Document ID: SEC-2010-1515-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2010-10-05T04:00Z

[Federal Register: October 5, 2010 (Volume 75, Number 192)]
[Notices]               
[Page 61536-61538]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc10-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63005; File No. SR-NSCC-2010-10]

 
Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To clarify Its Rules & Procedures Regarding Its Alternative 
Investment Product Service

September 29, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 20, 2010, the 
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 primarily by NSCC. NSCC filed the proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \2\ and Rule 19b-
4(f)(4) thereunder \3\ so that the proposal was effective upon filing 
with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(4).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change amends NSCC's rules to clarify that an 
Alternative Investment Product (``AIP'') Service prospective member is 
not required to designate a settling bank in order to become an AIP 
member.

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.

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

1. AIP Service
    In 2007, NSCC filed a rule change with the Commission that 
established the AIP Service, which is a processing platform for 
alternative investment products such as hedge funds, fund of hedge 
funds, commodities pools, managed futures, and real estate investment 
trusts.\4\ The AIP Service provides for settlement of related payments 
(``AIP Payments'') such as subscriptions and redemptions, activity, 
distributions, and commissions for AIPs. The AIP Service also supports 
communication of information and settlement of AIP Payments between the 
AIP Manufacturer \5\ and the AIP Distributor \6\ to facilitate 
processing of subscriptions and purchases, tenders and redemptions, 
dividends and distributions, commissions and fees, positions reporting, 
product information, account maintenance, automated transmission of 
imaged

[[Page 61537]]

documents, and such other services as NSCC may determine from time to 
time. AIP Members may transmit data in connection with transactions for 
which the payments are made outside of NSCC or are made through NSCC at 
their option.
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    \4\ Securities and Exchange Act Release No. 57813 (May 12, 
2008), 73 FR 28539 (May 16, 2008).
    \5\ NSCC Rule 53 defines an AIP Manufacturer as an AIP Member 
acting on behalf of or under authority of the sponsor, general 
partner, or any other party responsible for the creation or 
manufacturing of an Eligible AIP Product.
    \6\ NSCC Rule 53 defines an AIP Distributor as an AIP Member 
acting on behalf of or under authority of a customer or other 
investor in an Eligible AIP Product, or otherwise as the contra-side 
to an AIP Manufacturer in a transaction (including information 
processing) with an AIP Manufacturer.
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2. AIP Settlement
    Prior to this rule change, NSCC Rule 53, Section 7, paragraph (h), 
provided that unless ``otherwise permitted by [NSCC], each AIP Member 
shall appoint an AIP Settling Bank for the purpose of settling with 
[NSCC] on behalf of the AIP Member pursuant to an AIP Settling Bank 
Agreement.'' This settlement bank provision was implemented in the 
initial AIP Service rule filing to accommodate the stringent settlement 
rules implemented for the AIP Service. AIP settlement is segregated 
from all other NSCC settlement obligations and is settled on a gross 
debit/gross credit basis. In other words, each AIP Service participant 
must fully fund its debits before receiving its credit. In the event of 
a failure, NSCC does not fund the credits but rather begins the AIP 
reversal process. The AIP Service's prefunded settlement mitigates 
NSCC's risk. This settling bank provision was also included in the 
original AIP Service filing because participants were initially 
required to settle all NSCC invoices with their settlement obligation.
3. Clarification of Settling Bank Provision in Rule 53
    Since the implementation of the AIP Service, a significant number 
of prospective participants view its reporting functionality as a key 
first step in use of the AIP Service. These AIP prospects have 
expressed their interest in becoming AIP members in order to 
participate in the transmission of AIP Data but not the settling 
functions of the AIP Service.\7\
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    \7\ NSCC Rule 53 provides that ``AIP Data transmitted through 
the AIP Service may include data relating to subscriptions and 
purchases; redemptions, withdrawals and tender offers; commissions 
and other fees; distributions; exchange transactions; transfers; 
position reporting; product information; account maintenance, 
valuation, and activity and such other data as may be established by 
the Corporation from time to time.''
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    In response to this feedback, NSCC has developed a functionality 
that can designate AIP Service members as ``non-settling'' members that 
use the AIP Service for messaging only. Position and Activity-
Distribution and Commission are typically ``non-settling,'' and 
strictly reporting functions. Requiring these prospective participants 
to designate a settling bank simply for payment of NSCC bills is a 
hindrance to product adoption and is cost prohibitive. Additionally, 
the current list of NSCC settling banks accepting new clients is 
limited, and those settling banks willing to accept new settlement 
business have requested large monthly fees from the AIP prospects.
    The AIP Service has now been appropriately configured to allow for 
prospective members to apply for membership without designating a 
settling bank. If a participant is established by NSCC's Account 
Administration department on the Entity Master File (``EMF'') without a 
settling bank's ABA number, EMF notifies the AIP Service that the 
participant is non-settling. The AIP Service retains a table of the 
non-settling participants and validates all settlement files created by 
the application against the table. If a participant without a settling 
bank erroneously indicates settlement, no settlement file will be 
created or sent to settlement. The transaction will continue through 
normal AIP processing as non-settling.
    AIP Service participants that do not intend to use its settling 
function will no longer be required to settle their NSCC invoices in 
their settlement obligations. Those participants that are designated 
``non-settling'' members will be permitted to use alternative means of 
payment as designated from time to time by NSCC. Current methods of 
payment include DTCC ePayment for NSCC Invoices (which allows 
participants without a settling bank to authorize payment of NSCC 
Invoices through debit to an ACH-accessible commercial account at a 
U.S. bank) or credit card.
4. Implementation Time Frame
    NSCC will advise its members of the changes to the Rule 53 
clarification that settling bank designation is not a requirement for 
AIP Service membership through the issuance of an NSCC Important 
Notice.
    NSCC states that Section 17A(b)(3)(F) of the Act \8\ requires, 
among other things, that the rules of a clearing agency be designed to 
remove impediments to and perfect the mechanism of a national system 
for prompt and accurate clearance and settlement of securities 
transactions. NSCC believes that this proposed rule change, which seeks 
to clarify NSCC Rule 53, will remove an impediment to the AIP Service 
membership process.
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    \8\ 15 U.S.C. 78-1(b)(3)(F).
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B. Self-Regulatory Organization'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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    NSCC has not solicited or received written comments relating to the 
proposed rule change. NSCC will notify the Commission of any written 
comments it receives.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(4) \10\ thereunder 
because it effects a change in an existing service of a registered 
clearing agency that does not adversely affect the safeguarding of 
securities and funds in the custody or control of the clearing agency 
or for which it is responsible and does not significantly affect the 
respective rights or obligations of the clearing agency or persons 
using the service. At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \9\ Above note 2.
    \10\ Above note 3.
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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 No. SR-NSCC-2010-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission,

[[Page 61538]]

Station Place, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-NSCC-2010-10. 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 NSCC's principal office and on NSCC's Web 
site at http://www.dtcc.com/legal/rule_filings/nscc/2010.php. 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-2010-10 and should be 
submitted on or before October 26, 2010.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary .
[FR Doc. 2010-24884 Filed 10-4-10; 8:45 am]
BILLING CODE 8010-01-P