Document ID: SEC-2014-0054-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2014-01-13T05:00Z

[Federal Register Volume 79, Number 8 (Monday, January 13, 2014)]
[Notices]
[Pages 2237-2239]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00332]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71251; File No. SR-NSCC-2013-11]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Add a New Service 
to the National Securities Clearing Corporation's Obligation Warehouse 
(``OW'') Which Would Pair Off and Close Certain Open Obligations, 
Reducing the Number of Open Obligations in OW

January 7, 2014.

I. Introduction

    On November 14, 2013, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-NSCC-2013-11 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change was published 
for comment in the Federal Register on November 29, 2013.\3\ The 
Commission did not receive comments on the proposed rule change. This 
order approves 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. 34-70937 (Nov. 25, 
2013), 78 FR 71686 (Nov. 29, 2013) (SR-NSCC-2013-11).
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II. Description of the Proposal

    NSCC's proposed rule change consisted of amendments to the Rules 
and Procedures (``Rules'') of NSCC to modify its Rules to add a new 
service to NSCC's Obligation Warehouse (``OW'') that will daily apply a 
pair off methodology to open OW Obligations, designated by Members as 
eligible for the service, based on the quantity of underlying 
securities, the final money amount, and the settlement dates of the 
underlying obligations, the (``Pair Off Function''). Upon making those 
revisions to NSCC's Rules, this approved, new service to OW will pair 
off and close certain open obligations, thereby reducing the number of 
open obligations in OW. The effective date of the proposed rule change 
will be announced via an NSCC Important Notice.
    NSCC's OW, implemented in 2011, is a non-guaranteed, automated 
service that tracks, stores, and maintains unsettled ex-clearing and 
failed obligations, as well as obligations exited from NSCC's 
Continuous Net Settlement (``CNS'') system, non-CNS Automated Customer 
Account Transfer Service

[[Page 2238]]

(``ACATS'') Receive and Deliver Instructions, Balance Orders, and 
Special Trades, as defined in NSCC's Rules (collectively ``OW 
Obligations''). The service provides transparency, serves as a central 
storage of open (i.e. failed or unsettled) broker-to-broker 
obligations, and allows users to manage and resolve exceptions in an 
efficient and timely manner. Simultaneously, OW provides on-going 
maintenance and servicing of matched obligations that have not been 
marked by a Member as subject to upcoming delivery, closure, or 
cancellation. Examples of this on-going maintenance and servicing 
include: Adjustments for certain corporate actions; daily review for 
CNS eligibility; and regular processing of the Reconfirmation and 
Pricing Service (``RECAPS'') in the OW on days announced by Important 
Notices. During the daily review for CNS eligibility, OW Obligations 
that are eligible for CNS are exited from the OW and forwarded to CNS. 
On days when RECAPS is run in the OW, OW Obligations that are eligible 
for RECAPS \4\ are re-netted and, if appropriate, marked to the current 
market price \5\ and provided with an updated settlement date of the 
next business day. The Pair Off Function will run once a day, 
immediately following the completion of the review for CNS 
eligibility.\6\
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    \4\ Obligations that are matched and have a settlement date of 
at least two days prior to the date on which the RECAPS process 
commences will be considered for inclusion in the RECAPS process, 
and therefore, fail items not already in the OW and eligible for 
RECAPS processing must be submitted by the Member prior to RECAPS 
processing.
    \5\ In the event that the current market price for a security is 
not available, the obligation's price details will be unchanged from 
when it was previously matched.
    \6\ NSCC will announce by Important Notice days on which Pair 
Off function will not run, which may include days on which the 
RECAPS process is run in the OW.
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    Today, in order to reduce the number of obligations that remain on 
their books and records, Members may take actions away from NSCC to 
close out these open obligations in OW. Those Members would then close 
the obligations in OW. The Pair Off Function will facilitate the close 
out of any OW Obligations that Members designate as eligible for the 
service. By facilitating the close out of these obligations in an 
automated manner within the OW, the Pair Off Function should add 
transparency to the life cycle of these obligations that may otherwise 
be closed out away from NSCC. With respect to obligations that are 
removed from the OW as a result of the Pair Off Function, Members' 
administrative costs associated with maintaining these obligations in 
OW should be reduced.
    NSCC Members will have the opportunity to designate certain OW 
Obligations that are in ``Open'' status in the OW, to which they are a 
party, to be eligible to be paired off with other OW Obligations in the 
same CUSIP, and ultimately closed.\7\ NSCC may, in its discretion, 
exclude certain obligations from the Pair Off Function, and will 
announce by Important Notice which obligations are excluded. Initially, 
the following obligations will be excluded: (1) OW Obligations in which 
the underlying security is a mutual fund, a when-issued security,\8\ or 
is part of a syndicate; (2) OW Obligations that are identified in OW as 
an ACATS Receive and Deliver Instruction; (3) obligations that, as of 
the time the Pair Off Function runs, are identified in the OW as being 
subject to a corporate action; and (4) an obligation that is marked in 
the OW as being in ``Open'' status but has already been sent to The 
Depository Trust Company's Inventory Management System (IMS) as a 
pending delivery.
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    \7\ Members may either participate in the Pair Off Function on 
an account level, designating all OW Obligations in an ``Open'' 
status in the OW to which they are a party as eligible for the Pair 
Off function and then opt out of the function with respect to 
certain OW Obligations, or they may designate only certain OW 
Obligations as eligible for pair off.
    \8\ A transaction in a ``when issued'' security is made 
conditionally because the underlying security has been authorized 
but not yet issued, and will only settle after the security has been 
issued.
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    The Pair Off Function will use a matching methodology that will 
pair off eligible OW Obligations based on the quantity of underlying 
securities, the final money amount, and the settlement dates of the 
underlying obligations. The Pair Off Function will only match OW 
Obligations that have been designated as eligible for pair off by both 
Members that are party thereto, and that are in the same CUSIP and have 
the same counterparties, where the counterparties have offsetting long 
and short obligations. The methodology will pair off eligible OW 
Obligations in order by first pairing off those obligations that have 
the most criteria in common. For example, the methodology will first 
pair off eligible OW Obligations where the quantity of underlying 
securities, the settlement dates of the obligations, and the final 
money amounts are identical. The methodology will continue to review 
eligible OW Obligations subject to certain rules, beginning with 
eligible OW Obligations with the oldest settlement date, and eligible 
OW Obligations with the smallest number of underlying securities.
    Eligible OW Obligations will be paired off where the quantity of 
underlying securities, the final money amount, or the settlement dates 
of the underlying obligations may not be identical, and, in certain 
cases, one OW Obligation may be paired off against multiple OW 
Obligations. However, a pair off would never occur if it would result 
in: (1) A negative quantity of underlying securities in either of the 
original obligations; (2) a negative final money amount; or (3) at 
least one of the obligations subject to the pair off to remaining open, 
with a reduced quantity of underlying securities and a final money 
amount of zero or less than zero. Additionally, OW Obligations in 
municipal bonds would only be eligible for pair off where the quantity 
of the underlying securities in the obligations subject to the pair off 
is identical and no underlying securities remain.
    When the pair off criteria are met, the OW Obligations will either 
be closed or, when the quantities of underlying securities are not 
exactly matched between obligations being paired off, the pair off will 
result in one or more of the obligations being reduced by the quantity 
of securities that were paired off. Those obligations will remain in 
``Open'' status in OW and will be adjusted to reflect the reduced 
number of underlying securities. Where the underlying final money 
amounts are not exactly matched between obligations being paired off, 
the pair off will result in a cash adjustment, which will be reflected 
in the Members' money settlement with NSCC on the following business 
day.

III. Discussion and Commission Finding

    Section 19(b)(2)(C) of the Act \9\ 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. Section 17A(b)(3)(F) of the Act \10\ requires 
that the rules of a clearing agency to be designed to, among other 
things, ``promote the prompt and accurate clearance and settlement of 
securities transactions and . . . to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.'' \11\ Further, Section 
17A(b)(3)(F) of the Act requires that the rules of a clearing agency be 
designed to, ``perfect the mechanism of a national system for the

[[Page 2239]]

prompt and accurate clearance and settlement of securities 
transactions.'' \12\ The Commission finds that NSCC's proposed rule 
change is consistent with these requirements because: the Pair Off 
Function is designed to provide for greater efficiency and transparency 
with respect to obligations processed through the OW; and to improve 
NSCC's current mechanism for the clearance and settlement of securities 
transactions that are placed in the OW.
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 12 U.S.C. 78q-1(b)(3)(F).
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ Id.
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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.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NSCC-2013-11 be, and it hereby is, 
approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00332 Filed 1-10-14; 8:45 am]
BILLING CODE 8011-01-P