Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving the Proposed Rule Change Relating to Confidential Information, Market Disruption Events, and Other Changes, 57229-57234 [2021-22438]
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Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices
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Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Exchange Act,15 which
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Exchange previously filed a
proposed rule change to adopt Nasdaq
Rule 5750 to permit the listing and
trading of Proxy Portfolio Shares.16 As
discussed above, under the current rule,
a series of Proxy Portfolio Shares must
create or redeem shares in return for the
Proxy Basket and/or cash. The Exchange
is now proposing to amend Nasdaq Rule
5750 to allow a series of Proxy Portfolio
Shares to create or redeem shares in
return for a Custom Basket, which is a
portfolio of securities that is different
from the Proxy Basket, to the extent
consistent with an issuer’s exemptive
relief under the 1940 Act.17 For the
reasons discussed below, the
Commission finds that the proposed
amendments to Nasdaq Rule 5750 to
provide for the use of Custom Baskets
for Proxy Portfolio Shares, to the extent
permitted by an issuer’s exemptive
relief under the 1940 Act, are consistent
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
15 15 U.S.C. 78f(b)(5).
16 See Securities Exchange Act Release No. 89110
(June 22, 2020), 85 FR 38461 (June 26, 2020) (SR–
NASDAQ–2020–032) (Notice of Filing and
Immediate Effectiveness to Adopt Nasdaq Rule
5750 to List and Trade Proxy Portfolio Shares)
(‘‘2020 Notice’’). At the time, the Exchange stated
that the proposed rule change to adopt new Nasdaq
Rule 5750 was substantially similar to a proposed
rule change by Cboe BZX Exchange, Inc. (‘‘BZX’’)
to adopt BZX Rule 14.11(m) that the Commission
had recently approved. See id. at 38461 (citing
Securities Exchange Act Release No. 88887 (May
15, 2020), 85 FR 30990 (May 21, 2020) (SR–
CboeBZX–2019–107) (‘‘2020 Order’’)). The
Exchange must file a separate proposed rule change
pursuant to Section 19(b) of the Exchange Act for
each series of Proxy Portfolio Shares. See Nasdaq
Rule 5750(b)(1).
17 In the 2020 Notice, the Exchange identified
several applications for exemptive relief and
subsequent orders granting certain exemptive relief
under the 1940 Act and stated that it believed that
each associated series of shares would qualify as
Proxy Portfolio Shares under proposed Nasdaq Rule
5750. See 2020 Notice, supra note 16, 85 FR at
38461 n.3. The Commission has since granted
exemptive relief under the 1940 Act to certain
series of shares that the Exchange had identified as
qualifying as Proxy Portfolio Shares to permit the
creation or redemption of shares using a Custom
Basket that includes instruments that are not
included, or included with different weightings, in
the fund’s equivalent to a Proxy Basket. See, e.g.,
Fidelity Beach Street Trust, et al., Investment
Company Act Release No. 34350 (August 5, 2021).
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with Section 6(b)(5) of the Exchange
Act.
The Commission believes that the
proposed changes to Nasdaq Rules
5750(b)(5) and (6) are consistent with
the Exchange Act and are reasonably
designed to help prevent fraudulent and
manipulative acts and practices. The
Commission notes that, because Proxy
Portfolio Shares do not publicly disclose
on a daily basis information about the
holdings of the Fund Portfolio, it is vital
that key information relating to Proxy
Portfolio Shares, including information
relating to Custom Baskets, be kept
confidential prior to its public
disclosure and not be subject to
misuse.18 Accordingly, the Commission
believes that the Exchange’s proposal to
amend Nasdaq Rules 5750(b)(5) and
(6) 19 to apply the current ‘‘fire wall’’
and other requirements contained
therein to those that have access to
information concerning, or make
decisions pertaining to, the composition
of and/or changes to the Custom
Baskets, in addition to the existing
requirements relating to the Fund
Portfolio and the Proxy Basket, is
designed to prevent fraud and
manipulation with respect to Proxy
Portfolio Shares.
The Commission also believes that the
proposed amendments to the initial and
continued listing requirements for Proxy
Portfolio Shares are adequate to ensure
transparency of information relating to
Custom Baskets utilized by a fund and
to ensure that such information is
available to the rest of the market
participants at the same time.
Specifically, prior to the opening of
trading on each business day, the
Investment Company will make
publicly available on its website the
composition of any Custom Basket
transacted on the previous business day,
except a Custom Basket that differs from
the applicable Proxy Basket only with
respect to cash.20 In addition, prior to
the initial listing of the Proxy Portfolio
Shares, the Exchange will be required to
obtain a representation from the issuer
of each series of Proxy Portfolio Shares
that the issuer and any person acting on
behalf of the series of Proxy Portfolio
Shares will comply with Regulation FD,
including with respect to any Custom
Basket.21 These measures help to
18 See
2020 Order, supra note 16, 85 FR at 31002–
03.
19 See
supra Section II, describing proposed
Nasdaq Rules 5750(b)(5) and (6).
20 See proposed Nasdaq Rule 5750(d)(2)(A)(ii).
21 See proposed Nasdaq Rule 5750(d)(1)(B)(iii).
The Commission notes that a fund’s use of, or
conversations with authorized participants about,
Creation Baskets that would result in selective
disclosure of nonpublic information would
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57229
mitigate concerns that certain
information regarding the funds will be
available only to select market
participants and thereby helps to
prevent fraud and manipulation.
The Commission notes that, as set
forth in the definition of ‘‘Custom
Basket,’’ a series of Proxy Portfolio
Shares may only utilize Custom Baskets
to the extent consistent with the
exemptive relief issued pursuant to the
1940 Act applicable to such series.22
The Commission further notes that all
series of Proxy Portfolio Shares will
continue to be subject to the existing
rules and procedures that govern the
listing and trading of Proxy Portfolio
Shares and the trading of equity
securities on the Exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act 23
that the proposed rule change (SR–
NASDAQ–2021–065), be, and it hereby
is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–22437 Filed 10–13–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93278; File No. SR–NSCC–
2021–007]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving the
Proposed Rule Change Relating to
Confidential Information, Market
Disruption Events, and Other Changes
October 8, 2021.
I. Introduction
On June 25, 2021, National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–NSCC–2021–007 (the
‘‘Proposed Rule Change’’) pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder 2 to amend NSCC’s
effectively be limited by the fund’s obligation to
comply with Regulation FD. See, e.g., Fidelity
Beach Street Trust, et al., Investment Company Act
Release No. 34326 (July 9, 2021).
22 See proposed Nasdaq Rule 5750(c)(6).
23 15 U.S.C. 78s(b)(2).
24 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices
rules relating to confidentiality
requirements, Market Disruption Events,
and procedures for disconnecting a
participant from NSCC’s network,
among other changes.3 The Proposed
Rule Change was published for
comment in the Federal Register on July
13, 2021.4 The Commission received
comments that it has considered with
respect to the Proposed Rule Change.5
For the reasons discussed below, the
Commission is approving the Proposed
Rule Change.
II. Description of the Proposed Rule
Change
Pursuant to the Proposed Rule
Change, NSCC is proposing three main
changes to its Rules & Procedures
(‘‘Rules’’): 6 (1) Standardizing the
confidentiality requirement applicable
to NSCC with respect to its participants’
information and adding confidentiality
requirement applicable to participants
with respect to NSCC’s information, (2)
updating its Market Disruption and
Force Majeure Rule (‘‘Force Majeure
Rule’’) to authorize two additional
officers to determine that a Market
Disruption Event has occurred, and (3)
adding a new rule setting forth the
procedures under which NSCC would
be able to disconnect a participant from
its network in certain circumstances
(‘‘Systems Disconnect Rule’’). The
Commission provides relevant
background and describes each of these
proposed changes in greater detail
below.
A. Background
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NSCC provides clearance, settlement,
risk management, central counterparty
services, and a guarantee of completion
for virtually all broker-to-broker trades
involving equity securities, corporate
and municipal debt securities,
3 See Notice of Filing, infra note 4, at 86 FR
36815.
4 See Securities Exchange Act Release No. 92334
(June 25, 2021), 86 FR 36815 (July 13, 2021) (File
No. SR–NSCC–2021–007) (‘‘Notice of Filing’’).
5 Specifically, the Commission received
comments on a proposed rule change filed by
NSCC’s affiliate, the Depository Trust Company,
regarding parallel changes to DTC’s Rules. See
Securities Exchange Act Release No. 92342 (June
25, 2021), 86 FR 36833 (July 13, 2021) (File No. SR–
DTC–2021–011). The comment letters are available
on the Commission’s website at https://
www.sec.gov/comments/sr-dtc-2021-011/
srdtc2021011.htm. Because the comments address
issues that also appear in this Proposed Rule
Change, the Commission has considered it in
connection with NSCC’s proposal as well. Several
comments generally supported the Proposed Rule
Change, and the Commission considers the
additional comments in its analysis at Section III
infra.
6 Capitalized terms not defined herein are defined
in the Rules, available at https://dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
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American depository receipts, exchange
traded funds, and unit investment
trusts. In light of NSCC’s critical role in
the marketplace, NSCC was designated
a Systemically Important Financial
Market Utility (‘‘SIFMU’’) under Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of
2010.7 Due to NSCC’s unique position
in the marketplace, a failure or a
disruption to NSCC could, among other
things, significantly disrupt settlement
of securities transactions cleared by
NSCC and increase the risk of
substantial liquidity problems spreading
among financial institutions or markets,
and thereby threaten the stability of the
financial system in the United States.8
NSCC participants connect to NSCC’s
systems, either directly through the
Securely Managed and Reliable
Technology (‘‘SMART’’) network or
through a third party service provider or
service bureau.9 NSCC’s parent
company, The Depository Trust &
Clearing Corporation (‘‘DTCC’’) manages
the SMART network, which connects a
nationwide complex of networks,
processing centers, and control
facilities.10
B. Proposed Changes
1. Confidentiality Requirements
Confidentiality Requirements
Applicable to NSCC: NSCC collects
confidential information from its
participants to assess whether each
participant meets NSCC’s membership
requirements either to gain or continue
access to NSCC’s clearance and
settlement services.11 In turn, NSCC is
required to maintain the confidentiality
of any information furnished by its
participants. Currently, NSCC’s Rules
7 12 U.S.C. 5465(e)(1); Financial Stability
Oversight Counsel 2012 Annual Report, Appendix
A (‘‘FSOC 2012 Report’’), available at https://
www.treasury.gov/initiatives/fsoc/Documents/2012
%20Annual%20Report.pdf.
8 See FSOC 2012 Report, supra note 7.
9 See Securities Exchange Act Release No. 87696
(December 9, 2019), 84 FR 68243 (December 13,
2019) (File No. SR–NSCC–2019–003) (describing
the DTCC SMART network).
10 DTCC provides a set of core business processes
for NSCC and DTCC’s other subsidiaries, including
the technology systems and networks, that provide
connectivity between NSCC and its participants and
that provide NSCC with the ability to provide its
services as required under the Rules. Most
corporate functions are established and managed on
an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that
provides services to NSCC and DTCC’s other
subsidiaries.
11 See Rule 2A, supra note 6 (establishing NSCC’s
right to require applicants to furnish information to
become Members or Limited Members of NSCC);
and Rule 15, supra note 4 (establishing NSCC’s
right to require participants to furnish information
relating to assurances of financial responsibility and
operational capability).
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obligate NSCC to hold participants’
information in the same degree of
confidence as may be required by law or
the rules and regulations (hereinafter
collectively, ‘‘regulations’’) of the
appropriate regulatory body having
jurisdiction over the participant.12
NSCC states that its current Rules
create ambiguity because NSCC’s
obligations depend on each participant’s
regulatory requirements, which could
lead to unequal treatment of
participants and conflicts of law with
NSCC’s regulatory requirements or with
respect to a participant who is subject
to multiple jurisdictions’ regulations.13
NSCC also states that applying different
standards creates operational burdens
because NSCC must track the
regulations applicable to each of its
participants and must maintain the
confidentiality of each participant’s
information to the same degree as
required by the applicable regulations.14
In order to clarify its confidentiality
requirements and to enhance its
operational efficiency, NSCC proposes
to revise its Rules to establish a
standard, which will require NSCC to
hold participant confidential
information to the same degree as
NSCC’s regulatory requirements that
relate to the confidentiality of records,
and to remove the references to each
participant’s particular regulatory
obligations. NSCC represents that the
proposed change would provide
participants with similar protections
because NSCC believes its regulatory
requirements are comparable to the
regulations applicable to its participants
and, therefore, would not result in
changes to NSCC’s current practices or
the protection offered to its participants’
confidential information.15
Confidentiality Requirements
Applicable to Participants: NSCC’s
Rules do not include obligations for its
participants to protect confidential
information furnished by NSCC or its
affiliates.16 However, NSCC states that,
in connection with the development of
cyber and information security
programs pursuant to applicable
participant regulatory requirements,
NSCC and DTCC have received an
increasing number of requests from
12 See Section 1.C. of Rule 2A and Section 3 of
Rule 15, supra note 6.
13 See Notice of Filing, supra note 4, at 36816.
14 See id.
15 See id.
16 NSCC states that, historically, it has generally
not provided, nor been requested to provide,
information that contains confidential or
proprietary information of NSCC or its affiliates to
its participants except for information necessary for
participants to connect to DTCC Systems, which is
typically protected under intellectual property
laws. See id.
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participants for confidential
information, such as information
regarding DTCC’s network operations,
data security practices, and legal
settlements.17 Additionally, NSCC states
that participants may request NSCC or
DTCC to disclose confidential
information regarding its cyber threat
indicators, sources of cyber threat
information, or other information and
actions taken following a cyber incident
relating to a participant, NSCC, or
DTCC.18
To facilitate information sharing by
NSCC while protecting the
confidentiality of proprietary and
confidential information NSCC shares
with its participants, NSCC proposes to
add participant confidentiality
requirements to its Rules. The new
provisions will require participants to
maintain the confidentiality of
information furnished by NSCC through
proper safeguards to prevent disclosure
of such confidential information, except
as necessary to perform its obligations
under NSCC’s Rules or as otherwise
required by applicable law. NSCC
proposes that participants be required to
maintain the confidentiality of this
information to the same extent and
using the same means the participant
uses to protect its own confidential
information, but no less than a
reasonable standard of care. NSCC’s
proposal will also entitle NSCC or DTCC
to seek any temporary or permanent
injunctive or other equitable relief in
addition to any monetary damages
under the Rules if a participant breaches
its confidentiality requirements.
Additionally, NSCC’s proposal will
entitle NSCC to impose other
disciplinary proceedings or restrictions
on access to services for a participant’s
failure to comply with its
confidentiality requirements, consistent
with the existing tools available to
NSCC regarding a participant’s failure to
comply with its Rules.
2. Market Disruption Event
NSCC’s Rules contain provisions that
identify the events or circumstances that
NSCC would consider to be a Market
Disruption Event, including, for
example, events that lead to the
suspension or limitation of trading or
banking in the markets in which NSCC
operates, or the unavailability or failure
of any material payment, bank transfer,
wire or securities settlement systems.19
17 See
Notice of Filing, supra note 4, at 36817. See
also, supra discussion in Section II.A (Background)
relating to DTCC Systems.
18 See Notice of Filing, supra note 4, at 36817.
19 See Rule 60, supra note 6. See also Securities
Exchange Act Release Nos. 83955 (August 27,
2018), 83 FR 44340 (August 30, 2018) (File No. SR–
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Upon the declaration of a Market
Disruption Event, NSCC’s Rules provide
NSCC with tools to address such an
event, such as suspending any or all
services and taking, or requiring
participants to take, any actions NSCC
considers appropriate to facilitate the
continuation of NSCC’s services.20
Currently, NSCC’s Board of Directors
may declare a Market Disruption Event
and may take any actions authorized by
NSCC’s Rules to address the event.21
However, NSCC’s Rules also authorize
certain officers to make an interim
declaration of a Market Disruption
Event, to allow NSCC to prevent delays
in addressing a Market Disruption Event
if the Board of Directors is unable to
convene.22 In the event of such an
interim declaration, the Board of
Directors must ratify, modify, or rescind
the officer’s determination as soon as
practicable.23 Currently, the officers
authorized to make such determination
are the Chief Executive Officer, Chief
Financial Officer, Group Chief Risk
Officer, and General Counsel.24
NSCC proposes to add two additional
officers of NSCC, the Chief Information
Officer and the Head of Clearing Agency
Services, to the list of authorized
officers that could make such an interim
determination if the Board of Directors
is unable to convene. NSCC states these
two officers, like the other officers
currently provided in the Rules,
maintain senior executive level
positions at NSCC, oversee divisions of
NSCC, and hold positions at NSCC that
would provide them a necessary global
view into NSCC’s operations and
systems to enable them to determine the
existence of a Market Disruption
Event.25 NSCC states adding these two
additional officers would facilitate
NSCC’s ability to implement its
emergency procedures in the event of a
Market Disruption Event.26
3. Systems Disconnect Rule
As mentioned above in Section II.A
(Background), NSCC’s participants
connect to NSCC’s systems, either
through the DTCC-managed SMART
network or through other electronic
means, such as through a third party
service provider or service bureau.
NSCC’s Rules do not address NSCC’s
ability to disconnect a participant
NSCC–2017–805); 83974 (August 28, 2018), 83 FR
44988 (September 4, 2018) (File No. SR–NSCC–
2017–017).
20 See Rule 60, supra note 6.
21 See Section 2 of Rule 60, id.
22 See id.
23 See id.
24 See id.
25 See Notice of Filing, supra note 4, at 36817.
26 See id.
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57231
whose network connection risks
harming NSCC’s systems. NSCC’s
proposal will establish procedures
under which NSCC would be able to
disconnect a participant from its
network due to the risk of an imminent
threat to NSCC, participants, or other
market participants.27
NSCC’s proposal will address NSCC’s
authority to take certain actions upon
the occurrence, and during the
pendency, of a Major Event. A ‘‘Major
Event’’ will be defined as the happening
of one or more ‘‘Systems Disruptions’’
reasonably likely to have a significant
impact on NSCC’s operations, including
‘‘DTCC Systems,’’ 28 that affect the
business, operations, safeguarding of
securities or funds, or physical
functions of NSCC, its participants, or
other market participants. ‘‘Systems
Disruption’’ will, in turn, be defined as
the unavailability, failure, malfunction,
overload, or restriction (whether partial
or total) of a DTCC Systems Participant’s
systems that disrupts or degrades the
normal operation of such DTCC Systems
Participant’s systems; or anything that
impacts or alters the normal
communication or the files that are
received, or information transmitted, to
or from the DTCC Systems.
NSCC’s proposal would also provide
governance procedures applicable to
NSCC’s determination whether, and
how, to implement the provisions of the
Systems Disconnect Rule. The same
officers with delegated authority under
the Force Majeure Rule may make a
determination that a Major Event has
occurred. As discussed in Section II.B.2
(Market Disruption Event) above, NSCC
states these officers maintain senior
executive level positions at NSCC,
oversee divisions of NSCC, and hold
positions at NSCC that would provide
them a necessary global view into
NSCC’s operations and systems to
enable them to determine the existence
of a Market Disruption Event, which
would also enable them to determine
the existence of a Major Event.
However, the proposed process for
declaring a Major Event, by contrast,
would start with a designated officer,
whereas, for a Market Disruption Event,
the officer would make an interim
determination only if the Board of
Directors were unable to timely
convene. NSCC states it designed the
27 See
Notice of Filing, supra note 4, at 36817.
Systems’’ will be defined as the
systems, equipment and technology networks of
DTCC, NSCC and/or their Affiliates, whether
owned, leased, or licensed, software, devices, IP
addresses or other addresses or accounts used in
connection with providing the services set forth in
the Rules, or used to transact business or to manage
the connection with NSCC.
28 ‘‘DTCC
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process in this way to improve its
ability to respond quickly, efficiently,
and effectively to a Major Event that
arises abruptly.29 Following this
determination, any management
committee including all of the officers
authorized to determine a Major Event
would convene, and NSCC would
convene a Board of Directors meeting as
soon as practicable thereafter, and in
any event within five Business Days
following such determination, to ratify,
modify, or rescind the Officer Major
Event Action.30
In addition, the proposed rule will
require participants to notify NSCC
immediately upon becoming aware of a
Major Event, and, likewise, will require
NSCC to notify its participants promptly
of any action NSCC takes or intends to
take with respect to a Major Event.31
Finally, the proposal will address
certain miscellaneous related matters
including: (i) A limitation of liability for
any failure or delay in performance, in
whole or in part of NSCC’s obligations
under the Rules, arising out of or related
to a Major Event, (ii) a statement that
NSCC’s power to take any action
pursuant to the Systems Disconnect
Rule also includes the power to repeal,
rescind, revoke, amend or vary such
action, (iii) a statement that NSCC’s
powers pursuant to the Systems
Disconnect Rule shall be in addition to,
and not in derogation of, authority
granted elsewhere in the Rules to take
action as specified therein, (iv) a
requirement that participants shall keep
any confidential information provided
to them by NSCC in connection with a
Major Event confidential, and (v) a
statement that in the event of any
conflict between the provisions of the
Systems Disconnect Rule and any other
Rules or Procedures, the provisions of
the Systems Disconnect Rule would
prevail.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 32
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to such organization. After
careful consideration, the Commission
finds that the Proposed Rule Change is
consistent with the requirements of the
Act and the rules and regulations
applicable to NSCC. In particular, the
Commission finds that the Proposed
Rule Change is consistent with Section
17A(b)(3)(F) 33 of the Act and Rules
17Ad-22(e)(1),34 (e)(2),35 and (e)(17)(i) 36
thereunder.
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) 37 of the
Exchange Act requires, in part, that the
rules of a clearing agency, such as
NSCC, be designed, in part, to promote
the prompt and accurate clearance and
settlement of securities transactions and
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. The
Commission finds that the Proposed
Rule Change is consistent with Section
17A(b)(3)(F) of the Act 38 for the reasons
discussed below.
As described above in Section II.B.1
(Confidentiality Requirements), NSCC
proposes to revise its Rules to establish
a standard relating to NSCC’s obligation
to maintain the confidentiality of
information it collects from participants
to assess each participant’s compliance
with NSCC’s membership requirements.
The Commission believes such a
uniform standard will help NSCC meet
its obligations and will help each
participant better understand NSCC’s
obligations for maintaining the
confidential information it shares with
NSCC, which, in turn, may facilitate the
sharing of such information and
improve NSCC’s ability to evaluate its
participants’ eligibility to access NSCC’s
clearance and settlement services.
Also, as described above in Section
II.B.1 (Confidentiality Requirements),
NSCC proposes to add participant
confidentiality requirements to its Rules
to ensure participants maintain the
confidentiality of information NSCC
shares, which participants may then use
to determine whether to participate in
NSCC’s clearance and settlement
services by understanding NSCC system
requirements and NSCC system
safeguards. The Commission believes
participant confidentiality requirements
will help each participant better
understand its rights and obligations for
maintaining the confidential
information NSCC shares, which, in
turn, may facilitate participant
compliance. Therefore, the Commission
believes the proposed changes to NSCC
and participant confidentiality
33 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(1).
35 17 CFR 240.17Ad–22(e)(2).
36 17 CFR 240.17Ad–22(e)(17)(i).
37 15 U.S.C. 78q–1(b)(3)(F).
38 Id.
34 17
29 See
Notice of Filing, supra note 4, at 36818.
id.
31 See id.
32 15 U.S.C. 78s(b)(2)(C).
30 See
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requirements are consistent with
promoting the prompt and accurate
clearance and settlement of securities
transactions by NSCC.
As described above in Section II.B.2
(Market Disruption Event) and Section
II.B.3 (Systems Disconnect Rule), risks,
threats, and potential vulnerabilities
due to a Market Disruption Event or a
Major Event could impede NSCC’s
ability to provide its clearance and
settlement services. NSCC proposes to
add two officers authorized to make an
interim determination that a Market
Disruption Event has occurred if the
Board of Directors is unable to timely
convene. The Commission believes the
proposed change will improve NSCC’s
ability to respond quickly to a Market
Disruption Event, which could help
NSCC mitigate the impact of such event
on NSCC, its participants, and the
broader market.
Additionally, as described above in
Section II.B.3 (Systems Disconnect
Rule), NSCC proposes to add the
Systems Disconnect Rule, which will set
forth the procedures under which NSCC
would be authorized, upon the
occurrence of a Major Event (as defined
in the proposed rules), to take certain
actions, including disconnecting a
participant from NSCC’s systems,
suspending data transmissions between
NSCC and the participant, and requiring
the participant to take other actions
necessary to protect NSCC and its
participants. The Commission believes
the proposed Systems Disconnect Rule
will enable NSCC to respond quickly to
a potential cyber threat or other network
disruption, which could help NSCC
prevent the spread of a participant’s
systems disruptions to NSCC, its
participants, and other market
participants that could otherwise cause
losses to NSCC or its participants.
One commenter suggests certain
revisions to the definition of Major
Event so that certain terms in the
Systems Disconnect Rule are consistent
with the definition of Market Disruption
Event in the Force Majeure Rule.39 The
Commission disagrees. Consistency
between the Systems Disconnect Rule
and Force Majeure Rule is not necessary
because NSCC designed the Systems
Disconnect Rule for a different purpose.
Although both rules relate to events
that, if left unaddressed, could affect
NSCC’s ability to provide clearance and
settlement services, the Force Majeure
Rule is designed to cover events caused
by external forces that impact NSCC and
its participants, whereas the Systems
Disconnect Rule is designed only to
39 See letter from Anonymous, dated July 28,
2021, supra note 5.
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cover disruptions to participant’s
computer systems or network that could
flow through to NSCC systems.
Therefore, differences between the two
rules do not raise consistency concerns,
because of their different purposes.40
Therefore, for the reasons described
above, the Commission believes the
proposed changes relating to a Market
Disruption Event or a Major Event will
help promote the prompt and accurate
clearance and settlement of securities
transactions and with assuring NSCC
safeguards securities and funds that are
in its custody or control or for which it
is responsible. Accordingly, the
Commission finds that the
implementation of the Proposed Rule
Change is consistent with Section
17A(b)(3)(F) of the Act.41
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B. Consistency With Rule 17Ad–22(e)(1)
Rule 17Ad–22(e)(1) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for a well-founded, clear,
transparent and enforceable legal basis
for each aspect of its activities in all
relevant jurisdictions.42 The
Commission finds that the Proposed
Rule Change is consistent with Rule
17Ad–22(e)(1) of the Exchange Act 43 for
the reasons discussed below.
As described above in Sections II.B.1
(Confidentiality Requirements) and
II.B.2 (Market Disruption Event), NSCC
proposes to establish a consistent
standard for its obligation to maintain
the confidentiality of information it
collects from its participants and to
establish participant confidentiality
requirements. The Commission believes
a consistent standard for NSCC’s
confidentiality requirements will
provide for clear and transparent
standard rules for participants, rather
than maintaining potentially different
confidentiality standards for
participants based on the various,
unrelated regulatory bodies governing
those participants. Additionally, the
Commission believes that imposing
specific legal standards applicable to
40 The commenter also suggests adding language
to the end of the Major Event definition to indicate
that, to avoid doubt, a Major Event would not
include disruptions due to normal market forces.
The Commission does not believe that such
additional language is necessary because, as
discussed above in Section II.B.3 (Systems
Disconnect Rule), a Major Event is limited to one
or more ‘‘Systems Disruption(s)’’ (as defined in the
proposed rule), which is properly limited to
disruptions to participant systems or its network
connection.
41 15 U.S.C. 78q–1(b)(3)(F).
42 17 CFR 240.17Ad–22(e)(1).
43 Id.
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both NSCC and its participants to follow
will provide for a well-founded legal
basis for the sharing and maintaining of
confidential information between NSCC
and its participants.44
Accordingly, the Commission finds
that the implementation of the Proposed
Rule Change is consistent with Rule
17Ad–22(e)(1) of the Exchange Act.45
C. Consistency With Rule 17Ad–22(e)(2)
Rule 17Ad–22(e)(2) under the
Exchange Act requires, in part, that a
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that are clear
and transparent and that specify clear
and direct lines of responsibility.46 The
Commission finds that the Proposed
Rule Change is consistent with Rule
17Ad–22(e)(2) of the Exchange Act 47 for
the reasons discussed below.
The Commission believes NSCC’s
proposal, as described above in Section
II.B.2 (Market Disruption Event), to add
two officers authorized to make an
interim determination of a Market
Disruption Event if the Board of
Directors is unable to convene in a
timely manner provides for governance
arrangements that are clear and
transparent and that provide clear and
direct lines of responsibility. Likewise,
the Commission believes NSCC’s
proposal to identify the officers
authorized to make an interim
determination of a Major Event, which
will then be ratified, modified, or
rescinded by the management
committee and the Board of Directors
will provide for clear and transparent
governance procedures and will specify
clear and direct lines of responsibility.
Accordingly, the Commission finds that
the implementation of the Proposed
Rule Change is consistent with Rule
17Ad–22(e)(2) of the Exchange Act.48
44 One commenter suggests adding an exception
for negligence or fraud to the limitation of liability
clause in the proposed Systems Disconnect Rule,
which the commenter states is customary
contractual language. See letter from Anonymous,
dated July 28, 2021, supra note 5. The Commission
notes NSCC has already included similar language
in its Rules, which would be applicable to this
aspect of the proposal. See Section 2 of Rule 58,
supra note 6 (providing for NSCC liability to its
participants for ‘‘gross negligence, willful
misconduct, or violations of Federal securities laws
for which there is a private right of action’’
notwithstanding any other provision in the Rules).
45 17 CFR 240.17Ad–22(e)(1).
46 17 CFR 240.17Ad–22(e)(2).
47 Id.
48 Id.
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57233
D. Consistency With Rule 17Ad–
22(e)(17)(i)
Rule 17Ad–22(e)(17)(i) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
manage the covered clearing agency’s
operational risks by identifying the
plausible sources of operational risk,
both internal and external, and
mitigating their impact through the use
of appropriate systems, policies,
procedures, and controls.49 The
Commission finds that the Proposed
Rule Change is consistent with Rule
17Ad–22(e)(17)(i) of the Exchange Act 50
for the reasons discussed below.
The Commission believes NSCC’s
proposal, as described above in Section
II.B.2 (Market Disruption Event), to add
two officers authorized to make an
interim determination of a Market
Disruption Event could help NSCC
mitigate the impact of a Market
Disruption Event by ensuring NSCC can
respond quickly to such event if the
Board of Directors were unable to
convene in a timely manner. Likewise,
the Commission believes the proposed
Systems Disconnect Rule, as described
in Section II.B.3 above, provides a rulesbased process that will enable NSCC to
identify potential cyber threats or other
network disruptions, which could help
NSCC prevent the spread of a
participant’s systems disruptions to
NSCC, its participants, and other market
participants that could otherwise cause
losses to NSCC or its participants.
One commenter suggests revising the
definition of Major Event to be
consistent with the definition of Market
Disruption Event in the Force Majeure
Rule.51 The commenter further argues
the impact to NSCC covered by the
definition of Major Event should be
limited to ‘‘DTCC Systems’’ (as defined
in the proposed rule) to ensure the
scope of the proposed rule is limited to
technical systems.52 The Commission
disagrees. As noted above, the purposes
of both the Force Majeure Rule and the
Systems Disconnect Rule are different.
The Force Majeure Rule is designed to
cover events external to NSCC and its
participants that materially impact, or
are likely to materially impact, NSCC’s
ability to provide its clearance and
settlement services. The Systems
49 17
CFR 240.17Ad–22(e)(17)(i).
50 Id.
51 Specifically, the commenter suggests deleting
reference to ‘‘reasonably’’ and by replacing
‘‘significant’’ with ‘‘material’’ when describing the
likelihood and level of impact to NSCC. See letter
from Anonymous, dated July 28, 2021, supra note
5.
52 See id.
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Disconnect Rule, by contrast, is
designed to cover a participant’s
systems or network disruption, which
through its connection to NSCC, is
reasonably likely to have a significant
impact on NSCC’s systems. The
differences between the rules’ purposes
support the need for differing
standards.53 Furthermore, the
Commission notes the reference to
‘‘including DTCC Systems’’ in the
proposed definition of Major Event
takes into account how NSCC’s
operations, i.e., its clearance and
settlement services, work, in that they
utilize DTCC Systems. Consequently,
the commenter’s proposed revisions are
not necessary.54
Accordingly, the Commission finds
that the implementation of the Proposed
Rule Change is consistent with Rule
17Ad–22(e)(17)(i) of the Exchange
Act.55
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
J. Matthew DeLesDernier,
Assistant Secretary.
IV. Conclusion
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 24, 2021, Cboe C2 Exchange,
Inc. (the ‘‘Exchange’’ or ‘‘C2’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Exchange filed the proposal as a
‘‘non-controversial’’ proposed rule
change pursuant to Section
19(b)(3)(A)(iii) of the Act 3 and Rule
19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of the Act and in
particular with the requirements of
Section 17A of the Act 56 and the rules
and regulations promulgated
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 57 that
Proposed Rule Change SR–NSCC–2021–
007, be, and hereby is, approved.58
53 The Commission also disagrees with the
commenter’s suggestion to remove the references to
‘‘reasonably’’ with respect to the likelihood of an
event impacting NSCC’s operations. The
Commission believes that NSCC’s assessment of the
likelihood of such an impact should be reasonable
before taking actions like disconnecting a
participant from its systems. In addition, the
Commission notes that NSCC’s references to
‘‘reasonably likely’’ and ‘‘significant impact’’ in the
proposed definition of Major Event are consistent
with the Commission’s definition of a ‘‘Major SCI
Event’’ under Regulation SCI. 17 CFR 242.1000.
Likewise, the Commission notes that references in
the proposed rule text to ‘‘reasonable basis’’ and
‘‘appropriate’’ is consistent with the obligations
related to a Major SCI Event under Regulation SCI.
17 CFR 242.1002.
54 Another commenter expressed concern that the
proposed Systems Disconnect Rule could be used
to benefit the trading activity of certain participants
at the detriment of disconnected participants. See
letter from Jarrod Knudson, dated June 27, 2021,
supra note 5. The Commission disagrees because
the proposed rule, by its terms, would only apply
when certain Systems Disruptions occur at a
participant that could impact NSCC’s operations.
55 17 CFR 240.17Ad–22(e)(17)(i).
56 15 U.S.C. 78q–1.
57 15 U.S.C. 78s(b)(2).
58 In approving the Proposed Rule Change, the
Commission considered the proposals’ impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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[FR Doc. 2021–22438 Filed 10–13–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93269; File No. SR–C2–
2021–014]
Self-Regulatory Organizations; Cboe
C2 Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rule 5.5(c) and
Rule 5.6 in Connection With Time-InForce Instructions Available for Bulk
Messages and To Make a Clarifying
Change
October 7, 2021.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) proposes to amend
Rule 5.5(c) and Rule 5.6 in connection
with Time-in-Force instructions
available for bulk messages and to make
a clarifying change. The text of the
proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/ctwo/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
59 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)(iii).
4 17 CFR 240.19b–4(f)(6).
1 15
PO 00000
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Sfmt 4703
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange 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
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 5.5(c) and Rule 5.6(d) to allow
Users to instruct bulk messages with a
Time-in-Force of Immediate-or-Cancel
(‘‘IOC’’). Currently, Users may not
designate bulk messages as IOC, which,
pursuant to Rule 5.6(d), instructs a limit
order to execute in whole or in part as
soon as the System receives it. The
System cancels and does not post to the
Book an IOC order (or unexecuted
portion) not executed immediately on
the Exchange or another options
exchange. A bulk message is a single
electronic message a User submits with
an M Capacity (i.e., for the account of
a Market-Maker) to the Exchange in
which the User may enter, modify, or
cancel up to an Exchange-specified
number of bids and offers. More,
specifically, bulk message functionality
is available to Market-Makers and
permits them to update their electronic
quotes in block quantities across series
in a class. Rule 5.5(c)(3)(A)(i) currently
provides that a bulk message submitted
through a dedicated logical port (i.e., a
‘‘bulk port’’) has a Time-in-Force of Day.
Pursuant to Rule 5.6(d), the term ‘‘Day’’
means, for an order so designated, an
order or quote that, if not executed,
expires at the RTH market close. All
bulk messages have a Time in Force of
DAY, as set forth in Rule 5.5(c).
The Exchange proposes to allow
Market-Makers to designate bulk
messages as IOC by amending the
following: Rule 5.3(c)(3)(A)(i) to provide
that a bulk message submitted through
a bulk port has a Time-in-Force of Day
or IOC; the definition of IOC in Rule
5.6(d) to provide that Users may
designate bulk messages as IOC; and the
definition of ‘‘Day’’ in Rule 5.6(d) to
remove the language that all bulk
messages have a Time-in-Force of DAY,
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]]>Agencies
[Federal Register Volume 86, Number 196 (Thursday, October 14, 2021)]
[Notices]
[Pages 57229-57234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-22438]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93278; File No. SR-NSCC-2021-007]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving the Proposed Rule Change Relating to
Confidential Information, Market Disruption Events, and Other Changes
October 8, 2021.
I. Introduction
On June 25, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2021-007 (the ``Proposed
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to amend NSCC's
[[Page 57230]]
rules relating to confidentiality requirements, Market Disruption
Events, and procedures for disconnecting a participant from NSCC's
network, among other changes.\3\ The Proposed Rule Change was published
for comment in the Federal Register on July 13, 2021.\4\ The Commission
received comments that it has considered with respect to the Proposed
Rule Change.\5\ For the reasons discussed below, the Commission is
approving the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing, infra note 4, at 86 FR 36815.
\4\ See Securities Exchange Act Release No. 92334 (June 25,
2021), 86 FR 36815 (July 13, 2021) (File No. SR-NSCC-2021-007)
(``Notice of Filing'').
\5\ Specifically, the Commission received comments on a proposed
rule change filed by NSCC's affiliate, the Depository Trust Company,
regarding parallel changes to DTC's Rules. See Securities Exchange
Act Release No. 92342 (June 25, 2021), 86 FR 36833 (July 13, 2021)
(File No. SR-DTC-2021-011). The comment letters are available on the
Commission's website at https://www.sec.gov/comments/sr-dtc-2021-011/srdtc2021011.htm. Because the comments address issues that also
appear in this Proposed Rule Change, the Commission has considered
it in connection with NSCC's proposal as well. Several comments
generally supported the Proposed Rule Change, and the Commission
considers the additional comments in its analysis at Section III
infra.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
Pursuant to the Proposed Rule Change, NSCC is proposing three main
changes to its Rules & Procedures (``Rules''): \6\ (1) Standardizing
the confidentiality requirement applicable to NSCC with respect to its
participants' information and adding confidentiality requirement
applicable to participants with respect to NSCC's information, (2)
updating its Market Disruption and Force Majeure Rule (``Force Majeure
Rule'') to authorize two additional officers to determine that a Market
Disruption Event has occurred, and (3) adding a new rule setting forth
the procedures under which NSCC would be able to disconnect a
participant from its network in certain circumstances (``Systems
Disconnect Rule''). The Commission provides relevant background and
describes each of these proposed changes in greater detail below.
---------------------------------------------------------------------------
\6\ Capitalized terms not defined herein are defined in the
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------
A. Background
NSCC provides clearance, settlement, risk management, central
counterparty services, and a guarantee of completion for virtually all
broker-to-broker trades involving equity securities, corporate and
municipal debt securities, American depository receipts, exchange
traded funds, and unit investment trusts. In light of NSCC's critical
role in the marketplace, NSCC was designated a Systemically Important
Financial Market Utility (``SIFMU'') under Title VIII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010.\7\ Due to
NSCC's unique position in the marketplace, a failure or a disruption to
NSCC could, among other things, significantly disrupt settlement of
securities transactions cleared by NSCC and increase the risk of
substantial liquidity problems spreading among financial institutions
or markets, and thereby threaten the stability of the financial system
in the United States.\8\
---------------------------------------------------------------------------
\7\ 12 U.S.C. 5465(e)(1); Financial Stability Oversight Counsel
2012 Annual Report, Appendix A (``FSOC 2012 Report''), available at
https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
\8\ See FSOC 2012 Report, supra note 7.
---------------------------------------------------------------------------
NSCC participants connect to NSCC's systems, either directly
through the Securely Managed and Reliable Technology (``SMART'')
network or through a third party service provider or service bureau.\9\
NSCC's parent company, The Depository Trust & Clearing Corporation
(``DTCC'') manages the SMART network, which connects a nationwide
complex of networks, processing centers, and control facilities.\10\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 87696 (December 9,
2019), 84 FR 68243 (December 13, 2019) (File No. SR-NSCC-2019-003)
(describing the DTCC SMART network).
\10\ DTCC provides a set of core business processes for NSCC and
DTCC's other subsidiaries, including the technology systems and
networks, that provide connectivity between NSCC and its
participants and that provide NSCC with the ability to provide its
services as required under the Rules. Most corporate functions are
established and managed on an enterprise-wide basis pursuant to
intercompany agreements under which it is generally DTCC that
provides services to NSCC and DTCC's other subsidiaries.
---------------------------------------------------------------------------
B. Proposed Changes
1. Confidentiality Requirements
Confidentiality Requirements Applicable to NSCC: NSCC collects
confidential information from its participants to assess whether each
participant meets NSCC's membership requirements either to gain or
continue access to NSCC's clearance and settlement services.\11\ In
turn, NSCC is required to maintain the confidentiality of any
information furnished by its participants. Currently, NSCC's Rules
obligate NSCC to hold participants' information in the same degree of
confidence as may be required by law or the rules and regulations
(hereinafter collectively, ``regulations'') of the appropriate
regulatory body having jurisdiction over the participant.\12\
---------------------------------------------------------------------------
\11\ See Rule 2A, supra note 6 (establishing NSCC's right to
require applicants to furnish information to become Members or
Limited Members of NSCC); and Rule 15, supra note 4 (establishing
NSCC's right to require participants to furnish information relating
to assurances of financial responsibility and operational
capability).
\12\ See Section 1.C. of Rule 2A and Section 3 of Rule 15, supra
note 6.
---------------------------------------------------------------------------
NSCC states that its current Rules create ambiguity because NSCC's
obligations depend on each participant's regulatory requirements, which
could lead to unequal treatment of participants and conflicts of law
with NSCC's regulatory requirements or with respect to a participant
who is subject to multiple jurisdictions' regulations.\13\ NSCC also
states that applying different standards creates operational burdens
because NSCC must track the regulations applicable to each of its
participants and must maintain the confidentiality of each
participant's information to the same degree as required by the
applicable regulations.\14\
---------------------------------------------------------------------------
\13\ See Notice of Filing, supra note 4, at 36816.
\14\ See id.
---------------------------------------------------------------------------
In order to clarify its confidentiality requirements and to enhance
its operational efficiency, NSCC proposes to revise its Rules to
establish a standard, which will require NSCC to hold participant
confidential information to the same degree as NSCC's regulatory
requirements that relate to the confidentiality of records, and to
remove the references to each participant's particular regulatory
obligations. NSCC represents that the proposed change would provide
participants with similar protections because NSCC believes its
regulatory requirements are comparable to the regulations applicable to
its participants and, therefore, would not result in changes to NSCC's
current practices or the protection offered to its participants'
confidential information.\15\
---------------------------------------------------------------------------
\15\ See id.
---------------------------------------------------------------------------
Confidentiality Requirements Applicable to Participants: NSCC's
Rules do not include obligations for its participants to protect
confidential information furnished by NSCC or its affiliates.\16\
However, NSCC states that, in connection with the development of cyber
and information security programs pursuant to applicable participant
regulatory requirements, NSCC and DTCC have received an increasing
number of requests from
[[Page 57231]]
participants for confidential information, such as information
regarding DTCC's network operations, data security practices, and legal
settlements.\17\ Additionally, NSCC states that participants may
request NSCC or DTCC to disclose confidential information regarding its
cyber threat indicators, sources of cyber threat information, or other
information and actions taken following a cyber incident relating to a
participant, NSCC, or DTCC.\18\
---------------------------------------------------------------------------
\16\ NSCC states that, historically, it has generally not
provided, nor been requested to provide, information that contains
confidential or proprietary information of NSCC or its affiliates to
its participants except for information necessary for participants
to connect to DTCC Systems, which is typically protected under
intellectual property laws. See id.
\17\ See Notice of Filing, supra note 4, at 36817. See also,
supra discussion in Section II.A (Background) relating to DTCC
Systems.
\18\ See Notice of Filing, supra note 4, at 36817.
---------------------------------------------------------------------------
To facilitate information sharing by NSCC while protecting the
confidentiality of proprietary and confidential information NSCC shares
with its participants, NSCC proposes to add participant confidentiality
requirements to its Rules. The new provisions will require participants
to maintain the confidentiality of information furnished by NSCC
through proper safeguards to prevent disclosure of such confidential
information, except as necessary to perform its obligations under
NSCC's Rules or as otherwise required by applicable law. NSCC proposes
that participants be required to maintain the confidentiality of this
information to the same extent and using the same means the participant
uses to protect its own confidential information, but no less than a
reasonable standard of care. NSCC's proposal will also entitle NSCC or
DTCC to seek any temporary or permanent injunctive or other equitable
relief in addition to any monetary damages under the Rules if a
participant breaches its confidentiality requirements. Additionally,
NSCC's proposal will entitle NSCC to impose other disciplinary
proceedings or restrictions on access to services for a participant's
failure to comply with its confidentiality requirements, consistent
with the existing tools available to NSCC regarding a participant's
failure to comply with its Rules.
2. Market Disruption Event
NSCC's Rules contain provisions that identify the events or
circumstances that NSCC would consider to be a Market Disruption Event,
including, for example, events that lead to the suspension or
limitation of trading or banking in the markets in which NSCC operates,
or the unavailability or failure of any material payment, bank
transfer, wire or securities settlement systems.\19\ Upon the
declaration of a Market Disruption Event, NSCC's Rules provide NSCC
with tools to address such an event, such as suspending any or all
services and taking, or requiring participants to take, any actions
NSCC considers appropriate to facilitate the continuation of NSCC's
services.\20\
---------------------------------------------------------------------------
\19\ See Rule 60, supra note 6. See also Securities Exchange Act
Release Nos. 83955 (August 27, 2018), 83 FR 44340 (August 30, 2018)
(File No. SR-NSCC-2017-805); 83974 (August 28, 2018), 83 FR 44988
(September 4, 2018) (File No. SR-NSCC-2017-017).
\20\ See Rule 60, supra note 6.
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Currently, NSCC's Board of Directors may declare a Market
Disruption Event and may take any actions authorized by NSCC's Rules to
address the event.\21\ However, NSCC's Rules also authorize certain
officers to make an interim declaration of a Market Disruption Event,
to allow NSCC to prevent delays in addressing a Market Disruption Event
if the Board of Directors is unable to convene.\22\ In the event of
such an interim declaration, the Board of Directors must ratify,
modify, or rescind the officer's determination as soon as
practicable.\23\ Currently, the officers authorized to make such
determination are the Chief Executive Officer, Chief Financial Officer,
Group Chief Risk Officer, and General Counsel.\24\
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\21\ See Section 2 of Rule 60, id.
\22\ See id.
\23\ See id.
\24\ See id.
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NSCC proposes to add two additional officers of NSCC, the Chief
Information Officer and the Head of Clearing Agency Services, to the
list of authorized officers that could make such an interim
determination if the Board of Directors is unable to convene. NSCC
states these two officers, like the other officers currently provided
in the Rules, maintain senior executive level positions at NSCC,
oversee divisions of NSCC, and hold positions at NSCC that would
provide them a necessary global view into NSCC's operations and systems
to enable them to determine the existence of a Market Disruption
Event.\25\ NSCC states adding these two additional officers would
facilitate NSCC's ability to implement its emergency procedures in the
event of a Market Disruption Event.\26\
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\25\ See Notice of Filing, supra note 4, at 36817.
\26\ See id.
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3. Systems Disconnect Rule
As mentioned above in Section II.A (Background), NSCC's
participants connect to NSCC's systems, either through the DTCC-managed
SMART network or through other electronic means, such as through a
third party service provider or service bureau. NSCC's Rules do not
address NSCC's ability to disconnect a participant whose network
connection risks harming NSCC's systems. NSCC's proposal will establish
procedures under which NSCC would be able to disconnect a participant
from its network due to the risk of an imminent threat to NSCC,
participants, or other market participants.\27\
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\27\ See Notice of Filing, supra note 4, at 36817.
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NSCC's proposal will address NSCC's authority to take certain
actions upon the occurrence, and during the pendency, of a Major Event.
A ``Major Event'' will be defined as the happening of one or more
``Systems Disruptions'' reasonably likely to have a significant impact
on NSCC's operations, including ``DTCC Systems,'' \28\ that affect the
business, operations, safeguarding of securities or funds, or physical
functions of NSCC, its participants, or other market participants.
``Systems Disruption'' will, in turn, be defined as the unavailability,
failure, malfunction, overload, or restriction (whether partial or
total) of a DTCC Systems Participant's systems that disrupts or
degrades the normal operation of such DTCC Systems Participant's
systems; or anything that impacts or alters the normal communication or
the files that are received, or information transmitted, to or from the
DTCC Systems.
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\28\ ``DTCC Systems'' will be defined as the systems, equipment
and technology networks of DTCC, NSCC and/or their Affiliates,
whether owned, leased, or licensed, software, devices, IP addresses
or other addresses or accounts used in connection with providing the
services set forth in the Rules, or used to transact business or to
manage the connection with NSCC.
---------------------------------------------------------------------------
NSCC's proposal would also provide governance procedures applicable
to NSCC's determination whether, and how, to implement the provisions
of the Systems Disconnect Rule. The same officers with delegated
authority under the Force Majeure Rule may make a determination that a
Major Event has occurred. As discussed in Section II.B.2 (Market
Disruption Event) above, NSCC states these officers maintain senior
executive level positions at NSCC, oversee divisions of NSCC, and hold
positions at NSCC that would provide them a necessary global view into
NSCC's operations and systems to enable them to determine the existence
of a Market Disruption Event, which would also enable them to determine
the existence of a Major Event.
However, the proposed process for declaring a Major Event, by
contrast, would start with a designated officer, whereas, for a Market
Disruption Event, the officer would make an interim determination only
if the Board of Directors were unable to timely convene. NSCC states it
designed the
[[Page 57232]]
process in this way to improve its ability to respond quickly,
efficiently, and effectively to a Major Event that arises abruptly.\29\
Following this determination, any management committee including all of
the officers authorized to determine a Major Event would convene, and
NSCC would convene a Board of Directors meeting as soon as practicable
thereafter, and in any event within five Business Days following such
determination, to ratify, modify, or rescind the Officer Major Event
Action.\30\
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\29\ See Notice of Filing, supra note 4, at 36818.
\30\ See id.
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In addition, the proposed rule will require participants to notify
NSCC immediately upon becoming aware of a Major Event, and, likewise,
will require NSCC to notify its participants promptly of any action
NSCC takes or intends to take with respect to a Major Event.\31\
Finally, the proposal will address certain miscellaneous related
matters including: (i) A limitation of liability for any failure or
delay in performance, in whole or in part of NSCC's obligations under
the Rules, arising out of or related to a Major Event, (ii) a statement
that NSCC's power to take any action pursuant to the Systems Disconnect
Rule also includes the power to repeal, rescind, revoke, amend or vary
such action, (iii) a statement that NSCC's powers pursuant to the
Systems Disconnect Rule shall be in addition to, and not in derogation
of, authority granted elsewhere in the Rules to take action as
specified therein, (iv) a requirement that participants shall keep any
confidential information provided to them by NSCC in connection with a
Major Event confidential, and (v) a statement that in the event of any
conflict between the provisions of the Systems Disconnect Rule and any
other Rules or Procedures, the provisions of the Systems Disconnect
Rule would prevail.
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\31\ See id.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \32\ 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 the rules and regulations thereunder
applicable to such organization. After careful consideration, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Act and the rules and regulations applicable to
NSCC. In particular, the Commission finds that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) \33\ of the Act and Rules 17Ad-
22(e)(1),\34\ (e)(2),\35\ and (e)(17)(i) \36\ thereunder.
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\32\ 15 U.S.C. 78s(b)(2)(C).
\33\ 15 U.S.C. 78q-1(b)(3)(F).
\34\ 17 CFR 240.17Ad-22(e)(1).
\35\ 17 CFR 240.17Ad-22(e)(2).
\36\ 17 CFR 240.17Ad-22(e)(17)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) \37\ of the Exchange Act requires, in part,
that the rules of a clearing agency, such as NSCC, be designed, in
part, to promote the prompt and accurate clearance and settlement of
securities transactions and 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. The Commission finds that the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) of the Act \38\ for
the reasons discussed below.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78q-1(b)(3)(F).
\38\ Id.
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As described above in Section II.B.1 (Confidentiality
Requirements), NSCC proposes to revise its Rules to establish a
standard relating to NSCC's obligation to maintain the confidentiality
of information it collects from participants to assess each
participant's compliance with NSCC's membership requirements. The
Commission believes such a uniform standard will help NSCC meet its
obligations and will help each participant better understand NSCC's
obligations for maintaining the confidential information it shares with
NSCC, which, in turn, may facilitate the sharing of such information
and improve NSCC's ability to evaluate its participants' eligibility to
access NSCC's clearance and settlement services.
Also, as described above in Section II.B.1 (Confidentiality
Requirements), NSCC proposes to add participant confidentiality
requirements to its Rules to ensure participants maintain the
confidentiality of information NSCC shares, which participants may then
use to determine whether to participate in NSCC's clearance and
settlement services by understanding NSCC system requirements and NSCC
system safeguards. The Commission believes participant confidentiality
requirements will help each participant better understand its rights
and obligations for maintaining the confidential information NSCC
shares, which, in turn, may facilitate participant compliance.
Therefore, the Commission believes the proposed changes to NSCC and
participant confidentiality requirements are consistent with promoting
the prompt and accurate clearance and settlement of securities
transactions by NSCC.
As described above in Section II.B.2 (Market Disruption Event) and
Section II.B.3 (Systems Disconnect Rule), risks, threats, and potential
vulnerabilities due to a Market Disruption Event or a Major Event could
impede NSCC's ability to provide its clearance and settlement services.
NSCC proposes to add two officers authorized to make an interim
determination that a Market Disruption Event has occurred if the Board
of Directors is unable to timely convene. The Commission believes the
proposed change will improve NSCC's ability to respond quickly to a
Market Disruption Event, which could help NSCC mitigate the impact of
such event on NSCC, its participants, and the broader market.
Additionally, as described above in Section II.B.3 (Systems
Disconnect Rule), NSCC proposes to add the Systems Disconnect Rule,
which will set forth the procedures under which NSCC would be
authorized, upon the occurrence of a Major Event (as defined in the
proposed rules), to take certain actions, including disconnecting a
participant from NSCC's systems, suspending data transmissions between
NSCC and the participant, and requiring the participant to take other
actions necessary to protect NSCC and its participants. The Commission
believes the proposed Systems Disconnect Rule will enable NSCC to
respond quickly to a potential cyber threat or other network
disruption, which could help NSCC prevent the spread of a participant's
systems disruptions to NSCC, its participants, and other market
participants that could otherwise cause losses to NSCC or its
participants.
One commenter suggests certain revisions to the definition of Major
Event so that certain terms in the Systems Disconnect Rule are
consistent with the definition of Market Disruption Event in the Force
Majeure Rule.\39\ The Commission disagrees. Consistency between the
Systems Disconnect Rule and Force Majeure Rule is not necessary because
NSCC designed the Systems Disconnect Rule for a different purpose.
Although both rules relate to events that, if left unaddressed, could
affect NSCC's ability to provide clearance and settlement services, the
Force Majeure Rule is designed to cover events caused by external
forces that impact NSCC and its participants, whereas the Systems
Disconnect Rule is designed only to
[[Page 57233]]
cover disruptions to participant's computer systems or network that
could flow through to NSCC systems. Therefore, differences between the
two rules do not raise consistency concerns, because of their different
purposes.\40\
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\39\ See letter from Anonymous, dated July 28, 2021, supra note
5.
\40\ The commenter also suggests adding language to the end of
the Major Event definition to indicate that, to avoid doubt, a Major
Event would not include disruptions due to normal market forces. The
Commission does not believe that such additional language is
necessary because, as discussed above in Section II.B.3 (Systems
Disconnect Rule), a Major Event is limited to one or more ``Systems
Disruption(s)'' (as defined in the proposed rule), which is properly
limited to disruptions to participant systems or its network
connection.
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Therefore, for the reasons described above, the Commission believes
the proposed changes relating to a Market Disruption Event or a Major
Event will help promote the prompt and accurate clearance and
settlement of securities transactions and with assuring NSCC safeguards
securities and funds that are in its custody or control or for which it
is responsible. Accordingly, the Commission finds that the
implementation of the Proposed Rule Change is consistent with Section
17A(b)(3)(F) of the Act.\41\
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\41\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent and enforceable legal basis for each aspect
of its activities in all relevant jurisdictions.\42\ The Commission
finds that the Proposed Rule Change is consistent with Rule 17Ad-
22(e)(1) of the Exchange Act \43\ for the reasons discussed below.
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\42\ 17 CFR 240.17Ad-22(e)(1).
\43\ Id.
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As described above in Sections II.B.1 (Confidentiality
Requirements) and II.B.2 (Market Disruption Event), NSCC proposes to
establish a consistent standard for its obligation to maintain the
confidentiality of information it collects from its participants and to
establish participant confidentiality requirements. The Commission
believes a consistent standard for NSCC's confidentiality requirements
will provide for clear and transparent standard rules for participants,
rather than maintaining potentially different confidentiality standards
for participants based on the various, unrelated regulatory bodies
governing those participants. Additionally, the Commission believes
that imposing specific legal standards applicable to both NSCC and its
participants to follow will provide for a well-founded legal basis for
the sharing and maintaining of confidential information between NSCC
and its participants.\44\
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\44\ One commenter suggests adding an exception for negligence
or fraud to the limitation of liability clause in the proposed
Systems Disconnect Rule, which the commenter states is customary
contractual language. See letter from Anonymous, dated July 28,
2021, supra note 5. The Commission notes NSCC has already included
similar language in its Rules, which would be applicable to this
aspect of the proposal. See Section 2 of Rule 58, supra note 6
(providing for NSCC liability to its participants for ``gross
negligence, willful misconduct, or violations of Federal securities
laws for which there is a private right of action'' notwithstanding
any other provision in the Rules).
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Accordingly, the Commission finds that the implementation of the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(1) of the
Exchange Act.\45\
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\45\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rule 17Ad-22(e)(2)
Rule 17Ad-22(e)(2) under the Exchange Act requires, in part, that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that are clear and transparent and that specify
clear and direct lines of responsibility.\46\ The Commission finds that
the Proposed Rule Change is consistent with Rule 17Ad-22(e)(2) of the
Exchange Act \47\ for the reasons discussed below.
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\46\ 17 CFR 240.17Ad-22(e)(2).
\47\ Id.
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The Commission believes NSCC's proposal, as described above in
Section II.B.2 (Market Disruption Event), to add two officers
authorized to make an interim determination of a Market Disruption
Event if the Board of Directors is unable to convene in a timely manner
provides for governance arrangements that are clear and transparent and
that provide clear and direct lines of responsibility. Likewise, the
Commission believes NSCC's proposal to identify the officers authorized
to make an interim determination of a Major Event, which will then be
ratified, modified, or rescinded by the management committee and the
Board of Directors will provide for clear and transparent governance
procedures and will specify clear and direct lines of responsibility.
Accordingly, the Commission finds that the implementation of the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(2) of the
Exchange Act.\48\
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\48\ Id.
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D. Consistency With Rule 17Ad-22(e)(17)(i)
Rule 17Ad-22(e)(17)(i) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to manage the
covered clearing agency's operational risks by identifying the
plausible sources of operational risk, both internal and external, and
mitigating their impact through the use of appropriate systems,
policies, procedures, and controls.\49\ The Commission finds that the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(17)(i) of the
Exchange Act \50\ for the reasons discussed below.
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\49\ 17 CFR 240.17Ad-22(e)(17)(i).
\50\ Id.
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The Commission believes NSCC's proposal, as described above in
Section II.B.2 (Market Disruption Event), to add two officers
authorized to make an interim determination of a Market Disruption
Event could help NSCC mitigate the impact of a Market Disruption Event
by ensuring NSCC can respond quickly to such event if the Board of
Directors were unable to convene in a timely manner. Likewise, the
Commission believes the proposed Systems Disconnect Rule, as described
in Section II.B.3 above, provides a rules-based process that will
enable NSCC to identify potential cyber threats or other network
disruptions, which could help NSCC prevent the spread of a
participant's systems disruptions to NSCC, its participants, and other
market participants that could otherwise cause losses to NSCC or its
participants.
One commenter suggests revising the definition of Major Event to be
consistent with the definition of Market Disruption Event in the Force
Majeure Rule.\51\ The commenter further argues the impact to NSCC
covered by the definition of Major Event should be limited to ``DTCC
Systems'' (as defined in the proposed rule) to ensure the scope of the
proposed rule is limited to technical systems.\52\ The Commission
disagrees. As noted above, the purposes of both the Force Majeure Rule
and the Systems Disconnect Rule are different. The Force Majeure Rule
is designed to cover events external to NSCC and its participants that
materially impact, or are likely to materially impact, NSCC's ability
to provide its clearance and settlement services. The Systems
[[Page 57234]]
Disconnect Rule, by contrast, is designed to cover a participant's
systems or network disruption, which through its connection to NSCC, is
reasonably likely to have a significant impact on NSCC's systems. The
differences between the rules' purposes support the need for differing
standards.\53\ Furthermore, the Commission notes the reference to
``including DTCC Systems'' in the proposed definition of Major Event
takes into account how NSCC's operations, i.e., its clearance and
settlement services, work, in that they utilize DTCC Systems.
Consequently, the commenter's proposed revisions are not necessary.\54\
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\51\ Specifically, the commenter suggests deleting reference to
``reasonably'' and by replacing ``significant'' with ``material''
when describing the likelihood and level of impact to NSCC. See
letter from Anonymous, dated July 28, 2021, supra note 5.
\52\ See id.
\53\ The Commission also disagrees with the commenter's
suggestion to remove the references to ``reasonably'' with respect
to the likelihood of an event impacting NSCC's operations. The
Commission believes that NSCC's assessment of the likelihood of such
an impact should be reasonable before taking actions like
disconnecting a participant from its systems. In addition, the
Commission notes that NSCC's references to ``reasonably likely'' and
``significant impact'' in the proposed definition of Major Event are
consistent with the Commission's definition of a ``Major SCI Event''
under Regulation SCI. 17 CFR 242.1000. Likewise, the Commission
notes that references in the proposed rule text to ``reasonable
basis'' and ``appropriate'' is consistent with the obligations
related to a Major SCI Event under Regulation SCI. 17 CFR 242.1002.
\54\ Another commenter expressed concern that the proposed
Systems Disconnect Rule could be used to benefit the trading
activity of certain participants at the detriment of disconnected
participants. See letter from Jarrod Knudson, dated June 27, 2021,
supra note 5. The Commission disagrees because the proposed rule, by
its terms, would only apply when certain Systems Disruptions occur
at a participant that could impact NSCC's operations.
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Accordingly, the Commission finds that the implementation of the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(17)(i) of the
Exchange Act.\55\
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\55\ 17 CFR 240.17Ad-22(e)(17)(i).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \56\ and
the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\57\ that Proposed Rule Change SR-NSCC-2021-007, be, and hereby is,
approved.\58\
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\57\ 15 U.S.C. 78s(b)(2).
\58\ In approving the Proposed Rule Change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22438 Filed 10-13-21; 8:45 am]
BILLING CODE 8011-01-P
