Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Provide Members With a Risk Management Tool That Will Enable Members To Monitor Trading Activity and Receive Notifications When Pre-Set Trading Limits Are Reached, 12708-12712 [2014-04923]
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12708
Federal Register / Vol. 79, No. 44 / Thursday, March 6, 2014 / Notices
AllianzGI International & Premium
Strategy Fund [File No. 811–21724]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. On October 28,
2013, applicant made a liquidating
distribution to its shareholders, based
on net asset value. Expenses of $68,000
incurred in connection with the
liquidation were paid by applicant.
Filing Date: The application was filed
on January 24, 2014.
Applicant’s Address: 1633 Broadway,
New York, NY 10019.
If AST is unable to locate these
shareholders, the remaining funds will
be held for the period of time specified
by state law and will escheat to the state
after that time. Applicant has retained
$96,300 in cash to pay outstanding
liabilities. Expenses of $69,410 incurred
in connection with the liquidation were
paid by applicant.
Filing Dates: The application was
filed on November 4, 2013, and
amended on February 14, 2014.
Applicant’s Address: c/o Aberdeen
Asset Management Inc., 1735 Market
St., 32nd Floor, Philadelphia, PA 19103.
UBS Master Series Inc. [File No. 811–
4448]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. On June 20, 2013,
applicant made a liquidating
distribution to its shareholders, based
on net asset value. Expenses of $40,430
incurred in connection with the
liquidation were paid by UBS Global
Asset Management (Americas) Inc.,
applicant’s investment adviser.
Filing Date: The application was filed
on January 23, 2014.
Applicant’s Address: 1285 Avenue of
the Americas, 12th Floor, New York, NY
10019–6028.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Kevin M. O’Neill,
Deputy Secretary.
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RiverSource Selected Series, Inc. [File
No. 811–4132]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. Applicant
transferred its assets to Columbia Energy
and Natural Resource Fund, a series of
Columbia Funds Series Trust I, and on
May 31, 2011, made a distribution to its
shareholders based on net asset value.
Expenses of $90,927 incurred in
connection with the reorganization were
paid by applicant and Columbia
Management Investment Advisers, LLC,
applicant’s investment adviser.
Filing Date: The application was filed
on January 29, 2014.
Applicant’s Address: 901 Marquette
Ave. South, Suite 2810, Minneapolis,
MN 55402–3268.
Thai Capital Fund Inc. [File No. 811–
6062]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. On August 23,
2013 and September 30, 2013, applicant
made liquidating distributions to its
shareholders, based on net asset value.
Applicant has 91 shareholders of record.
Undistributed funds are being held by
American Stock Transfer & Trust
Company (‘‘AST’’), pending ongoing
efforts to locate remaining shareholders.
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[FR Doc. 2014–04927 Filed 3–5–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71637; File No. SR–NSCC–
2013–12]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving
Proposed Rule Change To Provide
Members With a Risk Management
Tool That Will Enable Members To
Monitor Trading Activity and Receive
Notifications When Pre-Set Trading
Limits Are Reached
February 28, 2014.
I. Introduction
On November 15, 2013, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
proposed rule change SR–NSCC–2013–
12 (‘‘Proposed Rule Change’’) 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 in the Federal
Register on December 3, 2013.3 NSCC
voluntarily extended the Commission’s
period of review of the Proposed Rule
Change on January 9, 2014. The
Commission received one comment
letter to the Proposed Rule Change 4 and
one response letter from NSCC.5 This
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Release No. 34–70946 (Nov. 26, 2013), 78 FR
72737 (Dec. 3, 2013).
4 Letter to Elizabeth M. Murphy, Secretary,
Commission, from Manisha Kimmel, Executive
Director, Financial Information Forum (‘‘FIF’’) (Dec.
23, 2013) (hereinafter ‘‘FIF Letter’’).
5 Letter to Elizabeth M. Murphy, Secretary,
Commission, from Murray C. Pozmanter, Managing
2 17
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order approves the Proposed Rule
Change.
II. Description
NSCC filed the Proposed Rule Change
to amend its Rules & Procedures
(‘‘Rules’’) in order to implement DTCC
Limit Monitoring, a risk management
tool.6 As discussed below, the tool will
enable NSCC’s members (‘‘Members’’) 7
to view their trading exposure across
markets and at the CUSIP and
individual trade levels through Risk
Entities created by the Member. DTCC
Limit Monitoring will then alert the
Member when trading limits for Risk
Entities are approached and when limits
are reached. Members have discretion to
determine whether to take action in
response to an alert.
A. Trading Data Captured
Through DTCC Limit Monitoring,
Members will be able to monitor the
intraday, post-trade 8 clearing activity of
their own trading desks, their
correspondents, and their clients.9 The
clearing activity captured by DTCC
Limit Monitoring will include: (i) Posttrade data relating to unsettled equity
and fixed income securities trades that
were compared or recorded through
NSCC’s trade capture mechanisms 10 on
that day (‘‘LM Trade Date Data’’), and
(ii) other applicable trade positions that
the Member chooses to input at the start
of or throughout the day (‘‘LM MemberProvided Data’’) (collectively, ‘‘LM
Transaction Data’’).11
Director, Depository Trust and Clearing Corporation
(‘‘DTCC’’) (Jan. 15, 2014) (hereinafter ‘‘NSCC
Response’’).
6 DTCC Limit Monitoring is separate from and
will operate independently of other risk
management tools developed by other market
participants (e.g., registered securities exchanges).
Release No. 34–70946, supra note 3, at 2 n.3.
7 Members that clear trades for others or
participate in special representative transactions
will be required to use DTCC Limit Monitoring.
Approximately 85 percent of Members are in this
category.
8 For the purposes of this Proposed Rule Change,
‘‘post-trade’’ refers to the period in a transaction
lifecycle after it is submitted to NSCC for clearing
and settlement. Release No. 34–70946, supra note
3, at 2 n.4.
9 In compliance with NSCC Rule 49, Members are
only able to view trading activity with respect to
their own clearing account(s).
10 Such mechanisms include NSCC’s Universal
Trade Capture and Real-Time Trade Matching trade
capture and comparisons systems.
11 NSCC states that, since NSCC will not be the
originator of the information made available
through DTCC Limit Monitoring, NSCC will not be
responsible for: (i) The completeness or accuracy of
LM Trade Date Data; (ii) other information or data
that it receives from Members or third parties and
that is used in DTCC Limit Monitoring or received
and compared or recorded by NSCC; or (iii) any
errors, omissions, or delays that may occur in the
transmission of such data or information, as
provided in the Rules. Release No. 34–70946, supra
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B. Establishing Risk Entities
A Member that uses DTCC Limit
Monitoring will create Risk Entities for
its own trading desks, each
correspondent firm, and each client for
which the Member clears trades. The
Member will define each Risk Entity’s
rules for aggregating LM Trade Date
Data and LM Member-Provided Data
and set trading limits 12 based on the net
notional value 13 of the aggregated LM
Transaction Data. DTCC Limit
Monitoring will provide Members a
screen-based view of their LM
Transaction Data for a given day,
aggregated and organized according to
trading limits set by the Member.
positions, will be provided to Members
in both an end-of-day report and a
monthly report.16 Members will be
required to identify primary and
secondary contacts within their firm to
receive alerts and reports. Additionally,
Members will be required to review
their Risk Entities’ alerts and reports on
an on-going basis and, as deemed
appropriate by the Member, modify
trading limits to reflect current trading
activities within each of their Risk
Entities. Changes made by Members
with respect to trading limits will be
made in real-time. All other updates and
changes made by Members to their Risk
Entities will take effect overnight.
C. Trading Limits
DTCC Limit Monitoring will alert a
Member when a pre-set trading limit
with respect to the trading activity of
one of its Risk Entities is approached
and when it is reached. Specifically,
DTCC Limit Monitoring will alert a
Member when the net notional value of
aggregated LM Transaction Data for a
Member’s Risk Entity is:
• 50 percent of the trading limit set
by the Member for that Risk Entity;
• 75 percent of the trading limit set
by the Member for that Risk Entity;
• 90 percent of the trading limit set
by the Member for that Risk Entity; and
• 100 percent of the trading limit set
by the Member for that Risk Entity.14
Members may elect to receive such
alerts through the DTCC Limit
Monitoring interface, email, and/or an
automated electronic message. Members
have the discretion to decide whether to
take action pursuant to an alert.15 Alerts
do not trigger a block by NSCC on any
trading activity processed through
NSCC.
E. Mandatory Use
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D. Risk Entity Reports
Risk Entity information, such as alert
history, characteristics, and end-of-day
note 3, at 7–8. Additionally, because not all
transactions are submitted to NSCC in real-time,
NSCC can only provide Members using DTCC Limit
Monitoring with LM Trade Date Data as it is
compared or recorded through NSCC; accordingly,
LM Trade Date Data may not reflect all transactions.
Id.
12 The rules governing DTCC Limit Monitoring
will refer to such trading limits also as
‘‘parameters.’’ Id. at 5.
13 For purposes of DTCC Limit Monitoring, ‘‘net
notional’’ will mean the sum of the absolute value
of exposure for each security ticker symbol. For
example, a firm that is net-long in Company X for
$50,000 and net-short in Company Z for $100,000
has a net notional exposure of $150,000. Id. at 5 n.5.
14 DTCC Limit Monitoring will also alert a
Member when the trading activity of a Risk Entity
returns below an alert threshold.
15 NSCC may discuss a Member’s use of DTCC
Limit Monitoring, including the trading limits set
by that Member, with the Member.
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Although DTCC Limit Monitoring will
be available to all Members,17 NSCC
will require the following Members to
use the tool: (1) Any NSCC full-service
Member that clears for others; (2) any
NSCC full-service Member that submits
transactions to NSCC’s trade capture
system either as a Qualified Special
Representative (‘‘QSR’’) or Special
Representative, pursuant to Procedure
IV (Special Representative Service) of
the Rules; and (3) any NSCC full-service
Member that has established a 9A/9B
relationship in order to allow another
Member (either a QSR or Special
Representative) to submit locked-in
trade data on its behalf.18 However,
NSCC will not charge a fee for the use
of DTCC Limit Monitoring, whether
voluntary or mandatory, and, according
to NSCC, implementation and use of the
tool will require minimal, if any,
changes to Members’ current systems.
16 NSCC states that reports and data provided to
Members through DTCC Limit Monitoring are not
intended to impact the timing or status of NSCC’s
guaranty of any transaction in NSCC’s Continuous
Net Settlement or Balance Order Securities. Release
No. 34–70946, supra note 3, at 7. Furthermore, the
issuance of information or data, or the lack thereof,
to Members through DTCC Limit Monitoring will
not in and of itself indicate or have any bearing on
the status of any trade, including, but not limited
to, the status of a trade as compared, locked-in,
validated, guaranteed, or not guaranteed trades. Id.
17 NSCC states that since the information
provided by DTCC Limit Monitoring is to be used
by the Member at the Member’s discretion, the
Proposed Rule Change provides that any Member
that registers for DTCC Limit Monitoring shall
indemnify NSCC, and any of NSCC’s employees,
officers, directors, shareholders, agents, and
participants who may sustain any loss, liability, or
expense as a result of a third party claim related to
any act or omission by the Member made in
reliance upon data or information transmitted to the
Member through DTCC Limit Monitoring. Id. at 8.
18 Members that are required to use DTCC Limit
Monitoring will be required to create a Risk Entity
for their own trading desks, as well as for all
correspondents and clients for which the Members
clear trades through NSCC.
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12709
III. Comment Letter and Response
The Commission received one
comment letter to the Proposed Rule
Change 19 and one response letter from
NSCC.20 Below is a summary of the
concerns raised by the commenter
regarding the Proposed Rule Change and
NSCC’s responses to those concerns.
A. Completeness of Trading Data
The commenter argues that DTCC
Limit Monitoring will have incomplete
trading information.21 Specifically, the
commenter claims that the tool will not
capture Institutional Delivery (‘‘ID’’)
trades, options trades, or futures trades
that may hedge or offset positions
captured by the tool.22 The commenter
also states that certain information
identifying the parties to a trade is not
always required or validated by certain
exchanges or other venues that submit
trades to NSCC for clearing; thus, DTCC
Limit Monitoring may not accurately
account for such trades.23 Furthermore,
the commenter points out that not all
trades are submitted to NSCC for
clearance in real-time.24 The commenter
argues that these issues may result in
DTCC Limit Monitoring presenting
incomplete and/or inaccurate trade
positions to Members.25
In response, NSCC acknowledges that
certain transactions, such as ID trades,
options trades, and futures trades are
not within the scope of DTCC Limit
Monitoring, but it believes that
Members will take that fact into
consideration when setting trading
limits and responding to alerts
received.26 Moreover, NSCC believes
that implementation of DTCC Limit
Monitoring should not be delayed in
order to discuss the expansion of the
tool to incorporate transactions outside
the purview of NSCC, which would
likely be a complex endeavor.27 NSCC
also states that it has recently
implement a previously approved rule
that requires all locked-in trade data
submitted to NSCC for trade recording
be submitted in real-time.28 Although
that rule does not apply to
correspondent clearing trades, nor is
there a rule that requires all information
identifying parties to a transaction be
included with each trade submission,
NSCC explains that Members are
19 See
FIF Letter, supra note 4.
NSCC Response, supra note 5.
21 FIF Letter, supra note 4, at 1–2.
22 Id. at 2.
23 Id.
24 Id.
25 See id. at 1–2.
26 NSCC Response, supra note 5, at 4.
27 Id.
28 See id.
20 See
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Federal Register / Vol. 79, No. 44 / Thursday, March 6, 2014 / Notices
permitted and encouraged to take such
action and often do, given the associated
benefits.29 Accordingly, NSCC argues
that DTCC Limit Monitoring, as
currently structured, will offer Members
significant risk management benefits by
providing a single, centralized, and
aggregated view of all equity
transactions submitted to NSCC for
clearance.30
B. Benefits of Trade Alerts
The commenter states that there are
variable benefits offered by DTCC Limit
Monitoring’s post-trade alerts.31 For
example, the commenter argues that
some Members have dedicated
significant resources to proprietary risk
management platforms based on pretrade and/or post-trade alerts, and such
existing platforms may not incorporate
the data provided by DTCC Limit
Monitoring.32 The commenter also
asserts that Members with sophisticated
risk management tools are capable of
measuring, monitoring, and aggregating
such trade data in more detail than
DTCC Limit Monitoring.33 Similarly, the
commenter argues that DTCC Limit
Monitoring does not provide sufficient
granularity because it aggregates trades
by clearing numbers or Market
Participant Identifiers (‘‘MPID’’); thus,
where a Member has multiple trading
desks associated with a single MPID, it
may prove difficult for the Member to
identify the specific source that
triggered a DTCC Limit Monitoring
alert.34 Accordingly, the commenter
suggests that Members should have
flexibility within the tool to determine
the level of granularity of the sources
with respect to Risk Entities, in
accordance with each Member’s risk
management preferences.35 Therefore,
the commenter contends that the
benefits of DTCC Limit Monitoring are
limited, especially for self-clearing
Members with no correspondents.36
In response, NSCC states that DTCC
consulted with its Members and other
industry participants when developing
DTCC Limit Monitoring. Industry
participants indicated that pre-trade
monitoring, as a stand-alone risk
management tool at the Member level,
may not provide adequate protection for
firms or against systemic risk.37 NSCC
also states that DTCC Limit Monitoring
was not developed to replace pre-trade
and real-time risk management tools,
but as an independent, standardized,
post-trade surveillance tool that would
contribute to a multi-layered risk
management system, in efforts to avoid
a single point of failure within such a
system.38 Additionally, NSCC highlights
that Members will be able to integrate
the data and information provided by
DTCC Limit Monitoring with their own
risk management processes as they see
fit.39 Finally, NSCC states that DTCC
Limit Monitoring uses the MPID to
allocate transactions because the MPID
is the standard industry identifier used
by exchanges and other execution
platforms for identifying the origin of an
executed trade.40 Therefore, NSCC
believes that each of its Members,
including those with sophisticated,
internal risk management tools, will
benefit from using DTCC Limit
Monitoring.41 The commenter
acknowledges that some Members
‘‘believe post-trade alerts disseminated
by DTCC would increase market
stability by offering an added level of
protection against clearing firm
failure.’’ 42
C. Operational Burdens
The commenter argues that the
requirement to set and maintain trading
limits imposes a significant operational
burden on Members.43 Specifically, the
commenter states that establishing
meaningful trading limits is not a trivial
task and will require the input of staff
from operations, ‘‘front office,’’ risk, and
compliance.44 Accordingly, the
commenter contends that sufficient
implementation time would be required
in order to set meaningful trading limits
that are consistent with the Member’s
existing risk management platforms.45
Furthermore, the commenter states that
there will be costs associated with the
maintenance of trading limits, including
communications with NSCC regarding
the reasonableness of such limits.46
In response, NSCC states that
Members should not incur a significant
burden in initiating and maintaining
their Risk Entities in DTCC Limit
Monitoring.47 For example, NSCC states
that subscribing to the tool will not
require any system changes for
Members.48 NSCC also states that it has
made available various information
documents, conducted numerous
webinars, held group and one-on-one
information and training sessions, and
met with industry groups and
individual Members to discuss DTCC
Limit Monitoring and to support
Members in anticipation of
implementing the tool and reducing
efforts needed to maintain it.49 NSCC
asserts that it will continue to provide
such support.50 NSCC also states that
many Members already have risk
management staff in place to manage
proprietary risk management platforms,
but NSCC acknowledges that the use of
DTCC Limit Monitoring will require
additional time and effort by such
staff.51 Nevertheless, NSCC believes that
any time spent using DTCC Limit
Monitoring is justified by the risk
management benefits offered by the tool
to Members and the industry.52
D. Consistency of Mandatory
Requirement With Industry Practice
The commenter argues that the
mandatory use of DTCC Limit
Monitoring for certain Members is
inconsistent with other risk
management tools offered by other selfregulatory organizations (‘‘SRO’’).53 For
example, the commenter references risk
management tools by NYSE 54 and
BATS,55 neither of which are mandatory
for their respective members.56
However, the commenter acknowledges
the unique position of NSCC as an
industry-wide utility that impacts a
greater breadth of participants than any
single exchange.57
In response, NSCC highlights that
trading activity processed through those
SROs is subject to other mandatory risk
management requirements (e.g.,
exchange rules regarding ‘‘clearly
erroneous’’ trades).58 NSCC also notes
that those SROs do not assume the same
level of risks as NSCC, which, as a
central counterparty (‘‘CCP’’), has a
greater stake in ensuring that its
Members implement effective risk
management tools.59 NSCC believes that
Members that clear for others or
participate in special representative
transactions must use DTCC Limit
49 Id.
50 See
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at 4–5.
30 Id. at 4.
31 FIF Letter, supra note 4, at 2.
32 Id.
33 Id.
34 Id.
35 Id. at 3.
36 Id. at 2.
37 See NSCC Response, supra note 5, at 5.
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52 Id.
40 Id.
id.
51 Id.
39 Id.
29 Id.
38 Id.
53 FIF
41 See
id.
42 FIF Letter, supra note 4, at 2.
43 Id. at 3.
44 Id.
45 Id.
46 Id.
47 NSCC Response, supra note 5, at 6.
48 Id.
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Letter, supra note 4, at 3.
Release No. 34–71164 (Dec. 20, 2013), 78
FR 79044 (Dec. 27, 2013) (SR–NYSE–2013–08).
55 See Release No. 34–68330 (Nov. 30, 2012), 77
FR 72894 (Dec. 6, 2012) (SR–BATS–2012–045).
56 FIF Letter, supra note 4, at 3.
57 Id.
58 NSCC Response, supra note 5, at 7.
59 Id.
54 See
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Monitoring for it to be maximally
effective because those Members have
less control when clearing and settling
trading activity that is executed by
another firm.60
E. Additional Time To Discuss
Finally, given the concerns it raises,
the commenter believes that additional
discussion is necessary before use of
DTCC Limit Monitoring is required and
that an opportunity exists for a phased
implementation of the tool that will
balance the needs of the Members.61
NSCC responded that it does not
believe the concerns raised by the
commenter warrant additional
discussion before making DTCC Limit
Monitoring a requirement for certain
Members.62 NSCC states that the launch
of DTCC Limit Monitoring will be
followed by a six-month phase-in
period, during which Members can seek
additional support from NSCC in
establishing any internal procedures
with respect to DTCC Limit
Monitoring.63
IV. Discussion and Commission
Findings
Section 19(b)(2)(C)(i) of the Act 64
directs the Commission to approve a
proposed rule change of an SRO if the
Commission finds the proposed rule
change consistent with the requirements
of the Act and the rules and regulations
thereunder applicable to such an
organization. After a thorough review
and careful consideration of the
comments received, the Commission
finds that the Proposed Rule Change is
consistent with the requirements of the
Act, in particular the requirements of
Section 17A of the Act, and the
applicable rules and regulations
thereunder.65 Specifically, the
Commission finds that the Proposed
Rule Change is consistent with Section
17A(b)(3)(F) of the Act 66 and
Commission Rule 17Ad–22(b)(1),67 as
discussed below.
A. Assessment of the Commenter’s
Concerns and NSCC’s Responses
The Commission fully considered the
comment letter and NSCC’s response as
it carefully assessed the Proposed Rule
Change for consistency with the Act.
60 Id.
at 3, 7.
Letter, supra note 4, at 4.
62 NSCC Response, supra note 5, at 7.
63 Id. at 6.
64 15 U.S.C. 78s(b)(2)(C)(i).
65 15 U.S.C. 78q–1. In approving the Proposed
Rule Change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
66 15 U.S.C. 78q–1(b)(3)(F).
67 17 CFR 240.17Ad–22(b)(1).
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61 FIF
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The commenter raises no issues, as
detailed above and addressed below,
that convinced the Commission that the
Proposed Rule Change is inconsistent
with the Act and the applicable rules
and regulations thereunder—the
standard by which the Commission
must evaluate proposed rule changes.68
Additionally, the Commission believes
that NSCC articulates colorable
arguments in its response to the
concerns expressed by the commenter,69
thus satisfying NSCC’s burden to
demonstrate that the Propose Rule
Change is adequately designed to
comply with the Act.
First, the Commission understands
that the trading information captured by
DTCC Limit Monitoring will not reflect
every trade or every detail of every trade
made by Members, as identified by the
commenter and acknowledged by
NSCC.70 Nevertheless, the Commission
believes that the information captured is
sufficiently extensive to provide a
useful risk management tool for
Members. Furthermore DTCC Limit
Monitoring permits Members to input
LM Member-Provided Data.
Second, the Commission recognizes
that Members may disagree on the
usefulness of DTCC Limit Monitoring.
The Commission believes that DTCC
Limit Monitoring will serve as a
practical risk management tool for
Members that do not currently employ
such a tool. Alternatively, for Members
that already use an internal risk
management system, DTCC Limit
Monitoring can serve as a meaningful
backstop to that system in the event of
failure, thus increasing market stability,
as acknowledged by the commenter.71
Third, regarding the operational costs
that DTCC Limit Monitoring may
impose on Members, the Commission
understands that: (i) Access to the tool
will require little, if any, changes to a
Member’s systems; (ii) NSCC has
provided and will continue to provide
support for all Members implementing
and using the tool; and (iii) a six-month
‘‘phase-in’’ period will follow the
enactment of the tool, in order to
accommodate Members that need
additional time or assistance.
Consequently, the Commission believes
that Members should experience
minimal additional costs, either in time
or money, in implementing and
maintaining DTCC Limit Monitoring.
Fourth, the Commission understands
that NSCC will require approximately
68 15
U.S.C. 78s(b)(2)(C)(i).
generally NSCC Response, supra note 5.
70 See FIF Letter, supra note 4, at 1–2; NSCC
Response, supra note 5, at 3–4.
71 See FIF Letter, supra note 4, at 2.
69 See
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12711
85 percent of its Members to use DTCC
Limit Monitoring. Given the unique
risks carried by NSCC as a prominent
CCP, which the commenter
acknowledges,72 and given that there
will be no fee charged for using DTCC
Limit Monitoring, the Commission finds
that the mandatory nature of the tool for
Members that clear trades for other
firms or allow special representative
transactions is reasonable and
appropriate.73
Finally, the Commission does not
believe that further discussions are
needed prior to approving the Proposed
Rule Change and the implementation of
DTCC Limit Monitoring because the
Commission finds the Proposed Rule
Change consistent with the Act, even in
consideration of the concerns raised by
the commenter, and because DTCC
Limit Monitoring will be phased in over
a six-month period.
B. Compliance With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act 74
requires, among other things, that the
rules of a registered clearing agency ‘‘are
designed to promote the prompt and
accurate clearance and settlement of
securities transactions . . ., to assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.’’ 75
As a CCP, NSCC occupies an
important role in the securities
settlement system by interposing itself
between counterparties to financial
transactions, thereby reducing certain
risks faced by Members and
contributing to global financial stability.
In this role, NSCC is necessarily subject
to certain risks in the event of a Member
default—risks that could also affect
other Members and the marketplace as
a whole. DTCC Limit Monitoring is
designed to help mitigate the risk of a
Member default by providing all
Members with a tool to monitor their
aggregated net notional trading activity,
via Risk Entities, for transactions
submitted to NSCC and any other
transactions included by the Member as
LM Member-Provided Data. By enabling
all Members to monitor intraday trading
activity for their Risk Entities and by
alerting a Member when its activity
approaches and breaches Member-set
72 FIF
Letter, supra note 4, at 3.
Commission notes that other SROs have
implemented mandatory risk management tools.
See, e.g., Release Nos. 34–70132 (Aug. 7, 2013), 78
FR 49311 (Aug. 13, 2013) (SR–ISE–2013–38) and
34–71252 (Jan. 7, 2014), 79 FR 2224 (Jan. 13, 2014)
(SR–NYSEMKT–2013–106).
74 15 U.S.C. 78q–1(b)(3)(F).
75 Id.
73 The
E:\FR\FM\06MRN1.SGM
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Federal Register / Vol. 79, No. 44 / Thursday, March 6, 2014 / Notices
trading limits, DTCC Limit Monitoring
can notify a Member of trading
abnormalities that could threaten the
stability of the Member and, potentially,
NSCC’s ability to clear and settle
transactions or safeguard securities in
its possession. Therefore, the
Commission finds the Proposed Rule
Change compliant with Section
17A(b)(3)(F) of the Act.76
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,80 that the
proposed rule change SR–NSCC–2013–
12 be and hereby is approved as of the
date of this order.
C. Compliance With Commission Rule
17Ad–22(b)(1)
[FR Doc. 2014–04923 Filed 3–5–14; 8:45 am]
Commission Rule 17Ad–22(b)(1)
regarding measurement and
management of credit exposure requires
a CCP to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
measure its credit exposures to its
participants at least once a day and limit
its exposures to potential losses from
defaults by its participants under
normal market conditions so that the
operations of the CCP would not be
disrupted and non-defaulting
participants would not be exposed to
losses that they cannot anticipate or
control.77
DTCC Limit Monitoring will enable
Members to monitor intraday trading
activity for each of their Risk Entities
and will alert Members when such
activity approaches and breaches
Member-set trading limits. At NSCC,
that trading activity manifests as credit
risk borne by NSCC. Therefore, by
providing Members notification of
possible trading abnormalities, DTCC
Limit Monitoring serves as an NSCC risk
management tool. Moreover, absent the
tool’s alert feature, particularly where a
Member lacks an internal risk
management system or such system has
failed, trading abnormalities may go
unnoticed, which could increase the
likelihood of a Member default,
including NSCC’s and non-defaulting
Members’ risk. As such, the
Commission finds the Proposed Rule
Change consistent with Rule 17Ad–
22(b)(1).78
tkelley on DSK3SPTVN1PROD with NOTICES6
V. Conclusion
On the basis of the foregoing, the
Commission finds the Proposed Rule
Change consistent with the
requirements of the Act, particularly
with the requirements of Section 17A of
the Act,79 and the rules and regulations
thereunder.
76 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(b)(1). Commission Rule
17Ad–22(b)(1) was adopted as part of the Clearing
Agency Standards. Release No. 34–68080 (Oct. 22,
2012), 77 FR 66219 (Nov. 2, 2012).
78 Id.
79 15 U.S.C. 78q–1.
77 17
VerDate Mar<15>2010
17:07 Mar 05, 2014
Jkt 232001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.81
Kevin M. O’Neill,
Deputy Secretary.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71636; File No. SR–FINRA–
2013–036]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Designation
of Longer Period for Commission
Action on Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by
Amendment No. 1, Relating to Wash
Sale Transactions and FINRA Rule
5210 (Publication of Transactions and
Quotations)
February 28, 2014.
On August 15, 2013, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to add
Supplementary Material .02 to FINRA
Rule 5210 (Publication of Transactions
and Quotations) to emphasize that wash
sale transactions are generally non-bona
fide transactions and that members have
an obligation to have policies and
procedures in place to review their
trading activity for, and prevent, wash
sale transactions. The proposed rule
change was published for comment in
the Federal Register on September 4,
2013.3 The Commission received five
comment letters on the proposed rule
change.4 On October 4, 2013, the
80 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70276
(August 28, 2013), 78 FR 54502 (‘‘Notice’’).
4 See letter from Anonymous to Elizabeth M.
Murphy, Secretary, Commission, dated September
9, 2013 (‘‘Anonymous Letter’’); letter from William
A. Jacobson, Clinical Professor of Law, and Director,
Cornell Securities Law Clinic, and Jimin Lee,
Cornell University Law School, to Elizabeth M.
Murphy, Secretary, Commission, dated September
25, 2013 (‘‘Cornell Letter’’); letter from Stuart J.
Kaswell, Executive Vice President, Managing
Director and General Counsel, Managed Funds
81 17
PO 00000
Frm 00027
Fmt 4703
Sfmt 4703
Commission extended the time period
for Commission action to December 3,
2013.5 On December 2, 2013, FINRA
submitted a response to the comment
letters 6 and filed Amendment No. 1 to
the proposed rule change. On December
3, 2013, the Commission published for
comment both Amendment No. 1 and
an order instituting proceedings under
Section 19(b)(2)(B) of the Act 7 to
determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment No. 1.8 The
Commission received three comment
letters on the Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings.9 On February 24, 2014,
FINRA submitted a response to the
comment letters.10
Section 19(b)(2)(B)(ii)(I) of the Act
provides that, after initiating
disapproval proceedings, the
Commission shall issue an order
approving or disapproving a proposed
rule change not later than 180 days after
the date of publication of notice of the
filing of the proposed rule change.11 The
Commission may extend the period for
issuing an order approving or
disapproving the proposed rule change,
however, by not more than 60 days if
the Commission determines that a
longer period is appropriate and
publishes the reasons for the
Association, to Elizabeth M. Murphy, Secretary,
Commission, dated September 25, 2013 (‘‘MFA
Letter’’); letter from Manisha Kimmel, Executive
Director, Financial Industry Forum, to Elizabeth M.
Murphy, Secretary, Commission, dated September
25, 2013 (‘‘FIF Letter’’); and letter from Theodore
R. Lazo, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets
Association, to Elizabeth M. Murphy, Secretary,
Commission, dated October 4, 2013 (‘‘SIFMA
Letter’’).
5 See Securities Exchange Act Release No. 70613
(October 4, 2013), 78 FR 62784 (October 22, 2013).
6 See letter from Brant K. Brown, Associate
General Counsel, FINRA, to Elizabeth M. Murphy,
Secretary, Commission, dated December 2, 2013
(‘‘FINRA Response 1’’).
7 15 U.S.C. 78s(b)(2)(B).
8 See Securities Exchange Act Release No. 70966
(December 3, 2013), 78 FR 73900 (December 9,
2013) (‘‘Notice of Filing of Amendment No. 1 and
Order Instituting Proceedings’’).
9 See letter from Manisha Kimmel, Executive
Director, Financial Industry Forum, to Elizabeth M.
Murphy, Secretary, Commission, dated December
23, 2013 (‘‘FIF Letter 2’’); letter from Mary Ann
Burns, Chief Operating Officer, Futures Industry
Association, to Elizabeth M. Murphy, Secretary,
Commission, dated January 6, 2014 (‘‘FIA PTG
Letter’’); and letter from Theodore R. Lazo,
Managing Director and Associate General Counsel,
Securities Industry and Financial Markets
Association, to Elizabeth M. Murphy, Secretary,
Commission, dated January 13, 2014 (‘‘SIFMA
Letter 2’’).
10 See letter from Brant K. Brown, Associate
General Counsel, FINRA, to Elizabeth M. Murphy,
Secretary, Commission, dated February 24, 2014
(‘‘FINRA Response 2’’).
11 15 U.S.C. 78s(b)(2)(B)(ii)(I).
E:\FR\FM\06MRN1.SGM
06MRN1
]]>Agencies
[Federal Register Volume 79, Number 44 (Thursday, March 6, 2014)]
[Notices]
[Pages 12708-12712]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04923]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71637; File No. SR-NSCC-2013-12]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Provide Members
With a Risk Management Tool That Will Enable Members To Monitor Trading
Activity and Receive Notifications When Pre-Set Trading Limits Are
Reached
February 28, 2014.
I. Introduction
On November 15, 2013, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2013-12 (``Proposed Rule
Change'') 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 in the Federal Register on December 3, 2013.\3\
NSCC voluntarily extended the Commission's period of review of the
Proposed Rule Change on January 9, 2014. The Commission received one
comment letter to the Proposed Rule Change \4\ and one response letter
from NSCC.\5\ This order approves the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Release No. 34-70946 (Nov. 26, 2013), 78 FR 72737 (Dec. 3,
2013).
\4\ Letter to Elizabeth M. Murphy, Secretary, Commission, from
Manisha Kimmel, Executive Director, Financial Information Forum
(``FIF'') (Dec. 23, 2013) (hereinafter ``FIF Letter'').
\5\ Letter to Elizabeth M. Murphy, Secretary, Commission, from
Murray C. Pozmanter, Managing Director, Depository Trust and
Clearing Corporation (``DTCC'') (Jan. 15, 2014) (hereinafter ``NSCC
Response'').
---------------------------------------------------------------------------
II. Description
NSCC filed the Proposed Rule Change to amend its Rules & Procedures
(``Rules'') in order to implement DTCC Limit Monitoring, a risk
management tool.\6\ As discussed below, the tool will enable NSCC's
members (``Members'') \7\ to view their trading exposure across markets
and at the CUSIP and individual trade levels through Risk Entities
created by the Member. DTCC Limit Monitoring will then alert the Member
when trading limits for Risk Entities are approached and when limits
are reached. Members have discretion to determine whether to take
action in response to an alert.
---------------------------------------------------------------------------
\6\ DTCC Limit Monitoring is separate from and will operate
independently of other risk management tools developed by other
market participants (e.g., registered securities exchanges). Release
No. 34-70946, supra note 3, at 2 n.3.
\7\ Members that clear trades for others or participate in
special representative transactions will be required to use DTCC
Limit Monitoring. Approximately 85 percent of Members are in this
category.
---------------------------------------------------------------------------
A. Trading Data Captured
Through DTCC Limit Monitoring, Members will be able to monitor the
intraday, post-trade \8\ clearing activity of their own trading desks,
their correspondents, and their clients.\9\ The clearing activity
captured by DTCC Limit Monitoring will include: (i) Post-trade data
relating to unsettled equity and fixed income securities trades that
were compared or recorded through NSCC's trade capture mechanisms \10\
on that day (``LM Trade Date Data''), and (ii) other applicable trade
positions that the Member chooses to input at the start of or
throughout the day (``LM Member-Provided Data'') (collectively, ``LM
Transaction Data'').\11\
---------------------------------------------------------------------------
\8\ For the purposes of this Proposed Rule Change, ``post-
trade'' refers to the period in a transaction lifecycle after it is
submitted to NSCC for clearing and settlement. Release No. 34-70946,
supra note 3, at 2 n.4.
\9\ In compliance with NSCC Rule 49, Members are only able to
view trading activity with respect to their own clearing account(s).
\10\ Such mechanisms include NSCC's Universal Trade Capture and
Real-Time Trade Matching trade capture and comparisons systems.
\11\ NSCC states that, since NSCC will not be the originator of
the information made available through DTCC Limit Monitoring, NSCC
will not be responsible for: (i) The completeness or accuracy of LM
Trade Date Data; (ii) other information or data that it receives
from Members or third parties and that is used in DTCC Limit
Monitoring or received and compared or recorded by NSCC; or (iii)
any errors, omissions, or delays that may occur in the transmission
of such data or information, as provided in the Rules. Release No.
34-70946, supra note 3, at 7-8. Additionally, because not all
transactions are submitted to NSCC in real-time, NSCC can only
provide Members using DTCC Limit Monitoring with LM Trade Date Data
as it is compared or recorded through NSCC; accordingly, LM Trade
Date Data may not reflect all transactions. Id.
---------------------------------------------------------------------------
[[Page 12709]]
B. Establishing Risk Entities
A Member that uses DTCC Limit Monitoring will create Risk Entities
for its own trading desks, each correspondent firm, and each client for
which the Member clears trades. The Member will define each Risk
Entity's rules for aggregating LM Trade Date Data and LM Member-
Provided Data and set trading limits \12\ based on the net notional
value \13\ of the aggregated LM Transaction Data. DTCC Limit Monitoring
will provide Members a screen-based view of their LM Transaction Data
for a given day, aggregated and organized according to trading limits
set by the Member.
---------------------------------------------------------------------------
\12\ The rules governing DTCC Limit Monitoring will refer to
such trading limits also as ``parameters.'' Id. at 5.
\13\ For purposes of DTCC Limit Monitoring, ``net notional''
will mean the sum of the absolute value of exposure for each
security ticker symbol. For example, a firm that is net-long in
Company X for $50,000 and net-short in Company Z for $100,000 has a
net notional exposure of $150,000. Id. at 5 n.5.
---------------------------------------------------------------------------
C. Trading Limits
DTCC Limit Monitoring will alert a Member when a pre-set trading
limit with respect to the trading activity of one of its Risk Entities
is approached and when it is reached. Specifically, DTCC Limit
Monitoring will alert a Member when the net notional value of
aggregated LM Transaction Data for a Member's Risk Entity is:
50 percent of the trading limit set by the Member for that
Risk Entity;
75 percent of the trading limit set by the Member for that
Risk Entity;
90 percent of the trading limit set by the Member for that
Risk Entity; and
100 percent of the trading limit set by the Member for
that Risk Entity.\14\
\14\ DTCC Limit Monitoring will also alert a Member when the
trading activity of a Risk Entity returns below an alert threshold.
Members may elect to receive such alerts through the DTCC Limit
Monitoring interface, email, and/or an automated electronic message.
Members have the discretion to decide whether to take action pursuant
to an alert.\15\ Alerts do not trigger a block by NSCC on any trading
activity processed through NSCC.
---------------------------------------------------------------------------
\15\ NSCC may discuss a Member's use of DTCC Limit Monitoring,
including the trading limits set by that Member, with the Member.
---------------------------------------------------------------------------
D. Risk Entity Reports
Risk Entity information, such as alert history, characteristics,
and end-of-day positions, will be provided to Members in both an end-
of-day report and a monthly report.\16\ Members will be required to
identify primary and secondary contacts within their firm to receive
alerts and reports. Additionally, Members will be required to review
their Risk Entities' alerts and reports on an on-going basis and, as
deemed appropriate by the Member, modify trading limits to reflect
current trading activities within each of their Risk Entities. Changes
made by Members with respect to trading limits will be made in real-
time. All other updates and changes made by Members to their Risk
Entities will take effect overnight.
---------------------------------------------------------------------------
\16\ NSCC states that reports and data provided to Members
through DTCC Limit Monitoring are not intended to impact the timing
or status of NSCC's guaranty of any transaction in NSCC's Continuous
Net Settlement or Balance Order Securities. Release No. 34-70946,
supra note 3, at 7. Furthermore, the issuance of information or
data, or the lack thereof, to Members through DTCC Limit Monitoring
will not in and of itself indicate or have any bearing on the status
of any trade, including, but not limited to, the status of a trade
as compared, locked-in, validated, guaranteed, or not guaranteed
trades. Id.
---------------------------------------------------------------------------
E. Mandatory Use
Although DTCC Limit Monitoring will be available to all
Members,\17\ NSCC will require the following Members to use the tool:
(1) Any NSCC full-service Member that clears for others; (2) any NSCC
full-service Member that submits transactions to NSCC's trade capture
system either as a Qualified Special Representative (``QSR'') or
Special Representative, pursuant to Procedure IV (Special
Representative Service) of the Rules; and (3) any NSCC full-service
Member that has established a 9A/9B relationship in order to allow
another Member (either a QSR or Special Representative) to submit
locked-in trade data on its behalf.\18\ However, NSCC will not charge a
fee for the use of DTCC Limit Monitoring, whether voluntary or
mandatory, and, according to NSCC, implementation and use of the tool
will require minimal, if any, changes to Members' current systems.
---------------------------------------------------------------------------
\17\ NSCC states that since the information provided by DTCC
Limit Monitoring is to be used by the Member at the Member's
discretion, the Proposed Rule Change provides that any Member that
registers for DTCC Limit Monitoring shall indemnify NSCC, and any of
NSCC's employees, officers, directors, shareholders, agents, and
participants who may sustain any loss, liability, or expense as a
result of a third party claim related to any act or omission by the
Member made in reliance upon data or information transmitted to the
Member through DTCC Limit Monitoring. Id. at 8.
\18\ Members that are required to use DTCC Limit Monitoring will
be required to create a Risk Entity for their own trading desks, as
well as for all correspondents and clients for which the Members
clear trades through NSCC.
---------------------------------------------------------------------------
III. Comment Letter and Response
The Commission received one comment letter to the Proposed Rule
Change \19\ and one response letter from NSCC.\20\ Below is a summary
of the concerns raised by the commenter regarding the Proposed Rule
Change and NSCC's responses to those concerns.
---------------------------------------------------------------------------
\19\ See FIF Letter, supra note 4.
\20\ See NSCC Response, supra note 5.
---------------------------------------------------------------------------
A. Completeness of Trading Data
The commenter argues that DTCC Limit Monitoring will have
incomplete trading information.\21\ Specifically, the commenter claims
that the tool will not capture Institutional Delivery (``ID'') trades,
options trades, or futures trades that may hedge or offset positions
captured by the tool.\22\ The commenter also states that certain
information identifying the parties to a trade is not always required
or validated by certain exchanges or other venues that submit trades to
NSCC for clearing; thus, DTCC Limit Monitoring may not accurately
account for such trades.\23\ Furthermore, the commenter points out that
not all trades are submitted to NSCC for clearance in real-time.\24\
The commenter argues that these issues may result in DTCC Limit
Monitoring presenting incomplete and/or inaccurate trade positions to
Members.\25\
---------------------------------------------------------------------------
\21\ FIF Letter, supra note 4, at 1-2.
\22\ Id. at 2.
\23\ Id.
\24\ Id.
\25\ See id. at 1-2.
---------------------------------------------------------------------------
In response, NSCC acknowledges that certain transactions, such as
ID trades, options trades, and futures trades are not within the scope
of DTCC Limit Monitoring, but it believes that Members will take that
fact into consideration when setting trading limits and responding to
alerts received.\26\ Moreover, NSCC believes that implementation of
DTCC Limit Monitoring should not be delayed in order to discuss the
expansion of the tool to incorporate transactions outside the purview
of NSCC, which would likely be a complex endeavor.\27\ NSCC also states
that it has recently implement a previously approved rule that requires
all locked-in trade data submitted to NSCC for trade recording be
submitted in real-time.\28\ Although that rule does not apply to
correspondent clearing trades, nor is there a rule that requires all
information identifying parties to a transaction be included with each
trade submission, NSCC explains that Members are
[[Page 12710]]
permitted and encouraged to take such action and often do, given the
associated benefits.\29\ Accordingly, NSCC argues that DTCC Limit
Monitoring, as currently structured, will offer Members significant
risk management benefits by providing a single, centralized, and
aggregated view of all equity transactions submitted to NSCC for
clearance.\30\
---------------------------------------------------------------------------
\26\ NSCC Response, supra note 5, at 4.
\27\ Id.
\28\ See id.
\29\ Id. at 4-5.
\30\ Id. at 4.
---------------------------------------------------------------------------
B. Benefits of Trade Alerts
The commenter states that there are variable benefits offered by
DTCC Limit Monitoring's post-trade alerts.\31\ For example, the
commenter argues that some Members have dedicated significant resources
to proprietary risk management platforms based on pre-trade and/or
post-trade alerts, and such existing platforms may not incorporate the
data provided by DTCC Limit Monitoring.\32\ The commenter also asserts
that Members with sophisticated risk management tools are capable of
measuring, monitoring, and aggregating such trade data in more detail
than DTCC Limit Monitoring.\33\ Similarly, the commenter argues that
DTCC Limit Monitoring does not provide sufficient granularity because
it aggregates trades by clearing numbers or Market Participant
Identifiers (``MPID''); thus, where a Member has multiple trading desks
associated with a single MPID, it may prove difficult for the Member to
identify the specific source that triggered a DTCC Limit Monitoring
alert.\34\ Accordingly, the commenter suggests that Members should have
flexibility within the tool to determine the level of granularity of
the sources with respect to Risk Entities, in accordance with each
Member's risk management preferences.\35\ Therefore, the commenter
contends that the benefits of DTCC Limit Monitoring are limited,
especially for self-clearing Members with no correspondents.\36\
---------------------------------------------------------------------------
\31\ FIF Letter, supra note 4, at 2.
\32\ Id.
\33\ Id.
\34\ Id.
\35\ Id. at 3.
\36\ Id. at 2.
---------------------------------------------------------------------------
In response, NSCC states that DTCC consulted with its Members and
other industry participants when developing DTCC Limit Monitoring.
Industry participants indicated that pre-trade monitoring, as a stand-
alone risk management tool at the Member level, may not provide
adequate protection for firms or against systemic risk.\37\ NSCC also
states that DTCC Limit Monitoring was not developed to replace pre-
trade and real-time risk management tools, but as an independent,
standardized, post-trade surveillance tool that would contribute to a
multi-layered risk management system, in efforts to avoid a single
point of failure within such a system.\38\ Additionally, NSCC
highlights that Members will be able to integrate the data and
information provided by DTCC Limit Monitoring with their own risk
management processes as they see fit.\39\ Finally, NSCC states that
DTCC Limit Monitoring uses the MPID to allocate transactions because
the MPID is the standard industry identifier used by exchanges and
other execution platforms for identifying the origin of an executed
trade.\40\ Therefore, NSCC believes that each of its Members, including
those with sophisticated, internal risk management tools, will benefit
from using DTCC Limit Monitoring.\41\ The commenter acknowledges that
some Members ``believe post-trade alerts disseminated by DTCC would
increase market stability by offering an added level of protection
against clearing firm failure.'' \42\
---------------------------------------------------------------------------
\37\ See NSCC Response, supra note 5, at 5.
\38\ Id.
\39\ Id.
\40\ Id.
\41\ See id.
\42\ FIF Letter, supra note 4, at 2.
---------------------------------------------------------------------------
C. Operational Burdens
The commenter argues that the requirement to set and maintain
trading limits imposes a significant operational burden on Members.\43\
Specifically, the commenter states that establishing meaningful trading
limits is not a trivial task and will require the input of staff from
operations, ``front office,'' risk, and compliance.\44\ Accordingly,
the commenter contends that sufficient implementation time would be
required in order to set meaningful trading limits that are consistent
with the Member's existing risk management platforms.\45\ Furthermore,
the commenter states that there will be costs associated with the
maintenance of trading limits, including communications with NSCC
regarding the reasonableness of such limits.\46\
---------------------------------------------------------------------------
\43\ Id. at 3.
\44\ Id.
\45\ Id.
\46\ Id.
---------------------------------------------------------------------------
In response, NSCC states that Members should not incur a
significant burden in initiating and maintaining their Risk Entities in
DTCC Limit Monitoring.\47\ For example, NSCC states that subscribing to
the tool will not require any system changes for Members.\48\ NSCC also
states that it has made available various information documents,
conducted numerous webinars, held group and one-on-one information and
training sessions, and met with industry groups and individual Members
to discuss DTCC Limit Monitoring and to support Members in anticipation
of implementing the tool and reducing efforts needed to maintain
it.\49\ NSCC asserts that it will continue to provide such support.\50\
NSCC also states that many Members already have risk management staff
in place to manage proprietary risk management platforms, but NSCC
acknowledges that the use of DTCC Limit Monitoring will require
additional time and effort by such staff.\51\ Nevertheless, NSCC
believes that any time spent using DTCC Limit Monitoring is justified
by the risk management benefits offered by the tool to Members and the
industry.\52\
---------------------------------------------------------------------------
\47\ NSCC Response, supra note 5, at 6.
\48\ Id.
\49\ Id.
\50\ See id.
\51\ Id.
\52\ Id.
---------------------------------------------------------------------------
D. Consistency of Mandatory Requirement With Industry Practice
The commenter argues that the mandatory use of DTCC Limit
Monitoring for certain Members is inconsistent with other risk
management tools offered by other self-regulatory organizations
(``SRO'').\53\ For example, the commenter references risk management
tools by NYSE \54\ and BATS,\55\ neither of which are mandatory for
their respective members.\56\ However, the commenter acknowledges the
unique position of NSCC as an industry-wide utility that impacts a
greater breadth of participants than any single exchange.\57\
---------------------------------------------------------------------------
\53\ FIF Letter, supra note 4, at 3.
\54\ See Release No. 34-71164 (Dec. 20, 2013), 78 FR 79044 (Dec.
27, 2013) (SR-NYSE-2013-08).
\55\ See Release No. 34-68330 (Nov. 30, 2012), 77 FR 72894 (Dec.
6, 2012) (SR-BATS-2012-045).
\56\ FIF Letter, supra note 4, at 3.
\57\ Id.
---------------------------------------------------------------------------
In response, NSCC highlights that trading activity processed
through those SROs is subject to other mandatory risk management
requirements (e.g., exchange rules regarding ``clearly erroneous''
trades).\58\ NSCC also notes that those SROs do not assume the same
level of risks as NSCC, which, as a central counterparty (``CCP''), has
a greater stake in ensuring that its Members implement effective risk
management tools.\59\ NSCC believes that Members that clear for others
or participate in special representative transactions must use DTCC
Limit
[[Page 12711]]
Monitoring for it to be maximally effective because those Members have
less control when clearing and settling trading activity that is
executed by another firm.\60\
---------------------------------------------------------------------------
\58\ NSCC Response, supra note 5, at 7.
\59\ Id.
\60\ Id. at 3, 7.
---------------------------------------------------------------------------
E. Additional Time To Discuss
Finally, given the concerns it raises, the commenter believes that
additional discussion is necessary before use of DTCC Limit Monitoring
is required and that an opportunity exists for a phased implementation
of the tool that will balance the needs of the Members.\61\
---------------------------------------------------------------------------
\61\ FIF Letter, supra note 4, at 4.
---------------------------------------------------------------------------
NSCC responded that it does not believe the concerns raised by the
commenter warrant additional discussion before making DTCC Limit
Monitoring a requirement for certain Members.\62\ NSCC states that the
launch of DTCC Limit Monitoring will be followed by a six-month phase-
in period, during which Members can seek additional support from NSCC
in establishing any internal procedures with respect to DTCC Limit
Monitoring.\63\
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\62\ NSCC Response, supra note 5, at 7.
\63\ Id. at 6.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C)(i) of the Act \64\ directs the Commission to
approve a proposed rule change of an SRO if the Commission finds the
proposed rule change consistent with the requirements of the Act and
the rules and regulations thereunder applicable to such an
organization. After a thorough review and careful consideration of the
comments received, the Commission finds that the Proposed Rule Change
is consistent with the requirements of the Act, in particular the
requirements of Section 17A of the Act, and the applicable rules and
regulations thereunder.\65\ Specifically, the Commission finds that the
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act
\66\ and Commission Rule 17Ad-22(b)(1),\67\ as discussed below.
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\64\ 15 U.S.C. 78s(b)(2)(C)(i).
\65\ 15 U.S.C. 78q-1. In approving the Proposed Rule Change, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\66\ 15 U.S.C. 78q-1(b)(3)(F).
\67\ 17 CFR 240.17Ad-22(b)(1).
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A. Assessment of the Commenter's Concerns and NSCC's Responses
The Commission fully considered the comment letter and NSCC's
response as it carefully assessed the Proposed Rule Change for
consistency with the Act. The commenter raises no issues, as detailed
above and addressed below, that convinced the Commission that the
Proposed Rule Change is inconsistent with the Act and the applicable
rules and regulations thereunder--the standard by which the Commission
must evaluate proposed rule changes.\68\ Additionally, the Commission
believes that NSCC articulates colorable arguments in its response to
the concerns expressed by the commenter,\69\ thus satisfying NSCC's
burden to demonstrate that the Propose Rule Change is adequately
designed to comply with the Act.
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\68\ 15 U.S.C. 78s(b)(2)(C)(i).
\69\ See generally NSCC Response, supra note 5.
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First, the Commission understands that the trading information
captured by DTCC Limit Monitoring will not reflect every trade or every
detail of every trade made by Members, as identified by the commenter
and acknowledged by NSCC.\70\ Nevertheless, the Commission believes
that the information captured is sufficiently extensive to provide a
useful risk management tool for Members. Furthermore DTCC Limit
Monitoring permits Members to input LM Member-Provided Data.
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\70\ See FIF Letter, supra note 4, at 1-2; NSCC Response, supra
note 5, at 3-4.
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Second, the Commission recognizes that Members may disagree on the
usefulness of DTCC Limit Monitoring. The Commission believes that DTCC
Limit Monitoring will serve as a practical risk management tool for
Members that do not currently employ such a tool. Alternatively, for
Members that already use an internal risk management system, DTCC Limit
Monitoring can serve as a meaningful backstop to that system in the
event of failure, thus increasing market stability, as acknowledged by
the commenter.\71\
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\71\ See FIF Letter, supra note 4, at 2.
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Third, regarding the operational costs that DTCC Limit Monitoring
may impose on Members, the Commission understands that: (i) Access to
the tool will require little, if any, changes to a Member's systems;
(ii) NSCC has provided and will continue to provide support for all
Members implementing and using the tool; and (iii) a six-month ``phase-
in'' period will follow the enactment of the tool, in order to
accommodate Members that need additional time or assistance.
Consequently, the Commission believes that Members should experience
minimal additional costs, either in time or money, in implementing and
maintaining DTCC Limit Monitoring.
Fourth, the Commission understands that NSCC will require
approximately 85 percent of its Members to use DTCC Limit Monitoring.
Given the unique risks carried by NSCC as a prominent CCP, which the
commenter acknowledges,\72\ and given that there will be no fee charged
for using DTCC Limit Monitoring, the Commission finds that the
mandatory nature of the tool for Members that clear trades for other
firms or allow special representative transactions is reasonable and
appropriate.\73\
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\72\ FIF Letter, supra note 4, at 3.
\73\ The Commission notes that other SROs have implemented
mandatory risk management tools. See, e.g., Release Nos. 34-70132
(Aug. 7, 2013), 78 FR 49311 (Aug. 13, 2013) (SR-ISE-2013-38) and 34-
71252 (Jan. 7, 2014), 79 FR 2224 (Jan. 13, 2014) (SR-NYSEMKT-2013-
106).
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Finally, the Commission does not believe that further discussions
are needed prior to approving the Proposed Rule Change and the
implementation of DTCC Limit Monitoring because the Commission finds
the Proposed Rule Change consistent with the Act, even in consideration
of the concerns raised by the commenter, and because DTCC Limit
Monitoring will be phased in over a six-month period.
B. Compliance With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \74\ requires, among other things,
that the rules of a registered clearing agency ``are designed to
promote the prompt and accurate clearance and settlement of securities
transactions . . ., to assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible.'' \75\
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\74\ 15 U.S.C. 78q-1(b)(3)(F).
\75\ Id.
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As a CCP, NSCC occupies an important role in the securities
settlement system by interposing itself between counterparties to
financial transactions, thereby reducing certain risks faced by Members
and contributing to global financial stability. In this role, NSCC is
necessarily subject to certain risks in the event of a Member default--
risks that could also affect other Members and the marketplace as a
whole. DTCC Limit Monitoring is designed to help mitigate the risk of a
Member default by providing all Members with a tool to monitor their
aggregated net notional trading activity, via Risk Entities, for
transactions submitted to NSCC and any other transactions included by
the Member as LM Member-Provided Data. By enabling all Members to
monitor intraday trading activity for their Risk Entities and by
alerting a Member when its activity approaches and breaches Member-set
[[Page 12712]]
trading limits, DTCC Limit Monitoring can notify a Member of trading
abnormalities that could threaten the stability of the Member and,
potentially, NSCC's ability to clear and settle transactions or
safeguard securities in its possession. Therefore, the Commission finds
the Proposed Rule Change compliant with Section 17A(b)(3)(F) of the
Act.\76\
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\76\ 15 U.S.C. 78q-1(b)(3)(F).
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C. Compliance With Commission Rule 17Ad-22(b)(1)
Commission Rule 17Ad-22(b)(1) regarding measurement and management
of credit exposure requires a CCP to establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
measure its credit exposures to its participants at least once a day
and limit its exposures to potential losses from defaults by its
participants under normal market conditions so that the operations of
the CCP would not be disrupted and non-defaulting participants would
not be exposed to losses that they cannot anticipate or control.\77\
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\77\ 17 CFR 240.17Ad-22(b)(1). Commission Rule 17Ad-22(b)(1) was
adopted as part of the Clearing Agency Standards. Release No. 34-
68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 2012).
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DTCC Limit Monitoring will enable Members to monitor intraday
trading activity for each of their Risk Entities and will alert Members
when such activity approaches and breaches Member-set trading limits.
At NSCC, that trading activity manifests as credit risk borne by NSCC.
Therefore, by providing Members notification of possible trading
abnormalities, DTCC Limit Monitoring serves as an NSCC risk management
tool. Moreover, absent the tool's alert feature, particularly where a
Member lacks an internal risk management system or such system has
failed, trading abnormalities may go unnoticed, which could increase
the likelihood of a Member default, including NSCC's and non-defaulting
Members' risk. As such, the Commission finds the Proposed Rule Change
consistent with Rule 17Ad-22(b)(1).\78\
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\78\ Id.
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V. Conclusion
On the basis of the foregoing, the Commission finds the Proposed
Rule Change consistent with the requirements of the Act, particularly
with the requirements of Section 17A of the Act,\79\ and the rules and
regulations thereunder.
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\79\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\80\ that the proposed rule change SR-NSCC-2013-12 be and hereby is
approved as of the date of this order.
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\80\ 15 U.S.C. 78s(b)(2).
\81\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\81\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04923 Filed 3-5-14; 8:45 am]
BILLING CODE 8011-01-P
