Document ID: SEC-2010-1148-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2010-07-29T04:00Z

[Federal Register: July 29, 2010 (Volume 75, Number 145)]
[Notices]               
[Page 44828-44829]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jy10-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62567; File No. SR-NSCC-2010-07]

 
Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Amend Addendum 
C of Its Rules and Procedures To Implement Risk Enhancements to Its 
Stock Borrow Program

July 23, 2010.
    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 1, 2010, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-NSCC-2010-07 as described in Items I, II, and 
III below, which Items have been substantially prepared by NSCC. 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 purpose of the proposed rule change is to amend Addendum C of 
NSCC's Rules and Procedures (``Rules'') to implement risk enhancements 
so that municipal and corporate bonds would be ineligible for lending 
through the Stock Borrow Program (``SBP'') and so that Members would be 
prevented from lending securities through the SBP that were issued by 
that Member or any of its affiliates.

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.\3\
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    \3\ The Commission has modified parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    National Securities Clearing Corporation (``NSCC'') proposes 
amending its Rules to implement risk enhancements so that municipal and 
corporate bonds would be ineligible for lending through the SBP and so 
that Members would be prevented from lending securities through the SBP 
that were issued by that Member or any of its affiliates.
1. Stock Borrow Program Background
    In the course of daily operations, NSCC's Continuous Net Settlement 
(``CNS'') system often requires a number of shares for a particular 
security that exceeds the number of shares available to NSCC through 
Member deliveries. This can arise for several reasons including 
satisfaction of Member priority requests for allocation as well as buy-
ins submitted by Members. To improve the efficiency of the clearing 
system in these situations, NSCC's Board authorized implementation of 
automated stock borrow procedures to meet these needs for shares of a 
particular CNS security.
    Members wishing to participate in the SBP notify NSCC each day \4\ 
of the securities they have on deposit at The Depository Trust Company 
(``DTC'') that are available to be borrowed by NSCC. The daytime and 
nighttime SBP are separate processes. Members can choose to participate 
only in the nighttime SBP, only in the daytime SBP, or in both.
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    \4\ By such times specified by NSCC.
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    After NSCC's nighttime processing of regular deliveries, 
unsatisfied needs that remain in a particular security are borrowed 
from Members that identified available securities for the nighttime 
SBP.\5\ Similarly, needs in a particular security remaining unsatisfied 
at a time designated during the day cycle are borrowed from Members 
that have delivered instructions specifying available securities for 
the daytime SBP. Shares borrowed are placed in a special CNS 
subaccount, and the Member lending the shares is advanced the full 
market value of the borrowed shares until they are returned. As shares 
become available, borrowed stock is returned through normal long 
allocations against the special subaccount.
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    \5\ Securities subject to a voluntary reorganization are not 
borrowed by NSCC after nighttime processing on E+2 through the end 
of the protected period.

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[[Page 44829]]

2. Proposed Amendment to Addendum C of the NSCC's Rules
    After reviewing the SBP, NSCC has determined that it faces 
increased risks in two situations. Specifically, NSCC has identified 
increased risks when NSCC borrows municipal or corporate bonds and when 
NSCC borrows securities issued by the lending Member or any of its 
affiliates. First, if NSCC is unable to timely close out long positions 
in corporate or municipal bonds that were created by loans of such 
securities from a Member that becomes insolvent, then NSCC may possess 
high concentrations of corporate or municipal bonds that it cannot 
deliver to the insolvent Member. Consequently, NSCC bears an increased 
risk of loss because it would be forced to liquidate those corporate or 
municipal bond positions in thinly traded markets. Second, NSCC incurs 
credit exposure in instances where it borrows securities from a Member 
that is also the issuer of the securities or is an affiliate of the 
issuer. In the event that such a Member becomes insolvent, then NSCC 
incurs the additional risk that the securities issued by the Member or 
its affiliate and that are lent through the SBP will likely decline in 
value.
    In both situations, NSCC believes there are certain risks posed by 
the SBP that outweigh the benefits to NSCC and its Members. 
Accordingly, NSCC proposes amending its Rules so that municipal and 
corporate bonds would be ineligible for lending through the SBP and so 
that Members would be unable to lend securities through the SBP that 
are issued by the Member or its affiliates. Members would be advised of 
the implementation date for these proposed changes through the issuance 
of an NSCC Important Notice. The language of the proposed changes to 
NSCC's Rules and Procedures can be found in Exhibit 5 to proposed rule 
change SR-NSCC-2010-07 at http://www.dtcc.com/downloads/legal/rule_
filings/2010/nscc/2010-07.pdf.
    NSCC believes the proposed rule changes are consistent with the 
requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder because the proposed changes would facilitate 
prompt and accurate clearance and settlement of securities transactions 
by establishing appropriate safeguards and enhanced efficiency within 
the SBP process to mitigate risks that the SBP poses to NSCC.
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    \6\ 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 relating to the 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 thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to 90 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 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-2010-07 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-2010-07. 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 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of NSCC. 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 publicly available. All 
submissions should refer to File Number SR-NSCC-2010-07 and should be 
submitted on or before August 19, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18608 Filed 7-28-10; 8:45 am]
BILLING CODE 8010-01-P