Document ID: SEC-2014-0456-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes:National Securities Clearing Corp.
Posted Date: 2014-03-21T04:00Z

[Federal Register Volume 79, Number 55 (Friday, March 21, 2014)]
[Notices]
[Pages 15780-15782]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06187]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71725; File No. SR-NSCC-2014-03]

Self-Regulatory Organizations; National Securities Clearing 
Corporation (``NSCC''); Notice of Filing of Proposed Rule Change To 
Enhance the System That Processes Corporate Actions Within NSCC's 
Continuous Net Settlement (``CNS'') System

March 14, 2014.
    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 March 6, 2014, 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 
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 consist [sic] of amendments to the Rules & 
Procedures (``Rules'') of NSCC to enhance the system that processes 
corporate actions within NSCC's Continuous Net Settlement (``CNS'') 
system, as more fully described below.

II. Clearing Agency'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.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    NSCC has recently enhanced the system that applies corporate 
actions to Members' open failed positions within CNS. While the 
enhancements to corporate action processing would not require NSCC 
Members to make any coding changes, NSCC is proposing to update 
Procedure VII of its Rules in order to reflect these enhancements.
    One of NSCC's core service as a central counterparty is trade 
clearance and settlement through CNS, where compared and recorded 
transactions in eligible securities \3\ for a particular settlement 
date are netted by issue into one net long (buy) or net short (sell) 
position. As a continuous net system, those positions are further 
netted with positions of the same issue that remain open after their 
originally scheduled settlement date (usually T+3), so that trades 
scheduled to settle on any day are netted with fail positions to result 
in a single deliver or receive obligation for each Member for each 
issue in which it has activity. As part of the services offered to NSCC 
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 Member's 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.
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    \3\ 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 (i.e., 144A 
securities) or due to the pendency of certain corporate actions.
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    Enhancements to the processing of corporate actions within CNS, 
described below, would provide Members with more timely and detailed 
information regarding applicable corporate action events, would support 
additional corporate action events, and would provide short Members 
(i.e. Members that have failed to deliver securities to CNS) with 
information on their final liability on the same day that liability is 
applied to their CNS account. The proposed enhancements would also 
provide NSCC staff with an improved ability to monitor and process 
voluntary corporate action events. These enhancements are reflected in 
the proposed rule changes on Exhibit 5 \4\ hereto and are described 
below.
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    \4\ See Exhibit 5 of the Proposed Rule Change Filing, available 
at http://www.sec.gov/rules/sro/nscc.shtml under File No. SR-NSCC-
2014-04, Additional Materials.
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Optional Dividends

    When a fail position in CNS is subject to a dividend payment, the 
issuer will specify the form in which that dividend will be paid (i.e. 
in securities or cash), called the ``default option''. NSCC long 
Members (i.e. Members that have failed to receive securities from CNS) 
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. While these elections are submitted manually today, under the 
enhancements to the processing of corporate actions, these elections 
would be submitted to NSCC electronically.
    Today, NSCC sets a cut-off time that is based on the cut-off time 
set by DTC for the submission of these instructions.

[[Page 15781]]

Going forward, NSCC would set the date and cut-off time that is earlier 
than the DTC cut-off time, to provide the short Member with additional 
time to communicate that election to their counterparty.
    NSCC's Procedure VII, Section G.4 would be updated as marked in 
Exhibit 5 hereto to reflect these changes.

Support ``Offer To Consent'' Tender/Exchange Offers

    Today, if a 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 open fail position would be closed 
and exited out of CNS, and would settle directly between counterparties 
outside of CNS. The proposed enhancements would permit NSCC Members 
with fail positions in CNS to participate in tender or exchange offers 
that include an ``offer to consent'' within CNS.
    Under the proposed Rule changes, CNS would support tender/exchange 
offers that include an ``an offer to consent''. These corporate actions 
were not previously processed by NSCC in CNS. NSCC's Procedure VII, 
Section H.4 would be updated as marked in Exhibit 5 hereto to reflect 
this change.\5\
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    \5\ Id.
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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 on the business day prior to ``protect'' expiration 
date or, when there is no ``protect'' for that corporate action, on the 
business day prior to the expiration date of the corporate action. 
Today, because long Members may incur additional costs for failing to 
meet these deadlines, NSCC staff today may, in its discretion and on a 
best efforts basis, may accept and process these instructions either on 
the ``protect'' expiration or on the expiration date of the corporate 
action.
    Under the proposed enhancements, NSCC Members would submit these 
instructions to NSCC electronically, and, for a fee of US $500.00, NSCC 
Members would be permitted to submit instructions 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 on ``protect'' expiration date or, when there is no 
``protect'' for that corporate action, on the expiration date of the 
corporate action.
    NSCC's Procedure VII, Section H.4 (b), including the table in that 
Section, would be updated as marked in Exhibit 5 \6\ hereto to reflect 
this change.
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    \6\ Id.
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Final Liability and Final Protection Notification

    Today, CNS will alert a short Member of their final assigned 
liability with respect to voluntary corporate actions either on the 
business day after ``protect'' expiration date for that corporate 
action or, when there is no ``protect'' for that corporate action, on 
the business day after the expiration date of the corporate action.
    Under the proposed Rule changes, CNS would alert the short Member 
of their 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 would also make clear that long 
Members would be notified that their fail positions in CNS would 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.
    NSCC's Procedure VII, Section H.4(b), including the table in that 
Section, would be updated as marked in Exhibit 5 \7\ hereto to reflect 
this change.
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    \7\ Id.
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SMART/Track for CNS Corporate Actions

    Under the proposed Rule changes, Members would submit instructions 
to participate in a voluntary reorganization and would access all 
corporate action processing output data through SMART/Track for CNS 
Corporate Actions, which is available within the SMART/Track for 
Corporate Action Liability Notification Service. The output data, which 
today is delivered to Members through files and reports, would be 
visible through on-line screens with search options and filters.
    NSCC's Procedure VII, Section H.4 would be updated as marked in 
Exhibit 5 \8\ hereto to remove reference to the existing files and 
reports.
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    \8\ Id.
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Restriction on Movement of Positions Between CNS Sub-Accounts

    Under the proposed enhancements, when a voluntary reorganization is 
being processed on a security, CNS would no longer permit the movement 
of positions for that security between non-reorganization sub-accounts 
(which include, for example, the CNS General Account and the CNS Fully-
Paid-For Account) either on the ``protect'' expiration date, or, when 
there is no ``protect'' for that voluntary reorganization, on the 
expiration date of the voluntary reorganization.
    In order to make this change, NSCC's Procedure VII, Section H.4(b) 
would be updated as marked in Exhibit 5.\9\
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    \9\ Id.
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Additional Rule Changes

    In addition to the enhancements described above, NSCC is proposing 
to amend Procedure VII, Section H.4(b) to make clear that the Rules are 
drafted assuming the processing of subject securities with a protect 
period of three days, and the table included in that section sets forth 
the time frames for processing of subject securities with a protect 
period of two days or less. As such, NSCC would amend Sections G and H 
of Procedure VII (CNS Accounting Operation), as described above and as 
reflected in Exhibit 5 hereto.

Implementation Timeframe

    Subject to approval of this filing, NSCC proposes to implement the 
proposed rule changes in multiple phases during 2014. Pending 
Commission approval, Members will be advised of the implementation 
dates of the proposed rule changes through issuance of an NSCC 
Important Notice.
2. Statutory Basis
    NSCC believes the proposed rule change is consistent with the 
requirements of the Securities Exchange Act of 1934 (``Act'') and the 
rules and regulations thereunder applicable to NSCC, in particular 
Section 17A(b)(3)(F) of the Act,\10\ which requires that NSCC's Rules 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions. By providing for greater efficiency and 
automation with respect to processing corporate actions applicable to 
open failed positions within CNS, the proposed rule change promotes the 
prompt and accurate clearance and settlement of securities 
transactions.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have any 
impact, or impose any burden on competition.

[[Page 15782]]

(C) Clearing Agency'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 yet 
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, [sic] 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 a 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 No. SR-NSCC-2014-03 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 No. SR-NSCC-2014-03. 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 filings also will be available 
for inspection and copying at the principal office of NSCC and on 
NSCC's Web site at (http://www.dtcc.com/).
    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 No. SR-NSCC-2014-03 and 
should be submitted on or before April 11, 2014.
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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. 2014-06187 Filed 3-20-14; 8:45 am]
BILLING CODE 8011-01-P