Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Advance Notice To Adopt a New Stock Options and Futures Settlement Agreement With The Options Clearing Corporation, 31123-31130 [2017-14015]
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Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices
(B) Clearing Agency’s Statement on
Burden on Competition
ICC does not believe the proposed
rule changes would have any impact, or
impose any burden, on competition.
The changes to ICC’s eligible collateral
apply uniformly across all market
participants. Therefore, ICC does not
believe the proposed rule changes
impose any burden on competition that
is inappropriate in furtherance of the
purposes of the Act.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments relating to the
proposed rule change have not been
solicited or received. ICC will notify the
Commission of any written comments
received by ICC.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
only one method. The Commission will
post all comments on the Commission’s
internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filings will also be available for
inspection and copying at the principal
office of ICE Clear Credit and on ICE
Clear Credit’s Web site at https://
www.theice.com/clear-credit/regulation.
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
Number SR–ICC–2017–010 and should
be submitted on or before July 26, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–14013 Filed 7–3–17; 8:45 am]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ICC–2017–010 on the subject line.
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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:
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Advance Notice To Adopt a New Stock
Options and Futures Settlement
Agreement With The Options Clearing
Corporation
Paper Comments
Send paper comments in triplicate to
Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ICC–2017–010. 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
June 28, 2017.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81039; File No. SR–NSCC–
2017–803]
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
entitled the Payment, Clearing, and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’ or
‘‘Payment, Clearing and Settlement
Supervision Act’’) 1 and Rule 19b–
PO 00000
8 17
1 12
CFR 200.30–3(a)(12).
U.S.C. 5465(e)(1).
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4(n)(1)(i) under the Securities Exchange
Act of 1934 (‘‘Act’’),2 notice is hereby
given that on June 1, 2017, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the advance notice SR–NSCC–2017–803
(‘‘Advance Notice’’) as described in
Items I, II and III below, which Items
have been prepared by the clearing
agency.3 The Commission is publishing
this notice to solicit comments on the
Advance Notice from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
This Advance Notice has been filed
by NSCC in connection with proposed
changes relating to a new Stock Options
and Futures Settlement Agreement
(‘‘New Accord’’) between NSCC and The
Options Clearing Corporation (‘‘OCC,’’
collectively NSCC and OCC may be
referred to herein as the ‘‘clearing
agencies’’), and proposed amendments
to Procedures III and XV of the Rules &
Procedures of NSCC (‘‘NSCC Rules’’) to
accommodate the proposed provisions
of the New Accord, as described in
greater detail below.4
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission, the
clearing agency 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. The clearing agency has
prepared summaries, set forth in
sections A and B below, of the most
significant aspects of such statements.
2 17
CFR 240.19b–4(n)(1)(i).
June 1, 2017, NSCC filed this Advance
Notice as a proposed rule change (SR–NSCC–2017–
007) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule
19b–4, 17 CFR 240.19b–4. A copy of the proposed
rule change is available at https://www.dtcc.com/
legal/sec-rule-filings.aspx. The Options Clearing
Corporation also has filed proposed rule change and
advance notice filings with the Commission in
connection with this proposal. See OCC filings SR–
OCC–2017–013 and SR–OCC–2017–804.
4 Terms not defined herein are defined in the
NSCC Rules, available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/rules/nscc_rules.pdf,
or in OCC’s By-Laws and Rules, available at https://
optionsclearing.com/about/publications/bylaws.jsp,
as the context implies.
3 On
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Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices
(A) Clearing Agency’s Statement on
Comments on the Advance Notice
Received From Members, Participants or
Others
Written comments were not and are
not intended to be solicited with respect
to the proposed change and none have
been received. NSCC will notify the
Commission of any written comments
received by NSCC.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Payment, Clearing
and Settlement Supervision Act
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Background
OCC issues and clears U.S.-listed
options and futures on a number of
underlying financial assets including
common stocks, currencies and stock
indices. OCC’s Rules, however, provide
that delivery of, and payment for,
securities underlying certain physically
settled stock options and single stock
futures cleared by OCC are effected
through the facilities of a correspondent
clearing corporation (such as NSCC) and
are not settled through the facilities of
OCC. NSCC and OCC are parties to a
Third Amended and Restated Options
Exercise Settlement Agreement, dated
February 16, 1995, as amended
(‘‘Existing Accord’’),5 which governs the
delivery and receipt of stock in the
settlement of put and call options issued
by OCC (‘‘Stock Options’’) that are
eligible for settlement through NSCC’s
Continuous Net Settlement (‘‘CNS’’)
Accounting Operation and are
designated to settle on the third
business day following the date the
related exercise or assignment was
accepted by NSCC (‘‘Options E&A’’). All
OCC Clearing Members that intend to
engage in Stock Options transactions are
required to also be Members of NSCC or
to have appointed or nominated an
NSCC Member to act on its behalf.6
5 The Existing Accord and the proposed changes
thereunder were previously approved by the
Commission. See Securities Exchange Act Release
No. 37731 (September 26, 1996), 61 FR 51731
(October 3, 1996) (SR–OCC–96–04 and SR–NSCC–
96–11) (Order Approving Proposed Rule Change
Related to an Amended and Restated Options
Exercise Settlement Agreement Between the
Options Clearing Corporation and the National
Securities Clearing Corporation); Securities
Exchange Act Release No. 43837 (January 12, 2001),
66 FR 6726 (January 22, 2001) (SR–OCC–00–12)
(Order Granting Accelerated Approval of a
Proposed Rule Change Relating to the Creation of
a Program to Relieve Strains on Clearing Members’
Liquidity in Connection With Exercise Settlements);
and Securities Exchange Act Release No. 58988
(November 20, 2008), 73 FR 72098 (November 26,
2008) (SR–OCC–2008–18 and SR–NSCC–2008–09)
(Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Changes Relating to
Amendment No. 2 to the Third Amended and
Restated Options Exercise Settlement Agreement).
6 A firm that is both an OCC Clearing Member and
an NSCC Member, or is an OCC Clearing Member
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NSCC proposes to adopt a New
Accord with OCC, which would provide
for the settlement of certain Stock
Options and delivery obligations arising
from certain matured physically-settled
stock futures contracts cleared by OCC
(‘‘Stock Futures’’). Specifically, the New
Accord would, among other things: (1)
Expand the category of securities that
are eligible for settlement and guaranty
under the agreement to certain
securities (including stocks, exchangetraded funds and exchange-traded
notes) that (i) are required to be
delivered in the exercise and
assignment of Stock Options and are
eligible to be settled through NSCC’s
Balance Order Accounting Operation (in
addition to its CNS Accounting
Operation) or (ii) are delivery
obligations arising from Stock Futures
that have reached maturity and are
eligible to be settled through NSCC’s
CNS Accounting Operation or Balance
Order Accounting Operation; (2) modify
the time of the transfer of
responsibilities from OCC to NSCC and,
specifically, when OCC’s guarantee
obligations under OCC’s By-Laws and
Rules with respect to such transactions
(‘‘OCC’s Guaranty’’) end and NSCC’s
obligations under Addendum K of the
NSCC Rules with respect to such
transactions (‘‘NSCC’s Guaranty’’) begin
(such transfer being the ‘‘Guaranty
Substitution’’); and (3) put additional
arrangements into place concerning the
procedures, information sharing, and
overall governance processes under the
agreement. Furthermore, NSCC
proposes to make certain clarifying and
conforming changes to the NSCC Rules
as necessary to implement the New
Accord.
The primary purpose of the proposed
changes is to (1) provide consistent
treatment across all expiries for
products with ‘‘regular way’’ 7
that has designated an NSCC Member to act on its
behalf is referred to herein as a ‘‘Common
Member.’’
7 Under the New Accord, ‘‘regular way
settlement’’ shall have a meaning agreed to by the
clearing agencies. Generally, regular way settlement
is understood to be the financial services industry’s
standard settlement cycle. Currently, regular way
settlement of Stock Options or Stock Futures
transactions are those transactions designated to
settle on the third business day following the date
the related exercise, assignment or delivery
obligation was accepted by NSCC. NSCC has
proposed to change the NSCC Rules with respect to
the meaning of regular way settlement in order to
be consistent with the anticipated industry-wide
move to a shorter standard settlement cycle of two
business days after trade date. See Securities
Exchange Act Release No. 79734 (January 4, 2017),
82 FR 3030 (January 10, 2017) (SR–NSCC–2016–
007). See also Securities Exchange Act Release No.
78962 (September 28, 2016), 81 FR 69240 (October
5, 2016) (S7–22–16) (Amendment to Securities
Transaction Settlement Cycle).
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settlement cycle specifications; (2)
reduce the operational complexities of
the Existing Accord by eliminating the
cross-guaranty between OCC and NSCC
and the bifurcated risk management of
exercised and assigned transactions
between the two clearing agencies by
delineating a single point in time at
which OCC’s Guaranty ceases and
NSCC’s Guaranty begins; (3) further
solidify the roles and responsibilities of
OCC and NSCC in the event of a default
of a Common Member at either or both
clearing agencies; and (4) improve
procedures, information sharing, and
overall governance under the agreement.
The New Accord would become
effective, and wholly replace the
Existing Accord, at a date specified in
a service level agreement to be entered
into between NSCC and OCC.8
The Existing Accord
Key Terms of the Existing Accord
Under the Existing Accord, the
settlement of Options E&A generally
proceeds according to the following
sequence of events. NSCC maintains
and delivers to OCC a list (‘‘CNS
Eligibility Master File’’) that enumerates
all CNS Securities, which are defined in
NSCC Rule 1 and generally include
securities that have been designated by
NSCC as eligible for processing through
NSCC’s CNS Accounting Operation and
eligible for book entry delivery at
NSCC’s affiliate, The Depository Trust
Company (for purposes of this advance
notice, such securities are referred to as
‘‘CNS Eligible Securities’’).9 OCC, in
turn, uses this file to make a final
determination of which securities NSCC
would not accept and therefore would
need to be settled on a broker-to-broker
basis. OCC then sends to NSCC a
transactions file,10 listing the specific
securities that are to be delivered and
received in settlement of an Options
E&A that have not previously been
reported to NSCC and for which
settlement is to be made through NSCC
(‘‘OCC Transactions File’’).11 With
8 Such effective date would be a date following
approval of all required regulatory submissions to
be filed by OCC and NSCC with the appropriate
regulatory authorities, including this advance
notice. See supra note 3.
9 Supra note 4.
10 Delivery of the OCC Transactions File with
respect to an Options E&A typically happens on the
date of the option’s exercise or expiration, though
this is not expressly stated in the Existing Accord.
However, in theory, an Options E&A could, due to
an error or delay, be reported later than the date of
the option’s exercise or expiration.
11 This process would be substantially the same
under the New Accord with the exception that the
CNS Eligibility Master File and OCC Transactions
File would be renamed and would be expanded in
scope to include additional securities that would be
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respect to each Options E&A, the OCC
Transactions File includes the CUSIP
number of the security to be delivered,
the identities of the delivering and
receiving Common Members, the
quantity to be delivered, the total value
of the quantity to be delivered based on
the exercise price of the option for
which such security is the underlying
security, and the exercise settlement
date. After receiving the OCC
Transactions File, NSCC then has until
11:00 a.m. Central Time on the
following business day to reject any
transaction listed in the OCC
Transactions File. NSCC can reject a
transaction if the security to be
delivered has not been listed as a CNS
Eligible Security in the CNS Eligible
Master File or if information provided
in the OCC Transactions File is
incomplete. Otherwise, if NSCC does
not so notify OCC of its rejection of an
Options E&A by the time required under
the Existing Accord, NSCC will become
unconditionally obligated to effect
settlement of the Options E&A.
Under the Existing Accord, even after
NSCC’s trade guarantee has come into
effect,12 OCC is not released from its
guarantee with respect to the Options
E&A until certain deadlines 13 have
passed on the first business day
following the scheduled settlement date
without NSCC notifying OCC that the
relevant Common Member has failed to
meet an obligation to NSCC or NSCC
has ceased to act for such Common
Member pursuant to the NSCC Rules.14
As a result, there is a period of time
when NSCC’s trade guarantee overlaps
with OCC’s guarantee and where both
clearing agencies are holding margin
against the same Options E&A position.
In the event that NSCC or OCC ceases
to act on behalf of or suspends a
Common Member, that Common
Member becomes a ‘‘defaulting
member.’’ Once a Common Member
becomes a defaulting member, the
eligible for guaranty and settlement under the New
Accord, as discussed in further detail below.
12 Pursuant to Addendum K of the NSCC Rules,
NSCC guarantees the completion of CNS
transactions and balance order transactions that
have reached the point at which, for bi-lateral
submissions by Members, such trades have been
validated and compared by NSCC, and for lockedin submission, such trades have been validated by
NSCC, as described in the NSCC Rules.
Transactions that are covered by the Existing
Accord, and that would be covered by the New
Accord, are expressly excluded from the timeframes
described in Addendum K. See supra note 4.
13 The deadline is 6:00 a.m. Central Time for
NSCC notifying OCC of a Common Member failure
and, if NSCC does not immediately cease to act for
such defaulting Common Member, 4:00 p.m.
Central Time for notifying OCC that it has ceased
to act.
14 See NSCC Rule 46 (Rule 46 (Restrictions on
Access to Services)). See supra note 4.
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Existing Accord provides that NSCC
will make a payment to OCC equal to
the lesser of OCC’s loss or the positive
mark-to-market amount relating to the
defaulting member’s Options E&A and
that OCC will make a payment to NSCC
equal to the lesser of NSCC’s loss or the
negative mark-to-market amount
relating to the defaulting member’s
Options E&A to compensate for
potential losses incurred in connection
with the default. A clearing agency must
request the transfer of any such
payments by the close of business on
the tenth business day following the day
of default and, after a request is made,
the other clearing agency is required to
make payment within five business days
of the request.
The New Accord
Overview
As noted above, NSCC proposes to
adopt a New Accord with OCC, which
would provide for the settlement of
certain Stock Options and Stock Futures
transactions. The New Accord is
primarily designed to, among other
things, expand the category of securities
that are eligible for settlement and
guaranty under the agreement; simplify
the time of the transfer of
responsibilities from OCC to NSCC
(specifically, the transfer of guarantee
obligations); and put additional
arrangements into place concerning the
procedures, information sharing, and
overall governance processes under the
agreement. The material provisions of
the New Accord are described in detail
below.
Key Elements of the New Accord
Expanded Scope of Eligible Securities
Pursuant to the proposed New
Accord, on each day that both OCC and
NSCC are open for accepting trades for
clearing (‘‘Activity Date’’), NSCC would
deliver to OCC an ‘‘Eligibility Master
File,’’ which would identify the
securities, including stocks, exchangetraded funds and exchange-traded notes,
that are (1) eligible to settle through
NSCC’s CNS Accounting Operation (as
is currently the case under the Existing
Accord) or NSCC’s Balance Order
Accounting Operation (which is a
feature of the New Accord) and (2) to be
delivered in settlement of (i) exercises
and assignments of Stock Options (as is
currently the case under the Existing
Accord) or (ii) delivery obligations
arising from maturing physically settled
Stock Futures (which is a feature of the
New Accord) (all such securities
collectively being ‘‘Eligible Securities’’).
OCC, in turn, would deliver to NSCC its
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file of E&A/Delivery Transactions 15 that
list the Eligible Securities to be
delivered, or received, and for which
settlement is proposed to be made
through NSCC on that Activity Date.
Guaranty Substitution (discussed
further below) would not occur with
respect to an E&A/Delivery Transaction
that is not submitted in the proper
format or that involves a security that is
not identified as an Eligible Security on
the then-current Eligibility Master File.
This process is similar to the current
process under the Existing Accord with
the exception of the expanded scope of
Eligible Securities (and additional fields
necessary to accommodate such
securities) that would be listed on the
Eligibility Master File and the E&A/
Delivery Transactions file.
Like the Existing Accord, the
proposed New Accord would continue
to facilitate the processes by which
Common Members deliver and receive
stock in the settlement of Stock Options
that are eligible to settle through NSCC’s
CNS Accounting Operation and are
designated to settle regular way. The
New Accord would also expand the
category of securities eligible for
settlement under the agreement. In
particular, the New Accord would
facilitate the processes by which
Common Members deliver and receive
stock in settlement of Stock Futures that
are eligible to settle through NSCC’s
CNS Accounting Operation and are
designated to settle regular way. It
would also provide for the settlement of
both Stock Options and Stock Futures
that are eligible to settle through NSCC’s
Balance Order Accounting Operation on
a regular way basis. The primary
purpose of expanding the category of
securities that are eligible for settlement
and guaranty under the agreement is to
provide consistent treatment across all
expiries for products with regular way
settlement cycle specifications and
simplify the settlement process for these
additional securities transactions.
The New Accord would not apply to
Stock Options or Stock Futures that are
designated to settle on a shorter
timeframe than the regular way
settlement timeframe. These Stock
15 ‘‘E&A/Delivery Transactions’’ are transactions
involving the settlement of Stock Options and Stock
Futures under the New Accord. The delivery of
E&A/Delivery Transactions to NSCC would replace
the delivery of the ‘‘OCC Transactions File’’ from
the Existing Accord. The actual information
delivered by OCC to NSCC would be the same as
is currently provided on the OCC Transactions File,
but certain additional terms would be included to
accommodate the inclusion of Stock Futures, along
with information regarding the date that the
instruction to NSCC was originally created and the
E&A/Delivery Transaction’s designated settlement
date.
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Options would continue to be processed
and settled as they would be today,
outside of the New Accord. The New
Accord also would not apply to any
Stock Options or Stock Futures that are
neither CNS Securities nor Balance
Order Securities.16 Transactions in
these securities are, and would continue
to be processed on a trade-for-trade
basis away from NSCC’s facilities. Such
transactions may utilize other NSCC
services for which they are eligible, but
would not be subject to the New
Accord.17
Proposed Changes Related to Guaranty
Substitution
The New Accord would adopt a
fundamentally different approach to the
delineation of the rights and
responsibilities of OCC and NSCC with
respect to E&A/Delivery Transactions.
The purpose of the proposed changes
related to the Guaranty Substitution,
defined below, is to reduce the
operational complexities of the Existing
Accord by eliminating the crossguaranty between OCC and NSCC and
the bifurcated risk management of
exercised and assigned transactions
between the two clearing agencies and
delineating a single point in time at
which OCC’s Guaranty ceases and
NSCC’s Guaranty begins. Moreover, the
proposed changes would solidify the
roles and responsibilities of OCC and
NSCC in the event of a default of a
Common Member at either or both
clearing agencies.
As described above, the Existing
Accord provides that NSCC will make a
payment to OCC following the default of
a Common Member in an amount equal
to the lesser of OCC’s loss or the
positive mark-to-market amount relating
to the Common Member’s Options E&A,
and provides that OCC will make a
payment to NSCC following the default
of a Common Member equal to the
lesser of NSCC’s loss or the negative
mark-to-market amount relating to the
Common Member’s Options E&A to
compensate for potential losses incurred
in connection with the Common
Member’s default. The proposed New
Accord, in contrast, would focus on the
transfer of responsibilities from OCC to
NSCC and, specifically, the point at
which OCC’s Guaranty ends and NSCC’s
Guaranty begins (i.e., the Guaranty
Substitution) with respect to E&A/
16 Balance Order Securities are defined in NSCC
Rule 1, and are generally securities, other than
foreign securities, that are eligible to be cleared at
NSCC but are not eligible for processing through the
CNS Accounting Operation. See supra note 4.
17 OCC will continue to guarantee settlement until
settlement actually occurs with respect to these
Stock Options and Stock Futures.
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Delivery Transactions. By focusing on
the timing of the Guaranty Substitution,
rather than payment from one clearing
agency to the other, the New Accord
would simplify the agreement and the
procedures for situations involving the
default of a Common Member. The New
Accord additionally would minimize
‘‘double-margining’’ situations when a
Common Member may simultaneously
owe margin to both NSCC and OCC with
respect to the same E&A/Delivery
Transaction.
After NSCC has received an E&A/
Delivery Transaction, the Guaranty
Substitution would normally occur
when NSCC has received all Required
Deposits to its Clearing Fund, calculated
taking into account such E&A/Delivery
Transaction, of Common Members
(‘‘Guaranty Substitution Time’’).18 At
the Guaranty Substitution Time, NSCC’s
Guaranty takes effect, and OCC does not
retain any settlement obligations with
respect to such E&A/Delivery
Transactions. The Guaranty Substitution
would not occur, however, with respect
to any E&A/Delivery Transaction if
NSCC has rejected such E&A/Delivery
Transaction due to an improper
submission, as described above, or if,
during the time after NSCC’s receipt of
the E&A/Delivery Transaction but prior
to the Guaranty Substitution Time, a
Common Member involved in the E&A/
Delivery Transaction has defaulted on
its obligations to NSCC by failing to
meet its Clearing Fund obligations, or
NSCC has otherwise ceased to act for
such Common Member pursuant to the
NSCC Rules (in either case, such
Common Member becomes a
‘‘Defaulting NSCC Member’’).
NSCC would be required to promptly
notify OCC if a Common Member
becomes a Defaulting NSCC Member, as
described above. Upon receiving such a
notice, OCC would not submit to NSCC
any further E&A/Delivery Transactions
involving the Defaulting NSCC Member
for settlement, unless authorized
representatives of both OCC and NSCC
otherwise consent. OCC would,
however, deliver to NSCC a list of all
E&A/Delivery Transactions that have
already been submitted to NSCC and
that involve the Defaulting NSCC
Member (‘‘Defaulted NSCC Member
Transactions’’). The Guaranty
Substitution ordinarily would not occur
with respect to any Defaulted NSCC
Member Transactions, unless both
clearing agencies agree otherwise. As
such, NSCC would have no obligation to
guaranty such Defaulted NSCC Member
Transactions, and OCC would continue
to be responsible for effecting the
settlement of such Defaulted NSCC
Member Transactions pursuant to OCC’s
By-Laws and Rules. Once NSCC has
confirmed the list of Defaulted NSCC
Member Transactions, Guaranty
Substitution would occur for all E&A/
Delivery Transactions for that Activity
Date that are not included on such list.
NSCC would be required to promptly
notify OCC upon the occurrence of the
Guaranty Substitution Time on each
Activity Date.
If OCC suspends a Common Member
after NSCC has received the E&A/
Delivery Transactions but before the
Guaranty Substitution has occurred, and
that Common Member has not become
a Defaulting NSCC Member, the
Guaranty Substitution would proceed at
the Guaranty Substitution Time. In such
a scenario, OCC would continue to be
responsible for guaranteeing the
settlement of the E&A/Delivery
Transactions in question until the
Guaranty Substitution Time, at which
time the responsibility would transfer to
NSCC. If, however, the suspended
Common Member also becomes a
Defaulting NSCC Member after NSCC
has received the E&A/Delivery
Transactions but before the Guaranty
Substitution has occurred, Guaranty
Substitution would not occur, and OCC
would continue to be responsible for
effecting the settlement of such
Defaulted NSCC Member Transactions
pursuant to OCC’s By-Laws and Rules
(unless both clearing agencies agree
otherwise).
Finally, the New Accord also would
provide for the consistent treatment of
all exercise and assignment activity
under the agreement. Under the Existing
Accord, ‘‘standard’’ 19 option contracts
become guaranteed by NSCC when the
Common Member meets its morning
Clearing Fund Required Deposit at
NSCC while ‘‘non-standard’’ exercise
and assignment activity becomes
guaranteed by NSCC at midnight of the
day after trade date (T+1). Under the
New Accord, all exercise and
assignment activity for Eligible
Securities would be guaranteed by
NSCC as of the Guaranty Substitution
Time, under the circumstances
described above, further simplifying the
framework for the settlement of such
contracts.
18 Procedure XV of the NSCC Rules provides that
all Clearing Fund requirements and other deposits
must be made within one hour of demand, unless
NSCC determines otherwise. See supra note 4.
19 Option contracts with ‘‘standard’’ expirations
expire on the third Friday of the specified
expiration month, while ‘‘non-standard’’ contracts
expire on other days of the expiration month.
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Other Terms of the New Accord
The New Accord also would include
a number of other provisions intended
to either generally maintain certain
terms of the Existing Accord or improve
the procedures, information sharing,
and overall governance process under
the new agreement. Many of these terms
are additions to or improvements upon
the terms of the Existing Accord.
Under the proposed New Accord,
OCC and NSCC would agree to address
the specifics regarding the time, form
and manner of various required
notifications and actions in a separate
service level agreement, which the
parties would be able to revisit as their
operational needs evolve. The service
level agreement would also specify an
effective date for the New Accord,
which, as mentioned above, would
occur on a date following approval and
effectiveness of all required regulatory
submissions to be filed by OCC and
NSCC with the appropriate regulatory
authorities. Similar to the Existing
Accord, the proposed New Accord
would remain in effect (a) until it is
terminated by the mutual written
agreement of OCC and NSCC, (b) until
it is unilaterally terminated by either
clearing agency upon one year’s written
notice (as opposed to six months under
the Existing Accord), or (c) until it is
terminated by either NSCC or OCC upon
the bankruptcy or insolvency of the
other, provided that the election to
terminate is communicated to the other
party within three business days by
written notice.
Under the proposed New Accord,
NSCC would agree to notify OCC if
NSCC ceases to act for a Common
Member pursuant to the NSCC Rules no
later than the earlier of NSCC’s
provision of notice of such action to the
governmental authorities or notice to
other NSCC Members. Furthermore, if
an NSCC Member for which NSCC has
not yet ceased to act fails to satisfy its
Clearing Fund obligations to NSCC,
NSCC would be required to notify OCC
promptly after discovery of the failure.
Likewise, OCC would be required to
notify NSCC of the suspension of a
Common Member no later than the
earlier of OCC’s provision of notice to
the governmental authorities or other
OCC Clearing Members.
Under the Existing Accord, NSCC and
OCC agree to share certain reports and
information regarding settlement
activity and obligations under the
agreement. The New Accord would
enhance this information sharing
between the clearing agencies.
Specifically, NSCC and OCC would
agree to share certain information,
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including general risk management due
diligence regarding Common Members,
lists of Common Members, and
information regarding the amounts of
Common Members’ margin and
settlement obligations at OCC or
Clearing Fund Required Deposits at
NSCC. NSCC and OCC would also be
required to provide the other clearing
agency with any other information that
the other reasonably requests in
connection with the performance of its
obligations under the New Accord. All
such information would be required to
be kept confidential, using the same
care and discretion that each clearing
agency uses for the safekeeping of its
own members’ confidential information.
NSCC and OCC would each be required
to act in good faith to resolve and notify
the other of any errors, discrepancies or
delays in the information it provides.
The New Accord also would include
new terms to provide that, to the extent
one party is unable to perform any
obligation as a result of the failure of the
other party to perform its
responsibilities on a timely basis, the
time for the non-failing party’s
performance would be extended, its
performance would be reduced to the
extent of any such impairment, and it
would not be liable for any failure to
perform its obligations. Further, NSCC
and OCC would agree that neither party
would be liable to the other party in
connection with its performance of its
obligations under the proposed New
Accord to the extent it has acted, or
omitted or ceased to act, with the
permission or at the direction of a
governmental authority. Moreover, the
proposed New Accord would provide
that in no case would either clearing
agency be liable to the other for
punitive, incidental or consequential
damages. The purpose of these new
provisions is to provide clear and
specific terms regarding each clearing
agency’s liability for non-performance
under the agreement.
The proposed New Accord would also
contain the usual and customary
representations and warranties for an
agreement of this type, including
representations as to the parties’ good
standing, corporate power and authority
and operational capability, that the
agreement complies with laws and all
government documents and does not
violate any agreements, and that all of
the required regulatory notifications and
filings would be obtained prior to the
New Accord’s effective date. It would
also include representations that the
proposed New Accord constitutes a
legal, valid and binding obligation on
each of OCC and NSCC and is
enforceable against each, subject to
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31127
standard exceptions. Furthermore, the
proposed New Accord would contain a
force majeure provision, under which
NSCC and OCC would agree to notify
the other no later than two hours upon
learning that a force majeure event has
occurred and both parties would be
required to cooperate in good faith to
mitigate the effects of any resulting
inability to perform or delay in
performing.
Proposed Amendments to NSCC
Procedures III and XV of the NSCC
Rules
Given the key differences between the
Existing Accord and the New Accord, as
described above, NSCC proposes certain
changes to Procedures III and XV of the
NSCC Rules in order to accommodate
the terms of the New Accord. In
particular, NSCC would update Section
B of Procedure III to define the scope of
the New Accord. First, the proposed
Section B of Procedure III would
identify the E&A/Delivery Transactions,
and would make clear that the New
Accord would apply only to E&A/
Delivery Transactions that are in either
CNS Securities or Balance Order
Securities, as such terms are defined in
the NSCC Rules. The proposed Section
B of Procedure III would also define the
Common Members, or firms that must
be named as counterparties to E&A/
Delivery Transactions, as ‘‘Participating
Members.’’ The proposal would
describe the Guaranty Substitution Time
and would describe the circumstances
under which the Guaranty Substitution
would not occur. Finally, the proposed
Section B of Procedure III would
describe how E&A/Delivery
Transactions for which the Guaranty
Substitution has occurred would be
processed at NSCC both if they are
covered by the proposed New Accord
and if they are not covered by the
proposed New Accord because, for
example, they are not transactions in
CNS Securities or Balance Order
Securities or were not submitted for
regular way settlement.
Finally, NSCC is also proposing to
amend Procedure XV to remove
reference to the exclusion of E&A/
Delivery Transactions from the
calculation of the mark-to-market
margin component of its Clearing Fund
calculations, which is no longer
applicable under the proposed New
Accord where the Guaranty Substitution
would replace the transfer of a
defaulting Common Member’s margin
payments under the Existing Accord. As
such, NSCC is not proposing any change
to its margining methodology, but will
include E&A/Delivery Transactions in
the calculation the mark-to-market
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margin component of Common
Members’ Clearing Fund Required
Deposits following implementation of
the New Accord.
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Expected Effect on and Management of
Risk
NSCC believes that the proposed
change, which would adopt the New
Accord and make conforming changes
to the NSCC Rules to accommodate the
New Accord, would reduce the overall
level of risk to NSCC, its Members, and
the markets served by NSCC.
In connection with the proposal to
enhance the timing of the Guaranty
Substitution, the New Accord would
provide a clearer, simpler framework for
the settlement of Stock Options and
Stock Futures. By pinpointing a specific
moment in time, the Guaranty
Substitution Time, at which guarantee
obligations transfer from OCC to NSCC
with respect to each cleared securities
transaction, the New Accord would
eliminate any ambiguity regarding
which clearing agency is responsible for
guaranteeing settlement at any given
moment. Establishing a precise
Guaranty Substitution Time also would
provide greater certainty that, in the
event of the default of a Common
Member, the default would be handled
pursuant to the rules and procedures of
the clearing agency whose guarantee is
then in effect and the system for the
settlement and clearance of Stock
Options and Stock Futures would
continue with minimal interruption.
This greater certainty strengthens OCC’s
and NSCC’s ability to plan for and
manage, and therefore mitigate, the risk
presented by Common Member defaults
to NSCC, other Members and the market
as a whole.
The proposal to expand the category
of securities eligible for settlement and
guaranty under the New Accord would
provide consistent treatment across all
expiries for products with regular way
settlement cycle specifications, and
would provide a clearer, simpler
framework for the settlement of these
securities. Finally, the proposal to put
additional arrangements into place
concerning the procedures, information
sharing, and overall governance
processes under the New Accord, would
assist the clearing agencies to more
effectively identify, monitor, and
manage risks that may be presented by
certain Common Members, and would
create new efficiencies in their general
surveillance efforts with respect to these
firms.
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Consistency With the Clearing
Supervision Act
The stated purpose of the Clearing
Supervision Act is to mitigate systemic
risk in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for systemically
important financial market utilities and
strengthening the liquidity of
systemically important financial market
utilities.20 Section 805(a)(2) of the
Clearing Supervision Act 21 also
authorizes the Commission to prescribe
risk management standards for the
payment, clearing and settlement
activities of designated clearing entities,
like NSCC, for which the Commission is
the supervisory agency. Section 805(b)
of the Clearing Supervision Act 22 states
that the objectives and principles for
risk management standards prescribed
under Section 805(a) shall be to:
• Promote robust risk management;
• promote safety and soundness;
• reduce systemic risks; and
• support the stability of the broader
financial system.
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and the Act in furtherance of these
objectives and principles, including
those standards adopted pursuant to the
Commission rules cited below.23 For the
reasons set forth below, NSCC believes
that the proposed change is consistent
with the risk management standards
promulgated under Section 805(b) of the
Clearing Supervision Act.24
Rule 17Ad–22(e)(1) under the Act
requires that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to provide for a
well-founded, clear, transparent, and
enforceable legal basis for each aspect of
its activities in all relevant
jurisdictions.25 The New Accord would
constitute a legal, valid and binding
obligation on each of OCC and NSCC,
which is enforceable against each
clearing agency. In connection with the
proposal to enhance the timing of the
U.S.C. 5461(b).
U.S.C. 5464(a)(2).
22 12 U.S.C. 5464(b).
23 17 CFR 240.17Ad–22. See Securities Exchange
Act Release Nos. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11) (‘‘Clearing
Agency Standards’’); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7–03–14)
(‘‘Standards for Covered Clearing Agencies’’). The
Standards for Covered Clearing Agencies became
effective on December 12, 2016. NSCC is a ‘‘covered
clearing agency’’ as defined in Rule 17Ad–22(a)(5)
and therefore is subject to section (e) of Rule 17Ad–
22.
24 12 U.S.C. 5464(b)(1) and (4).
25 17 CFR 240.17Ad–22(e)(1).
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21 12
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Guaranty Substitution, the New Accord
would establish clear, transparent, and
enforceable terms for the settlement of
OCC’s cleared Stock Options and Stock
Futures through the facilities of NSCC
and would simplify the settlement
process for those Stock Options
currently settled under the Existing
Accord. By clarifying the timing and
mechanisms by which OCC’s Guaranty
ends and NSCC’s Guaranty begins by
focusing on the timing of the Guaranty
Substitution, the new Accord,
specifically the proposal to enhance the
timing of the Guaranty Substitution,
would provide a clear, transparent and
enforceable legal basis for OCC’s and
NSCC’s obligations during the event of
a Common Member default. As a result,
NSCC believes that the proposal is
consistent with the requirements of Rule
17Ad–22(e)(1).26
Rule 17Ad–22(e)(20) under the Act
requires, in part, that a covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
identify, monitor, and manage risks
related to any link the covered clearing
agency establishes with one or more
other clearing agencies or financial
market utilities.27
NSCC is proposing to adopt the New
Accord in order to address the risks it
has identified related to its existing link
with OCC within the Existing Accord.
Specifically, under the terms of the
Existing Accord, even after NSCC’s
guarantee has come into effect, OCC is
not released from its guarantee with
respect to the Options E&A until certain
deadlines have passed on the first
business day following the scheduled
settlement date without NSCC notifying
OCC that the relevant Common Member
has failed to meet an obligation to NSCC
and/or NSCC has ceased to act for such
firm. This current process results in a
period of time where NSCC’s trade
guarantee and OCC’s guarantee both
apply to the same positions, and,
therefore, both clearing agencies are
holding margin against the same
Options E&A position. As a result, the
Existing Accord provides for a more
complicated framework for the
settlement of certain Stock Options.
These complications could give rise to
inconsistencies with regard to the
development and application of
interdependent policies and procedures
between OCC and NSCC, which could
lead to unanticipated disruptions in
OCC’s or NSCC’s clearing operations.
In connection with the proposal to
enhance the timing of the Guaranty
26 Id.
27 17
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Substitution, the New Accord would
provide for a clearer, simpler framework
for the settlement of certain Stock
Options and Stock Futures by
pinpointing a specific moment in time,
the Guaranty Substitution Time, at
which guarantee obligations would
transfer from OCC to NSCC. The New
Accord would eliminate any ambiguity
regarding which clearing agency is
responsible for guaranteeing settlement
at any given moment. Establishing a
precise Guaranty Substitution Time
would also provide greater certainty that
in the event of a Common Member
default, the default would be handled
pursuant to the rules and procedures of
the clearing agency whose guarantee is
then in effect and the system for the
clearance and settlement of Stock
Options and Stock Futures would
continue with minimal interruption.
This greater certainty would strengthen
OCC’s and NSCC’s ability to plan for
and manage, and therefore would
mitigate, the risk presented by Common
Member defaults to OCC and NSCC,
other members, and the markets the
clearing agencies serve. Therefore,
through the adoption of the proposal to
enhance the timing of the Guaranty
Substitution, NSCC would more
effectively manage its risks related to
the operation of the New Accord.
Moreover, in connection with the
proposal to put additional arrangements
into place concerning the procedures,
information sharing, and overall
governance processes under the New
Accord, NSCC and OCC would agree to
share certain information, including
general surveillance information
regarding their members, so that each
clearing agency would be able to
effectively identify, monitor, and
manage risks that may be presented by
certain Common Members. Accordingly,
NSCC believes the proposed changes are
reasonably designed to identify,
monitor, and manage risks related to the
link established between OCC and
NSCC for the settlement of certain Stock
Options and Stock Futures in a manner
consistent with Rule 17Ad–22(e)(20).28
Finally, Rule 17Ad–22(e)(21) under
the Act requires that a covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to,
among other things, be efficient and
effective in meeting the requirements of
its participants and the markets it
serves.29 As noted above, under the
Existing Accord, even after NSCC’s
guarantee has come into effect, OCC is
not released from its guarantee with
respect to the Options E&A until certain
deadlines have passed on the first
business day following the scheduled
settlement date without NSCC notifying
OCC that the relevant Common Member
has failed to meet an obligation to NSCC
and/or NSCC has ceased to act for such
firm. This results in a period of time
where NSCC’s guarantee overlaps with
OCC’s guarantee and where both
clearing agencies are holding margin
against the same Options E&A positions.
In connection with the proposal to
enhance the timing of the Guaranty
Substitution, the New Accord would
minimize this ‘‘double margining’’ issue
by introducing a new Guaranty
Substitution Time, which would
normally occur as soon as NSCC has
received all Required Deposits to the
Clearing Fund from Common Members,
which have been calculated taking into
account the relevant E&A/Delivery
Transactions, rather than require
reimbursement payments from one
clearing agency to the other. As a result,
Common Members would no longer be
required to post margin at both clearing
agencies to cover the same E&A/
Delivery Transactions. NSCC believes
that, by simplifying the terms of the
existing agreement in this way, the New
Accord is designed to be efficient and
effective in meeting the requirements of
OCC’s and NSCC’s participants and the
markets they serve.
Additionally, the proposal to put
additional arrangements into place
concerning the procedures, information
sharing, and overall governance
processes under the New Accord would
create new efficiencies in the
management of this important link
between OCC and NSCC. The proposal
to enhance information sharing between
OCC and NSCC would allow the
clearing agencies to more effectively
identify, monitor, and manage risks that
may be presented by certain Common
Members, and would create new
efficiencies in their general surveillance
efforts with respect to these firms.
In these ways, NSCC believes the
proposed New Accord is consistent with
the requirements of Rule 17Ad–
22(e)(21).30
III. Date of Effectiveness of the Advance
Notice and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
that the proposed change was filed with
the Commission or (ii) the date that any
additional information requested by the
28 Id.
29 17
CFR 240.17Ad–22(e)(21).
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30 Id.
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Commission is received. The clearing
agency shall not implement the
proposed change if the Commission has
any objection to the proposed change.
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 the advance notice is
filed, or the date further information
requested by the Commission is
received, 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.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2017–803 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NSCC–2017–803. 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 (https://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
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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 the
filing also will be available for
inspection and copying at the principal
office of NSCC and on DTCC’s Web site
(https://dtcc.com/legal/sec-rulefilings.aspx). 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 Number SR–NSCC–
2017–803 and should be submitted on
or before July 20, 2017.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–14015 Filed 7–3–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32718; 812–14649]
Transamerica ETF Trust, et al.
June 30, 2017.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
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AGENCY:
Notice of an application for an order
under section 6(c) of the Investment
Company Act of 1940 (the ‘‘Act’’) for an
exemption from sections 2(a)(32),
5(a)(1), 22(d), and 22(e) of the Act and
rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B) of
the Act. The requested order would
permit (a) index-based series of certain
open-end management investment
companies (‘‘Funds’’) to issue shares
redeemable in large aggregations only
(‘‘Creation Units’’); (b) secondary market
transactions in Fund shares to occur at
negotiated market prices rather than at
net asset value (‘‘NAV’’); (c) certain
Funds to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of shares for
redemption; (d) certain affiliated
persons of a Fund to deposit securities
into, and receive securities from, the
Fund in connection with the purchase
and redemption of Creation Units; and
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(e) certain registered management
investment companies and unit
investment trusts outside of the same
group of investment companies as the
Funds (‘‘Funds of Funds’’) to acquire
shares of the Funds.
APPLICANTS: Transamerica Asset
Management, Inc. (the ‘‘Initial
Adviser’’), a Florida corporation that is
registered as an investment adviser
under the Investment Advisers Act of
1940, Transamerica ETF Trust (the
‘‘Trust’’), a Delaware statutory trust that
will be registered under the Act as an
open-end management investment
company with multiple series, and
Foreside Fund Services, LLC (the
‘‘Distributor’’), a Delaware limited
liability company and broker-dealer
registered under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’).
FILING DATE: The application was filed
on May 6, 2016 and amended on March
2, 2017 and June 23, 2017.
HEARING OR NOTIFICATION OF HEARING: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on July 25, 2017, and
should be accompanied by proof of
service on applicants, in the form of an
affidavit, or for lawyers, a certificate of
service. Pursuant to rule 0–5 under the
Act, hearing requests should state the
nature of the writer’s interest, any facts
bearing upon the desirability of a
hearing on the matter, the reason for the
request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Commission’s Secretary.
ADDRESSES: Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090;
Applicants: Transamerica Asset
Management, Inc. and Transamerica
ETF Trust, 1801 California Street, Suite
5200, Denver, Colorado 80202; and
Foreside Fund Services, LLC, Three
Canal Plaza, Suite 100, Portland, ME
04101.
FOR FURTHER INFORMATION CONTACT:
Rachel Loko, Senior Counsel, at (202)
551–6883, or Aaron Gilbride, Acting
Branch Chief, at (202) 551–6906
(Division of Investment Management,
Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Summary of the Application
1. Applicants request an order that
would allow Funds to operate as index
exchange traded funds (‘‘ETFs’’).1 Fund
shares will be purchased and redeemed
at their NAV in Creation Units only. All
orders to purchase Creation Units and
all redemption requests will be placed
by or through an ‘‘Authorized
Participant’’, which will have signed a
participant agreement with the
Distributor. Shares will be listed and
traded individually on a national
securities exchange, where share prices
will be based on the current bid/offer
market. Any order granting the
requested relief would be subject to the
terms and conditions stated in the
application.
2. Each Fund will hold investment
positions selected to correspond
generally to the performance of an
Underlying Index. In the case of SelfIndexing Funds, an affiliated person, as
defined in section 2(a)(3) of the Act
(‘‘Affiliated Person’’), or an affiliated
person of an Affiliated Person (‘‘SecondTier Affiliate’’), of the Trust or a Fund,
of the Adviser, of any sub-adviser to or
promoter of a Fund, or of the Distributor
will compile, create, sponsor or
maintain the Underlying Index.2
3. Shares will be purchased and
redeemed in Creation Units and
generally on an in-kind basis. Except
where the purchase or redemption will
include cash under the limited
circumstances specified in the
application, purchasers will be required
to purchase Creation Units by
depositing specified instruments
(‘‘Deposit Instruments’’), and
shareholders redeeming their shares
will receive specified instruments
(‘‘Redemption Instruments’’). The
Deposit Instruments and the
1 Applicants request that the order apply to the
new series of the Trust and any additional series of
the Trust, and any other open-end management
investment company or series thereof (each,
included in the term ‘‘Fund’’), each of which will
operate as an ETF and will track a specified index
comprised of domestic or foreign equity and/or
fixed income securities (each, an ‘‘Underlying
Index’’). Any Fund will (a) be advised by the Initial
Adviser or an entity controlling, controlled by, or
under common control with the Initial Adviser
(each, an ‘‘Adviser’’) and (b) comply with the terms
and conditions of the application.
2 Each Self-Indexing Fund will post on its Web
site the identities and quantities of the investment
positions that will form the basis for the Fund’s
calculation of its NAV at the end of the day.
Applicants believe that requiring Self-Indexing
Funds to maintain full portfolio transparency will
help address, together with other protections,
conflicts of interest with respect to such Funds.
E:\FR\FM\05JYN1.SGM
05JYN1
]]>Agencies
[Federal Register Volume 82, Number 127 (Wednesday, July 5, 2017)]
[Notices]
[Pages 31123-31130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14015]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81039; File No. SR-NSCC-2017-803]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Advance Notice To Adopt a New Stock
Options and Futures Settlement Agreement With The Options Clearing
Corporation
June 28, 2017.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'' or ``Payment, Clearing and Settlement Supervision
Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of
1934 (``Act''),\2\ notice is hereby given that on June 1, 2017,
National Securities Clearing Corporation (``NSCC'') filed with the
Securities and Exchange Commission (``Commission'') the advance notice
SR-NSCC-2017-803 (``Advance Notice'') as described in Items I, II and
III below, which Items have been prepared by the clearing agency.\3\
The Commission is publishing this notice to solicit comments on the
Advance Notice from interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ On June 1, 2017, NSCC filed this Advance Notice as a
proposed rule change (SR-NSCC-2017-007) with the Commission pursuant
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4,
17 CFR 240.19b-4. A copy of the proposed rule change is available at
https://www.dtcc.com/legal/sec-rule-filings.aspx. The Options
Clearing Corporation also has filed proposed rule change and advance
notice filings with the Commission in connection with this proposal.
See OCC filings SR-OCC-2017-013 and SR-OCC-2017-804.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This Advance Notice has been filed by NSCC in connection with
proposed changes relating to a new Stock Options and Futures Settlement
Agreement (``New Accord'') between NSCC and The Options Clearing
Corporation (``OCC,'' collectively NSCC and OCC may be referred to
herein as the ``clearing agencies''), and proposed amendments to
Procedures III and XV of the Rules & Procedures of NSCC (``NSCC
Rules'') to accommodate the proposed provisions of the New Accord, as
described in greater detail below.\4\
---------------------------------------------------------------------------
\4\ Terms not defined herein are defined in the NSCC Rules,
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf, or in OCC's By-Laws and Rules, available at
https://optionsclearing.com/about/publications/bylaws.jsp, as the
context implies.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, set forth in
sections A and B below, of the most significant aspects of such
statements.
[[Page 31124]]
(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed change and none have been received. NSCC will
notify the Commission of any written comments received by NSCC.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment,
Clearing and Settlement Supervision Act
Background
OCC issues and clears U.S.-listed options and futures on a number
of underlying financial assets including common stocks, currencies and
stock indices. OCC's Rules, however, provide that delivery of, and
payment for, securities underlying certain physically settled stock
options and single stock futures cleared by OCC are effected through
the facilities of a correspondent clearing corporation (such as NSCC)
and are not settled through the facilities of OCC. NSCC and OCC are
parties to a Third Amended and Restated Options Exercise Settlement
Agreement, dated February 16, 1995, as amended (``Existing
Accord''),\5\ which governs the delivery and receipt of stock in the
settlement of put and call options issued by OCC (``Stock Options'')
that are eligible for settlement through NSCC's Continuous Net
Settlement (``CNS'') Accounting Operation and are designated to settle
on the third business day following the date the related exercise or
assignment was accepted by NSCC (``Options E&A''). All OCC Clearing
Members that intend to engage in Stock Options transactions are
required to also be Members of NSCC or to have appointed or nominated
an NSCC Member to act on its behalf.\6\
---------------------------------------------------------------------------
\5\ The Existing Accord and the proposed changes thereunder were
previously approved by the Commission. See Securities Exchange Act
Release No. 37731 (September 26, 1996), 61 FR 51731 (October 3,
1996) (SR-OCC-96-04 and SR-NSCC-96-11) (Order Approving Proposed
Rule Change Related to an Amended and Restated Options Exercise
Settlement Agreement Between the Options Clearing Corporation and
the National Securities Clearing Corporation); Securities Exchange
Act Release No. 43837 (January 12, 2001), 66 FR 6726 (January 22,
2001) (SR-OCC-00-12) (Order Granting Accelerated Approval of a
Proposed Rule Change Relating to the Creation of a Program to
Relieve Strains on Clearing Members' Liquidity in Connection With
Exercise Settlements); and Securities Exchange Act Release No. 58988
(November 20, 2008), 73 FR 72098 (November 26, 2008) (SR-OCC-2008-18
and SR-NSCC-2008-09) (Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Changes Relating to Amendment
No. 2 to the Third Amended and Restated Options Exercise Settlement
Agreement).
\6\ A firm that is both an OCC Clearing Member and an NSCC
Member, or is an OCC Clearing Member that has designated an NSCC
Member to act on its behalf is referred to herein as a ``Common
Member.''
---------------------------------------------------------------------------
NSCC proposes to adopt a New Accord with OCC, which would provide
for the settlement of certain Stock Options and delivery obligations
arising from certain matured physically-settled stock futures contracts
cleared by OCC (``Stock Futures''). Specifically, the New Accord would,
among other things: (1) Expand the category of securities that are
eligible for settlement and guaranty under the agreement to certain
securities (including stocks, exchange-traded funds and exchange-traded
notes) that (i) are required to be delivered in the exercise and
assignment of Stock Options and are eligible to be settled through
NSCC's Balance Order Accounting Operation (in addition to its CNS
Accounting Operation) or (ii) are delivery obligations arising from
Stock Futures that have reached maturity and are eligible to be settled
through NSCC's CNS Accounting Operation or Balance Order Accounting
Operation; (2) modify the time of the transfer of responsibilities from
OCC to NSCC and, specifically, when OCC's guarantee obligations under
OCC's By-Laws and Rules with respect to such transactions (``OCC's
Guaranty'') end and NSCC's obligations under Addendum K of the NSCC
Rules with respect to such transactions (``NSCC's Guaranty'') begin
(such transfer being the ``Guaranty Substitution''); and (3) put
additional arrangements into place concerning the procedures,
information sharing, and overall governance processes under the
agreement. Furthermore, NSCC proposes to make certain clarifying and
conforming changes to the NSCC Rules as necessary to implement the New
Accord.
The primary purpose of the proposed changes is to (1) provide
consistent treatment across all expiries for products with ``regular
way'' \7\ settlement cycle specifications; (2) reduce the operational
complexities of the Existing Accord by eliminating the cross-guaranty
between OCC and NSCC and the bifurcated risk management of exercised
and assigned transactions between the two clearing agencies by
delineating a single point in time at which OCC's Guaranty ceases and
NSCC's Guaranty begins; (3) further solidify the roles and
responsibilities of OCC and NSCC in the event of a default of a Common
Member at either or both clearing agencies; and (4) improve procedures,
information sharing, and overall governance under the agreement.
---------------------------------------------------------------------------
\7\ Under the New Accord, ``regular way settlement'' shall have
a meaning agreed to by the clearing agencies. Generally, regular way
settlement is understood to be the financial services industry's
standard settlement cycle. Currently, regular way settlement of
Stock Options or Stock Futures transactions are those transactions
designated to settle on the third business day following the date
the related exercise, assignment or delivery obligation was accepted
by NSCC. NSCC has proposed to change the NSCC Rules with respect to
the meaning of regular way settlement in order to be consistent with
the anticipated industry-wide move to a shorter standard settlement
cycle of two business days after trade date. See Securities Exchange
Act Release No. 79734 (January 4, 2017), 82 FR 3030 (January 10,
2017) (SR-NSCC-2016-007). See also Securities Exchange Act Release
No. 78962 (September 28, 2016), 81 FR 69240 (October 5, 2016) (S7-
22-16) (Amendment to Securities Transaction Settlement Cycle).
---------------------------------------------------------------------------
The New Accord would become effective, and wholly replace the
Existing Accord, at a date specified in a service level agreement to be
entered into between NSCC and OCC.\8\
---------------------------------------------------------------------------
\8\ Such effective date would be a date following approval of
all required regulatory submissions to be filed by OCC and NSCC with
the appropriate regulatory authorities, including this advance
notice. See supra note 3.
---------------------------------------------------------------------------
The Existing Accord
Key Terms of the Existing Accord
Under the Existing Accord, the settlement of Options E&A generally
proceeds according to the following sequence of events. NSCC maintains
and delivers to OCC a list (``CNS Eligibility Master File'') that
enumerates all CNS Securities, which are defined in NSCC Rule 1 and
generally include securities that have been designated by NSCC as
eligible for processing through NSCC's CNS Accounting Operation and
eligible for book entry delivery at NSCC's affiliate, The Depository
Trust Company (for purposes of this advance notice, such securities are
referred to as ``CNS Eligible Securities'').\9\ OCC, in turn, uses this
file to make a final determination of which securities NSCC would not
accept and therefore would need to be settled on a broker-to-broker
basis. OCC then sends to NSCC a transactions file,\10\ listing the
specific securities that are to be delivered and received in settlement
of an Options E&A that have not previously been reported to NSCC and
for which settlement is to be made through NSCC (``OCC Transactions
File'').\11\ With
[[Page 31125]]
respect to each Options E&A, the OCC Transactions File includes the
CUSIP number of the security to be delivered, the identities of the
delivering and receiving Common Members, the quantity to be delivered,
the total value of the quantity to be delivered based on the exercise
price of the option for which such security is the underlying security,
and the exercise settlement date. After receiving the OCC Transactions
File, NSCC then has until 11:00 a.m. Central Time on the following
business day to reject any transaction listed in the OCC Transactions
File. NSCC can reject a transaction if the security to be delivered has
not been listed as a CNS Eligible Security in the CNS Eligible Master
File or if information provided in the OCC Transactions File is
incomplete. Otherwise, if NSCC does not so notify OCC of its rejection
of an Options E&A by the time required under the Existing Accord, NSCC
will become unconditionally obligated to effect settlement of the
Options E&A.
---------------------------------------------------------------------------
\9\ Supra note 4.
\10\ Delivery of the OCC Transactions File with respect to an
Options E&A typically happens on the date of the option's exercise
or expiration, though this is not expressly stated in the Existing
Accord. However, in theory, an Options E&A could, due to an error or
delay, be reported later than the date of the option's exercise or
expiration.
\11\ This process would be substantially the same under the New
Accord with the exception that the CNS Eligibility Master File and
OCC Transactions File would be renamed and would be expanded in
scope to include additional securities that would be eligible for
guaranty and settlement under the New Accord, as discussed in
further detail below.
---------------------------------------------------------------------------
Under the Existing Accord, even after NSCC's trade guarantee has
come into effect,\12\ OCC is not released from its guarantee with
respect to the Options E&A until certain deadlines \13\ have passed on
the first business day following the scheduled settlement date without
NSCC notifying OCC that the relevant Common Member has failed to meet
an obligation to NSCC or NSCC has ceased to act for such Common Member
pursuant to the NSCC Rules.\14\ As a result, there is a period of time
when NSCC's trade guarantee overlaps with OCC's guarantee and where
both clearing agencies are holding margin against the same Options E&A
position.
---------------------------------------------------------------------------
\12\ Pursuant to Addendum K of the NSCC Rules, NSCC guarantees
the completion of CNS transactions and balance order transactions
that have reached the point at which, for bi-lateral submissions by
Members, such trades have been validated and compared by NSCC, and
for locked-in submission, such trades have been validated by NSCC,
as described in the NSCC Rules. Transactions that are covered by the
Existing Accord, and that would be covered by the New Accord, are
expressly excluded from the timeframes described in Addendum K. See
supra note 4.
\13\ The deadline is 6:00 a.m. Central Time for NSCC notifying
OCC of a Common Member failure and, if NSCC does not immediately
cease to act for such defaulting Common Member, 4:00 p.m. Central
Time for notifying OCC that it has ceased to act.
\14\ See NSCC Rule 46 (Rule 46 (Restrictions on Access to
Services)). See supra note 4.
---------------------------------------------------------------------------
In the event that NSCC or OCC ceases to act on behalf of or
suspends a Common Member, that Common Member becomes a ``defaulting
member.'' Once a Common Member becomes a defaulting member, the
Existing Accord provides that NSCC will make a payment to OCC equal to
the lesser of OCC's loss or the positive mark-to-market amount relating
to the defaulting member's Options E&A and that OCC will make a payment
to NSCC equal to the lesser of NSCC's loss or the negative mark-to-
market amount relating to the defaulting member's Options E&A to
compensate for potential losses incurred in connection with the
default. A clearing agency must request the transfer of any such
payments by the close of business on the tenth business day following
the day of default and, after a request is made, the other clearing
agency is required to make payment within five business days of the
request.
The New Accord
Overview
As noted above, NSCC proposes to adopt a New Accord with OCC, which
would provide for the settlement of certain Stock Options and Stock
Futures transactions. The New Accord is primarily designed to, among
other things, expand the category of securities that are eligible for
settlement and guaranty under the agreement; simplify the time of the
transfer of responsibilities from OCC to NSCC (specifically, the
transfer of guarantee obligations); and put additional arrangements
into place concerning the procedures, information sharing, and overall
governance processes under the agreement. The material provisions of
the New Accord are described in detail below.
Key Elements of the New Accord
Expanded Scope of Eligible Securities
Pursuant to the proposed New Accord, on each day that both OCC and
NSCC are open for accepting trades for clearing (``Activity Date''),
NSCC would deliver to OCC an ``Eligibility Master File,'' which would
identify the securities, including stocks, exchange-traded funds and
exchange-traded notes, that are (1) eligible to settle through NSCC's
CNS Accounting Operation (as is currently the case under the Existing
Accord) or NSCC's Balance Order Accounting Operation (which is a
feature of the New Accord) and (2) to be delivered in settlement of (i)
exercises and assignments of Stock Options (as is currently the case
under the Existing Accord) or (ii) delivery obligations arising from
maturing physically settled Stock Futures (which is a feature of the
New Accord) (all such securities collectively being ``Eligible
Securities''). OCC, in turn, would deliver to NSCC its file of E&A/
Delivery Transactions \15\ that list the Eligible Securities to be
delivered, or received, and for which settlement is proposed to be made
through NSCC on that Activity Date. Guaranty Substitution (discussed
further below) would not occur with respect to an E&A/Delivery
Transaction that is not submitted in the proper format or that involves
a security that is not identified as an Eligible Security on the then-
current Eligibility Master File. This process is similar to the current
process under the Existing Accord with the exception of the expanded
scope of Eligible Securities (and additional fields necessary to
accommodate such securities) that would be listed on the Eligibility
Master File and the E&A/Delivery Transactions file.
---------------------------------------------------------------------------
\15\ ``E&A/Delivery Transactions'' are transactions involving
the settlement of Stock Options and Stock Futures under the New
Accord. The delivery of E&A/Delivery Transactions to NSCC would
replace the delivery of the ``OCC Transactions File'' from the
Existing Accord. The actual information delivered by OCC to NSCC
would be the same as is currently provided on the OCC Transactions
File, but certain additional terms would be included to accommodate
the inclusion of Stock Futures, along with information regarding the
date that the instruction to NSCC was originally created and the
E&A/Delivery Transaction's designated settlement date.
---------------------------------------------------------------------------
Like the Existing Accord, the proposed New Accord would continue to
facilitate the processes by which Common Members deliver and receive
stock in the settlement of Stock Options that are eligible to settle
through NSCC's CNS Accounting Operation and are designated to settle
regular way. The New Accord would also expand the category of
securities eligible for settlement under the agreement. In particular,
the New Accord would facilitate the processes by which Common Members
deliver and receive stock in settlement of Stock Futures that are
eligible to settle through NSCC's CNS Accounting Operation and are
designated to settle regular way. It would also provide for the
settlement of both Stock Options and Stock Futures that are eligible to
settle through NSCC's Balance Order Accounting Operation on a regular
way basis. The primary purpose of expanding the category of securities
that are eligible for settlement and guaranty under the agreement is to
provide consistent treatment across all expiries for products with
regular way settlement cycle specifications and simplify the settlement
process for these additional securities transactions.
The New Accord would not apply to Stock Options or Stock Futures
that are designated to settle on a shorter timeframe than the regular
way settlement timeframe. These Stock
[[Page 31126]]
Options would continue to be processed and settled as they would be
today, outside of the New Accord. The New Accord also would not apply
to any Stock Options or Stock Futures that are neither CNS Securities
nor Balance Order Securities.\16\ Transactions in these securities are,
and would continue to be processed on a trade-for-trade basis away from
NSCC's facilities. Such transactions may utilize other NSCC services
for which they are eligible, but would not be subject to the New
Accord.\17\
---------------------------------------------------------------------------
\16\ Balance Order Securities are defined in NSCC Rule 1, and
are generally securities, other than foreign securities, that are
eligible to be cleared at NSCC but are not eligible for processing
through the CNS Accounting Operation. See supra note 4.
\17\ OCC will continue to guarantee settlement until settlement
actually occurs with respect to these Stock Options and Stock
Futures.
---------------------------------------------------------------------------
Proposed Changes Related to Guaranty Substitution
The New Accord would adopt a fundamentally different approach to
the delineation of the rights and responsibilities of OCC and NSCC with
respect to E&A/Delivery Transactions. The purpose of the proposed
changes related to the Guaranty Substitution, defined below, is to
reduce the operational complexities of the Existing Accord by
eliminating the cross-guaranty between OCC and NSCC and the bifurcated
risk management of exercised and assigned transactions between the two
clearing agencies and delineating a single point in time at which OCC's
Guaranty ceases and NSCC's Guaranty begins. Moreover, the proposed
changes would solidify the roles and responsibilities of OCC and NSCC
in the event of a default of a Common Member at either or both clearing
agencies.
As described above, the Existing Accord provides that NSCC will
make a payment to OCC following the default of a Common Member in an
amount equal to the lesser of OCC's loss or the positive mark-to-market
amount relating to the Common Member's Options E&A, and provides that
OCC will make a payment to NSCC following the default of a Common
Member equal to the lesser of NSCC's loss or the negative mark-to-
market amount relating to the Common Member's Options E&A to compensate
for potential losses incurred in connection with the Common Member's
default. The proposed New Accord, in contrast, would focus on the
transfer of responsibilities from OCC to NSCC and, specifically, the
point at which OCC's Guaranty ends and NSCC's Guaranty begins (i.e.,
the Guaranty Substitution) with respect to E&A/Delivery Transactions.
By focusing on the timing of the Guaranty Substitution, rather than
payment from one clearing agency to the other, the New Accord would
simplify the agreement and the procedures for situations involving the
default of a Common Member. The New Accord additionally would minimize
``double-margining'' situations when a Common Member may simultaneously
owe margin to both NSCC and OCC with respect to the same E&A/Delivery
Transaction.
After NSCC has received an E&A/Delivery Transaction, the Guaranty
Substitution would normally occur when NSCC has received all Required
Deposits to its Clearing Fund, calculated taking into account such E&A/
Delivery Transaction, of Common Members (``Guaranty Substitution
Time'').\18\ At the Guaranty Substitution Time, NSCC's Guaranty takes
effect, and OCC does not retain any settlement obligations with respect
to such E&A/Delivery Transactions. The Guaranty Substitution would not
occur, however, with respect to any E&A/Delivery Transaction if NSCC
has rejected such E&A/Delivery Transaction due to an improper
submission, as described above, or if, during the time after NSCC's
receipt of the E&A/Delivery Transaction but prior to the Guaranty
Substitution Time, a Common Member involved in the E&A/Delivery
Transaction has defaulted on its obligations to NSCC by failing to meet
its Clearing Fund obligations, or NSCC has otherwise ceased to act for
such Common Member pursuant to the NSCC Rules (in either case, such
Common Member becomes a ``Defaulting NSCC Member'').
---------------------------------------------------------------------------
\18\ Procedure XV of the NSCC Rules provides that all Clearing
Fund requirements and other deposits must be made within one hour of
demand, unless NSCC determines otherwise. See supra note 4.
---------------------------------------------------------------------------
NSCC would be required to promptly notify OCC if a Common Member
becomes a Defaulting NSCC Member, as described above. Upon receiving
such a notice, OCC would not submit to NSCC any further E&A/Delivery
Transactions involving the Defaulting NSCC Member for settlement,
unless authorized representatives of both OCC and NSCC otherwise
consent. OCC would, however, deliver to NSCC a list of all E&A/Delivery
Transactions that have already been submitted to NSCC and that involve
the Defaulting NSCC Member (``Defaulted NSCC Member Transactions'').
The Guaranty Substitution ordinarily would not occur with respect to
any Defaulted NSCC Member Transactions, unless both clearing agencies
agree otherwise. As such, NSCC would have no obligation to guaranty
such Defaulted NSCC Member Transactions, and OCC would continue to be
responsible for effecting the settlement of such Defaulted NSCC Member
Transactions pursuant to OCC's By-Laws and Rules. Once NSCC has
confirmed the list of Defaulted NSCC Member Transactions, Guaranty
Substitution would occur for all E&A/Delivery Transactions for that
Activity Date that are not included on such list. NSCC would be
required to promptly notify OCC upon the occurrence of the Guaranty
Substitution Time on each Activity Date.
If OCC suspends a Common Member after NSCC has received the E&A/
Delivery Transactions but before the Guaranty Substitution has
occurred, and that Common Member has not become a Defaulting NSCC
Member, the Guaranty Substitution would proceed at the Guaranty
Substitution Time. In such a scenario, OCC would continue to be
responsible for guaranteeing the settlement of the E&A/Delivery
Transactions in question until the Guaranty Substitution Time, at which
time the responsibility would transfer to NSCC. If, however, the
suspended Common Member also becomes a Defaulting NSCC Member after
NSCC has received the E&A/Delivery Transactions but before the Guaranty
Substitution has occurred, Guaranty Substitution would not occur, and
OCC would continue to be responsible for effecting the settlement of
such Defaulted NSCC Member Transactions pursuant to OCC's By-Laws and
Rules (unless both clearing agencies agree otherwise).
Finally, the New Accord also would provide for the consistent
treatment of all exercise and assignment activity under the agreement.
Under the Existing Accord, ``standard'' \19\ option contracts become
guaranteed by NSCC when the Common Member meets its morning Clearing
Fund Required Deposit at NSCC while ``non-standard'' exercise and
assignment activity becomes guaranteed by NSCC at midnight of the day
after trade date (T+1). Under the New Accord, all exercise and
assignment activity for Eligible Securities would be guaranteed by NSCC
as of the Guaranty Substitution Time, under the circumstances described
above, further simplifying the framework for the settlement of such
contracts.
---------------------------------------------------------------------------
\19\ Option contracts with ``standard'' expirations expire on
the third Friday of the specified expiration month, while ``non-
standard'' contracts expire on other days of the expiration month.
---------------------------------------------------------------------------
[[Page 31127]]
Other Terms of the New Accord
The New Accord also would include a number of other provisions
intended to either generally maintain certain terms of the Existing
Accord or improve the procedures, information sharing, and overall
governance process under the new agreement. Many of these terms are
additions to or improvements upon the terms of the Existing Accord.
Under the proposed New Accord, OCC and NSCC would agree to address
the specifics regarding the time, form and manner of various required
notifications and actions in a separate service level agreement, which
the parties would be able to revisit as their operational needs evolve.
The service level agreement would also specify an effective date for
the New Accord, which, as mentioned above, would occur on a date
following approval and effectiveness of all required regulatory
submissions to be filed by OCC and NSCC with the appropriate regulatory
authorities. Similar to the Existing Accord, the proposed New Accord
would remain in effect (a) until it is terminated by the mutual written
agreement of OCC and NSCC, (b) until it is unilaterally terminated by
either clearing agency upon one year's written notice (as opposed to
six months under the Existing Accord), or (c) until it is terminated by
either NSCC or OCC upon the bankruptcy or insolvency of the other,
provided that the election to terminate is communicated to the other
party within three business days by written notice.
Under the proposed New Accord, NSCC would agree to notify OCC if
NSCC ceases to act for a Common Member pursuant to the NSCC Rules no
later than the earlier of NSCC's provision of notice of such action to
the governmental authorities or notice to other NSCC Members.
Furthermore, if an NSCC Member for which NSCC has not yet ceased to act
fails to satisfy its Clearing Fund obligations to NSCC, NSCC would be
required to notify OCC promptly after discovery of the failure.
Likewise, OCC would be required to notify NSCC of the suspension of a
Common Member no later than the earlier of OCC's provision of notice to
the governmental authorities or other OCC Clearing Members.
Under the Existing Accord, NSCC and OCC agree to share certain
reports and information regarding settlement activity and obligations
under the agreement. The New Accord would enhance this information
sharing between the clearing agencies. Specifically, NSCC and OCC would
agree to share certain information, including general risk management
due diligence regarding Common Members, lists of Common Members, and
information regarding the amounts of Common Members' margin and
settlement obligations at OCC or Clearing Fund Required Deposits at
NSCC. NSCC and OCC would also be required to provide the other clearing
agency with any other information that the other reasonably requests in
connection with the performance of its obligations under the New
Accord. All such information would be required to be kept confidential,
using the same care and discretion that each clearing agency uses for
the safekeeping of its own members' confidential information. NSCC and
OCC would each be required to act in good faith to resolve and notify
the other of any errors, discrepancies or delays in the information it
provides.
The New Accord also would include new terms to provide that, to the
extent one party is unable to perform any obligation as a result of the
failure of the other party to perform its responsibilities on a timely
basis, the time for the non-failing party's performance would be
extended, its performance would be reduced to the extent of any such
impairment, and it would not be liable for any failure to perform its
obligations. Further, NSCC and OCC would agree that neither party would
be liable to the other party in connection with its performance of its
obligations under the proposed New Accord to the extent it has acted,
or omitted or ceased to act, with the permission or at the direction of
a governmental authority. Moreover, the proposed New Accord would
provide that in no case would either clearing agency be liable to the
other for punitive, incidental or consequential damages. The purpose of
these new provisions is to provide clear and specific terms regarding
each clearing agency's liability for non-performance under the
agreement.
The proposed New Accord would also contain the usual and customary
representations and warranties for an agreement of this type, including
representations as to the parties' good standing, corporate power and
authority and operational capability, that the agreement complies with
laws and all government documents and does not violate any agreements,
and that all of the required regulatory notifications and filings would
be obtained prior to the New Accord's effective date. It would also
include representations that the proposed New Accord constitutes a
legal, valid and binding obligation on each of OCC and NSCC and is
enforceable against each, subject to standard exceptions. Furthermore,
the proposed New Accord would contain a force majeure provision, under
which NSCC and OCC would agree to notify the other no later than two
hours upon learning that a force majeure event has occurred and both
parties would be required to cooperate in good faith to mitigate the
effects of any resulting inability to perform or delay in performing.
Proposed Amendments to NSCC Procedures III and XV of the NSCC Rules
Given the key differences between the Existing Accord and the New
Accord, as described above, NSCC proposes certain changes to Procedures
III and XV of the NSCC Rules in order to accommodate the terms of the
New Accord. In particular, NSCC would update Section B of Procedure III
to define the scope of the New Accord. First, the proposed Section B of
Procedure III would identify the E&A/Delivery Transactions, and would
make clear that the New Accord would apply only to E&A/Delivery
Transactions that are in either CNS Securities or Balance Order
Securities, as such terms are defined in the NSCC Rules. The proposed
Section B of Procedure III would also define the Common Members, or
firms that must be named as counterparties to E&A/Delivery
Transactions, as ``Participating Members.'' The proposal would describe
the Guaranty Substitution Time and would describe the circumstances
under which the Guaranty Substitution would not occur. Finally, the
proposed Section B of Procedure III would describe how E&A/Delivery
Transactions for which the Guaranty Substitution has occurred would be
processed at NSCC both if they are covered by the proposed New Accord
and if they are not covered by the proposed New Accord because, for
example, they are not transactions in CNS Securities or Balance Order
Securities or were not submitted for regular way settlement.
Finally, NSCC is also proposing to amend Procedure XV to remove
reference to the exclusion of E&A/Delivery Transactions from the
calculation of the mark-to-market margin component of its Clearing Fund
calculations, which is no longer applicable under the proposed New
Accord where the Guaranty Substitution would replace the transfer of a
defaulting Common Member's margin payments under the Existing Accord.
As such, NSCC is not proposing any change to its margining methodology,
but will include E&A/Delivery Transactions in the calculation the mark-
to-market
[[Page 31128]]
margin component of Common Members' Clearing Fund Required Deposits
following implementation of the New Accord.
Expected Effect on and Management of Risk
NSCC believes that the proposed change, which would adopt the New
Accord and make conforming changes to the NSCC Rules to accommodate the
New Accord, would reduce the overall level of risk to NSCC, its
Members, and the markets served by NSCC.
In connection with the proposal to enhance the timing of the
Guaranty Substitution, the New Accord would provide a clearer, simpler
framework for the settlement of Stock Options and Stock Futures. By
pinpointing a specific moment in time, the Guaranty Substitution Time,
at which guarantee obligations transfer from OCC to NSCC with respect
to each cleared securities transaction, the New Accord would eliminate
any ambiguity regarding which clearing agency is responsible for
guaranteeing settlement at any given moment. Establishing a precise
Guaranty Substitution Time also would provide greater certainty that,
in the event of the default of a Common Member, the default would be
handled pursuant to the rules and procedures of the clearing agency
whose guarantee is then in effect and the system for the settlement and
clearance of Stock Options and Stock Futures would continue with
minimal interruption. This greater certainty strengthens OCC's and
NSCC's ability to plan for and manage, and therefore mitigate, the risk
presented by Common Member defaults to NSCC, other Members and the
market as a whole.
The proposal to expand the category of securities eligible for
settlement and guaranty under the New Accord would provide consistent
treatment across all expiries for products with regular way settlement
cycle specifications, and would provide a clearer, simpler framework
for the settlement of these securities. Finally, the proposal to put
additional arrangements into place concerning the procedures,
information sharing, and overall governance processes under the New
Accord, would assist the clearing agencies to more effectively
identify, monitor, and manage risks that may be presented by certain
Common Members, and would create new efficiencies in their general
surveillance efforts with respect to these firms.
Consistency With the Clearing Supervision Act
The stated purpose of the Clearing Supervision Act is to mitigate
systemic risk in the financial system and promote financial stability
by, among other things, promoting uniform risk management standards for
systemically important financial market utilities and strengthening the
liquidity of systemically important financial market utilities.\20\
Section 805(a)(2) of the Clearing Supervision Act \21\ also authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like NSCC, for which the Commission is the supervisory agency. Section
805(b) of the Clearing Supervision Act \22\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
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\20\ 12 U.S.C. 5461(b).
\21\ 12 U.S.C. 5464(a)(2).
\22\ 12 U.S.C. 5464(b).
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Promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and the Act in furtherance of
these objectives and principles, including those standards adopted
pursuant to the Commission rules cited below.\23\ For the reasons set
forth below, NSCC believes that the proposed change is consistent with
the risk management standards promulgated under Section 805(b) of the
Clearing Supervision Act.\24\
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\23\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered
Clearing Agencies''). The Standards for Covered Clearing Agencies
became effective on December 12, 2016. NSCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5) and therefore is subject
to section (e) of Rule 17Ad-22.
\24\ 12 U.S.C. 5464(b)(1) and (4).
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Rule 17Ad-22(e)(1) under the Act requires that a covered clearing
agency establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well-founded, clear,
transparent, and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions.\25\ The New Accord would
constitute a legal, valid and binding obligation on each of OCC and
NSCC, which is enforceable against each clearing agency. In connection
with the proposal to enhance the timing of the Guaranty Substitution,
the New Accord would establish clear, transparent, and enforceable
terms for the settlement of OCC's cleared Stock Options and Stock
Futures through the facilities of NSCC and would simplify the
settlement process for those Stock Options currently settled under the
Existing Accord. By clarifying the timing and mechanisms by which OCC's
Guaranty ends and NSCC's Guaranty begins by focusing on the timing of
the Guaranty Substitution, the new Accord, specifically the proposal to
enhance the timing of the Guaranty Substitution, would provide a clear,
transparent and enforceable legal basis for OCC's and NSCC's
obligations during the event of a Common Member default. As a result,
NSCC believes that the proposal is consistent with the requirements of
Rule 17Ad-22(e)(1).\26\
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\25\ 17 CFR 240.17Ad-22(e)(1).
\26\ Id.
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Rule 17Ad-22(e)(20) under the Act requires, in part, that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to identify, monitor, and
manage risks related to any link the covered clearing agency
establishes with one or more other clearing agencies or financial
market utilities.\27\
---------------------------------------------------------------------------
\27\ 17 CFR 240.17Ad-22(e)(20).
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NSCC is proposing to adopt the New Accord in order to address the
risks it has identified related to its existing link with OCC within
the Existing Accord. Specifically, under the terms of the Existing
Accord, even after NSCC's guarantee has come into effect, OCC is not
released from its guarantee with respect to the Options E&A until
certain deadlines have passed on the first business day following the
scheduled settlement date without NSCC notifying OCC that the relevant
Common Member has failed to meet an obligation to NSCC and/or NSCC has
ceased to act for such firm. This current process results in a period
of time where NSCC's trade guarantee and OCC's guarantee both apply to
the same positions, and, therefore, both clearing agencies are holding
margin against the same Options E&A position. As a result, the Existing
Accord provides for a more complicated framework for the settlement of
certain Stock Options. These complications could give rise to
inconsistencies with regard to the development and application of
interdependent policies and procedures between OCC and NSCC, which
could lead to unanticipated disruptions in OCC's or NSCC's clearing
operations.
In connection with the proposal to enhance the timing of the
Guaranty
[[Page 31129]]
Substitution, the New Accord would provide for a clearer, simpler
framework for the settlement of certain Stock Options and Stock Futures
by pinpointing a specific moment in time, the Guaranty Substitution
Time, at which guarantee obligations would transfer from OCC to NSCC.
The New Accord would eliminate any ambiguity regarding which clearing
agency is responsible for guaranteeing settlement at any given moment.
Establishing a precise Guaranty Substitution Time would also provide
greater certainty that in the event of a Common Member default, the
default would be handled pursuant to the rules and procedures of the
clearing agency whose guarantee is then in effect and the system for
the clearance and settlement of Stock Options and Stock Futures would
continue with minimal interruption. This greater certainty would
strengthen OCC's and NSCC's ability to plan for and manage, and
therefore would mitigate, the risk presented by Common Member defaults
to OCC and NSCC, other members, and the markets the clearing agencies
serve. Therefore, through the adoption of the proposal to enhance the
timing of the Guaranty Substitution, NSCC would more effectively manage
its risks related to the operation of the New Accord.
Moreover, in connection with the proposal to put additional
arrangements into place concerning the procedures, information sharing,
and overall governance processes under the New Accord, NSCC and OCC
would agree to share certain information, including general
surveillance information regarding their members, so that each clearing
agency would be able to effectively identify, monitor, and manage risks
that may be presented by certain Common Members. Accordingly, NSCC
believes the proposed changes are reasonably designed to identify,
monitor, and manage risks related to the link established between OCC
and NSCC for the settlement of certain Stock Options and Stock Futures
in a manner consistent with Rule 17Ad-22(e)(20).\28\
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\28\ Id.
---------------------------------------------------------------------------
Finally, Rule 17Ad-22(e)(21) under the Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to, among other things, be
efficient and effective in meeting the requirements of its participants
and the markets it serves.\29\ As noted above, under the Existing
Accord, even after NSCC's guarantee has come into effect, OCC is not
released from its guarantee with respect to the Options E&A until
certain deadlines have passed on the first business day following the
scheduled settlement date without NSCC notifying OCC that the relevant
Common Member has failed to meet an obligation to NSCC and/or NSCC has
ceased to act for such firm. This results in a period of time where
NSCC's guarantee overlaps with OCC's guarantee and where both clearing
agencies are holding margin against the same Options E&A positions. In
connection with the proposal to enhance the timing of the Guaranty
Substitution, the New Accord would minimize this ``double margining''
issue by introducing a new Guaranty Substitution Time, which would
normally occur as soon as NSCC has received all Required Deposits to
the Clearing Fund from Common Members, which have been calculated
taking into account the relevant E&A/Delivery Transactions, rather than
require reimbursement payments from one clearing agency to the other.
As a result, Common Members would no longer be required to post margin
at both clearing agencies to cover the same E&A/Delivery Transactions.
NSCC believes that, by simplifying the terms of the existing agreement
in this way, the New Accord is designed to be efficient and effective
in meeting the requirements of OCC's and NSCC's participants and the
markets they serve.
---------------------------------------------------------------------------
\29\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------
Additionally, the proposal to put additional arrangements into
place concerning the procedures, information sharing, and overall
governance processes under the New Accord would create new efficiencies
in the management of this important link between OCC and NSCC. The
proposal to enhance information sharing between OCC and NSCC would
allow the clearing agencies to more effectively identify, monitor, and
manage risks that may be presented by certain Common Members, and would
create new efficiencies in their general surveillance efforts with
respect to these firms.
In these ways, NSCC believes the proposed New Accord is consistent
with the requirements of Rule 17Ad-22(e)(21).\30\
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\30\ Id.
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III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
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 the advance notice is filed, or the date further
information requested by the Commission is received, 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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NSCC-2017-803 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSCC-2017-803. 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 (https://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
[[Page 31130]]
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 the filing also will be available
for inspection and copying at the principal office of NSCC and on
DTCC's Web site (https://dtcc.com/legal/sec-rule-filings.aspx). 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 Number SR-NSCC-2017-803 and should be
submitted on or before July 20, 2017.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-14015 Filed 7-3-17; 8:45 am]
BILLING CODE 8011-01-P
