Document ID: SEC-2017-0164-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2017-02-06T05:00Z

[Federal Register Volume 82, Number 23 (Monday, February 6, 2017)]
[Notices]
[Pages 9448-9450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02372]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79904; File No. SR-NSCC-2016-008]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of Proposed Rule Change To Reflect 
Updates to the Consolidated Trade Summary, Eliminate Re-Pricing in the 
Foreign Security Accounting Operation and Make Other Changes

January 31, 2017.
    On December 15, 2016, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2016-008, 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 December 29, 2016.\3\ The 
Commission did not receive any comment letters on the proposed rule 
change. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79655 (December 22, 
2016), 81 FR 96146 (December 29, 2016) (SR-NSCC-2016-008) 
(``Notice'').
---------------------------------------------------------------------------

I. Description of the Proposed Rule Change

    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') \4\ in order to (1) consolidate the file layouts 
into one common file layout, (2) provide more details in the revised 
Consolidated Trade Summary (``CTSs''), (3) discontinue a current output 
format (print image) and introduce a more user-friendly format 
(referred to as comma separated value or ``CSV'') and an online query 
tool, (4) simplify the terminology in the Rules by referring to each 
iteration of the CTS as the ``Consolidated Trade Summary'' (instead of 
the way in which the Rules are currently drafted to refer to a 
``Consolidated Trade Summary'' and a ``Supplemental Consolidated Trade 
Summary''), and (5) discontinue the Foreign Securities transaction file 
because information contained in that additional file would be 
reflected in the revised CTSs, each of which is described below.
---------------------------------------------------------------------------

    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at http://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------

A. Changes to the CTS and Technical Changes to the CTS-Related Rules

    First, the proposed rule change would consolidate the file layouts 
of the current CTSs into one common file layout that would be used for 
each of the three CTSs that are issued each day. Currently, each of the 
main CTS file, the supplemental CTS file, and the Foreign Securities 
file has its own individual file layout. NSCC would consolidate these 
multiple file layouts into one common file layout in the revised CTS 
file. Having one common layout in the revised CTS would eliminate the 
need for Members to maintain coding for multiple file layouts.
    Second, the proposal would update the CTS output file layout to 
provide Members with additional transparency and clarity regarding 
their trade summary, balance orders and receive and deliver 
instructions, which would help with reconciliation. For example, the 
current CTS output file layout specifies if a security is a CNS 
security or a non-CNS security but does not further clarify the non-CNS 
obligations as guaranteed or not guaranteed. Under the proposal, the 
CTS output file layout would be expanded to include a field for the 
guarantee/not guarantee designation to clearly indicate to users 
whether a trade obligation is guaranteed or not guaranteed. Other 
examples of new fields that would be added include: (1) Netting type to 
describe whether netted (e.g., multilaterally netted or bilaterally 
netted) or trade-for-trade instructions resulted, and (2) a net reason 
code to add clarity as to the netting type.
    Third, Members have also expressed interest in having NSCC change 
the current file format of the CTSs, which are currently available in 
print image format and machine-readable (``MRO'') format. As a result, 
NSCC would discontinue the current print image format while maintaining 
the current MRO format and would also introduce an online query tool. 
The print image format would be replaced by CSV which can be downloaded 
into spreadsheet programs. In addition to the three iterations of the 
CTS that would continue to be distributed to Members, Members would 
also be able to use a new online query tool to search information and 
create their own custom data view and custom reports. The new online 
query tool would enable users to research information that has been 
previously distributed in a CTS. Members have expressed interest in 
this change in file formats and the online query tool which allows 
results to be downloaded to spreadsheet programs.
    Fourth, from a Rules perspective, the terminology in Procedure II, 
Section H, Procedure V, Section E and Procedure VII, Section B would be 
revised, so that each CTS would be referred to as the ``Consolidated 
Trade Summary'' and more than one CTS would be referred to as the 
``Consolidated Trade Summaries.'' The proposed rule change would 
eliminate references to alternate terminology such as ``Supplemental 
Consolidated Trade Summary,'' ``Supplemental Consolidated Trade 
Summaries,'' and ``CTS.'' In addition, conforming changes would be made 
to Procedure V, Section C and Procedure VII, Section B to add phrases 
and terms such as ``next available,'' ``applicable'' and ``prior'' 
before references to ``Consolidated Trade Summary.'' Additional 
technical changes would be made to clarify that the CTS would continue 
to be issued to Members three times a day and would continue to be non-
cumulative; these changes would apply to Procedure II, Section H, 
Procedure V, Section E and Procedure VII, Section B. Procedure VII, 
Section B would also be amended to reflect the change in output format 
of the Consolidated Trade Summaries (specifically, because the print 
image format is being discontinued and the CSV format is being 
introduced, the Rules and terminology must be changed to use 
terminology consistent with the different format).
    Fifth, the Foreign Securities transaction file would be 
discontinued. Information that is currently in this additional file 
would be reflected in the revised CTSs.
    NSCC would continue to issue the CTSs to Members three times a day, 
at approximately the same intervals as it does today.\5\ The revised 
CTSs would continue to be iterative (i.e., any information that 
appeared on prior CTSs would not appear again on any successive CTSs), 
and also continue to be available in MRO format.
---------------------------------------------------------------------------

    \5\ The header of the CTS output file would indicate whether the 
CTS is for Cycle 1 (i.e., the one issued at approximately 21:00 ET), 
Cycle 2 (i.e., the one issued at approximately 24:00 ET) or Cycle 3 
(i.e., the one issued at approximately 12:00 ET on the next business 
day).

---------------------------------------------------------------------------

[[Page 9449]]

B. Discontinuation of the Re-Pricing of Foreign Securities and 
Technical Clarifications/Corrections to Procedure VI (Foreign Security 
Accounting Operation)

    Based on Member feedback, NSCC is also proposing to update the code 
associated with NSCC's Foreign Security Accounting Operation, which 
receives and processes Foreign Securities traded over-the-counter and 
settled in U.S. Dollars.\6\ The current foreign netting process 
aggregates Foreign Securities obligations, bilaterally nets these 
obligations and then re-prices these obligations using a uniform 
Settlement Price. As further explained below, NSCC is proposing to no 
longer re-price these Foreign Securities obligations.
---------------------------------------------------------------------------

    \6\ See Procedure VI (Foreign Security Accounting Operation).
---------------------------------------------------------------------------

    Foreign Securities would continue to be bilaterally netted, but 
would no longer be re-priced at uniform Settlement Prices. Instead, 
they would be bilaterally netted at their contract prices to eliminate 
the risk of a cash adjustment (which is not guaranteed by NSCC) due to 
re-pricing.
    To effectuate this proposed change, NSCC proposes to remove 
language in Procedure VI, Section C that permits NSCC to establish a 
uniform Settlement Price and calculate any related Foreign Security 
Clearance Cash Adjustment associated with the re-pricing. Unlike the 
underlying Foreign Securities transactions (which are settled in the 
local markets and not at NSCC), the payments of any Foreign Security 
Clearance Cash Adjustment (whether due to netting or re-pricing) 
related to those underlying Foreign Securities transactions are made 
through NSCC today and under the proposed rule change, this would 
continue to be the case with respect to Foreign Security Clearance Cash 
Adjustments that arise due to netting. The proposed rule change would 
revise the language in Procedure VI to clearly state that the failure 
of a Member to make payment of the Foreign Security Clearance Cash 
Adjustment with NSCC will cause NSCC to reverse all such cash 
adjustment debits and credits (rather than generally stating this would 
be caused by the failure to ``make settlement with the Corporation''). 
The proposed rule change would further clarify that neither the 
settlement of the underlying transaction nor the payment of the related 
Foreign Security Clearance Cash Adjustment would be guaranteed by NSCC 
(which is also the case today).\7\
---------------------------------------------------------------------------

    \7\ Under the proposed rule change, only a Foreign Security 
Clearance Cash Adjustment due to re-pricing would be eliminated. A 
Foreign Security Clearance Cash Adjustment due to netting is still 
possible, so this Procedure is still applicable to such Foreign 
Security Clearance Cash Adjustments.
---------------------------------------------------------------------------

    Additional clarifying changes to Procedure VI include revising the 
reference from ``T+2'' in Section B to ``SD-1'' because Foreign 
Securities transactions are not always settled on T+3 (according to 
local market practices) and thus, are not always compared on T+2, as 
Section B of Procedure VI states. Therefore, using Settlement Date 
(i.e., ``SD'') as the reference point is more appropriate. Furthermore, 
Foreign Securities transactions are reported on the CTSs, which are 
Settlement Date-based. In addition, in Section C, ``produced'' would be 
revised to ``reported,'' because ``reported'' more accurately describes 
what occurs today--that is, NSCC reports the netted Member-to-Member 
receive and deliver instructions. In addition, the proposed rule change 
would make the following corrections: (i) The reference in Section C to 
``Foreign Security Clearing Cash Adjustment'' would be revised to the 
correct term, ``Foreign Security Clearance Cash Adjustment'' and (ii) 
the cross-references to ``Section II'' and ``Section IV'' in Section A 
would be replaced with references to ``Procedure II'' and ``Procedure 
IV,'' respectively.

C. Implementation Timeframe

    These proposed rule changes would become effective by July 14, 
2017. After Commission approval of these proposed rule changes, a 
legend would be added to each of Procedures II, V, VI and VII stating 
that there are approved but not yet operative changes to the respective 
Procedure and specifying the applicable section or sections that would 
be amended by the proposed rule change. The legend would state that 
such changes would be operative by July 14, 2017, but if such changes 
become operative before July 14, 2017, NSCC would notify Members by 
Important Notice 30 days before the actual implementation date. The 
legend would also state that underlined and boldface text indicates new 
text and strikethrough and boldface text indicates deleted text. 
Additionally, the legend would include a reference to the file number 
of the proposed rule change and would state that once operative, the 
legend would automatically be removed from the Rules, and the 
formatting of the text of the changes in the applicable section or 
sections would automatically be revised to reflect that these changes 
have become operative.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \8\ 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. The Commission believes the proposal is 
consistent with Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    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.\9\ The Commission believes that the proposed rule 
changes are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to NSCC, in particular Section 
17(A)(b)(3)(F), because the proposed rule changes promote the prompt 
and accurate clearance and settlement of securities transactions.\10\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ Id.
---------------------------------------------------------------------------

    Specifically, by updating the CTS to provide more details and 
information in one common file layout, the proposal would provide 
Members with more transparency and clarity regarding their trade 
obligations, which could help Members better understand their 
reconciliation of trades for settlement. Furthermore, Members would 
receive the CTS in a more user-friendly format (i.e., CSV). With the 
new online query tool, Members would also be able to access trade 
obligation information that has been distributed in prior CTSs and 
customize searches of trade obligation information according to their 
needs. Therefore, the Commission believes that these changes to the CTS 
would make it a more effective tool for Members to help manage their 
settlement obligations, thus promoting the prompt and accurate 
clearance of securities transactions.
    Additionally, the Commission believes that the proposed rule 
changes associated with the Foreign Security Accounting Operation are 
designed to protect investors and the public interest.\11\ 
Specifically, the proposed rule change would address the timing 
mismatch between the receipt of the CTS by Members and the settlement 
of Foreign Securities trades in the local markets by Members by 
discontinuing

[[Page 9450]]

the practice of re-pricing Foreign Securities at the uniform Settlement 
Prices. This change also would eliminate Member exposure from a cash 
adjustment due to re-pricing and the associated risk that a solvent 
Member could be liable for the cash adjustment if its counterparty 
defaults because the cash adjustment is not guaranteed by NSCC. 
Therefore, the Commission believes that the proposed rule change 
promotes investor protection and the public interest.\12\
---------------------------------------------------------------------------

    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

    As the proposed rule change pertains to technical changes to the 
Rules, the Commission finds the technical changes also consistent with 
Section 17A(b)(3)(F) of the Act \13\ because the technical updates are 
designed to make the Rules more clear, consistent, and current for 
Members that rely on them. Therefore, the proposed technical changes 
help support NSCC's prompt and accurate clearance and settlement of 
securities transactions made by Members.
---------------------------------------------------------------------------

    \13\ Id.
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposals are consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \14\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule change SR-NSCC-2016-008 be, and hereby is, 
approved.\15\
---------------------------------------------------------------------------

    \15\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02372 Filed 2-3-17; 8:45 am]
BILLING CODE 8011-01-P