Document ID: SEC-2013-1048-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Advance Notices: National Securities Clearing Corp.
Posted Date: 2013-06-11T04:00Z

[Federal Register Volume 78, Number 112 (Tuesday, June 11, 2013)]
[Notices]
[Pages 35076-35078]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13773]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69699; File No. SR-NSCC-2013-805]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Advance Notice, as Modified by 
Amendment No. 1, To Require That All Locked-in Trade Data Submitted to 
It for Trade Recording Be Submitted in Real-time

June 5, 2013.
    Pursuant to Section 806(e)(1) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ 
and Rule 19b-4(n)(1)(i) \2\ thereunder, notice is hereby given that on 
April 30, 2013, the National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') an 
advance notice described in Items I, II and III below, which Items have 
been prepared primarily by NSCC. On May 14, 2013, NSCC filed Amendment 
No. 1 to the advance notice.\3\ The Commission is publishing this 
notice to solicit comments on the advance notice from interested 
persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(i).
    \3\ In Amendment No. 1, NSCC modified Exhibit 5 to the original 
advance notice filing to correct a typographical error in the text 
of its Rules & Procedures (``Rules'') related to the advance notice.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    NSCC is proposing to modify its Rules to require that all locked-in 
trade data submitted to NSCC for trade recording be submitted in real-
time, as defined below, and to prohibit pre-netting and other practices 
that prevent real-time trade submission.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, NSCC included statements 
concerning the purpose of and basis for the advance notice and 
discussed any comments it received on the advance notice. 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 these statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

Proposal Overview
    NSCC is proposing to modify its Rules to require that all locked-in 
trade data submitted to NSCC for trade recording be submitted in real-
time,\5\ and to prohibit pre-netting and other practices that prevent 
real time trade submission.
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    \5\ The term ``real-time,'' when used with respect to trade 
submission, will be defined in Procedure XIII (Definitions) of 
NSCC's Rules as the submission of such data on a trade-by-trade 
basis promptly after trade execution, in any format and by any 
communication method acceptable to NSCC.
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    According to NSCC, the majority of all transactions processed at 
NSCC are submitted on a locked-in basis by self-regulatory 
organizations (``SROs'') (including national and regional exchanges and 
marketplaces), and Qualified Special Representatives (``QSRs'').\6\ 
Currently NSCC data reveals that almost all exchanges \7\ and some QSRs 
submit trades executed on their respective markets in real-time, 
representing approximately 91% of the locked-in trades submitted to 
NSCC today. The proposed rule change would require that all locked-in 
trades submitted for trade recording by SROs and QSRs be submitted to 
NSCC in real-time.\8\
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    \6\ QSRs are NSCC Members that either (i) operate an automated 
execution system where they are always the contra side of every 
trade, (ii) are the parent or affiliate of an entity operating such 
an automated system, where they are the contra side of every trade, 
or (iii) clear for a broker-dealer that operates such a system and 
the subscribers to the system acknowledge the clearing Member's role 
in the clearance and settlement of these trades.
    \7\ One executing market with very low trade volume does not yet 
submit trades in real-time.
    \8\ NSCC is not at this time modifying Procedure III (Trade 
Recording Service (Interface Clearing Procedures)) of its Rules, so 
files submitted to NSCC by The Options Clearing Corporation 
(``OCC'') relating to option exercises and assignments (Procedure 
III, Section D--Settlement of Option Exercises and Assignments) will 
not be required to be submitted in real-time. OCC's process of 
assigning option assignments is and will continue to be an end-of-
day process.
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    NSCC is also proposing to prohibit practices that preclude real-
time submission, such as ``pre-netting.'' NSCC states that typically, 
pre-netting is done on a bilateral basis between a QSR and its 
customer, both NSCC Members. According to NSCC, any pre-netting 
practices--whether in the form of ``summarization'' (i.e., technique in 
which the clearing broker nets all trades in a single CUSIP by the same 
correspondent broker into fewer submitted trades), ``compression'' 
(i.e., technique to combine submissions of data for multiple trades to 
the point where the identity of the party actually responsible for the 
trades is masked), netting, or any other practice that combines two or 
more trades prior to their submission to NSCC (collectively, ``pre-
netting'')--prevent the submission to NSCC of transactions on a trade-
by-trade basis, and cause submitting firms to delay submission of their 
trades. According to NSCC, these practices disrupt NSCC's ability to 
accurately monitor market and credit risks as they evolve during the 
trading day. Therefore, NSCC's proposal will prohibit pre-netting 
activity on the part of entities submitting original trade data on a 
locked-in basis.\9\ The rules of NSCC's affiliate Fixed Income Clearing 
Corporation (``FICC'') currently prohibit such activity, and this 
proposed rule change would align NSCC's trade submission rules with 
those of FICC.\10\
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    \9\ Trades executed in the normal course of business between a 
Member that clears for other broker-dealers, and its correspondent, 
or between correspondents of the Member, which correspondent(s) is 
not itself a Member and settles such obligations through such 
clearing Member (i.e., ``internalized trades'') are not required to 
be submitted to NSCC and shall not be considered to violate the 
``pre-netting'' prohibition.
    \10\ See, e.g., GSD Rule 11 (Netting System), Section 3 (``All 
trade data required to be submitted to the Corporation under this 
Section must be submitted on a trade-by-trade basis with the 
original terms of the trades unaltered. A Member or any of its 
Affiliates may not engage in the Pre-Netting of Trades prior to 
their submission to the Corporation in contravention of this 
section. In addition, a Member or any of its Affiliates may not 
engage in any practice designed to contravene the prohibition 
against the Pre-Netting of Trades.''), http://dtcc.com/legal/rules_proc/FICC-Government_Security_Division_Rulebook.pdf. See also 
Order Granting Approval of a Proposed Rule Change Relating to Trade 
Submission Requirements and Pre-Netting, Release No. 34-51908 (June 
22, 2005), 70 FR 37450 (June 29, 2005).
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    NSCC does not expect the proposed rule changes to impact trade 
volumes significantly. According to NSCC, the majority of trades are 
currently being submitted to NSCC in real-time on a trade-by-trade 
basis, and NSCC is operationally capable of managing trade volumes that 
are multiple times larger than the historical peak volumes. NSCC's 
trade capture application,

[[Page 35077]]

Universal Trade Capture, provides contract information to Members in 
real-time. Receipt of trade data in real-time will enable NSCC to 
record, and report to Members, trade data as it is received by the 
marketplaces, thereby promoting intra-day reconciliation of 
transactions at the Member level.
    In the wake of recent industry disruptions, industry participants 
have been focused on developing controls to address the risks that 
arise from technology issues. NSCC believes that technology issues that 
could potentially cause significant disruptions and losses have become 
more likely in the securities markets that have leveraged technology 
advances to move to higher frequency trading environment. A comment 
letter submitted to the Commission in advance of its Technology and 
Trading Roundtable, held in October 2012, and signed by a number of 
industry participants including SROs, broker-dealers, and buy-side 
firms, supported this proposed rule change as a crucial component of 
the industry controls that could increase market transparency and 
ultimately mitigate risks associated with high-frequency trading and 
related technology.\11\
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    \11\ Comment Letter dated Sept. 28, 2012 (http://www.sec.gov/comments/4-652/4652-17.pdf).
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    As a central counterparty, NSCC contributes to market stability by 
interposing itself between counterparties to financial transactions and 
thereby reducing the risk faced by market participants. NSCC believes 
the proposed rule change will align NSCC's Rules with the trend in risk 
mitigation to move towards real-time trade submission and processing. 
NSCC believes the proposal will also support NSCC's critical role in 
maintaining financial stability by reducing the operational risk that 
results from locked-in trade data not being submitted to NSCC in real-
time, particularly from firms that delay trade submission so as to pre-
net their data. For example, receipt of locked-in trade data on a real-
time basis will permit NSCC's risk management processes to monitor 
trades closer to trade execution on an intra-day basis, and identify 
and manage any issues relating to excessive risk exposure earlier in 
the day. According to NSCC, it will also be able to provide safe 
storage for real-time trade data, mitigating the risk that an event 
that occurs after trade execution and disrupts trade input will 
significantly delay completion of those trades or may even cause trade 
data to be lost.
    While the proposed rule change will require some QSRs to enhance 
their trade submission systems, and could cause increased fees for 
those NSCC Members that pre-net their trade data so as to reduce 
clearance fees, NSCC believes the significant risk mitigation benefits 
of this proposal outweigh any temporary burdens or increased costs that 
may result. As a user-owned industry utility and a registered clearing 
agency, NSCC believes it must appropriately allocate the costs of its 
services in order to maintain a fee schedule that is fair and equitable 
among its participants. According to NSCC, enabling Members to persist 
in pre-netting practices permits those participants to evade paying 
their fair share of NSCC's costs, rendering NSCC's fee schedule, as 
currently applied, inequitable to the firms for whom trades are 
submitted in real-time without any pre-netting. Further, over the past 
few years, NSCC has adjusted its fee schedule to give more weight to 
``value transacted'' and less weight to ``units processed,'' which NSCC 
believes will reduce the impact of this rule change on Members' fees.
Implementation Timeframe
    If the Commission approves this proposed rule change, Members will 
be advised of the implementation date through issuance of an NSCC 
Important Notice. The proposed rule change will not be implemented 
earlier than seven (7) months from the date of Commission approval.
Proposed Rule Changes
    NSCC proposes to amend Rule 7 (Comparison and Trade Recording 
Operation), Procedures II (Trade Comparison and Recording Service), IV 
(Special Representative Service) and XIII (Definitions) of its Rules in 
order to require that all locked-in trades submitted for trade 
recording by SROs and QSRs be submitted on a real-time basis, and to 
make clear that locked-in trade data from SROs and QSRs must be 
submitted on a trade-by-trade basis, in the original form in which they 
are executed, and that pre-netting and similar practices are 
prohibited.
    In light of these proposed changes, Addendum N (Interpretation of 
the Board of Directors: Locked-In Data From Qualified Special 
Representatives) of NSCC's Rules will be deleted, as it will be no 
longer relevant.

(B) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    While written comments relating to the proposed rule change have 
not yet been solicited with respect to this filing, the proposed rule 
changes described herein were the subject of a prior rule filing that 
was filed with the Commission in 2006 as File No. SR-NSCC-2006-04 
(``2006 Filing'').\12\ NSCC received a number of public comments to the 
2006 Filing. NSCC submitted a public response to each of the comments 
in 2006.\13\ The 2006 Filing was officially withdrawn on December 29, 
2011.
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    \12\ Release No. 34-53742 (Apr. 28, 2006), 71 FR 26804 (May 8, 
2006).
    \13\ Response Letter from NSCC dated Aug. 18, 2006 (http://www.sec.gov/comments/sr-nscc-2006-04/nscc200604-9.pdf).
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    (C) Advance Notices Filed Pursuant to Section 806(e) of the 
Payment, Clearing and Settlement Supervision Act
Description of Change
    NSCC is proposing to amend its Rules in order to require that all 
locked-in trade data submitted to NSCC for trade recording be submitted 
promptly after trade execution (or in real- time), and to prohibit pre-
netting and other practices that prevent real-time trade submission. 
The proposed rule change is described in detail above.
Anticipated Effect on and Management of Risk
    As described above, the proposed rule change is designed to reduce 
the operational, market, and credit risk to both NSCC and it's Members 
that results from locked-in trade data not being submitted to NSCC in 
real-time. The risk-mitigating effects of this proposal are described 
in detail above.

III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The clearing agency may implement the proposed change pursuant to 
Section 806(e)(1)(G) of the Clearing Supervision Act \14\ if it has not 
received an objection to the proposed change within 60 days of the 
later of (i) the date that the Commission received the advance notice 
or (ii) the date the Commission receives any further information it 
requested for consideration of the notice. The clearing agency shall 
not implement the proposed change if the Commission has any objection 
to the proposed change.
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    \14\ 12 U.S.C. 5465(e)(1)(G).
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    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date of receipt of the advance

[[Page 35078]]

notice, or the date the Commission receives any further information it 
requested, if the Commission notifies the clearing agency in writing 
that it does not object to the proposed change and authorizes the 
clearing agency to implement the proposed change on an earlier date, 
subject to any conditions imposed by the Commission. The clearing 
agency shall post notice on its Web site of proposed changes that are 
implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\15\
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    \15\ NSCC also filed the proposals contained in this advance 
notice as a proposed rule change under Section 19(b)(1) of the 
Exchange Act and Rule 19b-4 thereunder. 15 U.S.C. 78s(b)(1); 17 CFR 
240.19b-4. Pursuant to Section 19(b)(2) of the Exchange Act, 
generally not later than 45 days after the date of publication of 
the proposed rule change in the Federal Register or such longer 
period up to 90 days if the Commission determines that a longer 
period is appropriate and publishes the reasons for such 
determination or the self-regulatory organization consents the 
Commission will either: (i) by order approve or disapprove the 
proposed rule change or (ii) institute proceedings to determine 
whether the proposed rule change should be disapproved. 17 U.S.C. 
78s(b)(2)(A). See Release No. 34-69571 (May 14, 2013), 78 FR 29408 
(May 20, 2013).
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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 advance 
notice is consistent with the Clearing Supervision 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-2013-805 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 No. SR-NSCC-2013-805. 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 advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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/downloads/legal/rule_filings/2013/nscc/SR-NSCC-203-805.pdf 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-
2013-805 and should be submitted on or before June 26, 2013.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13773 Filed 6-10-13; 8:45 am]
BILLING CODE 8011-01-P