Document ID: SEC-2012-1546-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2012-09-19T04:00Z

[Federal Register Volume 77, Number 182 (Wednesday, September 19, 2012)]
[Notices]
[Pages 58201-58202]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-23038]

[[Page 58201]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67850; File No. SR-NSCC-2012-07]

 Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Which: (i) Eliminates the Practice of Netting of Creations 
and Redemptions of Index Receipts Prior to Their Entering NSCC's 
Accounting Operation, and (ii) Effects Certain Other Technical Changes

September 13, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 4, 2012, 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared primarily by NSCC. NSCC filed the proposal pursuant to Section 
19(b)(3)(A)(iii) of the Act,\2\ and Rule 19b-4(f)(4) \3\ thereunder so 
that the proposal was effective upon filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(4).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change: (i) Eliminates the practice of netting of 
creations and redemptions of index receipts prior to their entering 
NSCC's Accounting Operation, and (ii) effects certain other technical 
changes. Details are set forth in Exhibit 5 to NSCC's rule filing, 
which can be found on NSCC's Web site (http://www.dtcc.com/downloads/legal/rule_filings/2012/nscc/SR-NSCC-2012-07.pdf).

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A), 
(B) and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    NSCC reports on, clears and settles domestic index receipts (i.e. 
shares in exchange-traded funds (``ETFs'')) and their underlying 
component securities through a creation/redemption process, which is 
initiated by a Member. As more fully described below, the purposes of 
the proposed rule change are to: (a) Discontinue the current practice 
of netting of ETF transactions prior to entering the Corporation's 
Accounting Operation in order to: (1) Harmonize ETF processing with 
that for other transaction types and (2) better facilitate Members' 
internal reconciliation processes, and (b) make certain technical 
corrections and clarifications to the Rules text with respect to 
current ETF processing.
    NSCC's index receipt processing supports: (a) The establishment of 
index receipt units (creation), whereby a Member will deliver the 
underlying component securities or cash to the index receipt agent and 
receive index receipts, and (b) the redemption of index receipt units 
whereby a Member will deliver the index receipts and receive the 
underlying components or cash. NSCC facilitates the processing of these 
transactions as set forth below.\4\
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    \4\ For the NSCC rule filing which implemented ETF processing, 
see Securities Exchange Act Release No. 31601 (December 16, 1992), 
[File No. SR-NSCC-92-08].
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    NSCC's process for handling of index receipt transactions is set 
forth in Procedure II, Section G. On the day before trade date (T-1), 
an index receipt agent transmits files to NSCC which contain 
information regarding the underlying composition of index receipts for 
creates and redeems occurring the next business day. That evening, NSCC 
compiles the information and provides the respective Members with a 
portfolio composition report/file that lists the composition of index 
receipts eligible for processing. The file displays the proportionate 
amount of underlying components or cash \5\ that comprise each index 
receipt. This file also contains a cash balancing component, which is 
an estimation of accrued dividends, cash-in-lieu of securities and any 
necessary balancing amount.\6\ The portfolio information contained in 
this file is used for creation/redemption processing the next day, or 
Trade Date (T). On T, by such time as established by NSCC, the index 
receipt agent, on behalf of each Member placing an index receipt order, 
will report to NSCC the number of index receipts created and redeemed 
that day. Such transactions constitute locked-in transactions between 
the index receipt agent and the relevant Members. The index receipt 
agent also will report the final cash amount and a transaction amount 
which represents the transaction fee. On the night of T, NSCC transmits 
an index receipt instruction detail report to Members who had activity 
on T. The report serves as the contract for the creation/redemption 
activity and lists the number of component shares, on a netted basis, 
associated with particular creations and redemptions executed on T. 
Prior to entering the Corporation's Accounting Operation, each index 
share instruction is separated into its underlying stock components, 
and incorporated into the normal equity clearance and settlement 
process. Unsettled positions in index receipts and their component 
securities are risk managed as ordinary activity and guaranteed 
pursuant to the provisions of Addendum K.
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    \5\ In 2008, NSCC expanded its index receipt processing to allow 
for creates and redeems using cash as the sole underlying component. 
This allows 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. See Securities 
Exchange Act Release No. 58694 (September 30, 2008), [File No. SR-
NSCC-2008-07].
    \6\ The 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. Separately, from time to 
time, an Index Receipt Agent may use cash-in-lieu as part of the 
cash balancing amount which means it would substitute the cash value 
of a component security for a security in the portfolio. For 
instance, such a substitution may be made due to difficulty in 
obtaining a particular security. The cash-in-lieu designation is not 
used where cash is the sole underlying component of a creation or 
redemption.
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    Pursuant to the proposed Rule change, creation/redemption index 
receipt activity will no longer be netted prior to the general netting 
associated with NSCC's Accounting Operation, and thus will not appear 
on the Index Receipt Detail Report as netted, but will be reported in 
gross. The discontinuation of this ``pre-netting'' practice will 
harmonize NSCC's processing for ETFs with the processing of other 
transactions that enter the Accounting Operation which are not netted 
prior to entering the Accounting Operation. In addition, the reporting 
of the underlying components for creations and redemptions in gross 
will better facilitate Members' internal

[[Page 58202]]

reconciliation processes by providing a comprehensive view of their 
activity prior to it entering the net. The proposed change will not 
have a substantive impact on Members or the Corporation, either 
operationally or from a risk perspective, as a Member's overall 
positions are mathematically the same, and margined equally, regardless 
of the whether a Member's create/redeem positions are separately netted 
prior to processing in the Accounting Operation. (Note: Included in 
NSCC's fee schedule, as set forth in Addendum A to the Rules, is an 
``into the net'' charge which is volume based in terms of the dollar 
value of the transactions entering the Corporation's Accounting 
Operation. In this regard, the proposed change may have an impact on 
Member billing in that a gross rather than net transaction value for 
creations and redemptions will be fed into the Accounting Operation.)
    In addition, NSCC proposes certain technical corrections and 
clarifications to the Section G of Procedure II, including to:
    (a) Highlight the distinction between cash used as the sole 
underlying component versus as a partial replacement for underlying 
components,
    (b) Indicate, consistent with the change to eliminate the ``pre-
net'' of index receipts, that the Index Receipt Detail Report will 
report securities components for a given index receipt transaction in 
gross,
    (c) Make a correction to reflect that the Corporation reports to 
Members on the Index Receipt Detail Report the details of the creations 
and redemptions submitted on T rather than T+1,
    (d) Clarify that the Index Receipt Detail Report also shows the 
quantity of index receipt shares associated with the current creation 
and redemption activity, and
    (e) Delete an incorrect reference that the Index Receipt Detail 
Report provides the total quantity of securities to be delivered and 
received on Settlement Date.\7\
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    \7\ Quantities of all securities to be delivered and received by 
a Member on Settlement Date (not only with respect to index 
receipts) are reported to Members on the Consolidated Trade Summary.
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    Implementation timeframe:
    NSCC proposes to implement the changes set forth in this filing in 
the third quarter of 2012. Members will be advised of the 
implementation date through the issuance of an NSCC Important Notice.
    The proposed rule change facilitates the prompt and accurate 
clearance and settlement of securities transactions by harmonizing the 
processing of creates and redeems of index receipts with other NSCC 
activity and enhancing Members' abilities to reconcile such activity, 
as described above; and is therefore consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to NSCC. 
The proposed rule change is consistent with the Principles for 
Financial Market Infrastructures as it promotes clarity in the Rules 
with respect to the reporting of contracts and input into the 
Corporation's Accounting Operation.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have any 
impact, or impose any burden, on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not yet 
been solicited or received. NSCC will notify the Commission of any 
written comments received by NSCC.

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

    The foregoing rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A)(iii) \8\ of the Act and Rule 19b-4(f)(4) \9\ 
thereunder. 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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    \8\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \9\ 17 CFR 240.19b-4(f)(4).
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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 rule-comments@sec.gov. Please include 
File Number SR-NSCC-2012-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2012-07. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 Web site viewing and 
printing in the Commission's Public Reference Section, 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 such filings will also be 
available for inspection and copying at the principal office of NSCC 
and on NSCC's Web site (http://www.dtcc.com/downloads/legal/rule_filings/2012/nscc/SR-NSCC-2012-07.pdf).
    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-NSCC-2012-07 
and should be submitted on or before October 10, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23038 Filed 9-18-12; 8:45 am]
BILLING CODE 8011-01-P