Document ID: SEC-2016-2349-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2016-12-30T05:00Z

[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Notices]
[Pages 96545-96550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31679]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79687; File No. SR-NASDAQ-2016-183]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Shorten the Settlement 
Cycle From T+3 to T+2

December 23, 2016.
    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 December 22, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
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. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Nasdaq Rules 11140 (Transactions in 
Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-Warrants''), 11150 
(Transactions ``Ex-Interest'' in Bonds Which Are Dealt in ``Flat''), 
11210 (Sent by Each Party), 11320 (Dates of Delivery), 11620 
(Computation of Interest), and IM-11810 (Sample Buy-In Forms), to 
conform to the Commission's proposed amendment to SEA Rule 15c6-1(a) to 
shorten the standard settlement cycle for most broker-dealer 
transactions from three business days after the trade date (``T+3'') to 
two business days after the trade date (``T+2'') and the industry-led 
initiative to shorten the settlement cycle from T+3 to T+2.\3\
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    \3\ See Securities Exchange Act Release No. 78962 (September 28, 
2016), 81 FR 69240 (October 5, 2016) (Amendment to Securities 
Transaction Settlement Cycle) (File No. S7-22-16) (``SEC Proposing 
Release'').
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements

[[Page 96546]]

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 Exchange 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

1. Purpose
SEC Proposing Release
    On September 28, 2016, the Commission proposed amending SEA Rule 
15c6-1(a) to shorten the standard settlement cycle for most broker-
dealer transactions from T+3 to T+2 on the basis that the shorter 
settlement cycle would reduce the risks that arise from the value and 
number of unsettled securities transactions prior to the completion of 
settlement, including credit, market, and liquidity risk directly faced 
by U.S. market participants.\4\ The proposed rule amendment was 
published for comment in the Federal Register on October 5, 2016.\5\
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    \4\ See Securities and Exchange Commission Press Release 2016-
200: ``SEC Proposes Rule Amendment to Expedite Process for Settling 
Securities Transactions'' (September 28, 2016).
    \5\ See supra note 3.
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Background
    In 1995, the standard U.S. trade settlement cycle for equities, 
municipal and corporate bonds, and unit investment trusts, and 
financial instruments composed of these products was shortened from 
five business days after the trade date (``T+5'') to T+3.\6\ 
Accordingly, Nasdaq and other self-regulatory organizations (``SROs'') 
amended their respective rules to conform to the T+3 settlement 
cycle.\7\ Since that time, the SEC and the financial services industry 
have continued to explore the idea of shortening the settlement cycle 
even further.\8\
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    \6\ In 1993, the Commission adopted SEA Rule 15c6-1 which became 
effective in 1995. See Securities Exchange Act Release Nos. 33023 
(October 6, 1993), 58 FR 52891 (October 13, 1993) and 34952 
(November 9, 1994), 59 FR 59137 (November 16, 1994). SEA Rule 15c6-
1(a) provides, in relevant part, that ``a broker or dealer shall not 
effect or enter into a contract for the purchase or sale of a 
security (other than an exempted security, government security, 
municipal security, commercial paper, bankers' acceptances, or 
commercial bills) that provides for payment of funds and delivery of 
securities later than the third business day after the date of the 
contract unless otherwise expressly agreed to by the parties at the 
time of the transaction.'' 17 CFR 240.15c6-1(a). Although not 
covered by SEA Rule 15c6-1, in 1995, the Commission approved the 
Municipal Securities Rulemaking Board's rule change requiring 
transactions in municipal securities to settle by T+3. See 
Securities Exchange Act Release No. 35427 (February 28, 1995), 60 FR 
12798 (March 8, 1995) (Order Approving File No. SR-MSRB-94-10).
    \7\ See, e.g., Securities Exchange Act Release No. 35507 (March 
17, 1995), 60 FR 15616 (March 24, 1995) (Order Approving File No. 
SR-NASD-94-56); Securities Exchange Act Release No. 35506 (March 17, 
1995), 60 FR 15618 (March 24, 1995) (Order Approving File No. SR-
NYSE-94-40); and Securities Exchange Act Release No. 35553 (March 
31, 1995), 60 FR 18161 (April 10, 1995) (Order Approving File No. 
SR-Amex-94-57).
    \8\ See, e.g., Securities Industry Association (``SIA''), ``SIA 
T+1 Business Case Final Report'' (July 2000); Concept Release: 
Securities Transactions Settlement, Securities Exchange Act Release 
No. 49405 (March 11, 2004), 69 FR 12922 (March 18, 2004); and 
Depository Trust & Clearing Corporation, ``Proposal to Launch a New 
Cost-Benefit Analysis on Shortening the Settlement Cycle'' (December 
2011).
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    In April 2014, the Depository Trust & Clearing Corporation 
(``DTCC'') published its formal recommendation to shorten the standard 
U.S. trade settlement cycle to T+2 and announced that it would partner 
with market participants and industry organizations to devise the 
necessary approach and timelines to achieve T+2.\9\
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    \9\ See DTCC, ``DTCC Recommends Shortening the U.S. Trade 
Settlement Cycle'' (April 2014).
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    In an effort to improve the overall efficiency of the U.S. 
settlement system by reducing the attendant risks in T+3 settlement of 
securities transactions, and to align U.S. markets with other major 
global markets that have already moved to T+2, DTCC, in collaboration 
with the financial services industry, formed an Industry Steering 
Committee (``ISC'') and an industry working group and sub-working 
groups to facilitate the move to T+2.\10\ In June 2015, the ISC 
published a White Paper outlining the activities and proposed time 
frames that would be required to move to T+2 in the U.S.\11\ 
Concurrently, the Securities Industry and Financial Markets Association 
(``SIFMA'') and the Investment Company Institute (``ICI'') jointly 
submitted a letter to SEC Chair White, expressing support of the 
financial services industry's efforts to shorten the settlement cycle 
and identifying SEA Rule 15c6-1(a) and several SRO rules that they 
believed would require amendments for an effective transition to 
T+2.\12\ In March 2016, the ISC announced the industry target date of 
September 5, 2017 for the transition to a T+2 settlement cycle to 
occur.\13\
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    \10\ The ISC includes, among other participants, DTCC, the 
Securities Industry and Financial Markets Association and the 
Investment Company Institute.
    \11\ See ``Shortening the Settlement Cycle: The Move to T+2'' 
(June 18, 2015).
    \12\ See Letter from ICI and SIFMA to Mary Jo White, Chair, SEC, 
dated June 18, 2015. See also Letter from Mary Jo White, Chair to 
Kenneth E. Bentsen, Jr., President and CEO, SIFMA, and Paul Schott 
Stevens, President and CEO, ICI, dated September 16, 2015 
(expressing her strong support for industry efforts to shorten the 
trade settlement cycle to T+2 and commitment to developing a 
proposal to amend SEA Rule 15c6-1(a) to require standard settlement 
no later than T+2).
    \13\ See ISC Media Alert: ``US T+2 ISC Recommends Move to 
Shorter Settlement Cycle On September 5, 2017'' (March 7, 2016).
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Proposed Rule Change
    In light of the SEC Proposing Release that would amend SEA Rule 
15c6-1(a) to require standard settlement no later than T+2 and similar 
proposals from other SROs,\14\ Nasdaq is proposing changes to its rules 
pertaining to securities settlement by, among other things, amending 
the definition of ``standard'' settlement as occurring on T+2. SEA Rule 
15c6-1(a) currently establishes ``standard'' settlement as occurring no 
later than T+3 for all securities, other than an exempt security, 
government security, municipal security, commercial paper, bankers' 
acceptances, or commercial bills.\15\ Nasdaq is proposing changes to 
rules pertaining to securities settlement to support the industry-led 
initiative to shorten the standard settlement cycle to two business 
days. Most of the rules that Nasdaq has identified for these changes 
are successors to provisions under the legacy NASD Rules of Fair 
Practice and NASD Uniform Practice Code (``UPC'') that were amended 
when the Commission adopted SEA Rule 15c6-1(a), which established T+3 
as the standard settlement cycle.\16\ As such, Nasdaq is proposing to 
amend Nasdaq Rules 11140 (Transactions in Securities ``Ex-Dividend,'' 
``Ex-Rights'' or ``Ex-Warrants''), 11150 (Transactions ``Ex- Interest'' 
in Bonds Which Are Dealt in ``Flat''), 11320 (Dates of Delivery), and 
11620 (Computation of Interest). In addition, Nasdaq is proposing to 
amend

[[Page 96547]]

Nasdaq Rules 11210 (Sent by Each Party) and IM-11810 (Sample Buy-In 
Forms) to conform provisions, where appropriate, to the T+2 settlement 
cycle.\17\
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    \14\ See, e.g., Securities Exchange Act Release No. 77744 (April 
29, 2016), 81 FR 26851 (May 4, 2016) (Order Approving File No. SR-
MSRB-2016-04).
    \15\ See supra note 7.
    \16\ The legacy NASD rules that were changed to conform to the 
move from T+5 to T+3 included Section 26 (Investment Companies) of 
the Rules of Fair Practice, and Section 5 (Transactions in 
Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex- Warrants''), 
Section 6 (Transactions ``Ex-Interest'' in Bonds Which Are Dealt in 
``Flat''), Section 12 (Dates of Delivery), Section 46 (Computation 
of Interest) and Section 64 (Acceptance and Settlement of COD 
Orders) of the UPC. See Securities Exchange Act Release No. 35507 
(March 17, 1995), 60 FR 15616 (March 24, 1995) (Order Approving File 
No. SR-NASD-94-56). See also Notice to Members 95-36 (May 1995) 
(enumerating the various sections under the NASD Rules of Fair 
Practice and UPC that were amended to implement T+3 settlement for 
securities transactions).
    \17\ Nasdaq Rules 11210 and IM-11810 are successors to legacy 
NASD UPC Section 9 (Sent by Each Party) and 59 (``Buying-in''), 
respectively, which remained unchanged during the transition from 
T+5 to T+3. See supra note 17 [sic].
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    The details of the proposed rule change are described below.
(1) Nasdaq Rule 11140 (Transactions in Securities ``Ex-Dividend,'' 
``Ex- Rights'' or ``Ex-Warrants'')
    Rule 11140(b)(1) provides that for dividends or distributions, and 
the issuance or distribution of warrants, that are less than 25 percent 
of the value of the subject security, if definitive information is 
received sufficiently in advance of the record date, the date 
designated as the ``ex-dividend date'' shall be the second business day 
preceding the record date if the record date falls on a business day, 
or the third business day preceding the record date if the record date 
falls on a day designated by Nasdaq Regulation as a non-delivery date. 
Nasdaq is proposing to shorten the time frames in Rule 11140(b)(1) by 
one business day.
(2) Nasdaq Rule 11150 (``Ex-Interest'' in Bonds Which Are Dealt in 
``Flat'')
    Rule 11150(a) prescribes the manner for establishing ``ex-interest 
dates'' for transactions in bonds or other similar evidences of 
indebtedness which are traded ``flat.'' Such transactions are ``ex-
interest'' on the second business day preceding the record date if the 
record date falls on a business day, on the third business day 
preceding the record date if the record date falls on a day other than 
a business day, or on the third business day preceding the date on 
which an interest payment is to be made if no record date has been 
fixed. Nasdaq is proposing to shorten the time frames in Rule 11150(a) 
by one business day.
(3) Nasdaq Rule 11210 (Sent by Each Party)
    Paragraphs (c) and (d) of Rule 11210 set forth the ``Don't Know'' 
(``DK'') voluntary procedures for using ``DK Notices'' or other forms 
of notices, respectively. Depending upon the notice used, a confirming 
member may follow the ``DK'' procedures when it sends a comparison or 
confirmation of a trade (other than one that clears through the 
National Securities Clearing Corporation (``NSCC'') or other registered 
clearing agency), but does not receive a comparison or confirmation or 
a signed ``DK'' from the contra-member by the close of four business 
days following the trade date of the transaction (``T+4''). The 
procedures generally provide that after T+4, the confirming member 
shall send a ``DK Notice'' (or similar notice) to the contra-member. 
The contra-member then has four business days after receipt of the 
confirming member's notice to either confirm or ``DK'' the transaction.
    Nasdaq is proposing to amend paragraphs (c) and (d) of Rule 11210 
to provide that the ``DK'' procedures may be used by the confirming 
member if it does not receive a comparison or confirmation or signed 
``DK'' from the contra-member by the close of one business day 
following the trade date of the transaction, rather than the current 
T+4.\18\ In addition, Nasdaq is proposing amendments to paragraphs 
(c)(2)(A), (c)(3), and (d)(5) of Rule 11210 to adjust the time in which 
a contra-member has to respond to a ``DK Notice'' (or similar notice) 
from four business days after the contra-member's receipt of the notice 
to two business days.
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    \18\ As stated above, the time frames in Rule 11210 remained 
unchanged during the transition from T+5 to T+3. In light of the 
industry-led initiative to shorten the standard settlement cycle and 
the SEC Proposing Release to amend SEA Rule 15c6-1(a) to establish 
T+2 as the standard settlement for most broker dealer transactions, 
the Exchange believes that the current time frames in Rule 11210 are 
more protracted than necessary even in a T+3 environment and as 
such, the Exchange is proposing to amend these time frames to 
reflect more current industry practices.
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(4) Nasdaq Rule 11320 (Dates of Delivery)
    Rule 11320 prescribes delivery dates for various transactions. 
Paragraph (b) states that for a ``regular way'' transaction, delivery 
must be made on, but not before, the third business day after the date 
of the transaction. Nasdaq is proposing to amend Rule 11320(b) to 
change the reference to third business day to second business day. 
Paragraph (c) provides that in a ``seller's option'' transaction, 
delivery may be made by the seller on any business day after the third 
business day following the date of the transaction. Nasdaq is proposing 
to amend Rule 11320(c) to change the reference to third business day to 
second business day.
(5) Nasdaq Rule 11620 (Computation of Interest)
    In the settlement of contracts in interest-paying securities other 
than for cash, Rule 11620(a) requires the calculation of interest at 
the rate specified in the security up to, but not including, the third 
business day after the date of the transaction. The proposed amendment 
would shorten the time frame to the second business day. In addition, 
the proposed amendment would make non-substantive technical changes to 
the title of paragraph (a).
(6) Nasdaq Rule IM-11810 (Sample Buy-In Forms)
    Rule IM-11810(i)(1)(A) sets forth the fail-to-deliver and liability 
notice procedures where a securities contract is for warrants, rights, 
convertible securities or other securities which have been called for 
redemption; are due to expire by their terms; are the subject of a 
tender or exchange offer; or are subject to other expiring events such 
as a record date for the underlying security and the last day on which 
the securities must be delivered or surrendered is the settlement date 
of the contract or later.\19\
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    \19\ Rule IM-11810(i) is the successor to legacy NASD UPC 
Section 59(i) (Failure to Deliver and Liability Notice Procedures). 
When this provision was added to NASD's existing close-out 
procedures in 1984, it was drafted to be similar to the liability 
notice provisions adopted by the NSCC so that members that were also 
participants in NSCC could use the same procedures for both ex-
clearing and NSCC cleared transactions, thereby simplifying members' 
back office procedures.
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    Under Rule IM-11810(i)(1)(A), the receiving member delivers a 
liability notice to the owing counterparty. The liability notice sets a 
cutoff date for the delivery of the securities by the counterparty and 
provides notice to the counterparty of the liability attendant to its 
failure to deliver the securities in time. If the owing counterparty, 
or delivering member, delivers the securities in response to the 
liability notice, it has met its delivery obligation. If the delivering 
member fails to deliver the securities on the expiration date, it will 
be liable for any damages that may accrue thereby.
    Rule IM-11810(i)(1)(A) further provides that when both parties to a 
contract are participants in a registered clearing agency that has an 
automated liability notification service, transmission of the liability 
notice must be accomplished through such system.\20\ When the parties 
to a contract are not both participants in a registered clearing agency 
that has an automated liability notification service, such notice must 
be issued using written or comparable

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electronic media having immediate receipt capabilities not later than 
one business day prior to the latest time and the date of the offer or 
other event in order to obtain the protection provided by the Rule.\21\
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    \20\ In 2007, NYSE Rule 180 was amended to require that when the 
parties to a failed contract were both participants in a registered 
clearing agency that had an automated service for notifying a 
failing party of the liability that will be attendant to a failure 
to deliver and the contract was to be settled through the facilities 
of that registered clearing agency, the transmission of the 
liability notification must be accomplished through the use of the 
registered clearing agency's automated liability notification 
system. See Securities Exchange Act Release No. 55132 (January 19, 
2007), 72 FR 3896 (January 26, 2007) (Order Approving File No. SR-
NYSE-2006-57).
    \21\ While Rule IM-11810 has undergone amendments over the 
years, the one-day time frame in paragraph (j) has remained 
unchanged. The one-day time frame also appears in comparable 
provisions of other SROs. See, e.g., NSCC Rules & Procedures, 
Procedure X (Execution of Buy-Ins) (Effective August 10, 2016); NYSE 
Rule 282.65 (Fail to Deliver and Liability Notice Procedures). See 
also infra note 28 and accompanying text.
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    Given the proposed shortened settlement cycle, Nasdaq is proposing 
to amend Rule IM-11810(i)(1)(A) in situations where both parties to a 
contract are not participants of a registered clearing agency with an 
automated notification service, by extending the time frame for 
delivery of the liability notice. Rule IM-11810(i)(1)(A) would be 
amended to provide that in such cases, the receiving member must send 
the liability notice to the delivering member as soon as practicable 
but not later than two hours prior to the cutoff time set forth in the 
instructions on a specific offer or other event to obtain the 
protection provided by the Rule. Nasdaq believes that extending the 
time given to the receiving member to transmit liability notifications 
will maintain the efficiency of the notification process while 
mitigating the possible overuse of such notifications.
    Currently, Nasdaq understands that the identity of the 
counterparty, or delivering member, becomes known to the receiving 
member by mid-day on the business day after trade date (``T+1''), and 
by that time, the receiving member will generally also know which 
transactions are subject to an event identified in Rule IM-
11810(i)(1)(A) that would prompt the receiving member to issue a 
liability notice to the delivering member. Nasdaq believes that the 
receiving member regularly issues liability notices to the seller or 
other parties from which the securities involved are due when the 
security is subject to an event identified in Rule IM-11810(i)(1)(A) 
during the settlement cycle as a way to mitigate the risk of a 
potential fail-to-deliver. In the current T+3 settlement environment, 
the one business day time frame gives the receiving member the 
requisite time needed to identify the parties involved and undertake 
the liability notification process.
    However, Nasdaq believes that the move to a T+2 settlement 
environment will create inefficiencies in the liability notification 
process under Rule IM-11810(i)(1)(A) when both parties to a contract 
are not participants in a registered clearing agency with an automated 
notification service. The shorter settlement cycle, with the loss of 
one business day, would not afford the receiving member sufficient time 
to: (1) ascertain that the securities are subject to an event listed in 
Rule IM-11810(i)(1)(A) during the settlement cycle; (2) identify the 
delivering member and other parties from which the securities involved 
are due; and (3) determine the likelihood that such parties may fail to 
deliver. Where the receiving member has sufficient time (e.g., one 
business day after), it can transmit liability notices as needed to the 
right parties. However, as a consequence of the shortened settlement 
cycle, the receiving member would be compelled to issue liability 
notices proactively to all potentially failing parties as a matter of 
course to preserve its rights against such parties without the benefit 
of knowing which transactions would actually necessitate the delivery 
of such notice. This would create a significant increase in the volume 
of liability notices members send and receive, many of which may be 
unnecessary. Members would then have to manage this overabundance of 
liability notices, increasing the possibility of errors, which would 
adversely impact the efficiency of the process. Therefore, Nasdaq 
believes its proposal to extend the time for the receiving member to 
deliver a liability notice when the parties to a contract are not both 
participants in a registered clearing agency with an automated 
notification service would help alleviate the potential burden on the 
liability notification process in a T+2 settlement environment.
Implementation
    Nasdaq will announce the effective date of the proposed rule change 
in an Equity Regulatory Alert, which date would correspond with the 
industry-led transition to a T+2 standard settlement, and the effective 
date of the Commission's proposed amendment to SEA Rule 15c6-1(a) to 
require standard settlement no later than T+2.\22\
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    \22\ See supra note 3.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\23\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\24\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, and, in general, to protect investors and 
the public interest. The Exchange believes that the proposed rule 
change supports the supports [sic] the industry-led initiative to 
shorten the settlement cycle to two business days. Moreover, the 
proposed rule change is consistent with the SEC's proposed amendment to 
SEA Rule 15c6-1(a) to require standard settlement no later than T+2. 
Nasdaq believes that the proposed rule change will provide the 
regulatory certainty to facilitate the industry-led move to a T+2 
settlement cycle. As noted herein, upon approval, Nasdaq will announce 
the effective date of the proposed rule change in an Equity Regulatory 
Alert, which date would correspond with the industry-led transition to 
a T+2 standard settlement, and the effective date of the Commission's 
proposed amendment to SEA Rule 15c6-1(a) to require standard settlement 
no later than T+2.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change makes 
changes to rules pertaining to securities settlement and is intended to 
facilitate the implementation of the industry-led transition to a T+2 
settlement cycle. Moreover, the proposed rule changes are consistent 
with the SEC's proposed amendment to SEA Rule 15c6-1(a) to require 
standard settlement no later than T+2. Accordingly, Nasdaq believes 
that the proposed changes do not impose any burdens on the industry in 
addition to those necessary to implement amendments to SEA Rule 15c6-
1(a) as described and enumerated in the SEC Proposing Release.\25\
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    \25\ See supra note 3.
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    These conforming changes include changes to rules that specifically 
establish the settlement cycle as well as rules that establish time 
frames based on settlement dates, including for certain post-settlement 
rights and obligations. Nasdaq believes that the proposed changes set 
forth in the filing are necessary to support a standard settlement 
cycle across the U.S. for secondary market transactions in equities, 
corporate and municipal bonds, unit investment trusts, and financial 
instruments composed of these

[[Page 96549]]

products, among other things.\26\ A standard U.S. settlement cycle for 
such products is critical for the operation of fair and orderly 
markets.
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    \26\ See supra note 3.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    A previous version of the proposed rule change was published for 
comment in Equity Regulatory Alert 2016-4 on May 18, 2016. Two comments 
were received in response to the Regulatory Alert.\27\ A copy of the 
Regulatory Alert is attached as Exhibit 2a. A list of comments is 
attached as Exhibit 2b [sic] and copies of the comment letters received 
in response to the Regulatory Notice are attached as Exhibits 2c [sic].
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    \27\ See Letter from Martin A. Burns, Chief Industry Operations 
Officer, Investment Company Institute to John Zecca, Senior Vice 
President, Marketwatch dated June 8, 2016 (``ICI''); letter from 
Thomas F. Price, Managing Director, Operations, Securities Industry 
and Financial Markets Association, to John Zecca, Senior Vice 
President Market Watch dated June 8, 2016 (``SIFMA'').
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    Both of the letters received expressed support for the industry led 
move to T+2 stating, among other benefits, that the move will align 
U.S. markets with international markets that already work in the T+2 
environment, improve the overall efficiency and liquidity of the 
securities markets, and the stability of the financial system by 
reducing counterparty risk and pro-cyclical and liquidity demands, and 
decreasing clearing capital requirements. SIFMA also provided their 
view on the proposed amendments to two rules under the Nasdaq Rule 
11800 Series (Buying In).
Nasdaq Rule IM-11810(i)--Sample Buy-In Forms
    In its comment letter, SIFMA raised a concern with the one-day time 
frame in Rule IM-11810(i)(1)(A), asserting that the requirement for the 
delivering member to deliver a liability notice to the receiving member 
no later than one business day prior to the latest time and the date of 
the offer or other event in order to obtain the protection provided by 
the Rule may no longer be appropriate in a T+2 environment in some 
situations such as where the delivery obligation is transferred to 
another party as a result of continuous net settlement, settlements 
outside of the NSCC, and settlements involving a third party that is 
not a Nasdaq member firm. SIFMA noted that NYSE Rule 180 (Failure to 
Deliver) includes a similar requirement for NYSE member firms that are 
participants in a registered clearing agency to transmit liability 
notification through an automated notification service and proposed 
amending Rule IM-11810(i)(1)(A) to omit the reference to a notification 
time frame, which would align with NYSE Rule 180.\28\ In the 
alternative, SIFMA proposed amending Rule IM-11810(i)(1)(A) to require 
that the liability notice be delivered in a ``reasonable amount of 
time'' ahead of the settlement obligation in light of facts and 
circumstances. SIFMA maintained that under either proposed amendment to 
paragraph (j), the delivering member would be liable for any damages 
caused by its failure to deliver in a timely fashion.
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    \28\ See NYSE Rule 180 (Failure to Deliver) providing in part 
that ``[w]hen the parties to a contract are both participants in a 
registered clearing agency which has an automated service for 
notifying a failing party of the liability that will be attendant to 
a failure to deliver and that contract was to be settled through the 
facilities of said registered clearing agency, the transmission of 
the liability notification must be accomplished through use of said 
automated notification service.'' Nasdaq notes that NYSE Rule 180 
does not address the transmission of the liability notification for 
parties to a contract that are not both participants in a registered 
clearing agency (or non-participants). The transmission of the 
liability notification for non-participants is addressed under NYSE 
Rule 282.65 (Failure to Deliver and Liability Notice Procedures). 
See supra note 22.
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    While Nasdaq did not initially propose amendments to Rule IM-11810 
for the T+2 initiative,\29\ in light of SIFMA's concern regarding Rule 
IM-11810(i)(1)(A), Nasdaq is proposing to amend the Rule to provide 
that, where both parties to a contract are not participants of a 
registered clearing agency with an automated notification service, the 
receiving member must send the liability notice to the delivering 
member as soon as practicable but not later than two hours prior to the 
cutoff time set forth in the instructions on a specific offer or other 
event to obtain the protection provided by the Rule.\30\
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    \29\ See Equity Regulatory Alert 2016-4.
    \30\ Nasdaq expects similar amendments to other comparable SRO 
provisions in NYSE Rule 282.65 (Fail to Deliver and Liability Notice 
Procedures) and FINRA Rule 11810 (Buying-in), and NSCC Rules & 
Procedures, Procedure X (Execution of Buy-Ins) to address SIFMA's 
concern about the one-day notification time frame.
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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 Exchange consents, the Commission shall: (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-NASDAQ-2016-183 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2016-183. 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 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. 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-

[[Page 96550]]

NASDAQ-2016-183 and should be submitted on or before January 20, 2017.
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    \31\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-31679 Filed 12-29-16; 8:45 am]
 BILLING CODE 8011-01-P