Document ID: SEC-2019-1138-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2019-08-08T04:00Z

[Federal Register Volume 84, Number 153 (Thursday, August 8, 2019)]
[Notices]
[Pages 39037-39041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16940]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86556; File No. SR-NSCC-2019-002]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change To Amend 
Procedure VII With Respect to the Receipt of CNS Securities and Make 
Other Changes

August 2, 2019.
    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 22, 2019, 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would amend Procedure VII of NSCC's Rules 
& Procedures (``Rules'') \3\ with respect to the receipt of securities 
from NSCC's Continuous Net Settlement (``CNS'') System \4\ and make 
technical changes, as described in greater detail below.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
    \4\ The CNS System and its operation are described in Rule 11 
(CNS System) and Procedure VII (CNS Accounting Operation) 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
    The purpose of this proposed rule change is to amend Procedure VII 
(CNS Accounting Operation) with respect to the receipt of securities 
from the CNS System in order to reflect a change in the allocation 
algorithm used during the night cycle.\5\ The proposed rule change 
would also make technical changes.
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    \5\ Night cycle is sometimes also referred to as ``evening 
cycle'' in the Rules. To ensure consistent terminology usage, NSCC 
is proposing technical changes to replace references to ``evening 
cycle'' with ``night cycle'' as described in greater detail below.
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(i) Background
    NSCC's CNS System is an automated accounting and securities 
settlement system that centralizes and nets the settlement of compared 
and recorded securities transactions and maintains an orderly flow of 
security and money balances. The CNS System provides clearance for 
equities, corporate bonds,

[[Page 39038]]

unit investment trusts, and municipal bonds that are eligible for book-
entry transfer at The Depository Trust Company (``DTC''), an NSCC 
affiliate.
    Under the CNS System, all eligible compared and recorded 
transactions for a particular settlement date are netted by CUSIP \6\ 
number into one position per Member. The position can be net long 
(buy), net short (sell) or flat. As a continuous net system, those 
positions are further netted with positions of the same CUSIP number 
that remain open after their original scheduled settlement date 
(usually two business days after the trade date or T+2), so that 
transactions scheduled to settle on any day are netted with fail 
positions (i.e., positions that have failed in delivery or receipt on 
the settlement date), which results in a single deliver or receive 
obligation for each Member for each CUSIP number in which the Member 
has activity.
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    \6\ CUSIP is a registered trademark of the American Bankers 
Association. The term ``CUSIP number'' refers to the Committee on 
Uniform Securities Identification Procedures identifying number.
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    CNS relies on an interface with DTC for the book-entry movement of 
securities. Procedure VII (CNS Accounting Operation) describes the 
receipt and delivery of CNS Securities. CNS short positions are 
compared against Members' DTC accounts to determine availability of 
securities for delivery. If securities are available, they are 
transferred from the Member's account at DTC to NSCC's account at DTC 
to cover the Member's short obligations to CNS. In contrast, the 
allocation of CNS long positions to receiving Members is processed in 
an order determined by an algorithm built into the system. CNS long 
positions are allocated to Members as the securities are received by 
NSCC, i.e., CNS long positions are transferred from the NSCC account at 
DTC to the accounts of NSCC Members at DTC, in accordance with the 
algorithm.
    For CNS Securities, NSCC uses a modified delivery versus payment 
mechanism in that when a Member delivers securities to CNS, the Member 
receives a credit, and when NSCC delivers securities to the long 
receiving Member (a long allocation), the securities deliveries/
movements are not final until the ``effective time'' occurs pursuant to 
Rule 12 (Settlement).\7\ Specifically, under the Rules, a CNS delivery 
transaction is complete and final as to the delivering Member once the 
securities are debited from the delivering Member's account at DTC and 
credited to NSCC's CNS account at DTC; however, a CNS delivery 
transaction does not become final as to the receiving ``long'' Member 
until the ``effective time.''
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    \7\ Pursuant to Rule 12 (Settlement), the ``effective time'' 
generally occurs when it is clear that NSCC has either been paid, or 
is in a credit position with respect to a Member or its Settling 
Bank, and NSCC has no obligation due with respect to a Member 
pursuant to the Clearing Agency Cross-Guaranty Agreement. Until the 
effective time has occurred in accordance with the Rules, NSCC 
retains ownership rights in the long allocations. Supra note 3.
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    The current settlement processing cycle spans two business days, 
with a night cycle that begins at approximately 8:30 p.m. Eastern Time 
(``ET'') on the day prior to settlement date and runs until 
approximately 10 p.m. ET, and a day cycle that begins at approximately 
6:30 a.m. ET on settlement date and runs until approximately 3:10 p.m. 
ET. The night cycle and the day cycle settlement processes are 
essentially the same, except that the night cycle settlement process 
runs in batches and the day cycle settlement process runs continuously. 
Transactions that do not get processed for settlement during the night 
cycle are carried into the following day cycle for settlement 
processing.
Current Allocation Algorithm
    NSCC employs an algorithm to determine the order in which Members 
with long allocations receive positions from CNS; however, Members can 
submit priority requests that override NSCC's algorithm when they have 
special needs to receive securities owed to them (e.g., the security is 
undergoing a corporate action or the Member has an urgent customer 
delivery). The priority requests can be submitted for the night cycle, 
the day cycle, or both.
    Pursuant to Procedure VII, subsection E (Influencing Receipts from 
CNS), Members can request that they receive priority for some or all 
issues on a standing or override basis. NSCC's Rules also permit a 
Member to buy-in long positions that have not been delivered to it by 
the close of business on the scheduled settlement date. Submission of 
buy-in notices and other specified activity will also affect the 
priority of a Member's long position.
    The current priority groups are as follows--
    First, long positions in a CNS Reorganization Sub-Account 
established pursuant to paragraph H.4 of Procedure VII of the Rules; 
\8\
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    \8\ Supra note 3.
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    Second, long positions against which Buy-In Intent \9\ notices are 
due to expire that day but which were not filled the previous day;
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    \9\ Section 7 of Rule 11 (CNS System) and subsection J of 
Procedure VII (CNS Accounting Operation) of the Rules provide that 
in the event a Member has a Long Position in a CNS Security, the 
Member may demand immediate delivery thereof by submitting to NSCC a 
Buy-In Intent notice in such form and within such times as 
determined by NSCC. Supra note 3.
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    Third, long positions against which Buy-In Intent \10\ notices are 
due to expire the following day;
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    \10\ Id.
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    Fourth, (i) long positions in a receiving ID Net Subscriber's 
agency account established at a Qualified Securities Depository,\11\ 
and (ii) long positions against the component securities of index 
receipts;
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    \11\ ID Net Service and its operation are described in Rule 65 
(ID Net Service) and Procedure XVI (ID Net Service) of the Rules. 
Supra note 3.
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    Fifth, in descending sequence, priority levels as specified by 
Standing Priority Requests and as modified by Priority Overrides.
    Currently, when more than one long position in a given CNS Security 
exists within the same priority group, the positions are allocated 
based on their age, i.e., the ``oldest'' position is allocated 
first.\12\ In addition, when more than one long position in a given CNS 
Security exists within the same priority group all of which have been 
long the same number of consecutive days (i.e., within the same age 
group), the allocation rank is determined by a computer generated 
random number.
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    \12\ Age is defined in Procedure VII, subsection E, as the 
number of consecutive days during which the position has been long, 
irrespective of quantity. Supra note 3.
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    The allocation algorithm currently used for the night and day 
cycles is the same but is computed separately.
(ii) Proposed Changes to Allocation Algorithm
    NSCC, together with DTC,\13\ is looking to improve processing 
efficiency and maximize the number of securities transactions processed 
for settlement during the night cycle.
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    \13\ On July 22, 2019, DTC submitted a proposed rule change to 
implement a new algorithm to optimize its settlement processing of 
transactions during the night cycle (``DTC settlement optimization 
algorithm''). The proposal is designed to maximize the number of 
transactions processed for settlement during the night cycle. See 
SR-DTC-2019-005, which was filed with the Commission. A copy of the 
proposed rule change is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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    Currently, approximately 50 percent (50%) of the CNS transactions 
are processed for settlement during the night cycle. In order to 
improve processing efficiency and maximize the number of CNS 
transactions that would get processed for settlement during the night 
cycle, NSCC is proposing a modification to the allocation algorithm 
used during the night cycle. NSCC anticipates that the proposal would 
increase the percentage of CNS

[[Page 39039]]

transactions processed for settlement during the night cycle to 
approximately 65 percent (65%).
    As described above, the current allocation sequence for day cycle 
and night cycle is as follows: priority groups, age of positions, and 
random number within an age group. Under the proposal, NSCC is 
proposing changes to the allocation algorithm so that age of positions 
and random number within an age group would no longer be considered as 
factors when allocating CNS long positions within the same priority 
group during the night cycle.\14\ Instead, allocation of CNS long 
positions within the same priority group during the night cycle would 
be determined by the DTC settlement optimization algorithm.\15\
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    \14\ Based on data from January through April 2019, aged 
positions (i.e., positions that have failed in delivery or receipt 
on their respective scheduled settlement dates for one or more days) 
comprised approximately 0.21 percent of the value of all 
transactions received before netting.
    \15\ Supra note 13.
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    NSCC believes eliminating the age of positions and random number 
within an age group from being considered as factors when allocating 
CNS long positions within the same priority group during the night 
cycle would help maximize the number of transactions processed for 
settlement during the night cycle. Specifically, removing the 
requirement to process transactions for settlement during the night 
cycle in an order based on the age of positions and random number 
within an age group would help the DTC settlement optimization 
algorithm\16\ perform more effectively in identifying the optimal order 
by which transactions are processed for settlement, which in turn would 
help maximize the number of transactions processed for settlement 
during the night cycle.
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    \16\ Id.
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    NSCC is not proposing changes to the allocation algorithm used 
during the day cycle.
    (iii) Proposed Rule Changes
    NSCC is proposing to add a clause to subsection C.4 of Procedure 
VII (CNS Accounting Operation) to make it clear that there would be 
differences in the allocation algorithm used for receipts from CNS 
between the day cycle and the night cycle processes. NSCC is also 
proposing to add a parenthetical regarding subsection E of Procedure 
VII for ease of reference.
    In order to reflect the proposed elimination of random number 
within an age group as a factor when allocating CNS long positions 
within the same priority group during the night cycle, NSCC is 
proposing to modify the first paragraph of subsection E of Procedure 
VII by deleting the references to an algorithm which changes daily.
    NSCC is also proposing to revise subsection E.4 of Procedure VII to 
reflect the proposed changes to the allocation algorithm used during 
the night cycle by adding (i) ``and, for the day cycle only,'' to the 
first paragraph in subsection E.4 and (ii) ``For the day cycle only,'' 
to the third and fourth paragraphs of subsection E.4. These changes are 
being proposed in order to make it clear that age of positions and 
random number within an age group would only be considered as factors 
when allocating CNS long positions during the day cycle.
    In addition, NSCC is proposing to modify the last paragraph of 
subsection E.4 of Procedure VII to make it clear that the allocation 
algorithm used for the night and day cycles is computed separately to 
allow for the use of different allocation factors in those respective 
cycles.
    NSCC is proposing technical changes by replacing references to 
``evening cycle'' with ``night cycle'' in subsections A, C.3, E.1, E.2, 
E.4, E.5, and H.5 of Procedure VII. Similarly, NSCC is proposing to 
replace references to (i) ``evening allocation'' with ``night 
allocation'' in subsections C.3, C.4, and J.1 of Procedure VII, (ii) 
``evening and day delivery cycles'' with ``night and day delivery 
cycles'' in subsection E.4 of Procedure VII and (iii) ``evening 
allocation cycle'' with ``night cycle'' in Section I of Addendum G. 
These changes are being proposed to ensure consistency in terminology 
usage in the Rules. NSCC is also proposing technical changes to correct 
cross references in subsections E.3 and E.4(a) of Procedure VII.
(iv) Member Outreach
    Beginning in March 2018, NSCC has conducted ongoing outreach with 
Members in order to provide them with notice of the proposed changes. 
As of the date of this filing, no written comments relating to the 
proposed changes have been received in response to this outreach. The 
Commission will be notified of any written comments received.
(v) Implementation Timeframe
    Pending Commission approval, NSCC expects to implement this 
proposal by September 26, 2019 and would announce the effective date of 
the proposed change by an Important Notice posted to its website. As 
proposed, a legend would be added to Procedure VII and Addendum G 
stating there are changes that have been approved by the Commission but 
have not yet been implemented. Each proposed legend also would include 
a date by which such changes would be implemented and the file number 
of this proposal, and state that, once this proposal is implemented, 
the legend would automatically be removed from Procedure VII and 
Addendum G, as applicable.
2. Statutory Basis
    NSCC believes this proposal is consistent with the requirements of 
the Act, and the rules and regulations thereunder applicable to a 
registered clearing agency. Specifically, NSCC believes this proposal 
is consistent with Section 17A(b)(3)(F) \17\ of the Act for the reasons 
described below.
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    \17\ 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.\18\ NSCC believes that the proposed changes 
to the allocation algorithm used during the night cycle would promote 
prompt and accurate clearance and settlement of securities 
transactions. This is because the proposed changes would remove the 
requirement to process transactions for settlement during the night 
cycle in an order based on the age of positions and random number 
within an age group. Eliminating the requirement to process 
transactions in an order based on the age of positions and random 
number within an age group would help enhance the effectiveness of the 
DTC settlement optimization algorithm in identifying the optimal order 
to process transactions for settlement. Being able to effectively 
identify the optimal order to process transactions for settlement would 
help maximize the number of transactions processed for settlement 
during the night cycle. Therefore, NSCC believes that the proposed 
changes to the allocation algorithm used during the night cycle would 
promote the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.
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    \18\ Id.
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    NSCC also believes that the proposal to make technical changes 
would promote prompt and accurate clearance and settlement of 
securities transactions. This is because the proposed technical changes 
would help ensure consistency in terminology usage and correct cross 
references in the Rules, both of which would ensure the Rules are clear 
and accurate. Having clear and accurate Rules would help Members to 
better understand their

[[Page 39040]]

rights and obligations regarding NSCC's clearance and settlement 
services. NSCC believes that when Members better understand their 
rights and obligations regarding NSCC's clearance and settlement 
services, they can act in accordance with the Rules. NSCC believes that 
better enabling Members to comply with the Rules would promote the 
prompt and accurate clearance and settlement of securities transactions 
by NSCC. As such, NSCC believes the proposal to make technical changes 
is consistent with Section 17A(b)(3)(F) of the Act.\19\
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    \19\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC believes the proposed changes to the allocation algorithm used 
during the night cycle could burden competition. This is because by 
eliminating the age of positions and random number within an age group 
from being considered as factors when allocating CNS long positions 
during the night cycle, Members with the oldest positions would no 
longer receive priority during the night cycle. While Members with aged 
positions would no longer be prioritized over other Members within the 
same priority group, NSCC does not believe such change in priority 
would in and of itself mean that the burden on competition is 
significant. This is because, as described above, aged positions only 
comprised approximately 0.21 percent of the value of all transactions 
received before netting. Accordingly, NSCC does not believe the burden 
on competition would be significant.
    Regardless of whether the burden on competition is deemed 
significant, NSCC believes any burden on competition that is created by 
these proposed changes would be necessary and appropriate in 
furtherance of the purposes of the Act, as permitted by Section 
17A(b)(3)(I) of the Act.\20\
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    \20\ 15 U.S.C. 78q-1(b)(3)(I).
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    The proposed changes to the allocation algorithm used during the 
night cycle would be necessary in furtherance of the purposes of the 
Act because the Rules must be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\21\ As 
described above, NSCC believes that the proposed changes would promote 
the prompt and accurate clearance and settlement of securities 
transactions by maximizing the number of transactions processed for 
settlement during the night cycle. As such, NSCC believes these 
proposed changes would be necessary in furtherance of the purposes of 
the Act, as permitted by Section 17A(b)(3)(I) of the Act.\22\
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    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 15 U.S.C. 78q-1(b)(3)(I).
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    NSCC believes any burden on competition that is created by the 
proposed changes to the allocation algorithm used during the night 
cycle would also be appropriate in furtherance of the purposes of the 
Act. The proposed changes would eliminate the age of positions and 
random number within an age group from being considered as factors when 
allocating CNS long positions within the same priority group during the 
night cycle, which would in turn enhance the effectiveness of the DTC 
settlement optimization algorithm in identifying the optimal order by 
which to process transactions for settlement during the night cycle. 
Being able to effectively identify the optimal order by which to 
process transactions for settlement during the night cycle would in 
turn help maximize the number of transactions processed for settlement 
during the night cycle. As such, NSCC believes these proposed changes 
would be appropriate in furtherance of the purposes of the Act, as 
permitted by Section 17A(b)(3)(I) of the Act.\23\
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    \23\ Id.
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    NSCC does not believe the proposal to make technical changes would 
impact competition. These changes are being proposed to ensure 
consistency in terminology usage in the Rules and to correct cross 
references. They would not change NSCC's current practices or affect 
Members' rights and obligations. As such, NSCC believes the proposal to 
make technical changes would not have any impact on competition.

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

    Written comments relating to this proposed rule change have not 
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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2019-002 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-2019-002. 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 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-

[[Page 39041]]

2019-002 and should be submitted on or before August 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16940 Filed 8-7-19; 8:45 am]
 BILLING CODE 8011-01-P