Document ID: SEC-2006-1262-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Securities Clearing Corp.
Posted Date: 2006-09-29T04:00Z

[Federal Register: September 29, 2006 (Volume 71, Number 189)]
[Notices]               
[Page 57588-57590]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29se06-143]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54482; File No. SR-NSCC-2006-09]

 
Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Allow Cash, 
Next Day, and Seller's Option Equity Trades To Be Processed in the 
Continuous Net Settlement System and To Modify the Clearing Fund 
Formula To Mitigate the Risk Associated With the Shorter Settlement 
Cycle of Cash and Next Day Settling Trades

September 22, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 24, 2006, the 
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 NSCC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NSCC is seeking to modify its procedures for equity trade 
processing to enable cash,\2\ next day,\3\ and seller's option \4\ 
equity trades received on a locked-in basis from self-regulatory 
organizations (``SROs'') and Qualified Special Representatives 
(``QSRs'') to be processed in NSCC's Continuous Net Settlement 
(``CNS'') system.\5\ NSCC is

[[Page 57589]]

also proposing to add a new element to its clearing fund formula to 
cover trades, such as cash and next day settling CNS trades, that 
settle in less than three days.
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    \2\ A ``cash trade'' is a trade that settles on the same day as 
the trade.
    \3\ A ``next day trade'' is a trade that settles on the day 
after the trade (``T+1'').
    \4\ A ``seller's option trade'' is a trade that gives the seller 
the right to deliver the securities on a specified date ranging from 
not less than two but not more than 180 days after the trade date.
    \5\ Cash and next day transactions in debt securities are 
compared but are not settled through NSCC. NSCC is not at this time 
seeking to make such transactions eligible for CNS.
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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 these 
statements.\6\
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    \6\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

A. Cash, Next Day, and Seller's Option Equity Trades Processed in CNS
    Currently, cash, next day, and seller's option equity trades are 
recorded or compared, as applicable, and are reported by NSCC to its 
members but are not settled through NSCC's facilities. Instead these 
trades currently settle on a trade-for-trade basis directly between 
counterparties.
    When NSCC updated and revised CNS in 2004 (referred to as the ``CNS 
Rewrite''), a major aspect included a new platform for the system that 
accommodates real-time updates, including the capacity to add trades to 
the settlement process real-time for late input into CNS until noon of 
settlement day.\7\ At that time, rule changes were made to permit as-of 
regular way equity trades (i.e., trades settling on a T+3 basis that 
are either recorded or compared after trade date) to be submitted to 
NSCC up to the cut-off time designated by NSCC on T+3 for processing in 
CNS for settlement on their originally designated settlement dates. 
Given the system's real-time capabilities, members would now also like 
to have cash, next day, and seller's option equity trades in CNS-
eligible CUSIPS made eligible for processing in CNS. This would provide 
members with the benefits of netting, automated trade processing, and 
NSCC's trade guaranty. Accordingly, NSCC proposes to amend its 
Procedure II (Trade Comparison and Recording Service) to permit cash, 
next day, and seller's option equity transactions submitted by SROs and 
QSRs on behalf of members to be processed for settlement through the 
facilities of NSCC. Locked-in trade data with respect to seller's 
option equity transactions would be accepted for processing so long as 
the parties' designated settlement date is not more than 180 days 
beyond the trade date.
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    \7\ Securities Exchange Act Release No. 50026 (July 15, 2004), 
69 FR 43650 [File No. SR-NSCC-2004-01].
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    Cash trades submitted after the cut-off time designated by NSCC, 
which is currently 11:30 a.m., would only be recorded and reported by 
NSCC and must, as is the current situation, would have to be settled 
directly between the parties outside of NSCC.\8\ Next day as-of 
transactions if received prior to the applicable cut-off time, would be 
processed for settlement on their originally designated settlement 
date.\9\ If such trades were received after the applicable cut-off 
time, the trade would be assigned the next settlement day. Finally, any 
trades that are either (i) designated ``special trades,'' \10\ (ii) in 
non-CNS eligible securities, (iii) in a security undergoing a corporate 
action, or (iv) scheduled to settle between the ex-dividend date and 
record date would continue to be processed on a trade-for-trade basis.
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    \8\ NSCC announced the 11:30 a.m. cut-off time in its Important 
Notice A6220, P&S5790 (March 23, 2006), which is 
the same as the cut-off time for receipt of next day as-of trade 
input. Any changes to the cut-off times would be announced by NSCC 
through an Important Notice.
    \9\ Id.
    \10\ A ``special trade'' is defined in NSCC's rules to mean a 
transaction reported to NSCC involving a cleared security either 
which the parties thereto agree to settle on a member-to-member 
basis or which NSCC designates as settling on a member-to-member 
basis.
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    Conforming changes as needed are also being made to Procedure IV 
(Special Representative Service), Procedure V (Balance Order Accounting 
Operation), and Procedure VII (CNS Accounting Operation).
B. Shortened Process Trade Component in the Clearing Fund Formula
    NSCC is also proposing to modify its clearing fund formula 
(Procedure XV) by including an additional component that is intended to 
mitigate the risk associated with shortened trades that are processed 
on a settlement cycle shorter than three days such as cash and next day 
settling CNS trades. Because NSCC's trade guaranty would attach to 
these trades prior to the scheduled collection of clearing fund monies, 
the proposed new additional component is intended to mitigate risk by 
calculating an average clearing fund requirement for this type of 
activity (referred to in the proposed rules and this release as 
``Specified Activity'') based upon historical activity.\11\
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    \11\ This component is also being added to Appendix 1.
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    Specified Activity positions would be isolated and a charge would 
be applied using not less than two standard deviations. (This would be 
the same standard deviations as those derived for the daily volatility 
calculation provided that where a percentage charge is applied in lieu 
of a volatility charge, the same percentage charge would be applied to 
the relevant Specified Activity.) The new component would equal the 
average of a member's three highest calculated charges for Specified 
Activity over the most recent 20-day period. Specified Activity 
includes cash trades, next day settling trades, as-of trades compared 
or recorded on T+3 (including trades received after the applicable T+2 
cut-off time), and similar transactions.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \12\ and the rules and 
regulations thereunder applicable to NSCC because it should facilitate 
the prompt and accurate clearance and settlement of securities by 
increasing automated trade processing and by expanding the types of 
trades eligible for CNS netting. In addition, the proposed rule change 
should assure the safeguarding of securities and funds in NSCC's 
custody or control or for which it is responsible by enabling NSCC to 
more accurately determine and collect collateral to cover the potential 
additional exposures resulting from trades that are processed on a 
settlement cycle other than three days.
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    \12\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change would 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 were not and are not intended to be solicited with 
respect to the proposed rule change, and none have been received. NSCC 
will notify the Commission of any written comments it receives.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal

[[Page 57590]]

Register or within such longer period (i) as the Commission may 
designate up to ninety days of such date 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 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, as amended, 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-NSCC-2006-09 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2006-09. This file 
number should be included on the subject line if e-mail 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 inspection and 
copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of NSCC and on 
NSCC's Web site at http://www.nscc.com/legal. 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-2006-09 and should be submitted on 
or before October 16, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-15985 Filed 9-28-06; 8:45 am]

BILLING CODE 8010-01-P