Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of and Immediate Effectiveness of a Proposed Rule Change To Amend Rules With Respect to Index Receipts, 37988-37992 [2020-13541]
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37988
Federal Register / Vol. 85, No. 122 / Wednesday, June 24, 2020 / Notices
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
[FR Doc. 2020–13537 Filed 6–23–20; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MIAX–2020–15 on the subject line.
Paper Comments
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• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2020–15. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–MIAX–2020–15 and should
be submitted on or before July 15, 2020.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
J. Matthew DeLesDernier,
Assistant Secretary.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89088; File No. SR–NSCC–
2020–010]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rules With
Respect to Index Receipts
June 18, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 11,
2020, National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the clearing agency. NSCC filed the
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(4) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to Procedure II (Trade
Comparison and Recording Service) of
the NSCC Rules & Procedures (‘‘Rules’’)
with respect to index receipts, as
described in greater detail below.5
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
24 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(4).
5 Capitalized terms not defined herein are defined
in the Rules, available at https://dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
1 15
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clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The purpose of this proposed rule
change is to amend Procedure II (Trade
Comparison and Recording Service)
with respect to index receipts in order
to (i) reflect the publication of ETF
portfolio holdings for pricing purposes
via the Portfolio Report (as defined
below and in the proposed rule text)
and (ii) permit Index Receipt Agents to
submit to NSCC index receipt creation
and redemption instructions with a
scheduled settlement date that is greater
than the standard settlement cycle of
second business day after the trade date
(‘‘T+2’’). The proposed rule change
would also make technical and
clarifying changes.
(i) Background
Overview of Exchange-Traded Funds
Exchange-traded funds (‘‘ETFs’’)
(referred to as ‘‘index receipts’’ in the
Rules) are marketable securities that
track stock indices, commodities, bonds,
or baskets of assets. ETFs are listed on
exchanges and are traded throughout
the trading day. Shares of ETFs are
created and redeemed in the primary
market and are traded on listed
exchanges in the secondary market.
Each share of an ETF represents an
undivided interest in the underlying
assets of the ETF. NSCC facilitates the
in-kind 6 clearing and settlement of the
creation and redemption of ETF shares
in the primary market as well as
clearing of ETF trades in the secondary
market.
The participants in the ETF primary
market typically consist of the issuers of
ETFs (‘‘ETF Sponsors’’), custodian
banks (‘‘ETF Agents,’’ also referred to as
‘‘Index Receipt Agents’’ in the Rules),
and brokers/dealers that have
agreements directly with ETF Sponsors
to allow the brokers/dealers to place
orders for the creation and redemption
of ETF shares (‘‘Authorized
Participants’’ or ‘‘APs’’). Both the ETF
Agents and APs 7 are Members of NSCC.
6 In the ETF industry, the clearing of ETF
creations and redemptions ‘‘in-kind’’ represents an
exchange of ETF shares for a basket of component
securities rather than cash.
7 Form N–CEN defines AP as a broker-dealer that
is also a member of a clearing agency registered
with the Commission, and which has a written
agreement with the ETF or one of its designated
service providers.
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Federal Register / Vol. 85, No. 122 / Wednesday, June 24, 2020 / Notices
As described in more detail below,
NSCC understands that ETFs are able to
realize a tax efficiency that other
corporations generally cannot because
redemptions from ETFs that are made
in-kind (that is, by delivering certain
assets from the ETF’s portfolio, rather
than in cash) do not require the ETF to
realize and recognize capital gains if
such assets have appreciated in value.
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Trading Baskets and ETF Portfolio
Holdings for Pricing Purposes
APs create and redeem ETF shares
from the ETF Sponsors in blocks called
‘‘creation units.’’ An AP that purchases
a creation unit of ETF shares delivers a
‘‘basket’’ of securities and other assets to
the ETF Agent, and then receives the
creation unit of ETF shares in return for
those assets. The redemption process is
the reverse of the creation process: the
AP redeems a creation unit of ETF
shares for a basket of securities and
other assets. These creation and
redemption baskets are referred to as
‘‘trading baskets.’’
A trading basket is generally
representative of the ETF’s portfolio
and, together with a cash balancing
amount, equal in value to the aggregate
net asset value (‘‘NAV’’) of the ETF
shares in the creation unit. There are
two types of trading baskets: standard
trading baskets and custom trading
baskets. Trading baskets that reflect a
pro rata representation of the ETF’s
portfolio are referred to as ‘‘standard
trading baskets.’’ Trading baskets that
are not standard trading baskets are
referred to as ‘‘custom trading baskets.’’
A custom trading basket is a basket that
contains a non-representative selection
of the ETF’s portfolio holdings and does
not reflect a pro rata representation of
the ETF’s portfolio holdings. Custom
trading baskets may, pursuant to
recently adopted Rule 6c–11 under the
Investment Company Act of 1940 8
(‘‘Rule 6c–11’’) or applicable exemptive
relief, substitute other securities or cash
in the basket for some (or all) of the
ETF’s portfolio holdings.
In contrast to trading baskets, the
‘‘ETF portfolio holdings for pricing
purposes’’ reflects an ETF’s entire
portfolio holding information and is not
used for creations and redemptions.9
8 See Exchange-Traded Funds, Release Nos. 33–
10695; IC 33646 (September 25, 2019), available at
https://www.sec.gov/rules/final/2019/33-10695.pdf
(the ‘‘Adopting Release’’).
9 As an example, the trading basket for the
Financial Select Sector SPDR® Fund (an ETF that
tracks an index of S&P 500® financial stocks) would
include the underlying securities of the relevant
financial institutions while the portfolio holdings
for pricing purposes for the ETF may include
futures, swaps, options, and fractional shares of
those underlying securities.
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The ETF portfolio holdings for pricing
purposes provides information such as
a comprehensive list of securities and
assets held by an ETF, as well as the
associated asset types, i.e., fixed
income, commodities, swaps, and
futures.10 Accordingly, the ETF
portfolio holdings for pricing purposes
can be used by APs to facilitate valuing
an ETF’s portfolio on an intraday basis,
which, in turn, enables APs to identify
any potential premiums and discounts
for the ETF in the secondary market.
The ability to identify an ETF’s
potential premiums and discounts in
the secondary market is necessary for
keeping the market prices of the ETF
shares at or close to the NAV per share
of the ETF. The ETF portfolio holdings
for pricing purposes may include
information beyond the disclosure
required of an ETF under Rule 6c–11.11
ETF Portfolio Reporting Service
NSCC’s ETF portfolio reporting
service is an optional service that is
available to Members by subscription.12
This service is covered in Procedure II
(Trade Comparison and Reporting
Service), Section F, of the Rules.
On the business day preceding the
trade date (‘‘T–1’’), an ETF’s NAV is
calculated by the ETF Sponsor or the
ETF Agent after the market closes.
Following the calculation of the NAV,
these firms calculate trading baskets for
use on the trade date (‘‘T’’). Pursuant to
Procedure II, Section F.1. of the Rules,
the ETF Agent, on behalf of the ETF
Sponsor, transmits to NSCC on T–1 files
that contain (a) the composition of
index receipts for creations and
redemptions occurring on the next
10 NSCC recognizes that an ETF would be able to
provide NSCC with such portfolio information only
to the extent consistent with its obligations under
the federal securities laws governing the disclosure
of non-public portfolio information. See Adopting
Release Footnote 271 and accompanying text, supra
note 8.
11 Rule 6c–11 requires any ETF relying upon Rule
6c–11 to disclose prominently on its website,
publicly available and free of charge, the portfolio
holdings that will form the basis for each
calculation of NAV per share, and any cash
balancing amount. The rule requires that the
portfolio holdings information contain specified
information, including description and amount of
each position. Rule 6c–11 also requires an ETF to
disclose on its website (i) the ETF’s NAV per share,
market price, and premium or discount, each as of
the end of the prior business day; (ii) a tabular chart
and line graph showing the ETF’s premiums and
discounts for the most recently completed calendar
year and the most recently completed calendar
quarters of the current year (or for the life of the
ETF if shorter); and (iii) the ETF’s median bid-ask
spread over the last 30 calendar days. See Adopting
Release Footnotes 675, 676 and 677 and
accompanying text, supra note 8.
12 Firms that are not Members can obtain Portfolio
Reports via the DTCC ETF Portfolio Data Service
provided by DTCC Solutions LLC, an affiliate of
NSCC.
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37989
business day (T), i.e., the shares and
their associated quantities, (b) the cash
value of the portfolio for creates and
redeems made solely for cash, and, if
applicable, (c) the estimated cash
amount, representing accrued dividend,
cash-in-lieu of components,13 if
applicable, and balancing amount data
(‘‘Dividend/Balancing Cash Amount’’),
and (d) such other financial data as
NSCC may require or permit from time
to time.14
NSCC compiles the information on
the evening of T–1 and provides
Members that subscribe to the ETF
portfolio reporting service with a
portfolio composition report (‘‘Portfolio
Report’’) detailing, if applicable, the
estimated Dividend/Balancing Cash
Amount, other financial data, and the
composition of the next business day’s
ETFs. The Portfolio Reports provide
subscribing Members a convenient and
comprehensive publication of basket
data for U.S.-listed ETFs in a
standardized format. For each U.S.listed ETF, NSCC currently publishes a
Portfolio Report that includes one
standard trading basket and, if
applicable, multiple custom trading
baskets.15
On T, based on the Portfolio Report,
create and redeem orders for the ETF
shares can be placed by APs with the
ETF Sponsors. The ETF Sponsors can,
via the ETF Agents, submit those orders
to NSCC on a locked-in basis for
clearing and settlement via NSCC’s
Continuous Net Settlement (‘‘CNS’’)
System. The delivers and receives are
processed through NSCC’s Universal
Trade Capture (‘‘UTC’’) system and
netted in the CNS System for settlement.
The Rules do not currently provide
for the publication of ETF portfolio
holdings for pricing purposes via the
Portfolio Report. In addition, the Rules
currently only permit the ETF Agents to
submit creation and redemption
instructions with scheduled settlement
date of one business day after the trade
date (‘‘T+1’’) or T+2.
(ii) Proposed Enhancements
Publication of ETF Portfolio Holdings
for Pricing Purposes via Portfolio
Reports
As discussed above, trading baskets
and ETF portfolio holdings for pricing
13 The ‘‘cash-in-lieu of securities’’ portion of the
cash amount represents cash substituted for a
partial quantity of the components underlying a
creation or redemption rather than acting as the sole
underlying component.
14 NSCC currently does not require any additional
financial data.
15 ETFs can, pursuant to Rule 6c–11 or applicable
exemptive relief, use custom trading baskets to
create and redeem shares.
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Federal Register / Vol. 85, No. 122 / Wednesday, June 24, 2020 / Notices
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purposes facilitate ETF trading
activities; however, because NSCC’s
Rules do not currently provide for the
publication of ETF portfolio holdings
for pricing purposes via the Portfolio
Report, Members need to obtain ETF
portfolio holdings for pricing purposes
via means outside of the Portfolio
Report.16 Based on its discussion with
the ETF industry group,17 NSCC
understands that obtaining ETF
portfolio holdings for pricing purposes
outside of the Portfolio Report is
inefficient for Members. Members
generally prefer to receive trading
baskets and ETF portfolio holdings for
pricing purposes within one single
consolidated and standardized file.
Therefore, NSCC is proposing to
enhance the Portfolio Report by
publishing ETF portfolio holdings for
pricing purposes along with trading
baskets in a standardized format.18
NSCC is proposing to amend
Procedure II (Trade Comparison and
Recording Service), Section F.1. to
reflect the publication of ETF portfolio
holdings for pricing purposes via the
Portfolio Report. Unlike trading baskets,
ETF portfolio holdings for pricing
purposes are not used for creations and
redemptions. Accordingly, NSCC is
proposing to add an additional
paragraph to Section F.1. that provides
each day, by such time as determined by
NSCC from time to time, the Index
Receipt Agent may also report to NSCC
the composition of index receipts for
purposes other than creations and
redemptions.19 NSCC is also proposing
to add an additional sentence to the last
paragraph of Section F.1. that provides
the Portfolio Report will also include, if
available, portfolio holdings of the
index receipts.
16 It is NSCC’s understanding that Members
currently obtain ETF portfolio holdings for pricing
purposes from ETF Sponsors. In addition, Members
can also obtain ETF portfolio holdings information
from an ETF’s website. As noted above, Rule 6c–
11 requires any ETF relying upon Rule 6c–11 to
disclose prominently on its website, publicly
available and free of charge, the portfolio holdings
that will form the basis for each calculation of NAV
per share, and any cash balancing amount. Supra
note 11.
17 The ETF industry group is comprised of
Members that are ETF Agents and APs.
18 Based on its discussions with the ETF industry
group, NSCC understands that, although Rule 6c–
11 does not require ETFs to publish any trading
basket information, Members would nevertheless
prefer to receive Portfolio Reports that include both
trading baskets and ETF portfolio holdings for
pricing purposes.
19 While NSCC believes publication of ETF
portfolio holdings for pricing purposes via the
Portfolio Reports would be an efficient and effective
means for ETF Agents to transmit ETF portfolio
holdings for pricing purposes, ETF Agents would
not be required to use Portfolio Reports.
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Extending ETF Creation/Redemption
Settlement Dates Beyond T+2
As mentioned above, NSCC
understands that an ETF is able to
realize a tax efficiency for the ETF when
redemptions from the ETF are made inkind. It is NSCC’s understanding that
this tax efficiency is particularly
implicated when an ETF needs to
undertake a large rebalancing (generally
due to a change in an index that the
ETF’s holdings track). This is because
when an index changes, the ETF needs
to rebalance by disposing of its holding
in securities that are no longer in the
index. NSCC understands that the sale
of such securities would generally incur
a capital gain tax liability (assuming the
securities have appreciated in market
value); however, if the ETF redeems its
shares from the ETF’s shareholders in
exchange for the securities that are no
longer in the index, such transaction
would generally not result in capital
gains tax under the current U.S. federal
income tax laws and regulations.
As understood by NSCC, this tax
efficiency for ETFs is generally known
in the market as giving rise to so called
‘‘heartbeat trades.’’ 20 Market
participants refer to heartbeat trades as
transactions in which an ETF would
fulfill a creation order from an AP (AP
gets newly created ETF shares in
exchange for either cash or securities),
the AP would then place a custom
redemption order to exchange the newly
created ETF shares for that ETF’s
holding in securities that are no longer
in the index. NSCC understands that an
AP would look to align the settlement
dates of both the creation and
redemption orders in order to minimize
any overnight positions and related
margin impact. In addition, NSCC
understands that APs would prefer to
hold the newly created ETF shares for
at least one day before placing any
redemption orders for such shares.
The Rules currently only permit ETF
creation and redemption instructions
with scheduled settlement dates of T+1
or T+2. This means that when an AP
submits a creation order on Monday (T),
the creation order has to settle no later
than Wednesday (T+2); however, if the
AP desires to hold the newly created
ETF shares for at least one day (i.e.,
Tuesday), then the earliest that the AP
can submit a redemption order for those
ETF shares would be on Wednesday for
20 Members interested in heartbeat trades should
discuss with their legal and tax advisers. By
submitting this proposal, NSCC is not opining on
the practice of heartbeat trades or any related tax
implications, including, but not limited to, whether
the alignment of the settlement dates of both the
creation and redemption orders impacts the tax
treatment of these transactions.
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settlement on Thursday. Therefore,
under the current Rules, the settlement
dates of the creation and redemption
orders could not be aligned if the AP
were to hold the newly created ETF
shares for at least one day.21
NSCC is proposing to modify
Procedure II (Trade Comparison and
Recording Service) Section F.2. to
provide APs more flexibility when
selecting settlement dates for creation
and redemption orders while still being
able to hold the newly created ETF
shares for at least one day. Specifically,
NSCC is proposing to revise the
language in the second paragraph of
Section F.2. so that Index Receipt
Agents 22 would be permitted to select a
Settlement Date of T+1 or later for their
index receipts.23
As proposed, when an AP submits a
creation order on Monday (T), it would
be able to have the creation order settle
on Thursday (T+3), which could be
aligned with a T+1 settlement date of a
redemption order submitted on
Wednesday while enabling the AP to
hold the newly created ETF shares for
one day (i.e., Tuesday). The proposal
would thus enable the AP to align the
settlement dates of both the creation and
redemption orders (i.e., Thursday) in
order to minimize any overnight
positions and related margin impact
while holding the newly created ETF
shares for one day (i.e., Tuesday) before
placing any redemption orders for such
shares.
Technical and Clarifying Changes
NSCC is proposing technical and
clarifying changes in Sections F.1. and
F.2 of Procedure II (Trade Comparison
and Recording Service). Specifically,
NSCC is proposing to modify Section
F.1. by replacing the term ‘‘cash-in-lieu
of components’’ with ‘‘cash-in-lieu of
securities’’ in order to conform with the
current industry terminology usage.
Likewise, NSCC is proposing technical
changes in footnote 1 of Section F.1. to
ensure consistent placement of hyphens
with respect to the term ‘‘cash-in-lieu of
securities.’’
NSCC is also proposing a technical
change to define Portfolio Report in
21 Currently, ETF creations and redemptions with
scheduled settlement dates beyond T+2 are settled
broker-to-broker outside of NSCC.
22 Create and redeem orders for the ETF shares are
placed by APs with the ETF Sponsors. The ETF
Sponsors, via the Index Receipt Agents, submit
those orders to NSCC for clearing and settlement.
23 NSCC believes extending ETF creation/
redemption settlement date beyond T+2 would be
consistent with rule 15c6–1 of the Act. Rule 15c6–
1 requires that most securities transactions settle
within two business days of the trade date, unless
otherwise expressly agreed to by the parties at the
time of the transaction. 17 CFR 240.15c6–1.
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Section F.1., which is a term currently
used in the Rules but has not been
defined. Specifically, NSCC is
proposing to delete the first instance of
‘‘Portfolio Report’’ from the last
paragraph of Section F.1. and replace it
with ‘‘report.’’ In addition, NSCC is
proposing to define the term ‘‘Portfolio
Report’’ at the end of the first sentence
in the last paragraph of Section F.1.
In the second paragraph of Section
F.2., NSCC is proposing a technical
change to replace ‘‘Index Receipts’’ with
‘‘index receipts’’ because it is not a
defined term under the Rules.
In addition, NSCC is proposing a
clarifying change in the last paragraph
of Section F.1. The clarifying change
would make it clear that the
composition data within the Portfolio
Report may be used by NSCC to process
index receipt creations and redemptions
on the next business day.
(iii) Member Outreach
Beginning in October 2017, NSCC has
conducted ongoing outreach to each
Member in order to provide them with
notice of the proposed changes. As of
the date of this filing, no written
comments relating to the proposed
changes have been received in response
to this outreach. The Commission will
be notified of any written comments
received.
(iv) Implementation Timeframe
NSCC would implement the proposed
changes by no later than August 31,
2020 and would announce the effective
date of the proposed changes by an
Important Notice, posted to its website.
As proposed, a legend would be added
to Procedure II stating there are changes
that became effective upon filing with
the Commission but have not yet been
implemented. The proposed legend also
would include a date by which such
changes would be implemented and the
file number of this proposal, and state
that, once this proposal is implemented,
the legend would automatically be
removed from Procedure II.
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2. Statutory Basis
NSCC believes this proposal is
consistent with the requirements of the
Act, and the rules and regulations
thereunder applicable to a registered
clearing agency. Specifically, NSCC
believes this proposal is consistent with
Section 17A(b)(3)(F) 24 of the Act and
Rule 17Ad–22(e)(21),25 as promulgated
under the Act, for the reasons described
below.
24 15
25 17
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(21).
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Section 17A(b)(3)(F) of the Act
requires, in part, that the Rules be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions and to protect
investors and the public interest.26
NSCC believes that the proposed rule
change to provide for the publication of
ETF portfolio holdings for pricing
purposes via the Portfolio Report would
protect investors and the public interest.
This is because publishing the ETF
portfolio holdings for pricing purposes
via the Portfolio Report would provide
Members with the necessary
information to facilitate their valuation
of the ETF portfolios on an intraday
basis, which, in turn, would help enable
them to assess whether any potential
ETF trading premiums or discounts
exist in the secondary market when
comparing to the ETF NAVs. The ability
to identify potential premiums and
discounts in the secondary market is
necessary for keeping the market prices
of ETF shares at or close to the NAV per
share of the ETF, thereby helping to
ensure ETF investors are treated
equitably when buying and selling ETF
shares. Therefore, NSCC believes that
the proposed rule change to provide for
the publication of ETF portfolio
holdings for pricing purposes via the
Portfolio Report would protect investors
and the public interest, consistent with
Section 17A(b)(3)(F) of the Act.
The proposed rule change to make
technical and clarifying changes would
help ensure that the Rules remain
accurate and clear to Members. Having
accurate and clear Rules would help
Members to better understand their
rights and obligations regarding NSCC’s
clearance and settlement services. NSCC
believes that when Members better
understand their rights and obligations
regarding NSCC’s clearance and
settlement services, they can act in
accordance with the Rules. NSCC
believes that better enabling Members to
comply with the Rules would promote
the prompt and accurate clearance and
settlement of securities transactions by
NSCC. As such, NSCC believes the
proposed rule changes to make
technical and clarifying changes are
consistent with Section 17A(b)(3)(F) of
the Act.
Rule 17Ad–22(e)(21) under the Act
requires NSCC to 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.27 The proposed rule
change to provide for the publication of
26 15
27 17
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PO 00000
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(21).
Frm 00172
Fmt 4703
Sfmt 4703
37991
ETF portfolio holdings for pricing
purposes via the Portfolio Report would
enhance the efficiency of the current
reporting capability by enabling
Members to receive both ETF portfolio
holdings for pricing purposes and
trading baskets in one single
consolidated file instead of having to
receive them from multiple sources. The
proposed rule change to provide for the
publication of ETF portfolio holdings
for pricing purposes via the Portfolio
Report would enhance the effectiveness
of the current reporting capability by
providing both ETF portfolio holdings
for pricing purposes and trading baskets
in a standardized format, which, NSCC
believes, would help reduce the need
for Members to work with data in
different formats and, in turn, result in
fewer data conversion errors and
omissions. Therefore, by establishing a
more efficient and effective reporting
capability for ETFs, NSCC believes that
the proposed rule change to provide for
the publication of ETF portfolio
holdings for pricing purposes via the
Portfolio Report is consistent with Rule
17Ad–22(e)(21) under the Act.
The proposed rule change to extend
ETF creation and redemption settlement
dates beyond T+2 is designed to meet
the requirements of APs and ETF Agents
by providing them with more flexibility
when selecting settlement dates for ETF
creation and redemption orders. As
discussed above, in order to minimize
any overnight positions and related
margin impact, NSCC understands that
APs and ETF Agents are looking to align
the applicable ETF creation and
redemption settlement dates while
holding newly created ETF shares for
the requisite time frame. The proposal
to extend ETF creation and redemption
settlement dates beyond T+2 would
provide APs and ETF Agents with
additional flexibility when selecting
settlement dates for ETF creation and
redemption orders. Having more
flexibility when selecting settlement
dates for ETF creation and redemption
orders would enable APs and ETF
Agents to align the applicable
settlement dates more easily while still
holding newly created ETF shares for
the desired time period. Therefore,
NSCC believes that the proposed rule
change to extend ETF creation and
redemption settlement dates beyond
T+2 is consistent with Rule 17Ad–
22(e)(21) under the Act.
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC does not believe the proposed
rule change to provide for the
publication of ETF portfolio holdings
for pricing purposes via the Portfolio
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37992
Federal Register / Vol. 85, No. 122 / Wednesday, June 24, 2020 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
Report would have any adverse impact,
or impose any burden, on
competition.28 This is because the
proposed rule change would enhance
NSCC’s reporting capabilities in a
manner that would enable Members to
receive all necessary information to
support their ETF trading activities in
one single consolidated and
standardized file. The proposed rule
change would not disproportionally
impact any Members.
Moreover, NSCC believes the
proposed rule change would have a
positive effect on competition among
ETF industry participants. This is
because the proposed rule change to
provide for the publication of ETF
portfolio holdings for pricing purposes
via the Portfolio Report would provide
the ETF industry a more efficient and
effective method to disseminate ETF
portfolio holdings for pricing purposes
and also enable Members to receive all
necessary information to support their
ETF trading activities in one single
consolidated and standardized file.
Therefore, NSCC believes the proposed
rule change to provide for the
publication of ETF portfolio holdings
for pricing purposes via the Portfolio
Report would enhance competition
among ETF industry participants by
allowing information to be distributed
more quickly and in a more streamlined
manner.
NSCC does not believe the proposed
rule change to extend ETF creation and
redemption settlement dates beyond
T+2 would have any adverse impact, or
impose any burden, on competition.29
This is because the proposed rule
change is designed to meet the
requirements of APs and ETF Agents by
providing them with more flexibility
when selecting settlement dates for ETF
creation and redemption orders. The
proposed rule change would not
disproportionally impact any Members.
NSCC does not believe the proposed
rule changes to make technical and
clarifying changes would impact
competition.30 These changes would
apply equally to all Members and would
not affect Members’ rights and
obligations. As such, NSCC believes
these proposed rule changes would not
have any impact on competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule Change
Received From Members, Participants,
or Others
Written comments relating to this
proposed rule change have not been
28 15
solicited or received. NSCC will notify
the Commission of any written
comments received by NSCC.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 31 and paragraph (f) of Rule
19b–4 thereunder.32 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2020–010 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–NSCC–2020–010. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
U.S.C. 78q–1(b)(3)(I).
29 Id.
31 15
30 Id.
32 17
VerDate Sep<11>2014
18:20 Jun 23, 2020
Jkt 250001
PO 00000
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
Frm 00173
Fmt 4703
Sfmt 4703
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of NSCC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NSCC–
2020–010 and should be submitted on
or before July 15, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–13541 Filed 6–23–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89090; File No. SR–ICEEU–
2020–009]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change Relating to
Amendments to the ICE Clear Europe
Model Risk Governance Framework
June 18, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 12,
2020, ICE Clear Europe Limited (‘‘ICE
Clear Europe’’ or the ‘‘Clearing House’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule changes described in
Items I, II, and III below, which Items
have been primarily prepared by ICE
Clear Europe. ICE Clear Europe filed the
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(6) 4 thereunder, such that the
proposed rule change was immediately
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
33 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
1 15
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]]>Agencies
[Federal Register Volume 85, Number 122 (Wednesday, June 24, 2020)]
[Notices]
[Pages 37988-37992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13541]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89088; File No. SR-NSCC-2020-010]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of and Immediate Effectiveness of a
Proposed Rule Change To Amend Rules With Respect to Index Receipts
June 18, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 11, 2020, National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. NSCC filed the
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and
Rule 19b-4(f)(4) thereunder.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(4).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to Procedure II
(Trade Comparison and Recording Service) of the NSCC Rules & Procedures
(``Rules'') with respect to index receipts, as described in greater
detail below.\5\
---------------------------------------------------------------------------
\5\ Capitalized terms not defined herein are defined in the
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to amend Procedure II
(Trade Comparison and Recording Service) with respect to index receipts
in order to (i) reflect the publication of ETF portfolio holdings for
pricing purposes via the Portfolio Report (as defined below and in the
proposed rule text) and (ii) permit Index Receipt Agents to submit to
NSCC index receipt creation and redemption instructions with a
scheduled settlement date that is greater than the standard settlement
cycle of second business day after the trade date (``T+2''). The
proposed rule change would also make technical and clarifying changes.
(i) Background
Overview of Exchange-Traded Funds
Exchange-traded funds (``ETFs'') (referred to as ``index receipts''
in the Rules) are marketable securities that track stock indices,
commodities, bonds, or baskets of assets. ETFs are listed on exchanges
and are traded throughout the trading day. Shares of ETFs are created
and redeemed in the primary market and are traded on listed exchanges
in the secondary market. Each share of an ETF represents an undivided
interest in the underlying assets of the ETF. NSCC facilitates the in-
kind \6\ clearing and settlement of the creation and redemption of ETF
shares in the primary market as well as clearing of ETF trades in the
secondary market.
---------------------------------------------------------------------------
\6\ In the ETF industry, the clearing of ETF creations and
redemptions ``in-kind'' represents an exchange of ETF shares for a
basket of component securities rather than cash.
---------------------------------------------------------------------------
The participants in the ETF primary market typically consist of the
issuers of ETFs (``ETF Sponsors''), custodian banks (``ETF Agents,''
also referred to as ``Index Receipt Agents'' in the Rules), and
brokers/dealers that have agreements directly with ETF Sponsors to
allow the brokers/dealers to place orders for the creation and
redemption of ETF shares (``Authorized Participants'' or ``APs''). Both
the ETF Agents and APs \7\ are Members of NSCC.
---------------------------------------------------------------------------
\7\ Form N-CEN defines AP as a broker-dealer that is also a
member of a clearing agency registered with the Commission, and
which has a written agreement with the ETF or one of its designated
service providers.
---------------------------------------------------------------------------
[[Page 37989]]
As described in more detail below, NSCC understands that ETFs are
able to realize a tax efficiency that other corporations generally
cannot because redemptions from ETFs that are made in-kind (that is, by
delivering certain assets from the ETF's portfolio, rather than in
cash) do not require the ETF to realize and recognize capital gains if
such assets have appreciated in value.
Trading Baskets and ETF Portfolio Holdings for Pricing Purposes
APs create and redeem ETF shares from the ETF Sponsors in blocks
called ``creation units.'' An AP that purchases a creation unit of ETF
shares delivers a ``basket'' of securities and other assets to the ETF
Agent, and then receives the creation unit of ETF shares in return for
those assets. The redemption process is the reverse of the creation
process: the AP redeems a creation unit of ETF shares for a basket of
securities and other assets. These creation and redemption baskets are
referred to as ``trading baskets.''
A trading basket is generally representative of the ETF's portfolio
and, together with a cash balancing amount, equal in value to the
aggregate net asset value (``NAV'') of the ETF shares in the creation
unit. There are two types of trading baskets: standard trading baskets
and custom trading baskets. Trading baskets that reflect a pro rata
representation of the ETF's portfolio are referred to as ``standard
trading baskets.'' Trading baskets that are not standard trading
baskets are referred to as ``custom trading baskets.'' A custom trading
basket is a basket that contains a non-representative selection of the
ETF's portfolio holdings and does not reflect a pro rata representation
of the ETF's portfolio holdings. Custom trading baskets may, pursuant
to recently adopted Rule 6c-11 under the Investment Company Act of 1940
\8\ (``Rule 6c-11'') or applicable exemptive relief, substitute other
securities or cash in the basket for some (or all) of the ETF's
portfolio holdings.
---------------------------------------------------------------------------
\8\ See Exchange-Traded Funds, Release Nos. 33-10695; IC 33646
(September 25, 2019), available at https://www.sec.gov/rules/final/2019/33-10695.pdf (the ``Adopting Release'').
---------------------------------------------------------------------------
In contrast to trading baskets, the ``ETF portfolio holdings for
pricing purposes'' reflects an ETF's entire portfolio holding
information and is not used for creations and redemptions.\9\ The ETF
portfolio holdings for pricing purposes provides information such as a
comprehensive list of securities and assets held by an ETF, as well as
the associated asset types, i.e., fixed income, commodities, swaps, and
futures.\10\ Accordingly, the ETF portfolio holdings for pricing
purposes can be used by APs to facilitate valuing an ETF's portfolio on
an intraday basis, which, in turn, enables APs to identify any
potential premiums and discounts for the ETF in the secondary market.
The ability to identify an ETF's potential premiums and discounts in
the secondary market is necessary for keeping the market prices of the
ETF shares at or close to the NAV per share of the ETF. The ETF
portfolio holdings for pricing purposes may include information beyond
the disclosure required of an ETF under Rule 6c-11.\11\
---------------------------------------------------------------------------
\9\ As an example, the trading basket for the Financial Select
Sector SPDR[supreg] Fund (an ETF that tracks an index of S&P
500[supreg] financial stocks) would include the underlying
securities of the relevant financial institutions while the
portfolio holdings for pricing purposes for the ETF may include
futures, swaps, options, and fractional shares of those underlying
securities.
\10\ NSCC recognizes that an ETF would be able to provide NSCC
with such portfolio information only to the extent consistent with
its obligations under the federal securities laws governing the
disclosure of non-public portfolio information. See Adopting Release
Footnote 271 and accompanying text, supra note 8.
\11\ Rule 6c-11 requires any ETF relying upon Rule 6c-11 to
disclose prominently on its website, publicly available and free of
charge, the portfolio holdings that will form the basis for each
calculation of NAV per share, and any cash balancing amount. The
rule requires that the portfolio holdings information contain
specified information, including description and amount of each
position. Rule 6c-11 also requires an ETF to disclose on its website
(i) the ETF's NAV per share, market price, and premium or discount,
each as of the end of the prior business day; (ii) a tabular chart
and line graph showing the ETF's premiums and discounts for the most
recently completed calendar year and the most recently completed
calendar quarters of the current year (or for the life of the ETF if
shorter); and (iii) the ETF's median bid-ask spread over the last 30
calendar days. See Adopting Release Footnotes 675, 676 and 677 and
accompanying text, supra note 8.
---------------------------------------------------------------------------
ETF Portfolio Reporting Service
NSCC's ETF portfolio reporting service is an optional service that
is available to Members by subscription.\12\ This service is covered in
Procedure II (Trade Comparison and Reporting Service), Section F, of
the Rules.
---------------------------------------------------------------------------
\12\ Firms that are not Members can obtain Portfolio Reports via
the DTCC ETF Portfolio Data Service provided by DTCC Solutions LLC,
an affiliate of NSCC.
---------------------------------------------------------------------------
On the business day preceding the trade date (``T-1''), an ETF's
NAV is calculated by the ETF Sponsor or the ETF Agent after the market
closes. Following the calculation of the NAV, these firms calculate
trading baskets for use on the trade date (``T''). Pursuant to
Procedure II, Section F.1. of the Rules, the ETF Agent, on behalf of
the ETF Sponsor, transmits to NSCC on T-1 files that contain (a) the
composition of index receipts for creations and redemptions occurring
on the next business day (T), i.e., the shares and their associated
quantities, (b) the cash value of the portfolio for creates and redeems
made solely for cash, and, if applicable, (c) the estimated cash
amount, representing accrued dividend, cash-in-lieu of components,\13\
if applicable, and balancing amount data (``Dividend/Balancing Cash
Amount''), and (d) such other financial data as NSCC may require or
permit from time to time.\14\
---------------------------------------------------------------------------
\13\ The ``cash-in-lieu of securities'' portion of the cash
amount represents cash substituted for a partial quantity of the
components underlying a creation or redemption rather than acting as
the sole underlying component.
\14\ NSCC currently does not require any additional financial
data.
---------------------------------------------------------------------------
NSCC compiles the information on the evening of T-1 and provides
Members that subscribe to the ETF portfolio reporting service with a
portfolio composition report (``Portfolio Report'') detailing, if
applicable, the estimated Dividend/Balancing Cash Amount, other
financial data, and the composition of the next business day's ETFs.
The Portfolio Reports provide subscribing Members a convenient and
comprehensive publication of basket data for U.S.-listed ETFs in a
standardized format. For each U.S.-listed ETF, NSCC currently publishes
a Portfolio Report that includes one standard trading basket and, if
applicable, multiple custom trading baskets.\15\
---------------------------------------------------------------------------
\15\ ETFs can, pursuant to Rule 6c-11 or applicable exemptive
relief, use custom trading baskets to create and redeem shares.
---------------------------------------------------------------------------
On T, based on the Portfolio Report, create and redeem orders for
the ETF shares can be placed by APs with the ETF Sponsors. The ETF
Sponsors can, via the ETF Agents, submit those orders to NSCC on a
locked-in basis for clearing and settlement via NSCC's Continuous Net
Settlement (``CNS'') System. The delivers and receives are processed
through NSCC's Universal Trade Capture (``UTC'') system and netted in
the CNS System for settlement.
The Rules do not currently provide for the publication of ETF
portfolio holdings for pricing purposes via the Portfolio Report. In
addition, the Rules currently only permit the ETF Agents to submit
creation and redemption instructions with scheduled settlement date of
one business day after the trade date (``T+1'') or T+2.
(ii) Proposed Enhancements
Publication of ETF Portfolio Holdings for Pricing Purposes via
Portfolio Reports
As discussed above, trading baskets and ETF portfolio holdings for
pricing
[[Page 37990]]
purposes facilitate ETF trading activities; however, because NSCC's
Rules do not currently provide for the publication of ETF portfolio
holdings for pricing purposes via the Portfolio Report, Members need to
obtain ETF portfolio holdings for pricing purposes via means outside of
the Portfolio Report.\16\ Based on its discussion with the ETF industry
group,\17\ NSCC understands that obtaining ETF portfolio holdings for
pricing purposes outside of the Portfolio Report is inefficient for
Members. Members generally prefer to receive trading baskets and ETF
portfolio holdings for pricing purposes within one single consolidated
and standardized file. Therefore, NSCC is proposing to enhance the
Portfolio Report by publishing ETF portfolio holdings for pricing
purposes along with trading baskets in a standardized format.\18\
---------------------------------------------------------------------------
\16\ It is NSCC's understanding that Members currently obtain
ETF portfolio holdings for pricing purposes from ETF Sponsors. In
addition, Members can also obtain ETF portfolio holdings information
from an ETF's website. As noted above, Rule 6c-11 requires any ETF
relying upon Rule 6c-11 to disclose prominently on its website,
publicly available and free of charge, the portfolio holdings that
will form the basis for each calculation of NAV per share, and any
cash balancing amount. Supra note 11.
\17\ The ETF industry group is comprised of Members that are ETF
Agents and APs.
\18\ Based on its discussions with the ETF industry group, NSCC
understands that, although Rule 6c-11 does not require ETFs to
publish any trading basket information, Members would nevertheless
prefer to receive Portfolio Reports that include both trading
baskets and ETF portfolio holdings for pricing purposes.
---------------------------------------------------------------------------
NSCC is proposing to amend Procedure II (Trade Comparison and
Recording Service), Section F.1. to reflect the publication of ETF
portfolio holdings for pricing purposes via the Portfolio Report.
Unlike trading baskets, ETF portfolio holdings for pricing purposes are
not used for creations and redemptions. Accordingly, NSCC is proposing
to add an additional paragraph to Section F.1. that provides each day,
by such time as determined by NSCC from time to time, the Index Receipt
Agent may also report to NSCC the composition of index receipts for
purposes other than creations and redemptions.\19\ NSCC is also
proposing to add an additional sentence to the last paragraph of
Section F.1. that provides the Portfolio Report will also include, if
available, portfolio holdings of the index receipts.
---------------------------------------------------------------------------
\19\ While NSCC believes publication of ETF portfolio holdings
for pricing purposes via the Portfolio Reports would be an efficient
and effective means for ETF Agents to transmit ETF portfolio
holdings for pricing purposes, ETF Agents would not be required to
use Portfolio Reports.
---------------------------------------------------------------------------
Extending ETF Creation/Redemption Settlement Dates Beyond T+2
As mentioned above, NSCC understands that an ETF is able to realize
a tax efficiency for the ETF when redemptions from the ETF are made in-
kind. It is NSCC's understanding that this tax efficiency is
particularly implicated when an ETF needs to undertake a large
rebalancing (generally due to a change in an index that the ETF's
holdings track). This is because when an index changes, the ETF needs
to rebalance by disposing of its holding in securities that are no
longer in the index. NSCC understands that the sale of such securities
would generally incur a capital gain tax liability (assuming the
securities have appreciated in market value); however, if the ETF
redeems its shares from the ETF's shareholders in exchange for the
securities that are no longer in the index, such transaction would
generally not result in capital gains tax under the current U.S.
federal income tax laws and regulations.
As understood by NSCC, this tax efficiency for ETFs is generally
known in the market as giving rise to so called ``heartbeat trades.''
\20\ Market participants refer to heartbeat trades as transactions in
which an ETF would fulfill a creation order from an AP (AP gets newly
created ETF shares in exchange for either cash or securities), the AP
would then place a custom redemption order to exchange the newly
created ETF shares for that ETF's holding in securities that are no
longer in the index. NSCC understands that an AP would look to align
the settlement dates of both the creation and redemption orders in
order to minimize any overnight positions and related margin impact. In
addition, NSCC understands that APs would prefer to hold the newly
created ETF shares for at least one day before placing any redemption
orders for such shares.
---------------------------------------------------------------------------
\20\ Members interested in heartbeat trades should discuss with
their legal and tax advisers. By submitting this proposal, NSCC is
not opining on the practice of heartbeat trades or any related tax
implications, including, but not limited to, whether the alignment
of the settlement dates of both the creation and redemption orders
impacts the tax treatment of these transactions.
---------------------------------------------------------------------------
The Rules currently only permit ETF creation and redemption
instructions with scheduled settlement dates of T+1 or T+2. This means
that when an AP submits a creation order on Monday (T), the creation
order has to settle no later than Wednesday (T+2); however, if the AP
desires to hold the newly created ETF shares for at least one day
(i.e., Tuesday), then the earliest that the AP can submit a redemption
order for those ETF shares would be on Wednesday for settlement on
Thursday. Therefore, under the current Rules, the settlement dates of
the creation and redemption orders could not be aligned if the AP were
to hold the newly created ETF shares for at least one day.\21\
---------------------------------------------------------------------------
\21\ Currently, ETF creations and redemptions with scheduled
settlement dates beyond T+2 are settled broker-to-broker outside of
NSCC.
---------------------------------------------------------------------------
NSCC is proposing to modify Procedure II (Trade Comparison and
Recording Service) Section F.2. to provide APs more flexibility when
selecting settlement dates for creation and redemption orders while
still being able to hold the newly created ETF shares for at least one
day. Specifically, NSCC is proposing to revise the language in the
second paragraph of Section F.2. so that Index Receipt Agents \22\
would be permitted to select a Settlement Date of T+1 or later for
their index receipts.\23\
---------------------------------------------------------------------------
\22\ Create and redeem orders for the ETF shares are placed by
APs with the ETF Sponsors. The ETF Sponsors, via the Index Receipt
Agents, submit those orders to NSCC for clearing and settlement.
\23\ NSCC believes extending ETF creation/redemption settlement
date beyond T+2 would be consistent with rule 15c6-1 of the Act.
Rule 15c6-1 requires that most securities transactions settle within
two business days of the trade date, unless otherwise expressly
agreed to by the parties at the time of the transaction. 17 CFR
240.15c6-1.
---------------------------------------------------------------------------
As proposed, when an AP submits a creation order on Monday (T), it
would be able to have the creation order settle on Thursday (T+3),
which could be aligned with a T+1 settlement date of a redemption order
submitted on Wednesday while enabling the AP to hold the newly created
ETF shares for one day (i.e., Tuesday). The proposal would thus enable
the AP to align the settlement dates of both the creation and
redemption orders (i.e., Thursday) in order to minimize any overnight
positions and related margin impact while holding the newly created ETF
shares for one day (i.e., Tuesday) before placing any redemption orders
for such shares.
Technical and Clarifying Changes
NSCC is proposing technical and clarifying changes in Sections F.1.
and F.2 of Procedure II (Trade Comparison and Recording Service).
Specifically, NSCC is proposing to modify Section F.1. by replacing the
term ``cash-in-lieu of components'' with ``cash-in-lieu of securities''
in order to conform with the current industry terminology usage.
Likewise, NSCC is proposing technical changes in footnote 1 of Section
F.1. to ensure consistent placement of hyphens with respect to the term
``cash-in-lieu of securities.''
NSCC is also proposing a technical change to define Portfolio
Report in
[[Page 37991]]
Section F.1., which is a term currently used in the Rules but has not
been defined. Specifically, NSCC is proposing to delete the first
instance of ``Portfolio Report'' from the last paragraph of Section
F.1. and replace it with ``report.'' In addition, NSCC is proposing to
define the term ``Portfolio Report'' at the end of the first sentence
in the last paragraph of Section F.1.
In the second paragraph of Section F.2., NSCC is proposing a
technical change to replace ``Index Receipts'' with ``index receipts''
because it is not a defined term under the Rules.
In addition, NSCC is proposing a clarifying change in the last
paragraph of Section F.1. The clarifying change would make it clear
that the composition data within the Portfolio Report may be used by
NSCC to process index receipt creations and redemptions on the next
business day.
(iii) Member Outreach
Beginning in October 2017, NSCC has conducted ongoing outreach to
each Member in order to provide them with notice of the proposed
changes. As of the date of this filing, no written comments relating to
the proposed changes have been received in response to this outreach.
The Commission will be notified of any written comments received.
(iv) Implementation Timeframe
NSCC would implement the proposed changes by no later than August
31, 2020 and would announce the effective date of the proposed changes
by an Important Notice, posted to its website. As proposed, a legend
would be added to Procedure II stating there are changes that became
effective upon filing with the Commission but have not yet been
implemented. The proposed legend also would include a date by which
such changes would be implemented and the file number of this proposal,
and state that, once this proposal is implemented, the legend would
automatically be removed from Procedure II.
2. Statutory Basis
NSCC believes this proposal is consistent with the requirements of
the Act, and the rules and regulations thereunder applicable to a
registered clearing agency. Specifically, NSCC believes this proposal
is consistent with Section 17A(b)(3)(F) \24\ of the Act and Rule 17Ad-
22(e)(21),\25\ as promulgated under the Act, for the reasons described
below.
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\24\ 15 U.S.C. 78q-1(b)(3)(F).
\25\ 17 CFR 240.17Ad-22(e)(21).
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Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions and to protect investors and the public
interest.\26\ NSCC believes that the proposed rule change to provide
for the publication of ETF portfolio holdings for pricing purposes via
the Portfolio Report would protect investors and the public interest.
This is because publishing the ETF portfolio holdings for pricing
purposes via the Portfolio Report would provide Members with the
necessary information to facilitate their valuation of the ETF
portfolios on an intraday basis, which, in turn, would help enable them
to assess whether any potential ETF trading premiums or discounts exist
in the secondary market when comparing to the ETF NAVs. The ability to
identify potential premiums and discounts in the secondary market is
necessary for keeping the market prices of ETF shares at or close to
the NAV per share of the ETF, thereby helping to ensure ETF investors
are treated equitably when buying and selling ETF shares. Therefore,
NSCC believes that the proposed rule change to provide for the
publication of ETF portfolio holdings for pricing purposes via the
Portfolio Report would protect investors and the public interest,
consistent with Section 17A(b)(3)(F) of the Act.
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\26\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change to make technical and clarifying changes
would help ensure that the Rules remain accurate and clear to Members.
Having accurate and clear Rules would help Members to better understand
their rights and obligations regarding NSCC's clearance and settlement
services. NSCC believes that when Members better understand their
rights and obligations regarding NSCC's clearance and settlement
services, they can act in accordance with the Rules. NSCC believes that
better enabling Members to comply with the Rules would promote the
prompt and accurate clearance and settlement of securities transactions
by NSCC. As such, NSCC believes the proposed rule changes to make
technical and clarifying changes are consistent with Section
17A(b)(3)(F) of the Act.
Rule 17Ad-22(e)(21) under the Act requires NSCC to 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.\27\ The
proposed rule change to provide for the publication of ETF portfolio
holdings for pricing purposes via the Portfolio Report would enhance
the efficiency of the current reporting capability by enabling Members
to receive both ETF portfolio holdings for pricing purposes and trading
baskets in one single consolidated file instead of having to receive
them from multiple sources. The proposed rule change to provide for the
publication of ETF portfolio holdings for pricing purposes via the
Portfolio Report would enhance the effectiveness of the current
reporting capability by providing both ETF portfolio holdings for
pricing purposes and trading baskets in a standardized format, which,
NSCC believes, would help reduce the need for Members to work with data
in different formats and, in turn, result in fewer data conversion
errors and omissions. Therefore, by establishing a more efficient and
effective reporting capability for ETFs, NSCC believes that the
proposed rule change to provide for the publication of ETF portfolio
holdings for pricing purposes via the Portfolio Report is consistent
with Rule 17Ad-22(e)(21) under the Act.
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\27\ 17 CFR 240.17Ad-22(e)(21).
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The proposed rule change to extend ETF creation and redemption
settlement dates beyond T+2 is designed to meet the requirements of APs
and ETF Agents by providing them with more flexibility when selecting
settlement dates for ETF creation and redemption orders. As discussed
above, in order to minimize any overnight positions and related margin
impact, NSCC understands that APs and ETF Agents are looking to align
the applicable ETF creation and redemption settlement dates while
holding newly created ETF shares for the requisite time frame. The
proposal to extend ETF creation and redemption settlement dates beyond
T+2 would provide APs and ETF Agents with additional flexibility when
selecting settlement dates for ETF creation and redemption orders.
Having more flexibility when selecting settlement dates for ETF
creation and redemption orders would enable APs and ETF Agents to align
the applicable settlement dates more easily while still holding newly
created ETF shares for the desired time period. Therefore, NSCC
believes that the proposed rule change to extend ETF creation and
redemption settlement dates beyond T+2 is consistent with Rule 17Ad-
22(e)(21) under the Act.
(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe the proposed rule change to provide for the
publication of ETF portfolio holdings for pricing purposes via the
Portfolio
[[Page 37992]]
Report would have any adverse impact, or impose any burden, on
competition.\28\ This is because the proposed rule change would enhance
NSCC's reporting capabilities in a manner that would enable Members to
receive all necessary information to support their ETF trading
activities in one single consolidated and standardized file. The
proposed rule change would not disproportionally impact any Members.
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\28\ 15 U.S.C. 78q-1(b)(3)(I).
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Moreover, NSCC believes the proposed rule change would have a
positive effect on competition among ETF industry participants. This is
because the proposed rule change to provide for the publication of ETF
portfolio holdings for pricing purposes via the Portfolio Report would
provide the ETF industry a more efficient and effective method to
disseminate ETF portfolio holdings for pricing purposes and also enable
Members to receive all necessary information to support their ETF
trading activities in one single consolidated and standardized file.
Therefore, NSCC believes the proposed rule change to provide for the
publication of ETF portfolio holdings for pricing purposes via the
Portfolio Report would enhance competition among ETF industry
participants by allowing information to be distributed more quickly and
in a more streamlined manner.
NSCC does not believe the proposed rule change to extend ETF
creation and redemption settlement dates beyond T+2 would have any
adverse impact, or impose any burden, on competition.\29\ This is
because the proposed rule change is designed to meet the requirements
of APs and ETF Agents by providing them with more flexibility when
selecting settlement dates for ETF creation and redemption orders. The
proposed rule change would not disproportionally impact any Members.
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\29\ Id.
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NSCC does not believe the proposed rule changes to make technical
and clarifying changes would impact competition.\30\ These changes
would apply equally to all Members and would not affect Members' rights
and obligations. As such, NSCC believes these proposed rule changes
would not have any impact on competition.
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\30\ Id.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments relating to this proposed rule change have not
been solicited or received. NSCC will notify the Commission of any
written comments received by NSCC.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \31\ and paragraph (f) of Rule 19b-4
thereunder.\32\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
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\31\ 15 U.S.C. 78s(b)(3)(A).
\32\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSCC-2020-010 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2020-010. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2020-010 and should be submitted on
or before July 15, 2020.
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\33\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13541 Filed 6-23-20; 8:45 am]
BILLING CODE 8011-01-P
