Document ID: SEC-2016-2073-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2016-11-25T05:00Z

[Federal Register Volume 81, Number 227 (Friday, November 25, 2016)]
[Notices]
[Pages 85299-85302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28312]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79356; File No. SR-NSCC-2016-007]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Accommodate 
Shorter Standard Settlement Cycle and Make Other Changes

November 18, 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 November 7, 2016, 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 consists of amendments to NSCC's Rules & 
Procedures (``Rules'') \3\ in order to ensure that the Rules are 
consistent with the anticipated industry-wide move to a shorter 
standard settlement cycle for certain securities \4\ from the third 
business day after the trade date (``T+3'') to the second business day 
after the trade date (``T+2''), as described below. The proposed rule 
change would not become effective until NSCC has submitted a subsequent 
proposed rule change under Rule 19b-4.\5\ Therefore, NSCC would not 
implement this version of the Rules until an effective date is 
established by the subsequent proposed rule change.\6\
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at http://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
    \4\ The financial services industry, in coordination with its 
regulators, is planning to shorten the standard settlement cycle for 
equities, corporate and municipal bonds, unit investment trusts and 
financial instruments comprised of the foregoing products traded on 
the secondary market from T+3 to T+2 (the ``Shortened Settlement 
Cycle''). See Securities Exchange Act Release No. 78962 (September 
28, 2016), 81 FR 69240 (October 5, 2016) (S7-22-16) (Amendment to 
Securities Transaction Settlement Cycle).
    \5\ 17 CFR 240.19b-4.
    \6\ NSCC will post a version of the relevant sections of the 
Rules reflecting the changes as they would appear upon the 
effectiveness of the subsequent proposed rule change mentioned above 
and will include a note on the cover page of the Rules to advise 
Members of these changes.
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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
(i) Background
    The standard settlement cycle has not changed since 1993, when the 
Commission adopted the current version of Rule 15c6-1(a) under the 
Securities Exchange Act of 1934, as amended (the ``Act''), which 
(subject to certain exceptions) prohibits any broker-dealer from 
entering into a contract for the purchase or sale of a security that 
provides for payment and delivery later than three business days after 
the trade date, unless otherwise expressly agreed to by the parties at 
the time of the transaction.\7\
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    \7\ 17 CFR 240.15c6-1.
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    In an effort to reduce counterparty risk, decrease clearing capital 
requirements, reduce liquidity demands and harmonize the settlement 
cycle globally, the financial services industry has been working on 
shortening the standard settlement cycle from T+3 to T+2. In connection 
therewith, the Commission has proposed a rule change to shorten the 
standard settlement cycle from T+3 to T+2.\8\
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    \8\ Supra note 4.
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    A number of provisions in the Rules currently define ``regular 
way'' settlement as occurring on T+3 and, as such, would need to be 
amended in connection with shortening the standard settlement cycle to 
T+2. Further, certain timeframes or cutoff times in the Rules key off 
the current settlement date of T+3, either expressly or indirectly. In 
such cases, these timeframes and cutoff times would also need to be 
amended in connection with the Shortened Settlement Cycle. Therefore, 
to facilitate the anticipated industry-wide move to the Shortened 
Settlement Cycle, NSCC proposes to make certain amendments to the 
Rules.
(ii) Proposed Changes to the Rules
    The primary purpose of the proposed rule change is to modify the 
Rules to accommodate the anticipated industry-wide move to a two-day 
settlement cycle.\9\ While the core functions of NSCC will continue to 
operate in the same way in the Shortened Settlement Cycle, NSCC has 
determined that the move to T+2 would necessitate certain amendments to 
the Rules because currently the Rules are designed to accommodate a T+3 
settlement cycle. In particular, NSCC has identified and is proposing 
to change (i) rules that have timeframes and/or cutoff times that are 
tied to the standard settlement cycle and (ii) rules affected by 
process changes relating to the Shortened Settlement Cycle. In 
addition, NSCC is proposing to make a number of technical changes and 
corrections to the Rules.
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    \9\ Id.
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A. Rules Tied to the Standard Settlement Cycle

    Certain provisions in the Rules are tied to the standard settlement 
cycle because they reference timeframes and/or cutoff times that are 
based on the timing of settlement. These are provisions that (i) 
directly track the timeframe and/or Settlement Date of the standard 
settlement cycle, (ii) address non-standard settlement cycles or (iii) 
provide for timeframes and/or cutoff times that are connected to or are 
affected by the timing of the standard settlement cycle, and they would 
need to be changed in order to accommodate the Shortened Settlement 
Cycle. As an example, the Rules contain a number of provisions that 
refer to ``three days'' or ``T+3'' as the timeframe and Settlement Date 
of the standard settlement cycle. These provisions would need to be 
updated to reflect ``two days'' or ``T+2'' to be in conformance with 
the Shortened Settlement Cycle. Similarly, a number of provisions in 
the Rules refer to timeframes and Settlement Dates that are intended to 
be shorter or earlier, as applicable, than the timeframe and/or 
Settlement Date of the standard

[[Page 85300]]

settlement cycle. These provisions would also need to be changed in 
order to accommodate the Shortened Settlement Cycle. Likewise, the 
length and timing of certain cutoff times are based on either a 
standard settlement cycle or a non-standard settlement cycle. 
Therefore, when the timeframe and Settlement Date of the standard 
settlement cycle and non-standard settlement cycle are changed, these 
cutoff times would also need to be revised accordingly.
    NSCC is proposing changes to the following Rules because they 
contain provisions that are tied to the standard settlement cycle and 
would need to be changed to facilitate the move to Shortened Settlement 
Cycle:
1. Rule 4A (Supplemental Liquidity Deposits)
    In Section 2, delete references to the ``third Settlement Day'' and 
replace them with references to the ``second Settlement Day'' in the 
definition of ``Options Expiration Activity Period.''
2. Procedure II (Trade Comparison and Recording Service)
    In Section C.1.(p), with regards to trade input and comparison of 
debt securities transactions submitted for non-standard settlement, 
delete the reference to ``T+2 and T+1 settlement'' and replace it with 
``T+1 settlement.''
    In Section D.2.(A)(1)(b), with regards to municipal and corporate 
debt securities, delete the reference to ``two days'' and replace it 
with ``one day.''
    In Section F.2, with regards to the Settlement Date for the Index 
Receipts, delete the reference to ``T+1, T+2 or T+3'' and replace it 
with ``T+1 or T+2.''
    In Section G, with regards to the eligibility of trades to be 
settled in the normal settlement cycle and the cutoff time for updating 
the totals reported for such trades, delete references to ``T+3'' and 
replace them with ``T+2.''
3. Procedure III (Trade Recording Service (Interface With Qualified 
Clearing Agencies))
    In Section B, with regards to the Settlement Date for the exercise 
or assignment of options at OCC, delete the reference to ``three days'' 
and replace it with ``two days.''
4. Procedure V (Balance Order Accounting Operation)
    In Section C, (i) with regards to the timing for the netting of 
trades in Balance Order Securities, delete references to ``T and T+1'' 
and replace them with ``T'' and (ii) with regards to the listing of the 
Clearance Cash Adjustment amount for all Balance Orders on the 
Consolidated Trade Summary, delete the reference to the Consolidated 
Trade Summary being available on T+2.
5. Procedure VII (CNS Accounting Operation)
    In Section B, (i) with regards to the timing of the comparison or 
recording of trades in CNS Securities for inclusion on the Consolidated 
Trade Summary, delete the words ``T+1 up to'' and (ii) with regards to 
the timing of as-of trades in CNS Securities that are reported on the 
Consolidated Trade Summary, delete references to ``T+2'' and ``T+3'' 
and replace them with ``T+1'' and ``T+2,'' respectively.
    In Section G.3, with regards to the time period for determining the 
rate of the split for adjustments to Current Market Price in the case 
of stock splits, delete the reference to ``last two days'' and replace 
it with ``one day.''
    In Section H.4(b), (i) with regards to timing related to securities 
subject to voluntary reorganizations, delete references to protect 
periods of ``two days'', ``three days'' and ``greater than three days'' 
and replace them with ``one day'', ``two days'' and ``greater than two 
days'', respectively and delete references to ``E+2'', ``E+3'' and 
``E+4'' and replace them with ``E+1'', ``E+2'' and ``E+3,'' 
respectively, (ii) in the table listing the time frames for the 
processing of securities subject to voluntary reorganizations with a 
protect period, delete the reference to ``two days or less'' and 
replace it with ``one day or less'' as well as delete the entries for 
the 2 day protect period and (iii) with regards to the timing for the 
recording of ID Net Service eligible transactions on the Miscellaneous 
Activity Report, delete the words ``on the night of T+2.''
    In Section K, with regards to the timing for advising a Member 
about its potential liability with respect to a short position or a 
short Settling Trade position in a security to which an exercise 
privilege attaches, delete the reference to ``T+2'' and replace it with 
``T+1.''
6. Procedure XIII (Definitions)
    In the definition for ``T,'' delete the reference to ``T+3'' and 
replace it with ``T+2.''
7. Procedure XVI (ID Net Service)
    In Procedure XVI, with regards to the timing for processing by NSCC 
of ID Net Service transactions, delete references to ``the evening of 
T+2'' and ``the night of T+2'' and replace them with ``the evening 
prior to Settlement Date'' and ``the night prior to Settlement Date,'' 
respectively.
8. Addendum A (Fee Structure)
    In Section E.1, with regards to the fee for Index Creation and 
Redemption instructions submitted for regular way settlement, delete 
the explanatory parenthetical ``(T+3)'' and replace it with ``(T+2).''
9. Addendum K (Interpretation of the Board of Directors Application of 
Clearing Fund
    In Section I.2, with regards to the endpoint of NSCC's guaranty for 
balance order transactions, delete the reference to ``T+3'' and replace 
it with ``T+2.''

B. Rules Covering Processes Affected by a Shortened Settlement Cycle

    NSCC conducted an in-depth review of its internal operational 
processes to identify those processes that would require changes in 
order to accommodate the Shortened Settlement Cycle. In connection with 
that review, NSCC has identified the following provisions in the Rules 
that would need to be updated in connection with such process changes:
1. Procedure V (Balance Order Accounting Operation)
    In Section B, with regards to trades that are to be processed on a 
trade-for-trade basis, clarify that such processing occurs for trades 
that are compared or otherwise entered into the Balance Order 
Accounting Operation on SD-1, ``after the cutoff time established by 
the Corporation.'' This is because under the Shortened Settlement 
Cycle, trades that are compared or otherwise entered into the Balance 
Order Accounting Operation on SD-1 would be processed as multilaterally 
netted balance orders when reported on the Consolidated Trade Summary 
issued at approximately 12:00 p.m. ET on SD-1. Trades compared and 
reported thereafter would continue to be processed on a trade-for-trade 
basis.
    Similarly, in Section B, with regards to trades that are to be 
processed on a trade-for-trade basis, clarify that such process occurs 
for securities that are subject to a voluntary corporate reorganization 
which have a trade date on or before the expiration of the voluntary 
corporate reorganization and which are compared or received ``on SD-1, 
after the cutoff time established by the Corporation'' and not ``after 
SD-1.'' This shift in cutoff time is because ``as of'' regular way 
trades compared and received prior to 11:30 a.m. on SD-1 would be 
processed as multilaterally netted balance orders when reported on the 
Consolidated Trade Summary issued at approximately 12:00 p.m. ET on SD-
1. ``As of'' regular way trades compared

[[Page 85301]]

and reported thereafter would continue to be processed on a trade-for-
trade basis.
2. Procedure VII (CNS Accounting Operation)
    In Section D.1, with regards to the timing of the distribution of 
Projection Reports, delete the reference to ``[e]ach morning'' and 
replace it with ``[t]wice a day'' because currently NSCC distributes 
the Projection Report only once a day; however, after the 
implementation of the Shortened Settlement Cycle, NSCC would be 
distributing the Projection Reports twice a day to enable Members to 
view their updated positions on a more timely basis.

C. Other Technical Changes and Corrections

    During its review of the Rules in connection with the Shortened 
Settlement Cycle, NSCC has identified the following technical changes 
and/or corrections that it proposes to make to the Rules in order to 
ensure that the Rules remain consistent and accurate.
    1. In Rule 3, Section 1(c), add a footnote that identifies the term 
``CUSIP'' as a registered trademark of the American Bankers 
Association.
    2. In Procedure II, Section G, correct a grammatical error.
    3. In Procedure VII, Sections B and D, correct grammatical errors.
    4. In Procedure X, Section B, delete the reference to the timeframe 
for the delivery of Liability Notices to the contra party by Members 
holding the receive balance orders for warrants, rights, convertible 
securities or certain other securities so the Members would remain 
solely subject to the schedules of the relevant exchanges.
    5. In Procedure XIII, delete the incorrect reference to 
``Settlement Day'' and replace it with ``Settlement Date'' in the 
definition for ``T'' to clarify that T+2 would normally be the 
Settlement Date after the implementation of the Shortened Settlement 
Cycle.
    6. In Procedure XVI, correct a grammatical error.
Implementation Timeframe
    The proposed rule change would not become effective until NSCC has 
submitted a subsequent proposed rule change under Rule 19b-4.\10\ 
Therefore, NSCC would not implement this version of the Rules until an 
effective date is established by the subsequent proposed rule change. 
NSCC anticipates that the implementation date would correspond with the 
industry's transition to a T+2 settlement cycle, which is currently 
anticipated to be in September 2017.
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    \10\ 17 CFR 240.19b-4.
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2. Statutory Basis
    NSCC believes the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to NSCC.
    In particular, Section 17A(b)(3)(F) of the Act requires, in part, 
that NSCC's Rules be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to protect 
investors and the public interest.\11\ NSCC believes that the proposed 
changes are consistent with the requirements of Section 17A(b)(3)(F) 
because by changing the timeframes and/or cutoff times that are based 
on timing of settlement to accommodate the Shortened Settlement Cycle, 
the proposal would ensure that securities transactions would be 
promptly and accurately cleared and settled within the industry 
standard settlement cycle. Similarly, the related process changes 
proposed are designed to update NSCC's operations in order to 
facilitate the move to the Shortened Settlement Cycle and, by 
extension, facilitate the prompt and accurate clearance and settlement 
of securities transactions submitted to NSCC for clearing and 
settlement. Therefore, NSCC believes the proposed rule change promotes 
the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\12\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ Id.
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    In addition, the proposed changes to (i) update the Rules to remove 
references to the settlement timeframes or Settlement Dates that would 
be rendered incorrect by the Shortened Settlement Cycle and (ii) make 
other technical changes and corrections as described in detail above 
would provide additional clarity to Members of their rights and 
obligations under the Rules and ensure technical accuracy of the Rules. 
Therefore, NSCC believes these proposed changes would protect investors 
and the public interest, consistent with the requirements of Section 
17A(b)(3)(F) of the Act.\13\
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    \13\ Id.
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    For the reasons noted above, NSCC believes that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to NSCC.
(B) Clearing Agency's Statement on Burden on Competition
    NSCC does not believe that the proposed rule changes would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.\14\ While the anticipated 
industry-wide move to the Shortened Settlement Cycle would likely have 
an impact on competition because the cost of required system changes 
for individual firms to shift from a T+3 to T+2 settlement may have a 
disproportionate impact on those firms with relatively smaller revenue 
bases, NSCC does not believe that the proposed rule changes themselves 
would have a significant impact on competition because they are 
operational in nature and consist of changes to processing timeframes 
and cutoff times for NSCC's services. Moreover, NSCC believes that the 
proposed rule changes are necessary because they are required to 
facilitate and accommodate the anticipated move to the Shortened 
Settlement Cycle and are appropriate in that they have been 
specifically tailored to be in conformance with the requirements of the 
Shortened Settlement Cycle. Therefore, NSCC does not believe that the 
proposed rule changes would impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act.
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    \14\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants, or Others
    NSCC has not received any written comments relating to this 
proposal. NSCC will notify the Commission of any written comments 
received.

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.

[[Page 85302]]

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-2016-007 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-2016-007. 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 the filing also will be available 
for inspection and copying at the principal office of NSCC and on 
DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-2016-007 and should be 
submitted on or before December 16, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-28312 Filed 11-23-16; 8:45 am]
BILLING CODE 8011-01-P