Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving of Proposed Rule Change To Accommodate a Shorter Standard Settlement Cycle and Make Other Changes, 38929-38932 [2024-10001]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 90 (Wednesday, May 8, 2024)]
[Notices]
[Pages 38929-38932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10001]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100048; File No. SR-NSCC-2024-002]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving of Proposed Rule Change To Accommodate a 
Shorter Standard Settlement Cycle and Make Other Changes

May 2, 2024.

I. Introduction

    On March 8, 2024, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2024-002 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule 
Change was published for comment in the Federal Register on March 21, 
2024.\3\ The Commission has received no comments on the Proposed Rule 
Change. For the reasons discussed below, the Commission is approving 
the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 99750 (Mar. 15, 
2024), 89 FR 20267 (Mar. 21, 2024) (File No. SR-NSCC-2024-002) 
(``Notice of Filing'').
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II. Background

    NSCC provides central counterparty services, including clearing, 
settlement, risk management, and a guarantee of completion, for 
virtually all broker-to-broker trades involving equity securities, 
corporate and municipal debt securities, and certain other securities.
    NSCC's Rules \4\ consider the current standard settlement cycle of 
two business days after the trade date (``T+2'') as ``regular way'' 
settlement, and as such, are currently designed to accommodate this 
settlement cycle. The T+2 settlement cycle has been in place since 2017 
when the Commission amended Exchange Act Rule 15c6-1(a) \5\

[[Page 38930]]

to shorten the standard settlement cycle from three business days after 
the trade date, in an effort to reduce credit, market, and liquidity 
risk, and as a result, reduce systemic risk for U.S. market 
participants.\6\ In an effort to further promote investor protection, 
reduce risk in the financial system, and increase operational and 
capital efficiency in the securities market, the Commission has adopted 
a rule change shortening the standard settlement cycle from T+2 to one 
business day after the trade date (``T+1'') (``Shortened Settlement 
Cycle''), with a compliance date of May 28, 2024.\7\
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    \4\ Capitalized terms not defined herein are defined in the 
Rules and Procedures of NSCC (``Rules''), available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
    \5\ Exchange Act Rule 15c6-1(a), as amended in 2017, required, 
with certain exceptions, that a broker or dealer shall not effect or 
enter into a contract for the purchase or sale of a security (other 
than an exempted security, government security, municipal security, 
commercial paper, bankers' acceptances, or commercial bills) that 
provides for payment of funds and delivery of securities later than 
the second business day after the date of the contract unless 
otherwise expressly agreed to by the parties at the time of the 
transaction. See 17 CFR 240.15c6-1(a).
    \6\ See Securities Exchange Act Release No. 80295 (Mar. 22, 
2017), 82 FR 15564 (Mar. 29, 2017).
    \7\ See Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872 (Mar. 6, 2023) (S7-05-22) (Shortening the 
Securities Transaction Settlement Cycle) (``T+1 Adopting Release'').
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    NSCC is proposing to amend the Rules to be consistent with this 
upcoming industry-wide move to the Shortened Settlement Cycle. However, 
NSCC states that the core functions of NSCC will generally continue to 
operate in the same way in the Shortened Settlement Cycle.\8\
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    \8\ See Notice of Filing, supra note 3, at 20268.
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III. Description of the Proposed Rule Change

    NSCC proposes changes to address two categories of rules: (A) rules 
that have timeframes and/or cutoff times that are tied to the standard 
settlement cycle, and (B) rules affected by process changes being made 
to accommodate the Shortened Settlement Cycle. In general, these 
provisions either directly track the timeframe and/or Settlement Date 
of the standard settlement cycle, address non-standard settlement 
cycles, or provide for timeframes and/or cutoff times that are 
connected to or are affected by the timing of the standard settlement 
cycle and would need to be changed to accommodate the Shortened 
Settlement Cycle. The proposed changes to accommodate the upcoming move 
to the Shortened Settlement Cycle would impact the following NSCC 
Rules: Definitions (Rule 1 and Procedure XIII); Supplemental Liquidity 
Deposits (Rule 4A); Trade Comparison and Recording (Procedure II); the 
Special Representative Service (Procedure IV); the Continuous Net 
Settlement (``CNS'') System and CNS Accounting Operation (Rule 11 and 
Procedure VII); the Balance Order Accounting Operation (Procedure V); 
the Foreign Security Accounting Operation (Procedure VI); the ACATS 
Settlement Accounting Operation (Procedure XVIII); and the NSCC 
Guaranty (Addendum K).\9\ These proposed changes are discussed below.
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    \9\ For more detailed discussion of each specific edit to the 
Rules, please refer to the Notice of Filing. See id. at 20268-73 
(describing specific changes to each of the relevant sections of the 
Rules).
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    NSCC is also proposing other technical changes and corrections to 
the Rules that are not required to accommodate the move to the 
Shortened Settlement Cycle but would provide additional clarity and 
accuracy in the Rules.\10\
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    \10\ See id. at 20269-72 (Subparagraphs B, C (concerning Index 
Receipts (Procedure II.F), E (concerning Consolidated Trade Summary 
(Procedure VII.B)), and G). See also infra note 9.
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A. Changes to Timeframes and/or Cut-off Times Tied to the Standard 
Settlement Cycle

    The Rules contain certain provisions that refer to ``T+2'' as the 
timeframe and Settlement Date of the standard settlement cycle and 
consider this as ``regular way'' settlement. These provisions would be 
updated to reflect the change to ``T+1'' and that T+1 would be Regular 
Way settlement under the Shortened Settlement Cycle.\11\ Similarly, a 
number of provisions in the Rules refer to timeframes and/or Settlement 
Dates that are intended to be shorter/earlier or later, as applicable, 
than the timeframe and/or Settlement Date of the standard settlement 
cycle. These provisions also must be changed to accommodate the 
Shortened Settlement Cycle.\12\ Likewise, the length and timing of 
certain cutoff times are based on either a standard settlement cycle or 
a non-standard settlement cycle. Therefore, when the timeframe and 
Settlement Date of the standard settlement cycle and nonstandard 
settlement cycle are changed, these cutoff times would also need to be 
revised accordingly.\13\
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    \11\ See id. (Subparagraphs A, C (concerning Equity and Listed 
Debt Securities (Procedure II.B), Debt Securities (Procedure II.C), 
Index Receipts (Procedure II.F), Reports and Output (Procedure 
II.G)), E (concerning Consolidated Trade Summary (Procedure VII.B)), 
and G).
    \12\ See id. (Subparagraphs B, E (concerning CNS System (Rule 
11), Consolidated Trade Summary (Procedure VII.B), Controlling 
Deliveries to CNS (Procedure VII.D)), F, H, and I).
    \13\ See id. (Subparagraphs C (concerning Debt Securities 
(Procedure II.C)), and E (concerning CNS System (Rule 11), 
Consolidated Trade Summary (Procedure VII.B), CNS Dividend 
Accounting (Procedure VII.G)).
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B. Changes to Process Relating to the Shortened Settlement Cycle

    Some of the Rules would require process changes to accommodate the 
Shortened Settlement Cycle, as described below.\14\
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    \14\ See infra note 9.
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Changes to Procedure II.F.--Index Receipts (Exchange-Traded Funds)
    NSCC proposes to amend its creation/redemption input and settlement 
procedures for exchange-traded funds (``ETF(s),'' also referred to as 
``index receipts'' in the Rules). Aside from proposed changes to 
reflect that T+1 would be Regular Way settlement under the Shortened 
Settlement Cycle, NSCC also proposes additional amendments to allow for 
the creation and redemption of index receipts for same-day settlement. 
NSCC would add new rule language to allow Index Receipt Agents to 
include an additional cash collateral amount (``Index Receipt Cash 
Collateral Amount'') for same-day settling index receipts, which would 
be subject to limits established by NSCC.\15\ NSCC would also report 
any necessary adjustments to the Index Receipt Cash Collateral Amount 
based on end of day values (``Collateral Cash Adjustments'') for non-
guaranteed payment order or money settlement between the Members on the 
next business day to ``true-up'' the Index Receipt Cash Collateral 
Amount amounts. In addition, NSCC would amend the procedure to provide 
that any creation and redemption instructions for same-day settling 
index receipts that exceed the Index Receipt Cash Collateral Amount 
limitations established by NSCC would be rejected.
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    \15\ NSCC would initially establish this limit at 3% of the 
contract settlement amount of the order, which would be priced based 
on the prior night's net asset value. NSCC will monitor the use and 
overall collateral buffer amounts over time and may adjust this 
threshold as needed. Changes to these limits would be announced to 
Members by Important Notice. See Notice of Filing, supra note 3, at 
20269.
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    NSCC states that these proposed rules for same-day creation/
redemption are designed to allow Authorized Participants to cover short 
positions in ETF shares.\16\ The Rules currently allow Index Receipt 
Agents to elect a Settlement Date of T+1 or later for ETFs. Under the 
current T+2 settlement cycle, Authorized Participants may address short 
positions through the submission of creations/redemptions for next-day 
settlement (i.e., T+1). However, under the Shortened Settlement Cycle, 
Authorized Participants may need to submit creations/redemptions on a 
same-day basis to cover short positions scheduled for settlement on 
T+1.\17\ NSCC states that in the absence of the proposed same-day 
cycle, Authorized Participants would need to process this

[[Page 38931]]

activity on an ex-clearing basis, which would result in excess capital 
expenses.\18\ As stated above, the proposed rule change would also 
provide Index Receipt Agents with the option to require an additional 
Index Receipt Cash Collateral Amount as part of the creation or 
redemption to act as a ``buffer'' and account for potential market 
moves in the ETF or underlying components between the submission of the 
creation or redemption earlier in the day (based on the prior day's 
closing price which aligns with net asset value) and the settlement of 
such obligations at the end of the day during NSCC's end-of-day 
settlement cycle. These same-day create/redeem transactions would be 
subject to NSCC's risk management, consistent with its risk management 
of other ETF create/redeem orders.
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    \16\ See id.
    \17\ Currently, NSCC allows for same-day settling cash trades in 
the secondary market, even in the T+2 environment. The proposed rule 
change would allow same-day settling trades in the primary market.
    \18\ See Notice of Filing, supra note 3, at 20270.
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Changes to Procedure II.H.--Consolidated Trade Summaries.
    NSCC proposes to update its procedures concerning Consolidated 
Trade Summaries to reflect processes under the Shortened Settlement 
Cycle. NSCC's Consolidated Trade Summary System defines the expected 
settlement path for each transaction received by the Universal Trade 
Capture (``UTC'') service as CNS or non-CNS eligible.\19\ NSCC would 
make changes regarding the reporting of Balance Order transactions 
under the Shortened Settlement Cycle to state, more generally, that 
each Consolidated Trade Summary would include Receive and Deliver 
instructions to each Member to settle directly with its counterparties. 
NSCC states that the proposed change is intended to reflect that the 
three Consolidated Trade Summaries made available by NSCC will not 
include the same information on all three reports (e.g., the first two 
cycles would report next-day settling Balance Order transactions while 
the third cycle would report same-day settling Balance Order 
transactions trades).\20\
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    \19\ NSCC's CNS system is NSCC's core netting, allotting, and 
fail-control engine in which each security is netted to one position 
per Member with NSCC as its central counterparty. See id. See also 
Rule 11, supra note 4.
    \20\ See Notice of Filing, supra note 3, at 20270.
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Changes to Procedure IV--Special Representative Service
    NSCC proposes to delete a provision related to the Correspondent 
Clearing Service,\21\ which states that transactions (other than cash, 
next day fixed-income transactions, or cash equity transactions 
received after the Corporation's designated cut-off time) which are 
accepted by NSCC are then entered into the Balance Order Accounting 
Operation or CNS Accounting Operation which, when processed through the 
Balance Order Accounting Operation or CNS Accounting Operation, 
effectively net the Special Representative out of the original trade. 
NSCC proposes to delete this statement because (i) under the Shortened 
Settlement Cycle, there will no longer be next day fixed-income 
transactions (i.e., such transactions will be Regular Way) and (ii) the 
statement, more generally, is not a rule or procedural requirement 
concerning the Correspondent Clearing Service, but rather, is simply a 
description of an expected outcome of the service.\22\
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    \21\ NSCC's Special Representative Service allows Members that 
are authorized by one or more other persons to act on their behalf 
to submit transactions in securities to NSCC. See id. As part of 
this, the Correspondent Clearing Service permits Members to clear 
and settle transactions executed for them by other Members acting as 
their Special Representative to accommodate (i) a Member with 
multiple affiliate accounts who wishes to move a position resulting 
from an ``original trade'' in the process of clearance from one 
affiliate account to another or(?) (ii) a Member that relies on its 
Special Representative to execute a trade in any market on its 
behalf to enable the resulting position to be moved from the Special 
Representative to that Member. Id.; see also Procedure IV, supra 
note 4.
    \22\ See Notice of Filing, supra note 3, at 20270.
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Changes to Procedure VII--CNS Accounting Operation
    NSCC proposes changes to Rule 11 and Procedure VII concerning 
projection reports. Under the Shortened Settlement Cycle, the CNS 
projection report that will be issued on each Settlement Date will no 
longer include next day settling positions because it will only cover 
obligations for a one-day settlement cycle and will be issued during 
early morning hours on the Settlement Date. NSCC proposes to revise 
Section 4 of Rule 11 to remove rule text related to positions or 
obligations due to settle on ``the next settlement day.'' NSCC proposes 
to delete subsection D.1. of Procedure VII \23\ concerning the CNS 
projection report and other references to it throughout Procedure VII. 
Under the Shortened Settlement Cycle, the CNS projection report would 
no longer be used for the exemption process because it will be 
distributed at 2:00 a.m. ET on Settlement Date, after the night cycle 
completes.\24\ However, NSCC would clarify in the newly renumbered 
Section D.1(a) that Members may use other position reporting made 
available by NSCC to set exemptions and control deliveries.
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    \23\ Section D of Procedure VII describes the process for 
Members to control the delivery of securities to satisfy short 
positions in NSCC's CNS system. See id. at 20271.
    \24\ See id.
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    NSCC also proposes changes to Section H of Procedure VII describing 
the timeline of actions that must occur in connection with the 
processing of eligible corporate reorganization events to align with 
the Shortened Settlement Cycle. While the processing of mandatory 
reorganizations occurs automatically, the processing of voluntary 
reorganizations through the CNS Reorganization Processing System 
requires certain actions to be taken by both NSCC and Members with 
positions in the subject security during the period of time leading up 
to and following the expiration of the event. This period of time is 
referred to in the Rules as the ``protect period'' and is defined by 
reference to the expiration date, or ``E,'' of a voluntary 
reorganization (e.g., ``E+1'' is one day past the expiration date of 
the event). NSCC would remove references to the current standard two 
business day protect period and replace them with references to the one 
business day protect period anticipated under the Shortened Settlement 
Cycle. NSCC also proposes to update the processing timeframes for 
voluntary reorganizations to reflect the new timeframes under the 
Shortened Settlement Cycle.\25\
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    \25\ For specific changes in processing timeframes for voluntary 
reorganizations, please refer to the Notice of Filing. See id. at 
20272.
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IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \26\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After careful review of the Proposed Rule Change, 
the Commission finds that the Proposed Rule Change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to NSCC. In particular, the Commission finds that the 
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the 
Act.\27\
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    \26\ 15 U.S.C. 78s(b)(2)(C).
    \27\ 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency with Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to, among other things, promote the prompt 
and accurate clearance and settlement of securities transactions and to 
remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and

[[Page 38932]]

settlement of securities transactions.\28\ The Commission believes that 
the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the 
Act for the reasons stated below.
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    \28\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed in Part II, the Commission has adopted a rule change 
shortening the standard settlement cycle from T+2 to T+1, with a 
compliance date of May 28, 2024. The Proposed Rule Change would align 
NSCC's Rules with this upcoming industry-wide move and update NSCC's 
Rules to accommodate anticipated processing timelines under a Shortened 
Settlement Cycle. The Proposed Rule Change would modify the timeframes, 
cutoff times, and associated outputs for certain processes related to 
NSCC's clearance and settlement operations for a T+1 environment, 
including Rules related to: Definitions (Rule 1 and Procedure XIII); 
Supplemental Liquidity Deposits (Rule 4A); Trade Comparison and 
Recording (Procedure II); the Special Representative Service (Procedure 
IV); the Continuous Net Settlement (``CNS'') System and CNS Accounting 
Operation (Rule 11 and Procedure VII); the Balance Order Accounting 
Operation (Procedure V); the Foreign Security Accounting Operation 
(Procedure VI); the ACATS Settlement Accounting Operation (Procedure 
XVIII); and the NSCC Guaranty (Addendum K).
    The Commission has reviewed and analyzed the filing materials, and 
agrees that these changes are necessary for NSCC to clear and settle 
transactions promptly and accurately under the Shortened Settlement 
Cycle. As described in Part III.A, the changes to update and modify 
timeframes and cutoff times to reflect a Shortened Settlement Cycle 
should help ensure that NSCC's operations and Rules are consistent with 
the Shortened Settlement Cycle. Similarly, the changes to modify 
existing processes such that they occur within the Shortened Settlement 
Cycle, as described in Part III.B, should also help ensure that NSCC's 
functions are consistent with and accommodate the Shortened Settlement 
Cycle. Therefore, the Commission finds that the Proposed Rule Change 
should support NSCC's ability to provide prompt and accurate clearance 
and settlement of securities transactions and to remove impediments to 
and perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.\29\ Regarding the 
technical changes and corrections to the Rules not required to 
accommodate the move to T+1, as also described in Part III, the 
Commission finds these changes also consistent with Section 
17A(b)(3)(F) of the Act \30\ because the technical updates would 
provide additional clarity and accuracy in the Rules for Members that 
rely on them.
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    \29\ Id.
    \30\ Id.
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V. 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 \31\ 
and the rules and regulations promulgated thereunder.
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    \31\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\32\ that proposed rule change SR-NSCC-2024-002, be, and hereby is, 
approved.\33\
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    \32\ 15 U.S.C. 78s(b)(2).
    \33\ In approving the Proposed Rule Change, the Commission 
considered its 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.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-10001 Filed 5-7-24; 8:45 am]
BILLING CODE 8011-01-P