Self-Regulatory Organizations; National Securities Clearing Corporation; The Options Clearing Corporation; Order Approving Proposed Rule Changes Concerning the Adoption of a New Stock Options and Futures Settlement Agreement Between the National Securities Clearing Corporation and The Options Clearing Corporation, 36484-36492 [2017-16401]
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Federal Register / Vol. 82, No. 149 / Friday, August 4, 2017 / Notices
its participants and the markets it
serves.37 As described above, the
proposal would modify the timing of the
Guaranty Substitution by establishing
the Guaranty Substitution Time. In
doing so, the New Accord would
minimize the ‘‘double margining’’
issue 38 that is present under the
Existing Accord. As a result, Common
Members would no longer be required
to post margin at both Clearing Agencies
to cover the same transactions. By
simplifying the terms of the existing
agreement in this way, the New Accord
is designed to be more efficient and
effective in meeting the requirements of
OCC’s and NSCC’s participants and the
markets they serve.
Furthermore, as described above, the
proposed changes would establish
additional arrangements between the
Clearing Agencies concerning the
procedures, information sharing, and
overall governance processes under the
New Accord. Such arrangements could
enhance information sharing between
the Clearing Agencies and enable them
to more effectively identify, monitor,
and manage risks that may be presented
by certain Common Members.
Because the New Accord would allow
for greater information sharing and
eliminate the need for Common
Members to post margin at both Clearing
Agencies for the same transactions, the
Commission believes the proposal is
designed to be efficient and effective in
meeting the requirements of Common
Members. Therefore, the Commission
believes that the changes proposed in
the Advance Notices are consistent with
the requirements of Rule 17Ad–
22(e)(21).39
III. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act,40 that the Commission
does not object to these advance notice
proposals (SR–NSCC–2017–803 and
SR–OCC–2017–804) and that the
Clearing Agencies are authorized to
implement the proposals as of the date
37 17
CFR 240.17Ad–22(e)(21).
noted above, under the Existing Accord,
even after NSCC’s trade guarantee has taken effect,
OCC retains its trade guarantee obligations with
respect to the options exercise or assignment until
certain deadlines have passed on the first business
day following the scheduled settlement date. Once
such deadlines have passed, OCC is released from
its trade guarantee unless NSCC has notified OCC
that the relevant Common Member has failed to
meet an obligation to NSCC or NSCC has ceased to
act for such firm. This results in a period of time
during which NSCC’s trade guarantee overlaps with
OCC’s trade guarantee, for which both Clearing
Agencies collect and hold margin from the Common
Member. See supra note 15.
39 17 CFR 240.17Ad–22(e)(21).
40 12 U.S.C. 5465(e)(1)(I).
38 As
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of this notice or the date of an order by
the Commission approving a proposed
rule change that reflects rule changes
that are consistent with the relevant
advance notice proposal (SR–NSCC–
2017–007, SR–OCC–2017–013),
whichever is later.
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16395 Filed 8–3–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81266; File Nos. SR–
NSCC–2017–007; SR–OCC–2017–013]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; The Options Clearing
Corporation; Order Approving
Proposed Rule Changes Concerning
the Adoption of a New Stock Options
and Futures Settlement Agreement
Between the National Securities
Clearing Corporation and The Options
Clearing Corporation
July 31, 2017.
On June 1, 2017, National Securities
Clearing Corporation (‘‘NSCC’’) and The
Options Clearing Corporation (‘‘OCC,’’
each a ‘‘Clearing Agency,’’ and
collectively, ‘‘Clearing Agencies’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule changes SR–NSCC–2017–007 and
SR–OCC–2017–013 respectively
(collectively, the ‘‘Proposed Rule
Changes’’), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder.2
The Proposed Rule Changes were
published for comment in the Federal
Register on June 20, 2017.3 The
Commission received one comment
letter to SR–OCC–2017–013.4 This order
approves the Proposed Rule Changes.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release Nos. 80942
(June 15, 2017), 82 FR 28141 (June 20, 2017) (SR–
NSCC–2017–007); 80941 (June 15, 2017), 82 FR
28207 (June 20, 2017) (SR–OCC–2017–013). The
Clearing Agencies also filed the Proposed Rule
Changes as advance notices pursuant to Section
806(e)(1) of the Payment, Clearing, and Settlement
Supervision Act of 2010 and Rule 19b–4(n)(1)
under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR
240.19b–4(n)(1). The advance notices were
published for comment in the Federal Register on
July 5, 2017. See Securities Exchange Act Release
Nos. 81039 (June 28, 2017), 82 FR 31123 (July 5,
2017) (SR–NSCC–2017–803); 81040 (June 28, 2017),
82 FR 31109 (July 5, 2017) (SR–OCC–2017–804).
The Commission did not receive any comments on
the advance notices.
4 See letter from Pamela D. Marler, dated June 30,
2017. Such comment letter does not specifically
2 17
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I. Description of the Proposed Rule
Changes
The Proposed Rule Changes filed by
the Clearing Agencies are a proposal to
implement a new Stock Options and
Futures Settlement Agreement (‘‘New
Accord’’) between the Clearing
Agencies, and to amend the Rules and
Procedures of NSCC (‘‘NSCC Rules’’)
and the By-Laws and Rules of OCC to
accommodate the proposed provisions
of the New Accord.5
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 (i.e., NSCC) and are
not settled through the facilities of OCC.
To enable this arrangement concerning
stock options, the Clearing Agencies
currently are parties to a Third
Amended and Restated Options
Exercise Settlement Agreement, dated
February 16, 1995, as amended
(‘‘Existing Accord’’),6 which governs the
delivery and receipt of stock resulting
from the exercise and assignment of
stock options (i.e., put and call options
issued by OCC (‘‘Stock Options’’)).
Pursuant to the Existing Accord, such
stock must be: (i) Eligible for settlement
through NSCC’s Continuous Net
Settlement (‘‘CNS’’) Accounting
Operation and (ii) designated to settle
comment on any aspect of the Proposed Rule
Changes.
5 Terms not defined herein are defined in the
NSCC Rules, available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/rules/nscc_rules.pdf,
or in OCC’s By-Laws and Rules, available at https://
optionsclearing.com/about/publications/bylaws.jsp,
as the context implies.
6 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).
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Federal Register / Vol. 82, No. 149 / Friday, August 4, 2017 / Notices
on the third business day following the
date the related exercise or assignment
is accepted by NSCC (‘‘Options E&A’’),
which is the current standard settlement
cycle, known as ‘‘regular way’’
settlement.7 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.8
The Proposed Rule Changes are a
proposal by the Clearing Agencies to
adopt a New Accord, which would
provide for the settlement of the
securities underlying certain Stock
Options and delivery obligations arising
from certain matured physically-settled
single stock futures contracts cleared by
OCC (‘‘Stock Futures’’). The New
Accord would implement three major
changes. First, the New Accord would
expand the category of securities that
would be 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 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.9 Second, the New Accord
would 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
7 According
to the Clearing Agencies, regular way
settlement is understood to be the financial services
industry’s standard settlement cycle. Currently,
regular way settlement of securities underlying
Stock Options and stock futures takes place on the
third business day following the date the related
exercise, assignment or delivery obligation is
accepted by NSCC. On or prior to September 5,
2017, the standard settlement cycle will be
shortened to two business days after trade date, as
required by the Commission. See Securities
Exchange Act Release No. 80295 (March 22, 2017),
82 FR 15564 (March 29, 2017) (S7–22–16)
(Securities Transaction Settlement Cycle). NSCC
has amended its Rules with respect to the meaning
of regular way settlement to be consistent with the
shorter standard settlement cycle and will establish
an effective date for these rule changes in a
subsequent rule filing. See Securities Exchange Act
Release No. 79734 (January 4, 2017), 82 FR 3030
(January 10, 2017) (SR–NSCC–2016–007).
8 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.’’
9 The New Accord would continue to provide for
the settlement of securities underlying Stock
Options that settle through NSCC’s CNS Accounting
Operation.
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(‘‘OCC’s Guaranty’’) end and NSCC’s
obligations under Addendum K of the
NSCC Rules with respect to such
transactions (‘‘NSCC’s Guaranty’’) begin,
i.e., when the ‘‘Guaranty Substitution’’
takes place. Third, the New Accord
would put additional arrangements into
place concerning the procedures,
information sharing, and overall
governance processes under the
agreement. The Clearing Agencies
propose to make certain clarifying and
conforming changes to the NSCC Rules
and the OCC By-Laws and Rules as
necessary to implement the New
Accord.
According to the Clearing Agencies,
the primary purpose of the proposed
changes is to: (1) Provide consistent
treatment across all expiries for
products with regular way 10 settlement
cycle specifications; (2) reduce the
operational complexities of the Existing
Accord by delineating a single point in
time at which OCC’s Guaranty ceases
and NSCC’s Guaranty begins and
clarifying the roles and responsibilities
of the Clearing Agencies in the event of
a default of a Common Member at either
or both Clearing Agencies; and (3)
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 the Clearing Agencies.11
The Existing Accord
Key Terms of the Existing Accord
According to the Clearing Agencies,
under the Existing Accord, the
settlement of underlying securities
resulting from 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 (‘‘CNS Eligible Securities’’).12
OCC, in turn, uses this file to make a
final determination of which securities
10 Under the New Accord, ‘‘regular way
settlement’’ would have a meaning agreed to by the
Clearing Agencies. This will address any changes to
the standard settlement cycle. See supra note 7.
11 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 these Proposed
Rule Changes. See supra note 3.
12 Supra note 5.
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36485
NSCC would not accept and therefore
would need to be settled on a broker-tobroker basis. OCC then sends to NSCC
a transactions file (‘‘OCC Transactions
File’’),13 listing the specific securities
that are to be delivered and received as
a result of Options E&A that have not
previously been reported to NSCC and
for which settlement is to be made
through NSCC.14 With 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 Eligibility
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 underlying securities
resulting from Options E&A.
According to the Clearing Agencies,
under the Existing Accord, even after
NSCC’s trade guarantee has taken
effect,15 OCC retains its trade guarantee
obligations with respect to the Options
E&A until certain deadlines 16 have
13 According to the Clearing Agencies, 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.
14 According to the Clearing Agencies, 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.
15 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 submissions, 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 5.
16 The deadline is 6:00 a.m. Central Time for
NSCC notifying OCC of a Common Member failure
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passed on the first business day
following the scheduled settlement date.
Once such deadlines have passed, OCC
is released from its trade guarantee
unless NSCC has notified 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.17
As a result, there is a period of time
during which NSCC’s trade guarantee
overlaps with OCC’s trade guarantee
and for which both Clearing Agencies
collect and hold margin from the
Common Member.
In the event that NSCC or OCC ceases
to act on behalf of or suspends a
Common Member, that Common
Member would become a ‘‘defaulting
member.’’ Once a Common Member
becomes a defaulting member, the
Existing Accord provides that if OCC
were to suspend a Common Member,
NSCC would be required to make a
payment to OCC equal to the lesser of
OCC’s total loss resulting from the
closeout or the positive mark-to-market
(‘‘MTM’’) amount relating to the
defaulting member’s Options E&A and
that if NSCC were to suspend a
Common Member, OCC would be
required to make a payment to NSCC
equal to the lesser of NSCC’s total loss
resulting from closeout or the negative
mark-to-market amount relating to the
defaulting member’s Options E&A. 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, the Clearing Agencies
propose to adopt a New Accord, which
would provide for the settlement of
certain securities underlying Stock
Options and Stock Futures transactions.
According to the Clearing Agencies, 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 Guaranty
Substitution); and put additional
arrangements into place concerning the
and, if NSCC does not immediately cease to act for
such defaulting Common Member, 4:00 p.m.
Central Time for notifying OCC that NSCC has
ceased to act.
17 See NSCC Rule 46 (Rule 46 (Restrictions on
Access to Services). See supra note 5.
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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)
required to be physically 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 18 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.
As with the Existing Accord, the
proposed New Accord would continue
to provide for the settlement of
securities underlying Stock Options that
18 ‘‘E&A/Delivery Transactions’’ are transactions
involving the settlement of securities underlying
Stock Options and Stock Futures under the New
Accord. The delivery of E&A/Delivery Transactions
to NSCC would replace the delivery of the ‘‘OCC
Transactions File’’ from the Existing Accord. The
actual information delivered by OCC to NSCC
would be the same as is currently provided on the
OCC Transactions File, but certain additional terms
would be included to accommodate the inclusion
of Stock Futures, along with information regarding
the date that the instruction to NSCC was originally
created and the E&A/Delivery Transaction’s
designated settlement date.
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Sfmt 4703
settle through NSCC’s CNS Accounting
Operation and are designated to settle
regular way. In addition, the New
Accord would expand the category of
securities eligible for settlement and
guarantee by NSCC to include Stock
Futures deliveries that are eligible to
settle through NSCC’s CNS Accounting
Operation and are designated to settle
regular way. The New Accord would
also provide for the settlement of
securities underlying 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
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 with
underlying securities that are neither
CNS Securities nor Balance Order
Securities.19 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.20
Proposed Changes Related to Guaranty
Substitution
The New Accord would adopt a
fundamentally different approach to the
delineation of the rights and
responsibilities of the Clearing Agencies
with respect to Guaranty Substitution.
As described above, the Existing
Accord provides that, following the
default of a Common Member, and
depending on the timing of the exercise
or assignment guarantee, the Clearing
Agency that suspends the Common
Member will receive payment from the
other Clearing Agency to compensate for
potential losses incurred in connection
19 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 5.
20 OCC will continue to guarantee settlement until
settlement actually occurs with respect to these
Stock Options and Stock Futures.
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with the Common Member’s default.
The proposed New Accord, in contrast,
would clearly delineate a point in time
at which OCC’s Guaranty ends and
NSCC’s Guaranty begins (i.e., the
Guaranty Substitution takes place) 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.
Under the New Accord, 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’’).21 At the Guaranty
Substitution Time, NSCC’s Guaranty
would take effect, and OCC would no
longer 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. The Guaranty
Substitution also would not occur if,
after NSCC’s receipt of the E&A/
Delivery Transaction but prior to
receiving corresponding Clearing Fund
deposits, 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 additional 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 would not occur with
respect to such Defaulted NSCC Member
Transactions, unless both Clearing
Agencies agree otherwise. Therefore,
NSCC would have no obligation to
guarantee 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
submitted E&A/Delivery Transactions
for that Activity Date that are not
included on such list (i.e., those
transactions not involving the
Defaulting NSCC Clearing Member).
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’’ 22 option contracts
become guaranteed by NSCC when the
Common Member meets its morning
Clearing Fund Required Deposit at
NSCC while ‘‘non-standard’’ exercise
21 Procedure XV of the NSCC Rules provides that
all Clearing Fund requirements and other deposits
be made within one hour of demand, unless NSCC
determines otherwise. See supra note 5.
22 Option contracts with ‘‘standard’’ expirations
expire on the third Friday of the specified
expiration month, while ‘‘non-standard’’ contracts
expire on other days of the expiration month.
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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.
Other Terms of the New Accord
The New Accord would include a
number of other provisions intended to
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, the
Clearing Agencies 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 separate
service level agreement also would
specify an effective date for the New
Accord, which 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
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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. For
example, the Clearing Agencies would
agree to share certain information,
including general risk management due
diligence regarding Common Members,
lists of Common Members, and
information regarding margin and
settlement obligations of the Common
Members. The Clearing Agencies would
also agree to provide each other with
any other information that the other
reasonably requests in connection with
their 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
a Clearing Agency is unable to perform
any obligation as a result of the failure
of the other Clearing Agency to perform
its responsibilities on a timely basis, the
time for the non-failing Clearing
Agency’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 Clearing Agency would be
liable to the other Clearing Agency 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
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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 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 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
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would replace the transfer of a
defaulting Common Member’s margin
payments under the Existing Accord.
Therefore, NSCC is not proposing any
change to its margining methodology,
but will include E&A/Delivery
Transactions in the calculation of the
mark-to-market margin component of
Common Members’ Clearing Fund
Required Deposits following
implementation of the New Accord.
Proposed Amendments to OCC’s ByLaws and Rules
OCC also proposes certain changes to
its By-Laws and Rules to accommodate
the terms of the New Accord. The
primary purpose of the proposed
changes is to: (1) Reflect the expanded
scope of the New Accord, (2) reflect
changes related to the new Guaranty
Substitution mechanics of the New
Accord; and (3) make other changes
necessary to conform to the terms of the
New Accord or to otherwise provide
additional clarity around the settlement
and margining 23 treatment of: (i)
Eligible Securities under the New
Accord, (ii) non-regular way securities
settling through the facilities of NSCC
but outside of the New Accord, and (iii)
those securities settling outside of the
New Accord and away from NSCC on a
broker-to-broker basis. These proposed
changes are discussed in greater detail
below.
Changes Related to the Expanded Scope
of the New Accord
First, OCC proposes to amend and
replace the defined term ‘‘CNSeligible’’ 24 to reflect the expanded
definition of Eligible Securities under
the New Accord. The term ‘‘CNSeligible’’ currently describes the
securities underlying the physicallysettled stock options that are eligible
under the Existing Accord to be settled
through NSCC’s CNS Accounting
Operation. Under the New Accord,
however, the term Eligible Securities is
more broadly defined to include
securities (both Stock Options and Stock
Futures) eligible for settlement via
NSCC’s CNS Accounting Operation and
NSCC’s Balance Order Accounting
Operation. Accordingly, OCC proposes
to use ‘‘CCC,’’ for ‘‘correspondent
23 OCC notes that, while it is proposing changes
to its Rules concerning margin requirements (e.g.,
which transactions would be included as part of
OCC’s margin calculation at a given point in time),
OCC is not proposing any changes to its margin
model (with the exception that OCC would no
longer collect and hold margin for positions after
NSCC’s Guaranty has taken effect under the New
Accord).
24 See Article I, Section (C)(23) of OCC’s By-Laws.
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clearing corporation’’ 25 to describe the
Eligible Securities. Thus, the term
‘‘CCC-eligible’’ would replace ‘‘CNSeligible’’ throughout OCC’s By-Laws and
Rules.
Next, because the New Accord would
include the settlement of securities
underlying Stock Futures, OCC
proposes to make several changes to its
rules regarding Stock Futures to
accommodate this expansion. More
specifically, OCC proposes a conforming
amendment to Rule 901 Interpretation
and Policy (.02) to clarify that, under the
New Accord, OCC will, subject to its
discretion, cause the settlement of all
matured Stock Futures to be made
through the facilities of NSCC to the
extent that the underlying securities are
CCC-eligible as the term is currently
proposed.
OCC also proposes clarifying and
conforming revisions to newly
renumbered Rule 901(e) (currently Rule
901(d)) to specify that settlements made
through the facilities of the
correspondent clearing corporation are
governed by Rule 901 and to clarify that,
under the New Accord, specifications
made in any Delivery Advice may be
revoked up until the point at which
NSCC’s Guaranty has taken effect (the
‘‘obligation time’’ as discussed below)
and not the opening of business on the
delivery date.
Changes Related to Guaranty
Substitution
OCC also proposes a series of
amendments to its Rules to accurately
reflect the process under which the
Guaranty Substitution occurs under the
New Accord. First, OCC proposes to
amend Rule 901(c) so that the term
‘‘obligation time’’—the time that the
correspondent clearing corporation
becomes unconditionally obligated, in
accordance with its rules, to effect
settlement in respect thereof or to close
out the securities contract arising
therefrom—is synonymous with the
Guaranty Substitution Time under the
New Accord (i.e., (i) settlement
obligations are reported to and are not
rejected by NSCC; (ii) NSCC has not
notified OCC that NSCC has ceased to
act for the relevant Clearing Member;
and (iii) the Clearing Fund requirements
of the relevant Clearing Member are
25 Under Article I of OCC’s By-Laws, the term
‘‘correspondent clearing corporation’’ means the
National Securities Clearing Corporation or any
successor thereto which, by agreement with the
Corporation, provides facilities for settlements in
respect of exercised option contracts or BOUNDs
(i.e., securities issued by OCC pursuant to Article
XXIV of OCC’s By-Laws and Chapter XXV of OCC’s
Rules) or in respect of delivery obligations arising
from physically-settled stock futures. See supra
note 5.
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received by NSCC). Under the New
Accord, if a default occurs prior to the
Guaranty Substitution Time, the
Guaranty Substitution will not occur for
any E&A/Delivery Transactions
involving the Defaulting NSCC Member,
and OCC will continue to guarantee
settlement for those Defaulted NSCC
Member Transactions.
Next, OCC proposes to amend
language in newly renumbered Rule
901(i) (currently Rule 901(h)) regarding
the timing of the end of a Clearing
Member’s obligations to OCC with
respect to securities to be settled
through NSCC. Under the Existing
Accord and OCC’s existing Rules, a
Clearing Member’s obligations to OCC
end only once settlement is completed.
Under the New Accord, however, a
Clearing Member’s obligations to OCC
will end when OCC’s obligations with
respect to guaranteeing settlement of the
security would end (i.e., the Guaranty
Substitution Time or ‘‘obligation time’’).
OCC therefore proposes to amend newly
renumbered Rule 901(i) to specify that
a Clearing Member’s obligations to OCC
will be deemed completed and
performed once the ‘‘obligation time’’
has occurred.
As discussed above, the New Accord
eliminates the provisions of the Existing
Accord whereby OCC and NSCC
guaranteed each other the performance
of Common Members and made certain
payments to the other upon the default
of a Common Member. Therefore, OCC
proposes to delete discussions of such
guarantees and payments from newly
renumbered Rule 901(i) and Rule 1107.
OCC also proposes amendments to
Rules 910 and 911, which set forth
procedures for handling failures to make
or take delivery of securities in
settlement of exercised or assigned
Stock Options and matured physicallysettled Stock Futures, to add language to
both rules to clarify that the failure
procedures set forth therein would not
apply with respect to any delivery to be
made through NSCC pursuant to Rule
901. Under the New Accord, once the
Guaranty Substitution Time with
respect to a specific E&A/Delivery
Transaction occurs, OCC’s Guaranty
ends and NSCC’s Guaranty begins,
leaving OCC with no involvement with
or responsibility for the settlement of
the securities underlying that
transaction. Therefore, if there is a
failure to make or take delivery with
respect to that transaction after
Guaranty Substitution has occurred, the
NSCC Rules will govern that failure.
With respect to deliveries made on a
broker-to-broker basis under OCC Rules
903 through 912 (including those that
may utilize NSCC’s Obligation
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36489
Warehouse services), and which are not
governed by Rule 901, Guaranty
Substitution does not occur and OCC’s
failure procedures would apply.
Changes to OCC’s Margin Rules
Under the New Accord, OCC will no
longer collect margin on a transaction
once it is no longer guaranteeing
settlement for that transaction.
Therefore, OCC proposes to add
language to Rule 601(f) to clarify that
OCC’s margin calculations will not
include delivery obligations arising
from any Stock Options or Stock
Futures that are eligible for settlement
through NSCC and for which OCC has
no further settlement obligations
because either (i) Guaranty Substitution
has occurred for E&A/Delivery
Transactions under the New Accord (as
described in revised Rule 901(c)) or (ii)
NSCC has otherwise accepted
transactions for non-regular way
settlement under the NSCC Rules (as
describe in newly proposed Rule
901(d)).26 By not including these
transactions as part of OCC’s margin
calculation, OCC is hoping to alleviate
instances of ‘‘double-margining’’ for
Common Members that may otherwise
simultaneously owe margin to NSCC
and OCC with respect to the same
position.
OCC also proposes to delete Rule
608A in its entirety. The New Accord
seeks to eliminate the situation under
the Existing Accord where Common
Members are effectively ‘‘doublemargined’’ or required to
simultaneously post margin with OCC
and NSCC with respect to the same
position. As the New Accord eliminates
this double-margining scenario, Rule
608A, which provides procedures
pursuant to which a Clearing Member
could use the securities deposited as
margin with OCC as collateral to secure
a loan to pay its margin obligations to
NSCC, is now unnecessary.
Other Clarifying Changes Not Related to
the New Accord
OCC also proposes to amend its Rules
to make clarifying changes that are not
directly required by the New Accord but
would provide additional clarity in its
Rules in light of other changes being
made to accommodate the New Accord.
Specifically, OCC proposes to revise
Rule 901 Interpretation and Policy (.02)
to provide that transactions that involve
the delivery of non-CCC eligible
securities made on a broker-to-broker
basis (and away from NSCC) may
26 Related revisions to Rule 901(c) and newly
proposed Rule 901(d) are discussed in more detail
below.
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nevertheless involve the use of certain
services of NSCC (e.g., NSCC’s
Obligation Warehouse). For such
transactions, because they are not
covered by the New Accord and NSCC
at no point guarantees settlement, OCC
Rule 901 would not apply and delivery
is governed by the broker-to-broker
settlement procedures set forth in OCC
Rules 903 through 912, as is the case
currently today. Additionally, while
OCC’s existing Rules do not prohibit
broker-to-broker settlements from being
facilitated through the services of a
correspondent clearing corporation,
they do not explicitly contemplate the
possibility. OCC also proposes to make
clarifying amendments to Rule 904(b)
and 910A(a) to more clearly distinguish
between settlements effected through
NSCC’s CNS Accounting Operation or
Balance Order Accounting Operations
in accordance with OCC Rule 901 and
deliveries effected on a broker-to-broker
basis utilizing services of NSCC under
OCC Rules 903 through 912 and to
clearly state which OCC Rules apply in
each context.
Further, OCC proposes to add a new
paragraph (d) to Rule 901 to clarify that
OCC still intends, at its discretion, to
effect settlement of Stock Options and
Stock Futures that are scheduled to be
settled on the first business day after
exercise or maturity through NSCC
pursuant to Rule 901 and the relevant
provisions of the NSCC Rules, even
though such contracts are outside the
scope of the New Accord. These
contracts would continue to be settled
as they are currently today.
OCC also proposes clarifying and
conforming changes to the introductory
language of Chapter IX of the Rules.
Specifically, OCC proposes conforming
changes to the Rule to reflect the
replacement of the defined term ‘‘CNSeligible’’ with ‘‘CCC-eligible’’ as
described above. The proposed changes
would also clarify that OCC’s broker-tobroker settlement rules are contained in
Rules 903–912, as Rule 902 concerns
Delivery Advices, which also may be
applicable to settlements made through
the correspondent clearing corporation
pursuant to Rule 901. In addition, the
proposed changes to the introductory
language of Chapter IX of the Rules
would provide additional clarity around
OCC’s existing authority to alter a
previous designation of a settlement
method at any time prior to the
designated delivery date by specifying
that this authority would apply to both
settlements to be made through the
facilities of the correspondent clearing
corporation pursuant to Rule 901 or
settlements to be made on a broker-tobroker basis pursuant to Rules 903
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through 912. Finally, OCC proposes a
number of conforming changes to Rules
901 and 912 to reflect the renumbering
of various Rule provisions due to the
proposed amendments described above.
II. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and rules
and regulations thereunder applicable to
such organization.27 After carefully
considering the Proposed Rule Changes,
the Commission finds that the Proposed
Rule Changes are consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
the Clearing Agencies. In particular, the
Commission believes the proposal is
consistent with Section 17A(b)(3)(F) of
the Act,28 as well as Rules 17Ad–
22(e)(20) and (21).29
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
clearing agency be designed to promote
the prompt and accurate clearance and
settlement of securities transactions, to
assure the safeguarding of securities and
funds which are in the custody or
control of the clearing agency or for
which it is responsible, and to foster
cooperation and coordination with
persons engaged in the clearance and
settlement of securities transactions.30
The Commission believes that the
Proposed Rule Changes are consistent
with the requirements of Section
17A(b)(3)(F) of the Act for the reasons
set forth below.
The proposal would expand the
category of securities eligible for
settlement and guarantee under the New
Accord to include Stock Futures
deliveries that are eligible to settle
through NSCC’s CNS Accounting
Operation, as well as securities
underlying Stock Options and Stock
Futures that are eligible to settle through
NSCC’s Balance Order Accounting
Operation, where each are scheduled to
settle regular way. By including these
additional securities as part of the New
Accord, the proposal would provide for
more uniform settlement processing of
securities with regular way settlement.
According to the Clearing Agencies, the
expansion of the category of securities
27 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
29 17 CFR 240.17Ad–22(e)(20) and (21).
30 15 U.S.C. 78q–1(b)(3)(F).
28 15
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eligible for settlement and guarantee
under the New Accord would simplify
the settlement process for these
additional securities transactions. By
providing for more uniform settlement
processing, simplifying the settlement
process, and subjecting such
transactions to enhanced information
sharing and governance, as described
below, this change would promote the
prompt and accurate clearance and
settlement of these additional securities
transactions.
The proposal would establish
additional arrangements concerning the
procedures, information sharing, and
overall governance processes under the
New Accord. For example, the Clearing
Agencies would agree to share certain
information, including general risk
management due diligence regarding
Common Members, lists of Common
Members, and information regarding
margin and settlement obligations of the
Common Members. The Clearing
Agencies also would agree to provide
each other with any other information
that the other reasonably requests in
connection with their obligations under
the New Accord. Such arrangements
would foster cooperation and
coordination between OCC and NSCC in
the settlement of securities transactions.
The New Accord also would establish
the Guaranty Substitution Time (i.e., a
specific point in time where trade
guarantee obligations would transfer
from OCC to NSCC), with respect to the
applicable securities transactions, as
described above. The Guaranty
Substitution Time would help eliminate
ambiguity and complexity that exists in
the current guarantee practice regarding
which Clearing Agency is responsible
for guaranteeing settlement at any given
moment, and help 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. This
proposed change is designed to help
strengthen the Clearing Agencies’
abilities to plan for, manage, and,
therefore, mitigate the risks that the
default of a Common Member could
present to the Clearing Agencies, other
clearing members, and the market as a
whole, thereby promoting the prompt
and accurate clearance and settlement of
securities transactions.
The proposed changes to the NSCC
Rules would provide additional clarity,
transparency, and certainty around the
application of the New Accord to the
applicable E&A/Delivery Transactions.
Other proposed changes to OCC’s Rules
also would provide additional clarity,
transparency, and certainty around the
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settlement and margining treatment of
various securities transactions cleared
by OCC (including those settled under
the New Accord, those otherwise settled
through the facilities of NSCC, and
those that settle on a broker-to-broker
basis away from NSCC). By providing
Clearing Members with this additional
clarity, transparency, and certainty in
the NSCC Rules and OCC’s Rules, the
Proposed Rule Changes are designed to
promote the prompt and accurate
clearance and settlement of securities
transactions and assure the safeguarding
of securities and funds which are in the
custody or control of the Clearing
Agencies or for which they are
responsible.
Therefore, for the reasons stated
above, the Commission believes that the
Proposed Rule Changes are consistent
with the requirements of Section
17A(b)(3)(F) of the Act.31
B. Consistency With Rule 17Ad–
22(e)(20)
The Commission believes that the
changes proposed in the Proposed Rule
Changes are consistent with Rule 17Ad–
22(e)(20) under the Act, which requires,
in part, that the Clearing Agencies
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to identify,
monitor, and manage risks related to
any link the clearing agency establishes
with one or more other clearing
agencies.32
Under the terms of the Existing
Accord, even after NSCC’s trade
guarantee has taken effect, OCC is not
released from its trade guarantee with
respect to the transactions until certain
deadlines have passed, as discussed
above. As a result, the Existing Accord
creates a complicated framework for the
settlement of securities underlying
certain Stock Options, which could lead
to an unanticipated disruption to the
Clearing Agencies’ respective clearing
operations.
The New Accord is designed to better
mitigate and manage the risks related to
the link the Clearing Agencies have
established with each other to settle the
securities underlying Stock Options and
Stock Futures. For example, by
instituting the Guaranty Substitution
Time, the New Accord would provide
for a clearer, simpler framework for the
settlement of securities underlying
certain Stock Options and Stock Futures
by setting a specific time at which trade
guarantee obligations would transfer
from OCC to NSCC. This would help
eliminate the ambiguity that currently
31 Id.
32 17
CFR 240.17Ad–22(e)(20).
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36491
exists regarding which Clearing Agency
is responsible for guaranteeing
settlement at any given moment. It
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. This greater certainty, in
turn, is designed to help improve the
OCC’s and NSCC’s ability to plan for
and manage the risk presented by the
default of a Common Member, and the
effects that such a default could have on
other members and the markets the
Clearing Agencies serve.
In connection with the proposal to
put additional arrangements into place
concerning the procedures, information
sharing, and overall governance
processes under the New Accord, the
Clearing Agencies would agree to share
certain information, including general
surveillance information regarding their
members. Such arrangements are
designed to help each Clearing Agency
more effectively identify, monitor, and
manage risks that may be presented by
Common Members.
For the above reasons, the
Commission believes that the New
Accord is designed to assist the Clearing
Agencies in identifying, monitoring, and
managing risks related to the link
between the Clearing Agencies.
Therefore, the Commission believes that
the changes proposed in the Proposed
Rule Changes are consistent with Rule
17Ad–22(e)(20).33
Existing Accord. As a result, Common
Members would no longer be required
to post margin at both Clearing Agencies
to cover the same transactions. By
simplifying the terms of the existing
agreement in this way, the New Accord
is designed to be more efficient and
effective in meeting the requirements of
OCC’s and NSCC’s participants and the
markets they serve.
Furthermore, as described above, the
proposed changes would establish
additional arrangements between the
Clearing Agencies concerning the
procedures, information sharing, and
overall governance processes under the
New Accord. Such arrangements could
enhance information sharing between
the Clearing Agencies and enable them
to more effectively identify, monitor,
and manage risks that may be presented
by certain Common Members.
Because the New Accord would allow
for greater information sharing and
eliminate the need for Common
Members to post margin at both Clearing
Agencies for the same transactions, the
Commission believes the proposal is
designed to be efficient and effective in
meeting the requirements of Common
Members. Therefore, the Commission
believes that the changes proposed in
the Proposed Rule Changes are
consistent with the requirements of Rule
17Ad–22(e)(21).36
C. Consistency With Rule 17Ad–
22(e)(21)
The Commission believes that the
proposal is consistent with Rule 17Ad–
22(e)(21) under the Act, which requires,
in part, that the Clearing Agencies
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to be efficient and
effective in meeting the requirements of
its participants and the markets it
serves.34 As described above, the
proposal would modify the timing of the
Guaranty Substitution by establishing
the Guaranty Substitution Time. In
doing so, the New Accord would
minimize the ‘‘double margining’’
issue 35 that is present under the
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Changes are consistent with the
requirements of the Act, in particular
the requirements of Section 17A of the
Act 37 and the rules and regulations
promulgated thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that
proposed rule changes SR–NSCC–2017–
007 and SR–OCC–2017–013 be and
hereby are Approved as of the date of
this order or the date of a notice by the
Commission authorizing the Clearing
Agencies to implement their advance
notice proposals (SR–NSCC–2017–803,
SR–OCC–2017–804), whichever is
later.38
III. Conclusion
33 Id.
34 17
CFR 240.17Ad–22(e)(21).
noted above, under the Existing Accord,
even after NSCC’s trade guarantee has taken effect,
OCC retains its trade guarantee obligations with
respect to the options exercise or assignment until
certain deadlines have passed on the first business
day following the scheduled settlement date. Once
such deadlines have passed, OCC is released from
its trade guarantee unless NSCC has notified OCC
that the relevant Common Member has failed to
meet an obligation to NSCC or NSCC has ceased to
35 As
PO 00000
Frm 00136
Fmt 4703
Sfmt 4703
act for such firm. This results in a period of time
during which NSCC’s trade guarantee overlaps with
OCC’s trade guarantee, for which both Clearing
Agencies collect and hold margin from the Common
Member. See supra note 16.
36 17 CFR 240.17Ad–22(e)(21).
37 15 U.S.C. 78q–1.
38 In approving the Proposed Rule Changes, the
Commission considered the proposals’ impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
E:\FR\FM\04AUN1.SGM
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36492
Federal Register / Vol. 82, No. 149 / Friday, August 4, 2017 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16401 Filed 8–3–17; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32768; 812–14759]
Sharespost 100 Fund and SP
Investments Management, LLC
July 31, 2017.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of an application under section
6(c) of the Investment Company Act of
1940 (the ‘‘Act’’) for an exemption from
sections 18(a)(2), 18(c) and 18(i) of the
Act, under sections 6(c) and 23(c)(3) of
the Act for an exemption from rule 23c–
3 under the Act, and for an order
pursuant to section 17(d) of the Act and
rule 17d–1 under the Act.
Summary of Application: Applicants
request an order to permit certain
registered closed-end management
investment companies to issue multiple
classes of shares and to impose assetbased distribution and/or service fees,
early withdrawal charges (‘‘EWCs’’) and
repurchase fees (‘‘Repurchase Fees’’).
Applicants: Sharespost 100 Fund (the
‘‘Initial Fund’’) and SP Investments
Management, LLC (the ‘‘Adviser’’).
Filing Dates: The application was
filed on April 6, 2017 and amended on
May 17, 2017 and July 19, 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 August 25, 2017, and
should be accompanied by proof of
service on the 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.
39 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
15:13 Aug 03, 2017
Jkt 241001
Secretary, U.S. Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090;
Applicants: 101 Jefferson Drive, Menlo
Park, California 94025.
FOR FURTHER INFORMATION CONTACT:
Barbara T. Heussler, Senior Attorney, at
(202) 551–6990, or Robert H. Shapiro,
Branch Chief, at (202) 551–6821
(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
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
ADDRESSES:
Applicants’ Representations
1. The Initial Fund is a Delaware
statutory trust that is registered under
the Act as a non-diversified, closed-end
management investment company. The
Initial Fund’s investment objective is
capital appreciation. The Initial Fund
seeks to achieve its investment objective
by investing in the equity securities of
certain private, operating, late-stage
growth companies primarily comprising
the SharesPost 100, a list of companies
selected and maintained by the Adviser.
2. The Adviser, a Delaware limited
liability company, is registered as an
investment adviser under the
Investment Advisers Act of 1940. The
Adviser serves as investment adviser to
the Initial Fund.
3. The applicants seek an order to
permit the Initial Fund to issue multiple
classes of shares, each having its own
fee and expense structure, and to
impose asset-based distribution and/or
service fees, EWCs and Repurchase
Fees.
4. Applicants request that the order
also apply to any continuously offered
registered closed-end management
investment company that has been
previously organized or that may be
organized in the future for which the
Adviser, or any entity controlling,
controlled by, or under common control
with the Adviser, or any successor in
interest to any such entity,1 acts as
investment adviser and which operates
as an interval fund pursuant to rule
23c–3 under the Act or provides
periodic liquidity with respect to its
shares pursuant to rule 13e–4 under the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) (each, a ‘‘Future
1A
successor in interest is limited to an entity
that results from a reorganization into another
jurisdiction or a change in the type of business
organization.
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
Fund’’ and together with the Initial
Fund, the ‘‘Funds’’).2
5. The Initial Fund is currently
making a continuous public offering of
its common shares. Applicants state that
additional offerings by any Fund relying
on the order may be on a private
placement or public offering basis.
Shares of the Funds will not be listed on
any securities exchange nor quoted on
any quotation medium. The Funds do
not expect there to be a secondary
trading market for their shares.
6. If the requested relief is granted, the
Initial Fund intends to redesignate its
common shares as ‘‘Class A Shares’’ and
to amend its registration statement in
order to continuously offer an
additional class of shares, designated as
‘‘Class I Shares’’. Each of the Class A
Shares and Class I Shares will have its
own fee and expense structure. The
Funds may in the future offer additional
classes of shares and/or another sales
charges structure. Because of the
different distribution and/or service
fees, services and any other class
expenses that may be attributable to the
Class A Shares and Class I Shares, the
net income attributable to, and the
dividends payable on, each class of
shares may differ from each other.
7. Applicants state that, from time to
time, the Initial Fund may create
additional classes of shares, the terms of
which may differ from Class A Shares
and Class I Shares in the following
respects: (i) The amount of fees
permitted by different distribution plans
and/or different service fee
arrangements; (ii) voting rights with
respect to a distribution and/or service
plan of a class; (iii) different class
designations; (iv) the impact of any class
expenses directly attributable to a
particular class of shares allocated on a
class basis as described in the
application; (v) any differences in
dividends and net asset value resulting
from differences in fees under a
distribution and/or service plan or in
class expenses; (vi) any EWC or other
sales load structure; and (vii) exchange
or conversion privileges of the classes as
permitted under the Act.
8. Applicants state that shares of a
Fund will be subject to a Repurchase
Fee at a rate of no greater than 2% of
the aggregate net asset value of a
shareholder’s shares repurchased by the
Fund if the interval between the date of
purchase of the shares and the valuation
date with respect to the repurchase of
those shares is less than one year.
2 Any Fund relying on this relief in the future will
do so in a manner consistent with the terms and
conditions of the application. Applicants represent
that each entity presently intending to rely on the
requested relief is listed as an applicant.
E:\FR\FM\04AUN1.SGM
04AUN1
]]>Agencies
[Federal Register Volume 82, Number 149 (Friday, August 4, 2017)]
[Notices]
[Pages 36484-36492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16401]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81266; File Nos. SR-NSCC-2017-007; SR-OCC-2017-013]
Self-Regulatory Organizations; National Securities Clearing
Corporation; The Options Clearing Corporation; Order Approving Proposed
Rule Changes Concerning the Adoption of a New Stock Options and Futures
Settlement Agreement Between the National Securities Clearing
Corporation and The Options Clearing Corporation
July 31, 2017.
On June 1, 2017, National Securities Clearing Corporation
(``NSCC'') and The Options Clearing Corporation (``OCC,'' each a
``Clearing Agency,'' and collectively, ``Clearing Agencies'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule changes SR-NSCC-2017-007 and SR-OCC-2017-013 respectively
(collectively, the ``Proposed Rule Changes''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder.\2\ The Proposed Rule Changes were published for
comment in the Federal Register on June 20, 2017.\3\ The Commission
received one comment letter to SR-OCC-2017-013.\4\ This order approves
the Proposed Rule Changes.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release Nos. 80942 (June 15, 2017),
82 FR 28141 (June 20, 2017) (SR-NSCC-2017-007); 80941 (June 15,
2017), 82 FR 28207 (June 20, 2017) (SR-OCC-2017-013). The Clearing
Agencies also filed the Proposed Rule Changes as advance notices
pursuant to Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1) under the
Act. 15 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1). The advance
notices were published for comment in the Federal Register on July
5, 2017. See Securities Exchange Act Release Nos. 81039 (June 28,
2017), 82 FR 31123 (July 5, 2017) (SR-NSCC-2017-803); 81040 (June
28, 2017), 82 FR 31109 (July 5, 2017) (SR-OCC-2017-804). The
Commission did not receive any comments on the advance notices.
\4\ See letter from Pamela D. Marler, dated June 30, 2017. Such
comment letter does not specifically comment on any aspect of the
Proposed Rule Changes.
---------------------------------------------------------------------------
I. Description of the Proposed Rule Changes
The Proposed Rule Changes filed by the Clearing Agencies are a
proposal to implement a new Stock Options and Futures Settlement
Agreement (``New Accord'') between the Clearing Agencies, and to amend
the Rules and Procedures of NSCC (``NSCC Rules'') and the By-Laws and
Rules of OCC to accommodate the proposed provisions of the New
Accord.\5\
---------------------------------------------------------------------------
\5\ Terms not defined herein are defined in the NSCC Rules,
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf, or in OCC's By-Laws and Rules, available at
https://optionsclearing.com/about/publications/bylaws.jsp, as the
context implies.
---------------------------------------------------------------------------
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 (i.e., NSCC) and
are not settled through the facilities of OCC. To enable this
arrangement concerning stock options, the Clearing Agencies currently
are parties to a Third Amended and Restated Options Exercise Settlement
Agreement, dated February 16, 1995, as amended (``Existing
Accord''),\6\ which governs the delivery and receipt of stock resulting
from the exercise and assignment of stock options (i.e., put and call
options issued by OCC (``Stock Options'')). Pursuant to the Existing
Accord, such stock must be: (i) Eligible for settlement through NSCC's
Continuous Net Settlement (``CNS'') Accounting Operation and (ii)
designated to settle
[[Page 36485]]
on the third business day following the date the related exercise or
assignment is accepted by NSCC (``Options E&A''), which is the current
standard settlement cycle, known as ``regular way'' settlement.\7\ 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.\8\
---------------------------------------------------------------------------
\6\ 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).
\7\ According to the Clearing Agencies, regular way settlement
is understood to be the financial services industry's standard
settlement cycle. Currently, regular way settlement of securities
underlying Stock Options and stock futures takes place on the third
business day following the date the related exercise, assignment or
delivery obligation is accepted by NSCC. On or prior to September 5,
2017, the standard settlement cycle will be shortened to two
business days after trade date, as required by the Commission. See
Securities Exchange Act Release No. 80295 (March 22, 2017), 82 FR
15564 (March 29, 2017) (S7-22-16) (Securities Transaction Settlement
Cycle). NSCC has amended its Rules with respect to the meaning of
regular way settlement to be consistent with the shorter standard
settlement cycle and will establish an effective date for these rule
changes in a subsequent rule filing. See Securities Exchange Act
Release No. 79734 (January 4, 2017), 82 FR 3030 (January 10, 2017)
(SR-NSCC-2016-007).
\8\ 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.''
---------------------------------------------------------------------------
The Proposed Rule Changes are a proposal by the Clearing Agencies
to adopt a New Accord, which would provide for the settlement of the
securities underlying certain Stock Options and delivery obligations
arising from certain matured physically-settled single stock futures
contracts cleared by OCC (``Stock Futures''). The New Accord would
implement three major changes. First, the New Accord would expand the
category of securities that would be 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 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.\9\ Second, the New Accord would 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, i.e., when the ``Guaranty Substitution''
takes place. Third, the New Accord would put additional arrangements
into place concerning the procedures, information sharing, and overall
governance processes under the agreement. The Clearing Agencies propose
to make certain clarifying and conforming changes to the NSCC Rules and
the OCC By-Laws and Rules as necessary to implement the New Accord.
---------------------------------------------------------------------------
\9\ The New Accord would continue to provide for the settlement
of securities underlying Stock Options that settle through NSCC's
CNS Accounting Operation.
---------------------------------------------------------------------------
According to the Clearing Agencies, the primary purpose of the
proposed changes is to: (1) Provide consistent treatment across all
expiries for products with regular way \10\ settlement cycle
specifications; (2) reduce the operational complexities of the Existing
Accord by delineating a single point in time at which OCC's Guaranty
ceases and NSCC's Guaranty begins and clarifying the roles and
responsibilities of the Clearing Agencies in the event of a default of
a Common Member at either or both Clearing Agencies; and (3) improve
procedures, information sharing, and overall governance under the
agreement.
---------------------------------------------------------------------------
\10\ Under the New Accord, ``regular way settlement'' would have
a meaning agreed to by the Clearing Agencies. This will address any
changes to the standard settlement cycle. See supra note 7.
---------------------------------------------------------------------------
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 the Clearing Agencies.\11\
---------------------------------------------------------------------------
\11\ 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 these Proposed
Rule Changes. See supra note 3.
---------------------------------------------------------------------------
The Existing Accord
Key Terms of the Existing Accord
According to the Clearing Agencies, under the Existing Accord, the
settlement of underlying securities resulting from 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 (``CNS Eligible Securities'').\12\ 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 (``OCC Transactions
File''),\13\ listing the specific securities that are to be delivered
and received as a result of Options E&A that have not previously been
reported to NSCC and for which settlement is to be made through
NSCC.\14\ With 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
Eligibility 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 underlying securities resulting from Options E&A.
---------------------------------------------------------------------------
\12\ Supra note 5.
\13\ According to the Clearing Agencies, 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.
\14\ According to the Clearing Agencies, 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.
---------------------------------------------------------------------------
According to the Clearing Agencies, under the Existing Accord, even
after NSCC's trade guarantee has taken effect,\15\ OCC retains its
trade guarantee obligations with respect to the Options E&A until
certain deadlines \16\ have
[[Page 36486]]
passed on the first business day following the scheduled settlement
date. Once such deadlines have passed, OCC is released from its trade
guarantee unless NSCC has notified 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.\17\ As a result, there
is a period of time during which NSCC's trade guarantee overlaps with
OCC's trade guarantee and for which both Clearing Agencies collect and
hold margin from the Common Member.
---------------------------------------------------------------------------
\15\ 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 submissions, 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 5.
\16\ 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 NSCC has ceased to act.
\17\ See NSCC Rule 46 (Rule 46 (Restrictions on Access to
Services). See supra note 5.
---------------------------------------------------------------------------
In the event that NSCC or OCC ceases to act on behalf of or
suspends a Common Member, that Common Member would become a
``defaulting member.'' Once a Common Member becomes a defaulting
member, the Existing Accord provides that if OCC were to suspend a
Common Member, NSCC would be required to make a payment to OCC equal to
the lesser of OCC's total loss resulting from the closeout or the
positive mark-to-market (``MTM'') amount relating to the defaulting
member's Options E&A and that if NSCC were to suspend a Common Member,
OCC would be required to make a payment to NSCC equal to the lesser of
NSCC's total loss resulting from closeout or the negative mark-to-
market amount relating to the defaulting member's Options E&A. 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, the Clearing Agencies propose to adopt a New
Accord, which would provide for the settlement of certain securities
underlying Stock Options and Stock Futures transactions. According to
the Clearing Agencies, 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
Guaranty Substitution); 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) required to be physically 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 \18\ 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.
---------------------------------------------------------------------------
\18\ ``E&A/Delivery Transactions'' are transactions involving
the settlement of securities underlying 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.
---------------------------------------------------------------------------
As with the Existing Accord, the proposed New Accord would continue
to provide for the settlement of securities underlying Stock Options
that settle through NSCC's CNS Accounting Operation and are designated
to settle regular way. In addition, the New Accord would expand the
category of securities eligible for settlement and guarantee by NSCC to
include Stock Futures deliveries that are eligible to settle through
NSCC's CNS Accounting Operation and are designated to settle regular
way. The New Accord would also provide for the settlement of securities
underlying 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 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 with underlying securities that are neither CNS
Securities nor Balance Order Securities.\19\ 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.\20\
---------------------------------------------------------------------------
\19\ 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 5.
\20\ 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 the Clearing
Agencies with respect to Guaranty Substitution.
As described above, the Existing Accord provides that, following
the default of a Common Member, and depending on the timing of the
exercise or assignment guarantee, the Clearing Agency that suspends the
Common Member will receive payment from the other Clearing Agency to
compensate for potential losses incurred in connection
[[Page 36487]]
with the Common Member's default. The proposed New Accord, in contrast,
would clearly delineate a point in time at which OCC's Guaranty ends
and NSCC's Guaranty begins (i.e., the Guaranty Substitution takes
place) 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.
Under the New Accord, 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'').\21\ At the Guaranty Substitution
Time, NSCC's Guaranty would take effect, and OCC would no longer retain
any settlement obligations with respect to such E&A/Delivery
Transactions.
---------------------------------------------------------------------------
\21\ Procedure XV of the NSCC Rules provides that all Clearing
Fund requirements and other deposits be made within one hour of
demand, unless NSCC determines otherwise. See supra note 5.
---------------------------------------------------------------------------
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. The
Guaranty Substitution also would not occur if, after NSCC's receipt of
the E&A/Delivery Transaction but prior to receiving corresponding
Clearing Fund deposits, 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 additional 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 would not occur with respect to such
Defaulted NSCC Member Transactions, unless both Clearing Agencies agree
otherwise. Therefore, NSCC would have no obligation to guarantee 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 submitted E&A/Delivery Transactions
for that Activity Date that are not included on such list (i.e., those
transactions not involving the Defaulting NSCC Clearing Member). 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'' \22\ 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.
---------------------------------------------------------------------------
\22\ 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.
---------------------------------------------------------------------------
Other Terms of the New Accord
The New Accord would include a number of other provisions intended
to 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, the Clearing Agencies 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 separate service level agreement also
would specify an effective date for the New Accord, which 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
[[Page 36488]]
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. For example, the Clearing
Agencies would agree to share certain information, including general
risk management due diligence regarding Common Members, lists of Common
Members, and information regarding margin and settlement obligations of
the Common Members. The Clearing Agencies would also agree to provide
each other with any other information that the other reasonably
requests in connection with their 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 a Clearing Agency is unable to perform any obligation as a
result of the failure of the other Clearing Agency to perform its
responsibilities on a timely basis, the time for the non-failing
Clearing Agency'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 Clearing Agency would be liable to the
other Clearing Agency 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 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 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.
Therefore, NSCC is not proposing any change to its margining
methodology, but will include E&A/Delivery Transactions in the
calculation of the mark-to-market margin component of Common Members'
Clearing Fund Required Deposits following implementation of the New
Accord.
Proposed Amendments to OCC's By-Laws and Rules
OCC also proposes certain changes to its By-Laws and Rules to
accommodate the terms of the New Accord. The primary purpose of the
proposed changes is to: (1) Reflect the expanded scope of the New
Accord, (2) reflect changes related to the new Guaranty Substitution
mechanics of the New Accord; and (3) make other changes necessary to
conform to the terms of the New Accord or to otherwise provide
additional clarity around the settlement and margining \23\ treatment
of: (i) Eligible Securities under the New Accord, (ii) non-regular way
securities settling through the facilities of NSCC but outside of the
New Accord, and (iii) those securities settling outside of the New
Accord and away from NSCC on a broker-to-broker basis. These proposed
changes are discussed in greater detail below.
---------------------------------------------------------------------------
\23\ OCC notes that, while it is proposing changes to its Rules
concerning margin requirements (e.g., which transactions would be
included as part of OCC's margin calculation at a given point in
time), OCC is not proposing any changes to its margin model (with
the exception that OCC would no longer collect and hold margin for
positions after NSCC's Guaranty has taken effect under the New
Accord).
---------------------------------------------------------------------------
Changes Related to the Expanded Scope of the New Accord
First, OCC proposes to amend and replace the defined term ``CNS-
eligible'' \24\ to reflect the expanded definition of Eligible
Securities under the New Accord. The term ``CNS-eligible'' currently
describes the securities underlying the physically-settled stock
options that are eligible under the Existing Accord to be settled
through NSCC's CNS Accounting Operation. Under the New Accord, however,
the term Eligible Securities is more broadly defined to include
securities (both Stock Options and Stock Futures) eligible for
settlement via NSCC's CNS Accounting Operation and NSCC's Balance Order
Accounting Operation. Accordingly, OCC proposes to use ``CCC,'' for
``correspondent
[[Page 36489]]
clearing corporation'' \25\ to describe the Eligible Securities. Thus,
the term ``CCC-eligible'' would replace ``CNS-eligible'' throughout
OCC's By-Laws and Rules.
---------------------------------------------------------------------------
\24\ See Article I, Section (C)(23) of OCC's By-Laws.
\25\ Under Article I of OCC's By-Laws, the term ``correspondent
clearing corporation'' means the National Securities Clearing
Corporation or any successor thereto which, by agreement with the
Corporation, provides facilities for settlements in respect of
exercised option contracts or BOUNDs (i.e., securities issued by OCC
pursuant to Article XXIV of OCC's By-Laws and Chapter XXV of OCC's
Rules) or in respect of delivery obligations arising from
physically-settled stock futures. See supra note 5.
---------------------------------------------------------------------------
Next, because the New Accord would include the settlement of
securities underlying Stock Futures, OCC proposes to make several
changes to its rules regarding Stock Futures to accommodate this
expansion. More specifically, OCC proposes a conforming amendment to
Rule 901 Interpretation and Policy (.02) to clarify that, under the New
Accord, OCC will, subject to its discretion, cause the settlement of
all matured Stock Futures to be made through the facilities of NSCC to
the extent that the underlying securities are CCC-eligible as the term
is currently proposed.
OCC also proposes clarifying and conforming revisions to newly
renumbered Rule 901(e) (currently Rule 901(d)) to specify that
settlements made through the facilities of the correspondent clearing
corporation are governed by Rule 901 and to clarify that, under the New
Accord, specifications made in any Delivery Advice may be revoked up
until the point at which NSCC's Guaranty has taken effect (the
``obligation time'' as discussed below) and not the opening of business
on the delivery date.
Changes Related to Guaranty Substitution
OCC also proposes a series of amendments to its Rules to accurately
reflect the process under which the Guaranty Substitution occurs under
the New Accord. First, OCC proposes to amend Rule 901(c) so that the
term ``obligation time''--the time that the correspondent clearing
corporation becomes unconditionally obligated, in accordance with its
rules, to effect settlement in respect thereof or to close out the
securities contract arising therefrom--is synonymous with the Guaranty
Substitution Time under the New Accord (i.e., (i) settlement
obligations are reported to and are not rejected by NSCC; (ii) NSCC has
not notified OCC that NSCC has ceased to act for the relevant Clearing
Member; and (iii) the Clearing Fund requirements of the relevant
Clearing Member are received by NSCC). Under the New Accord, if a
default occurs prior to the Guaranty Substitution Time, the Guaranty
Substitution will not occur for any E&A/Delivery Transactions involving
the Defaulting NSCC Member, and OCC will continue to guarantee
settlement for those Defaulted NSCC Member Transactions.
Next, OCC proposes to amend language in newly renumbered Rule
901(i) (currently Rule 901(h)) regarding the timing of the end of a
Clearing Member's obligations to OCC with respect to securities to be
settled through NSCC. Under the Existing Accord and OCC's existing
Rules, a Clearing Member's obligations to OCC end only once settlement
is completed. Under the New Accord, however, a Clearing Member's
obligations to OCC will end when OCC's obligations with respect to
guaranteeing settlement of the security would end (i.e., the Guaranty
Substitution Time or ``obligation time''). OCC therefore proposes to
amend newly renumbered Rule 901(i) to specify that a Clearing Member's
obligations to OCC will be deemed completed and performed once the
``obligation time'' has occurred.
As discussed above, the New Accord eliminates the provisions of the
Existing Accord whereby OCC and NSCC guaranteed each other the
performance of Common Members and made certain payments to the other
upon the default of a Common Member. Therefore, OCC proposes to delete
discussions of such guarantees and payments from newly renumbered Rule
901(i) and Rule 1107.
OCC also proposes amendments to Rules 910 and 911, which set forth
procedures for handling failures to make or take delivery of securities
in settlement of exercised or assigned Stock Options and matured
physically-settled Stock Futures, to add language to both rules to
clarify that the failure procedures set forth therein would not apply
with respect to any delivery to be made through NSCC pursuant to Rule
901. Under the New Accord, once the Guaranty Substitution Time with
respect to a specific E&A/Delivery Transaction occurs, OCC's Guaranty
ends and NSCC's Guaranty begins, leaving OCC with no involvement with
or responsibility for the settlement of the securities underlying that
transaction. Therefore, if there is a failure to make or take delivery
with respect to that transaction after Guaranty Substitution has
occurred, the NSCC Rules will govern that failure. With respect to
deliveries made on a broker-to-broker basis under OCC Rules 903 through
912 (including those that may utilize NSCC's Obligation Warehouse
services), and which are not governed by Rule 901, Guaranty
Substitution does not occur and OCC's failure procedures would apply.
Changes to OCC's Margin Rules
Under the New Accord, OCC will no longer collect margin on a
transaction once it is no longer guaranteeing settlement for that
transaction. Therefore, OCC proposes to add language to Rule 601(f) to
clarify that OCC's margin calculations will not include delivery
obligations arising from any Stock Options or Stock Futures that are
eligible for settlement through NSCC and for which OCC has no further
settlement obligations because either (i) Guaranty Substitution has
occurred for E&A/Delivery Transactions under the New Accord (as
described in revised Rule 901(c)) or (ii) NSCC has otherwise accepted
transactions for non-regular way settlement under the NSCC Rules (as
describe in newly proposed Rule 901(d)).\26\ By not including these
transactions as part of OCC's margin calculation, OCC is hoping to
alleviate instances of ``double-margining'' for Common Members that may
otherwise simultaneously owe margin to NSCC and OCC with respect to the
same position.
---------------------------------------------------------------------------
\26\ Related revisions to Rule 901(c) and newly proposed Rule
901(d) are discussed in more detail below.
---------------------------------------------------------------------------
OCC also proposes to delete Rule 608A in its entirety. The New
Accord seeks to eliminate the situation under the Existing Accord where
Common Members are effectively ``double-margined'' or required to
simultaneously post margin with OCC and NSCC with respect to the same
position. As the New Accord eliminates this double-margining scenario,
Rule 608A, which provides procedures pursuant to which a Clearing
Member could use the securities deposited as margin with OCC as
collateral to secure a loan to pay its margin obligations to NSCC, is
now unnecessary.
Other Clarifying Changes Not Related to the New Accord
OCC also proposes to amend its Rules to make clarifying changes
that are not directly required by the New Accord but would provide
additional clarity in its Rules in light of other changes being made to
accommodate the New Accord. Specifically, OCC proposes to revise Rule
901 Interpretation and Policy (.02) to provide that transactions that
involve the delivery of non-CCC eligible securities made on a broker-
to-broker basis (and away from NSCC) may
[[Page 36490]]
nevertheless involve the use of certain services of NSCC (e.g., NSCC's
Obligation Warehouse). For such transactions, because they are not
covered by the New Accord and NSCC at no point guarantees settlement,
OCC Rule 901 would not apply and delivery is governed by the broker-to-
broker settlement procedures set forth in OCC Rules 903 through 912, as
is the case currently today. Additionally, while OCC's existing Rules
do not prohibit broker-to-broker settlements from being facilitated
through the services of a correspondent clearing corporation, they do
not explicitly contemplate the possibility. OCC also proposes to make
clarifying amendments to Rule 904(b) and 910A(a) to more clearly
distinguish between settlements effected through NSCC's CNS Accounting
Operation or Balance Order Accounting Operations in accordance with OCC
Rule 901 and deliveries effected on a broker-to-broker basis utilizing
services of NSCC under OCC Rules 903 through 912 and to clearly state
which OCC Rules apply in each context.
Further, OCC proposes to add a new paragraph (d) to Rule 901 to
clarify that OCC still intends, at its discretion, to effect settlement
of Stock Options and Stock Futures that are scheduled to be settled on
the first business day after exercise or maturity through NSCC pursuant
to Rule 901 and the relevant provisions of the NSCC Rules, even though
such contracts are outside the scope of the New Accord. These contracts
would continue to be settled as they are currently today.
OCC also proposes clarifying and conforming changes to the
introductory language of Chapter IX of the Rules. Specifically, OCC
proposes conforming changes to the Rule to reflect the replacement of
the defined term ``CNS-eligible'' with ``CCC-eligible'' as described
above. The proposed changes would also clarify that OCC's broker-to-
broker settlement rules are contained in Rules 903-912, as Rule 902
concerns Delivery Advices, which also may be applicable to settlements
made through the correspondent clearing corporation pursuant to Rule
901. In addition, the proposed changes to the introductory language of
Chapter IX of the Rules would provide additional clarity around OCC's
existing authority to alter a previous designation of a settlement
method at any time prior to the designated delivery date by specifying
that this authority would apply to both settlements to be made through
the facilities of the correspondent clearing corporation pursuant to
Rule 901 or settlements to be made on a broker-to-broker basis pursuant
to Rules 903 through 912. Finally, OCC proposes a number of conforming
changes to Rules 901 and 912 to reflect the renumbering of various Rule
provisions due to the proposed amendments described above.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and rules and regulations thereunder applicable to such
organization.\27\ After carefully considering the Proposed Rule
Changes, the Commission finds that the Proposed Rule Changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to the Clearing Agencies. In
particular, the Commission believes the proposal is consistent with
Section 17A(b)(3)(F) of the Act,\28\ as well as Rules 17Ad-22(e)(20)
and (21).\29\
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\27\ 15 U.S.C. 78s(b)(2)(C).
\28\ 15 U.S.C. 78q-1(b)(3)(F).
\29\ 17 CFR 240.17Ad-22(e)(20) and (21).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible, and to
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions.\30\ The Commission
believes that the Proposed Rule Changes are consistent with the
requirements of Section 17A(b)(3)(F) of the Act for the reasons set
forth below.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The proposal would expand the category of securities eligible for
settlement and guarantee under the New Accord to include Stock Futures
deliveries that are eligible to settle through NSCC's CNS Accounting
Operation, as well as securities underlying Stock Options and Stock
Futures that are eligible to settle through NSCC's Balance Order
Accounting Operation, where each are scheduled to settle regular way.
By including these additional securities as part of the New Accord, the
proposal would provide for more uniform settlement processing of
securities with regular way settlement. According to the Clearing
Agencies, the expansion of the category of securities eligible for
settlement and guarantee under the New Accord would simplify the
settlement process for these additional securities transactions. By
providing for more uniform settlement processing, simplifying the
settlement process, and subjecting such transactions to enhanced
information sharing and governance, as described below, this change
would promote the prompt and accurate clearance and settlement of these
additional securities transactions.
The proposal would establish additional arrangements concerning the
procedures, information sharing, and overall governance processes under
the New Accord. For example, the Clearing Agencies would agree to share
certain information, including general risk management due diligence
regarding Common Members, lists of Common Members, and information
regarding margin and settlement obligations of the Common Members. The
Clearing Agencies also would agree to provide each other with any other
information that the other reasonably requests in connection with their
obligations under the New Accord. Such arrangements would foster
cooperation and coordination between OCC and NSCC in the settlement of
securities transactions.
The New Accord also would establish the Guaranty Substitution Time
(i.e., a specific point in time where trade guarantee obligations would
transfer from OCC to NSCC), with respect to the applicable securities
transactions, as described above. The Guaranty Substitution Time would
help eliminate ambiguity and complexity that exists in the current
guarantee practice regarding which Clearing Agency is responsible for
guaranteeing settlement at any given moment, and help 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. This proposed change
is designed to help strengthen the Clearing Agencies' abilities to plan
for, manage, and, therefore, mitigate the risks that the default of a
Common Member could present to the Clearing Agencies, other clearing
members, and the market as a whole, thereby promoting the prompt and
accurate clearance and settlement of securities transactions.
The proposed changes to the NSCC Rules would provide additional
clarity, transparency, and certainty around the application of the New
Accord to the applicable E&A/Delivery Transactions. Other proposed
changes to OCC's Rules also would provide additional clarity,
transparency, and certainty around the
[[Page 36491]]
settlement and margining treatment of various securities transactions
cleared by OCC (including those settled under the New Accord, those
otherwise settled through the facilities of NSCC, and those that settle
on a broker-to-broker basis away from NSCC). By providing Clearing
Members with this additional clarity, transparency, and certainty in
the NSCC Rules and OCC's Rules, the Proposed Rule Changes are designed
to promote the prompt and accurate clearance and settlement of
securities transactions and assure the safeguarding of securities and
funds which are in the custody or control of the Clearing Agencies or
for which they are responsible.
Therefore, for the reasons stated above, the Commission believes
that the Proposed Rule Changes are consistent with the requirements of
Section 17A(b)(3)(F) of the Act.\31\
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\31\ Id.
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(20)
The Commission believes that the changes proposed in the Proposed
Rule Changes are consistent with Rule 17Ad-22(e)(20) under the Act,
which requires, in part, that the Clearing Agencies establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor, and manage risks related to
any link the clearing agency establishes with one or more other
clearing agencies.\32\
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\32\ 17 CFR 240.17Ad-22(e)(20).
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Under the terms of the Existing Accord, even after NSCC's trade
guarantee has taken effect, OCC is not released from its trade
guarantee with respect to the transactions until certain deadlines have
passed, as discussed above. As a result, the Existing Accord creates a
complicated framework for the settlement of securities underlying
certain Stock Options, which could lead to an unanticipated disruption
to the Clearing Agencies' respective clearing operations.
The New Accord is designed to better mitigate and manage the risks
related to the link the Clearing Agencies have established with each
other to settle the securities underlying Stock Options and Stock
Futures. For example, by instituting the Guaranty Substitution Time,
the New Accord would provide for a clearer, simpler framework for the
settlement of securities underlying certain Stock Options and Stock
Futures by setting a specific time at which trade guarantee obligations
would transfer from OCC to NSCC. This would help eliminate the
ambiguity that currently exists regarding which Clearing Agency is
responsible for guaranteeing settlement at any given moment. It 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.
This greater certainty, in turn, is designed to help improve the OCC's
and NSCC's ability to plan for and manage the risk presented by the
default of a Common Member, and the effects that such a default could
have on other members and the markets the Clearing Agencies serve.
In connection with the proposal to put additional arrangements into
place concerning the procedures, information sharing, and overall
governance processes under the New Accord, the Clearing Agencies would
agree to share certain information, including general surveillance
information regarding their members. Such arrangements are designed to
help each Clearing Agency more effectively identify, monitor, and
manage risks that may be presented by Common Members.
For the above reasons, the Commission believes that the New Accord
is designed to assist the Clearing Agencies in identifying, monitoring,
and managing risks related to the link between the Clearing Agencies.
Therefore, the Commission believes that the changes proposed in the
Proposed Rule Changes are consistent with Rule 17Ad-22(e)(20).\33\
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\33\ Id.
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C. Consistency With Rule 17Ad-22(e)(21)
The Commission believes that the proposal is consistent with Rule
17Ad-22(e)(21) under the Act, which requires, in part, that the
Clearing Agencies establish, implement, maintain and enforce written
policies and procedures reasonably designed to be efficient and
effective in meeting the requirements of its participants and the
markets it serves.\34\ As described above, the proposal would modify
the timing of the Guaranty Substitution by establishing the Guaranty
Substitution Time. In doing so, the New Accord would minimize the
``double margining'' issue \35\ that is present under the Existing
Accord. As a result, Common Members would no longer be required to post
margin at both Clearing Agencies to cover the same transactions. By
simplifying the terms of the existing agreement in this way, the New
Accord is designed to be more efficient and effective in meeting the
requirements of OCC's and NSCC's participants and the markets they
serve.
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\34\ 17 CFR 240.17Ad-22(e)(21).
\35\ As noted above, under the Existing Accord, even after
NSCC's trade guarantee has taken effect, OCC retains its trade
guarantee obligations with respect to the options exercise or
assignment until certain deadlines have passed on the first business
day following the scheduled settlement date. Once such deadlines
have passed, OCC is released from its trade guarantee unless NSCC
has notified OCC that the relevant Common Member has failed to meet
an obligation to NSCC or NSCC has ceased to act for such firm. This
results in a period of time during which NSCC's trade guarantee
overlaps with OCC's trade guarantee, for which both Clearing
Agencies collect and hold margin from the Common Member. See supra
note 16.
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Furthermore, as described above, the proposed changes would
establish additional arrangements between the Clearing Agencies
concerning the procedures, information sharing, and overall governance
processes under the New Accord. Such arrangements could enhance
information sharing between the Clearing Agencies and enable them to
more effectively identify, monitor, and manage risks that may be
presented by certain Common Members.
Because the New Accord would allow for greater information sharing
and eliminate the need for Common Members to post margin at both
Clearing Agencies for the same transactions, the Commission believes
the proposal is designed to be efficient and effective in meeting the
requirements of Common Members. Therefore, the Commission believes that
the changes proposed in the Proposed Rule Changes are consistent with
the requirements of Rule 17Ad-22(e)(21).\36\
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\36\ 17 CFR 240.17Ad-22(e)(21).
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Changes are consistent with the requirements of the Act,
in particular the requirements of Section 17A of the Act \37\ and the
rules and regulations promulgated thereunder.
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\37\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule changes SR-NSCC-2017-007 and SR-OCC-2017-013 be and
hereby are Approved as of the date of this order or the date of a
notice by the Commission authorizing the Clearing Agencies to implement
their advance notice proposals (SR-NSCC-2017-803, SR-OCC-2017-804),
whichever is later.\38\
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\38\ In approving the Proposed Rule Changes, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
[[Page 36492]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16401 Filed 8-3-17; 8:45 am]
BILLING CODE P
