Document ID: SEC-2014-0713-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2014-05-01T04:00Z

[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24775-24776]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09925]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72029; File No. SR-NSCC-2014-03]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Enhance the System 
That Processes Corporate Actions Within NSCC's Continuous Net 
Settlement System

April 25, 2014.

I. Introduction

    On March 6, 2014, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2014-03 (``Proposed Rule 
Change'') 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 March 21, 
2014.\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\ Release No. 34-71725 (Mar. 14, 2014), 79 FR 15780 (Mar. 21, 
2014) (SR-NSCC-2014-03).
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II. Description

    With this Proposed Rule Change, NSCC will amend its Rules and 
Procedures (``Rules'') \4\ to enhance the system that processes 
corporate actions within NSCC's Continuous Net Settlement (``CNS'') 
system. NSCC plans to implement the enhancements contained the Proposed 
Rule Change in multiple phases during 2014, which NSCC will announce by 
Important Notice.
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    \4\ Defined terms not defined herein have the mean set forth in 
the Rules.
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    One of NSCC's core services as a central counterparty is to clear 
and settle trades through CNS. In CNS, compared and recorded 
transactions in CNS-eligible securities \5\ that are scheduled to 
settle on a common settlement date are netted by issue into one net 
long (i.e., buy) or net short (i.e., sell) position. CNS then nets 
those positions further with positions of the same issue that remain 
open after their originally scheduled settlement date (``Fail 
Positions''). The result is a single deliver or receive obligation for 
each NSCC member (``Member'') for each issue in which the Member has 
activity on a given day.
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    \5\ To be CNS-eligible, a security must be eligible for book-
entry transfer on the books of The Depository Trust Company 
(``DTC''), an NSCC affiliate, and must be capable of being processed 
in the CNS system. For example, securities may be ineligible for CNS 
processing due to certain transfer restrictions (e.g., 144A 
securities) or due to the pendency of certain corporate actions.
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    As part of the services offered to Members, certain corporate 
actions, including cash dividends, stock dividends, bond interest, and 
other mandatory corporate actions (which include redemptions, stock and 
cash mergers, and name changes) are automatically debited or credited 
to Members' CNS accounts with open Fail Positions in CNS. Members are 
also permitted to take part in certain voluntary corporate actions, 
which include tender or exchange offers, with respect to open Fail 
Positions in CNS.
    Upon implementation of the Proposed Rule Change, NSCC will make 
enhancements to its processing of corporate actions within the CNS 
system, as described below.

A. Optional Dividends

    When a Fail Position in CNS is subject to a dividend payment, the 
issuer specifies the form in which that dividend will be paid (e.g., 
securities or cash) (``Default Option''). NSCC Members that have failed 
to receive securities from CNS (``Long Members'') may elect a form of 
payment that differs from the Default Option by submitting an 
instruction to NSCC no later than a pre-set date and cut-off time. NSCC 
currently sets a cut-off time for the submission of such election 
instructions based on the cut-off time set by DTC. Under the Proposed 
Rule Change, NSCC will set the date and cut-off time that is earlier 
than the DTC cut-off time in order to provide Members that have failed 
to deliver securities to CNS (``Short Members'') with additional time 
to communicate elections to their customers. Additionally, such 
elections are currently submitted to NSCC manually; however, upon 
implementation of the Proposed Rule Change, the elections will be 
submitted to NSCC electronically.

B. Support ``Offer to Consent'' Tender/Exchange Offers

    Today, if an open Fail Position in CNS is subject to a tender or 
exchange offer that includes an ``offer to consent,'' in order to 
participate in that tender or exchange offer the Fail Position would be 
closed, exited out of CNS, and would then settle directly between the 
counterparties outside of CNS. With this Proposed Rule Change, Members 
with open Fail Positions in CNS will be able to participate in tender 
or exchange offers that include an ``offer to consent'' within CNS.

[[Page 24776]]

C. Protect Submission and Liability Notification

    Currently, the cut-off time for a Long Member to place a 
``protect'' on an open Fail Position in CNS in order to participate in 
an upcoming corporate action or to add shares to a voluntary corporate 
action is either (i) on the business day prior to the ``protect'' 
expiration date, or (ii) on the business day prior to the expiration 
date of the corporate action if there is no ``protect'' for that 
corporate action. Failure to meet those deadlines often results in Long 
Members incurring additional costs. As such, NSCC staff, in its 
discretion and on a best efforts basis, has accepted and processed such 
``protect'' instructions either on the ``protect'' expiration date or 
on the expiration date of the corporate action.
    Upon implementation of the Proposed Rule Change, for a fee of 
$500,\6\ Members will be permitted to place a ``protect'' on an open 
fail position in CNS in order to participate in an upcoming corporate 
action or to add shares to a voluntary corporate action either (i) on 
the ``protect'' expiration date, or (ii) on the expiration date of the 
corporate action if there is no ``protect'' for that corporate action. 
Additionally, with this Proposed Rule Change, Members will submit 
``protect'' instructions to NSCC electronically.
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    \6\ The Commission understands that NSCC will propose this fee 
in a separate rule filing with the Commission.
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D. Final Liability and Final Protection Notification

    Today, CNS alerts Short Members of their final assigned liability 
with respect to voluntary corporate actions either (i) on the business 
day after the ``protect'' expiration date for that corporate action, or 
(ii) on the business day after the expiration date of the corporate 
action if there is no ``protect'' for that corporate action.
    Upon implementation of the Proposed Rule Change, CNS will alert a 
Short Member of its assigned final liability no later than the close of 
business on the same business day the final liability is assigned to 
that Member by CNS. The Proposed Rule Change will also clarify that 
Long Members will be notified that their Fail Positions in CNS will be 
subject to the ``protection'' for that corporate action no later than 
the close of business on the same business day the final ``protection'' 
is assigned to that Member by CNS.

E. SMART/Track for CNS Corporate Actions

    With this Proposed Rule Change, Members will submit instructions to 
participate in a voluntary reorganization and access all corporate 
action processing output data through SMART/Track for CNS Corporate 
Actions, which is available within NSCC's SMART/Track for Corporate 
Action Liability Notification Service. The output data, which is 
currently delivered to Members through files and reports, will be 
visible through on-line screens and include search options and filters.

F. Restriction on Movement of Positions Between CNS Sub-Accounts

    Under the Proposed Rule Change, when a voluntary reorganization is 
being processed on a security, CNS will no longer permit the movement 
of positions in that security between non-reorganization sub-accounts 
(e.g., the CNS General Account and the CNS Fully-Paid-For Account) 
either (i) on the ``protect'' expiration date, or (ii) on the 
expiration date of the voluntary reorganization if there is no 
``protect'' for that voluntary reorganization.

G. Additional Rule Changes

    In addition to the enhancements described above, with this Proposed 
Rule Change NSCC will amend its Rules to clarify that the Rules are 
drafted assuming the processing of subject securities with a 
``protect'' period of three days. Similarly, the table that is 
currently included in the Rules regarding this topic will be updated to 
further illustrate the timeframes for processing of subject securities 
with a ``protect'' period of two days or less.

III. Discussion and Commission Finding

    Section 19(b)(2)(C) of the Act \7\ 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 \8\ requires that 
the rules of a clearing agency 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.'' \9\ Here, the 
Commission finds the enhancements to be implemented by the Proposed 
Rule Change consistent with those requirements because each change 
discussed above should result in greater efficiency and automation with 
respect to the processing of corporate actions within CNS, thus 
promoting the prompt and accurate clearance and settlement of 
securities transactions.
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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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 \10\ and the 
rules and regulations thereunder.
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    \10\ 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 proposed rule change SR-NSCC-2014-03 be, and it hereby is, 
approved.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09925 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P