below.
    NSCC believes these proposed changes would improve Members' 
understanding of their rights and obligations, and NSCC's rights and 
obligations, in connection with the CNS Reorganization Processing 
System and the processing of assets servicing events and, thereby, 
would improve the operation of these services.
iii. Proposed Changes to Description of CNS Reorganization Processing 
System
    The proposed changes, described below, would improve and update the 
Rules that describe the operation of the CNS Reorganization Processing 
System, by clarifying and enhancing the descriptions to make them 
clearer to Members. NSCC believes making these descriptions clearer 
would enhance Members' understanding of their rights and obligations in 
connection with this service.
Proposed Clarifications to the Scope of Corporate Reorganization Event 
Processing
    Under the introduction to ``Corporate Reorganizations,'' in Section 
H, 4 of Procedure VII of the Rules, NSCC is proposing changes to 
clarify and correct the descriptions of which corporate reorganization 
events may be processed through the CNS Reorganization Processing 
System and NSCC's authority to exclude certain corporate reorganization 
events from such processing.
    Revising the Non-Exhaustive List of Corporate Reorganization Events 
that May be Applied by NSCC. The proposed

[[Page 34903]]

changes to Procedure VII, Section H, 4 of the Rules would retain the 
existing list of the most common types of events that NSCC may process, 
but would clarify that this is a non-exhaustive list of examples. The 
proposed change would also revise the reference from ``redemptions'' to 
``full redemptions'' within the list of examples of mandatory 
reorganizations that NSCC may process. The current use of the term 
``redemptions'' was intended to refer to full redemptions, which are 
generally processed by NSCC. However, without using the qualifier 
``full,'' NSCC believes Members may misunderstand and believe that NSCC 
would process partial redemptions. Partial redemptions are not 
processed by NSCC. Therefore the proposed change would clarify which 
type of redemptions are processed by NSCC and were intended to be 
included in this list.
    The proposed change would also add mergers with elections to the 
list of voluntary reorganizations that may be processed through the CNS 
Reorganization Processing System as these events are applied relatively 
frequently and NSCC believes including these events in this non-
exhaustive list would improve the transparency of the Rules. Within 
this section, NSCC is also proposing to revise the defined term from 
``tender offers'' to ``voluntary offers,'' because this defined term, 
as used in this section of Procedure VII of the Rules, refers to two 
types of voluntary offers--both tender offers and exchange offers. This 
proposed change would improve the clarity of these procedures where the 
current defined term may incorrectly imply that exchange offers are not 
included when this defined term is used.
    NSCC is also proposing to revise the list of securities that would 
not be processed through the CNS Reorganization Processing System by 
changing ``securities subject to redemption if there is a conversion 
privilege attached'' \8\ to ``securities subject to a conversion 
event.'' While NSCC would not process conversion events due to 
operational difficulties, as described below, it generally would, as 
stated above, process full redemptions. The current language in this 
list was intended to reflect that NSCC would process a redemption 
event, but, if that event has a conversion privilege attached, it would 
not process the related conversion. The proposed change would clarify 
the meaning and would mitigate any confusion about the eligibility of 
these events for processing by providing greater transparency in the 
Rules with respect to the treatment of both full redemption events and 
conversion events.
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    \8\ A ``redemption'' is a reorganization event that occurs on a 
maturity date when the issuer makes a payment on debt securities for 
the principal amount plus any accrued interest. A redemption may 
include a conversion privilege, which would entitle the security 
holder to convert the security in lieu of the redemption payment.
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    Removing Descriptions of Corporate Reorganization Events that are 
Not Supported by the CNS Reorganization Processing System. NSCC is 
proposing to remove descriptions of the processing of two types of 
voluntary reorganizations that it does not support in the CNS 
Reorganization Processing System: (1) Voluntary reorganizations that 
have a protect period longer than two business days and (2) conversion 
events for convertible securities. As described below, NSCC has 
generally exercised its existing authority provided under Procedure 
VII, Section H of the Rules and declined to process these events due to 
operational difficulties. Therefore, while these changes would revise 
the Rules as written, the changes would not result in any change in the 
current operation of the service. Rather, the proposed change would 
reflect NSCC's longstanding exercise of its authority to decline to 
process these events. As such, NSCC does not believe that either of 
these changes would alter the respective rights or obligations of NSCC 
or Members using this service. NSCC believes these proposed changes 
would mitigate any confusion by Members regarding the availability of 
this service.
    First, NSCC is proposing to add a sentence to this Section H, 4 of 
Procedure VII of the Rules to make clear that NSCC generally would not 
process voluntary reorganizations that have a protect period longer 
than two business days. These types of events are extremely rare as the 
vast majority of voluntary reorganizations have a protect period of two 
business days or less. Additionally, industry feedback provided to NSCC 
has indicated that there is a preference that these events be processed 
outside NSCC's facilities.\9\
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    \9\ The Corporate Actions Section of the Operations & Technical 
Society of Securities Industry and Financial Markets Association 
(``SIFMA'') meets periodically to discuss issues related to 
corporate reorganization processing. NSCC staff attends these 
meetings. As recently as September 2017, this group requested that 
NSCC exercise the discretion currently provided to it in Procedure 
VII, Section H of the Rules to no longer process voluntary 
reorganization events with a protect period longer than two business 
days due to operational challenges in processing these events. This 
request was not solicited by NSCC.
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    In connection with this proposed change, NSCC would also remove 
from Section H, 4(b) of Procedure VII of the Rules descriptions of the 
special rules that govern the processing of events with a protect 
period longer than two business days. Some of the descriptions of these 
special processing rules currently in Section 4(b) do not clearly 
indicate that they are only applicable to these types of events, which 
could cause Members confusion about whether these descriptions are 
applicable to the processing of all voluntary reorganizations. Further, 
if NSCC does decide to process an event with a protect period longer 
than two business days, it would provide Members with a notice 
detailing the applicable processing rules, as currently stated in the 
introduction to ``Corporate Reorganizations,'' in Section H, 4 of 
Procedure VII of the Rules.
    Therefore, NSCC is proposing to remove a sentence in the 
introduction to Section H, 4(b) of Procedure VII of the Rules that 
states the rules within this subsection apply to voluntary 
reorganizations with a protect period longer than two business days 
unless otherwise stated. Additionally, within this section under new 
subheading ``On and Following E+3,'' NSCC is proposing to remove the 
statement that positions may be removed from the CNS Reorganization 
Sub-Account as a result of the CNS allocation process because only 
voluntary reorganizations that have a protect period longer than two 
business days would reach the CNS allocation process after NSCC has 
frozen positions in the CNS Reorganization Sub-Account. NSCC would also 
remove a paragraph under this subheading that describes the effect of 
the CNS allocation process on positions subject to a voluntary 
reorganization because, as stated above, only voluntary reorganizations 
that have a protect period longer than two business days would reach 
the CNS allocation process at this point in the processing timeline.
    Second, NSCC would remove Section H, 5 of Procedure VII of the 
Rules which describes the special processing rules that apply to a 
conversion event for convertible securities. For at least the past 10 
years, NSCC has exercised its existing authority to decline to process 
these reorganization events for convertible securities due to 
operational difficulties. Therefore, the proposed rule change would 
reflect the longstanding operation of the CNS Reorganization Processing 
System, and would mitigate any confusion by Members regarding the 
availability of this service.
    NSCC does not believe these proposed changes would alter the 
respective rights or obligations of NSCC or its Members using this 
service.

[[Page 34904]]

Proposed Clarifications to Voluntary Reorganization Processing Rules
    NSCC is also proposing changes that would clarify and enhance the 
description of rules applicable to voluntary reorganizations under 
Section H, 4(b) of Procedure VII of the Rules.
    Adding Chronological Subheadings and Reordering the Processing 
Rules. In order to better organize these rules and improve the 
transparency regarding when certain rules apply within the 
reorganization processing timeline, NSCC is proposing to add 
chronological subheadings within this section. Within the descriptions 
of the rules under each new subheading, NSCC would revise statements by 
removing redundant references to timing because the timing of that 
applicable statement or rule would be clear from the new subheadings. 
This proposed change would simplify these descriptions of the 
applicable rules, making them clearer and more easily understood by 
Members.
    NSCC is also proposing to reorder certain statements within this 
section of Procedure II to be more closely aligned to chronological 
order. While the chronology of processing has not changed, over time 
various revisions to these Rules have added descriptions to this 
section that are out of chronological order. NSCC is proposing to move 
the description of the processing that occurs on E+1 to follow the 
description of processing that occurs after the CNS night cycle 
processing on E+1. Additionally, NSCC is proposing to move two 
statements regarding the regular CNS allocation process to the new 
subheading ``On E+2 (Protect Period Expiration Date).'' These two 
statements describe the occurrence of the regular CNS allocation 
process and the priority within that allocation process of certain 
positions. Currently, these statements appear lower in the timeline.
    Revisions Under ``On E+2 (Protect Period Expiration Date).'' Under 
the new subheading ``On E+2 (Protect Period Expiration Date),'' NSCC is 
proposing to clarify that Members are prohibited from moving subject 
securities between the Fully-Paid-For Subaccount and the CNS General 
Account either on the protect expiration date or on the expiration of 
the voluntary reorganization when there is no protect period, as 
applicable. Currently, the Rules simply refer to the Fully-Paid-For 
Subaccount as a ``non-reorganization subaccount.'' NSCC believes the 
proposed change would improve the transparency of the Rules by more 
clearly identifying the subaccount that is subject to this restriction. 
NSCC is also proposing to move this statement earlier under the new 
heading ``On E+2 (Protect Period Expiration Date)'' because this 
restriction is applicable throughout during E+2 (rather than only after 
the day cycle, where it is currently listed). Finally, as described 
further below, NSCC is proposing to add this rule to the table within 
this section because this rule also applies to the events addressed by 
this table. This proposed change would improve the transparency of the 
Rules by making the table more comprehensive.
    Revisions Under ``After Day Cycle--E+2.'' Under the new subheading 
``After Day Cycle--E+2,'' NSCC is proposing to remove a sentence from 
the Rules that is a statement of fact that Members may have a partial 
allocation of positions in the CNS Reorganization Sub-Account. While 
accurate, this statement does not describe the rights or obligations of 
either NSCC or its Members in connection with the processing of 
corporate reorganization events, nor does it provide any material 
information that NSCC believes would be relevant to Members in their 
understanding of the operation of this service. NSCC is proposing to 
simplify the Rules by removing statements that do not provide important 
information to Members regarding the operation of this service and NSCC 
believes this proposed change would make the Rules clearer and more 
easily understood by Members.
    Also under this new subheading, NSCC is proposing to revise the 
description of the process by which a Member may request that NSCC move 
a long position in a subject security from the CNS Reorganization Sub-
Account back to the CNS General Account. The proposed change would 
clarify that, where one Member may make the request, the Member with 
the corresponding long or short position must approve that request 
before NSCC would take action. This proposed change would improve the 
transparency of the Rules by including a description of this necessary 
step in the processing of these requests that is not currently stated 
in the Rules.
    Under the new subheading ``After Day Cycle--E+2,'' NSCC is 
proposing to remove the description of the process by which NSCC would 
exit a security from the CNS System if it is subject to more tender 
offers than available CNS Reorganization Sub-Accounts. In the event 
that a CNS Security is subject to more tender offers than available CNS 
Reorganization Sub-Accounts, NSCC would exercise its discretion, as 
stated earlier in Section H, 4 of Procedure VII, and would not process 
the voluntary reorganization due to operational difficulties. 
Therefore, while this statement, which appears later in this section, 
is accurate, NSCC does not believe it is necessary to include this 
additional statement in the Rules. NSCC's decision not to process the 
voluntary reorganization due to operational difficulties would occur 
earlier in the chronology and is already covered by the earlier, 
broader statement regarding the scope of corporate reorganization event 
processing. This proposed change would simplify the Rules by removing 
an unnecessary statement that is redundant of an earlier statement and 
would make the Rules clearer.
    Revisions Under ``On and Following E+3.'' Under the new subheading 
``On and Following E+3,'' NSCC is proposing to improve the description 
of the circumstances in which positions in the CNS Reorganization Sub-
Account would be returned to the Members' CNS General Account by 
including a description of when a voluntary reorganization is canceled 
or when the expiration date of a voluntary reorganization is extended. 
This proposed change would make this description more comprehensive 
and, therefore, improve the transparency of the Rules.
    Also under this new subheading, NSCC is proposing to remove a 
paragraph that describes the process for reflecting a delivery of a 
subject security outside NSCC's facilities because NSCC believes this 
is a repetitive description of the process by which Members may request 
that their positions be removed from the CNS Reorganization Sub-Account 
back to the CNS General Account. This process is already described in 
the Rules under the new subheading ``On and Following E+3.'' Therefore, 
the proposed change would simplify the Rules by removing a redundant 
statement that does not provide Members with additional information 
regarding the process described above.
    Revisions to the Processing Rules Table. NSCC is also proposing 
changes that would improve the information within the table in this 
section of the Rules. This table identifies the timeframes for 
processing (1) voluntary reorganizations with a protect period of one 
day and (2) voluntary reorganizations with no protect period. The 
proposed changes to this table would clarify in the introduction to 
this table that the table applies to these two types of events, where 
it currently states it is applicable to processing of

[[Page 34905]]

voluntary reorganizations with protect period of one day ``or less.'' 
NSCC is also proposing to include in this table the rule that Members 
are prohibited from moving positions in subject securities between the 
CNS General Account and Fully-Paid-For Subaccount either on the protect 
period expiration date (in this case, E+1) or, when there is no protect 
period, on the event expiration date (in this case, E). Including this 
rule, which is applicable to the processing of these events, would make 
this table more comprehensive and improve the transparency of the 
Rules.
Proposed Technical Revisions To Improve, Clarify and Simplify 
Descriptions
    NSCC is proposing technical revisions to the descriptions 
throughout Section H of Procedure VII of the Rules that would enhance 
the clarity and transparency of these procedures. Such changes would 
correct the use of defined terms and typographical and other drafting 
errors, revise statements for clarity and consistency, and improve 
internal cross-references within the Rules. Additionally, NSCC would 
propose to add ``money balances'' to Section H, 1 of Procedure VII, 
which describes the types of adjustments NSCC may make within the CNS 
system and which may appear on the Members' Miscellaneous Activity 
Report. Currently, this section only refers to ``positions'' which 
could be interpreted to mean only securities positions. Because NSCC 
may make adjustments to either securities positions or money balances 
within CNS, the proposed change would clarify this statement and 
improve the transparency of this section of the Rules.
    As another example of the technical revisions being proposed, NSCC 
would also revise references within these procedures from ``short 
positions'' or ``long positions'' that are being processed through the 
CNS Reorganization Processing System to ``short positions in the 
subject security'' and ``long positions in the subject security.'' NSCC 
would also propose to amend this section by revising references to the 
``Sub-Account'' to the complete defined term, the ``CNS Reorganization 
Sub-Account.''
    NSCC believes the proposed technical revisions would create clearer 
descriptions of the rules that apply to the services described in this 
section of Procedure VII of the Rules and would improve the 
transparency of these processing procedures.
iv. Proposed Changes To Describe Processing of Asset Servicing Events 
and Authority To Reveal Counterparties
    NSCC is proposing to amend Section H of Procedure VII of the Rules 
to include a new subsection 7 that would (1) disclose NSCC's authority 
to determine when it may or may not process certain asset servicing 
events; (2) provide examples of asset servicing events that NSCC may 
determine shall be processed outside its facilities; and (3) describe 
the process by which NSCC may assist its Members in applying asset 
servicing events outside its facilities, including NSCC's authority to 
match counterparties as of the critical date of that asset servicing 
event and reveal those counterparties to those Members.
NSCC's Authority To Apply or Decline To Apply Asset Servicing Events
    NSCC currently may assist its Members by applying certain asset 
servicing events to Members' positions in CNS Securities that are 
subject to that event on the relevant event date or payment date. NSCC 
may also, in its discretion, determine that operational difficulties or 
other circumstances would prevent the processing of such asset 
servicing events within its facilities. NSCC is proposing to add a new 
Section H, 7 of Procedure VII of the Rules to provide transparency 
regarding its discretion in supporting asset servicing events with 
respect to transactions in CNS Securities, and its discretion in 
determining when it may be appropriate that an asset servicing event be 
processed outside its facilities due to operational difficulties or 
other concerns regarding the event.
Identify Examples of Asset Servicing Events That NSCC May Not Process
    NSCC is also proposing to include in this new Section H, 7 of 
Procedure VII of the Rules examples of the types of asset servicing 
events NSCC may determine shall be processed outside its facilities. 
These events may include payments pursuant to litigation or other 
disputes, distributions on class actions, bankruptcy payments, consent 
solicitations, other distributions, claims, fees, or events with 
respect to which a Member has notified the Corporation that it either 
has incurred or anticipates that it will incur liabilities greater than 
the terms of the reorganization event.
    In connection with this change, NSCC is proposing to remove the 
last paragraph in Section H, 4 of Procedure VII of the Rules that 
describes the process by which it would remove positions in subject 
securities from the CNS System if a Member has notified NSCC that it 
either has incurred or anticipates it will incur liabilities greater 
than the terms of the reorganization event. Instead, NSCC would include 
these events in the list of asset servicing events that may be 
processed outside of NSCC's facilities within the proposed new Section 
H, 7 of Procedure VII of the Rules. This proposed change would ensure 
the Rules continue to provide Members with an appropriate level of 
transparency regarding how these events are treated without providing 
unnecessary details regarding actions that are taken by NSCC in order 
to effect the exit of these positions from the CNS System. Therefore, 
the proposed change would simplify the Rules, which improves its 
overall clarity.
NSCC Authority To Reveal Counterparties To Assist Members in Processing 
Asset Servicing Events Away From NSCC
    The proposed rule change would also include a description in this 
new Section H, 7 of the Rules of NSCC's authority to use a random 
allocation procedure to match counterparties and identify those 
counterparties to Members. As stated earlier, counterparties to 
obligations in CNS Securities are not known to each other as a result 
of the continuous netting of transactions within CNS. Therefore, 
Members occasionally request that NSCC identify their counterparty to a 
particular obligation over a critical event or payment date in order to 
(1) assist them in the processing of an asset servicing event outside 
of NSCC's facilities, or (2) address claims, disputes, or information 
requests related to an event that NSCC has processed and that requires 
the Member to work directly with the counterparty. In these 
circumstances, NSCC applies a random allocation procedure (utilizing 
the same allocation procedure described in Procedure VII, Section H, 1 
of the Rules) to match counterparties. Currently, after matching 
counterparties through its allocation procedure, NSCC contacts each of 
the counterparties via email or telephone to receive authority to 
identify the counterparties to the requesting Member.
    As a result of the proposed change, NSCC would continue its 
practice of applying a random allocation procedure (utilizing the same 
allocation procedure described in Procedure VII, Section H, 1 of the 
Rules) to match counterparties when requested by a Member. The proposed 
rule change would provide Members with notice that NSCC may reveal 
counterparties to a requesting Member in these circumstances. By

[[Page 34906]]

providing this notice in the Rules, NSCC would no longer contact the 
counterparty to receive authority to reveal that counterparty's 
identity to the requesting Member. Therefore, NSCC would be able to 
expedite the process and provide Members with the information they need 
to process asset servicing events or address other related requests 
outside of its facilities more quickly.
    Given that Members often request this information from NSCC and 
NSCC generally receives the requested authority to reveal the identity 
to its relevant counterparty, NSCC believes the proposed change would 
improve the transparency of its Rules, improve the processing of these 
events, and help NSCC continue to provide Members with a beneficial 
service.
(b) Statutory Basis
    For the reasons described below, NSCC believes that the proposed 
changes are consistent with the Section 17A(b)(3)(F) of the Act, which 
requires, in part, that the rules of a registered clearing agency be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rule change would improve the transparency of the 
Rules and would clarify and correct the descriptions within Section H 
of Procedure VII of the Rules, particularly the procedures applicable 
to the CNS Reorganization Processing System. Specifically, the proposal 
to add a description of the processing of asset servicing events, 
including NSCC's discretion to determine that such events should be 
processed outside its facilities, would also improve the transparency 
of the Rules regarding these matters.
    The CNS Reorganization Processing System allows transactions in 
eligible CNS Securities to be processed for clearance and settlement 
through NSCC's CNS Accounting System notwithstanding the occurrence of 
a corporate reorganization event. By creating clearer Rules regarding 
the processing of both corporate reorganization events and asset 
servicing events to CNS Securities, and by increasing transparency 
regarding Members' and NSCC's rights and obligations in this regard, 
the proposed changes would better facilitate the operation of CNS 
Reorganization Processing System and would better facilitate the 
application of asset servicing events. Therefore, the proposed change 
would also better facilitate the operation of the CNS system and, in 
this way, would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\11\
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    \11\ Id.
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    Additionally, by providing Members with notice through the new 
Section H, 7 of Procedure VII of the Rules that NSCC may, when 
requested, identify their respective counterparties as of the critical 
event date, NSCC would no longer need to seek specific approval from 
each Member in order to do so. Therefore, the proposed changes would 
expedite Members' ability to process asset servicing events outside of 
NSCC's facilities. By assisting Members to process asset servicing 
events applicable to CNS Securities outside of NSCC's facilities, the 
proposed changes would also promote the prompt and accurate clearance 
and settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\12\
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    \12\ Id.
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    Rule 17Ad-22(e)(23)(i) under the Act requires, in part, that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for publicly disclosing all 
relevant rules and material procedures.\13\ As described above, the 
proposed rule change would improve the transparency, clarity, and 
accuracy of the Rules, such that these provisions of the Rules would 
better publicly disclose all relevant and material procedures regarding 
the aspects of the operation of NSCC's CNS Reorganization Processing 
System and the processing of asset servicing and other events and 
payments. Therefore, NSCC believes the proposed rule changes are 
consistent with Rule 17Ad-22(e)(23)(i).\14\
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    \13\ See 17 CFR 240.17Ad-22(e)(23)(i).
    \14\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule changes would have any 
impact, or impose any burden, on competition. The proposed rule changes 
would improve Members' understanding of their rights and obligations 
with respect to the operation of the CNS Reorganization Processing 
System and would improve transparency regarding the processing of asset 
servicing and other events and payments. These proposed changes would 
be applicable to all Members that utilize these services and would not 
alter Members' rights or obligations.
    The proposed rule change to remove descriptions of processing 
events that NSCC generally does not process due to operational 
difficulties, pursuant to its existing authority, would not result in 
any change in the current operation of the service. Rather, the change 
would update the Rules to reflect current practice. These changes would 
not alter Members' rights or obligations with respect to this service.
    Therefore, NSCC does not believe that the proposed rule changes 
would have any impact on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not solicited or received any written comments relating to 
this proposal. NSCC will notify the Commission of any written comments 
that it receives.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and paragraph (f) of Rule 19b-4 
thereunder.\16\ 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.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f).
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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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2018-003 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-2018-003. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your

[[Page 34907]]

comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's internet website (http://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 10:00 a.m. and 3:00 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 (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NSCC-2018-003 
and should be submitted on or before August 13, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15646 Filed 7-20-18; 8:45 am]
 BILLING CODE 8011-01-P