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]

Download as PDF 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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 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 (http://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. sradovich on DSK3GMQ082PROD with NOTICES 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. VerDate Sep<11>2014 17:57 Jul 03, 2017 Jkt 241001 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). Frm 00085 Fmt 4703 Sfmt 4703 31123 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 http://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 http://www.dtcc.com/∼/ media/Files/Downloads/legal/rules/nscc_rules.pdf, or in OCC’s By-Laws and Rules, available at http:// optionsclearing.com/about/publications/bylaws.jsp, as the context implies. 3 On E:\FR\FM\05JYN1.SGM 05JYN1 31124 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 sradovich on DSK3GMQ082PROD with NOTICES 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 VerDate Sep<11>2014 17:57 Jul 03, 2017 Jkt 241001 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). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 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 E:\FR\FM\05JYN1.SGM 05JYN1 Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES 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. VerDate Sep<11>2014 17:57 Jul 03, 2017 Jkt 241001 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 PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 31125 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. E:\FR\FM\05JYN1.SGM 05JYN1 31126 Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES 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. VerDate Sep<11>2014 17:57 Jul 03, 2017 Jkt 241001 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. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 E:\FR\FM\05JYN1.SGM 05JYN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices 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, VerDate Sep<11>2014 17:57 Jul 03, 2017 Jkt 241001 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 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 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 E:\FR\FM\05JYN1.SGM 05JYN1 31128 Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices margin component of Common Members’ Clearing Fund Required Deposits following implementation of the New Accord. sradovich on DSK3GMQ082PROD with NOTICES 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. VerDate Sep<11>2014 17:57 Jul 03, 2017 Jkt 241001 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). PO 00000 20 12 21 12 Frm 00090 Fmt 4703 Sfmt 4703 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 E:\FR\FM\05JYN1.SGM CFR 240.17Ad–22(e)(20). 05JYN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices 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). VerDate Sep<11>2014 17:57 Jul 03, 2017 30 Id. Jkt 241001 PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 31129 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 (http://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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Advance Notice that are filed with the Commission, and all written communications relating to the Advance Notice between the Commission and any person, other than those that may be withheld from the public in accordance with the E:\FR\FM\05JYN1.SGM 05JYN1 31130 Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices 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 (http://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. sradovich on DSK3GMQ082PROD with NOTICES 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 VerDate Sep<11>2014 17:57 Jul 03, 2017 Jkt 241001 (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 http:// 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.
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    \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 
http://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.
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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\
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    \4\ Terms not defined herein are defined in the NSCC Rules, 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf, or in OCC's By-Laws and Rules, available at 
http://optionsclearing.com/about/publications/bylaws.jsp, as the 
context implies.
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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\
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    \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.''
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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, 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.
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    \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:
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 5461(b).
    \21\ 12 U.S.C. 5464(a)(2).
    \22\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \25\ 17 CFR 240.17Ad-22(e)(1).
    \26\ Id.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
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    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 (http://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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the Advance Notice that are filed 
with the Commission, and all written communications relating to the 
Advance Notice between the Commission and any person, other than those 
that may be withheld from the public in accordance with the

[[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 (http://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