On October 7, 2015, National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-NSCC-2015-005 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] and Rule 19b-4 thereunder,^[2] to allow certain fixed-income securities trades that that are scheduled to settle on the day after trade date (“T+1”) to settle either through NSCC's Continuous Net Settlement (“CNS”) system, or through its Balance Order Accounting Operation on a trade-for-trade basis. The proposed rule change was published for comment in the Federal Register on October 15, 2015.^[3] The Commission did not receive any comment letters on the proposed rule change. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

I. Description of the Proposed Rule Change

The following is a description of the proposed rule change, as provided by NSCC:

The proposed rule change consists of amendments to NSCC's Rules & Procedures (“Rules”) in order to permit trades in fixed income securities (corporate and municipal bonds, and unit investment trusts, collectively “CMU”) that are T+1 to settle either through its CNS system, as described below, or through its Balance Order Accounting Operation on a trade-for-trade basis, as described below, when eligible for settlement through these services.^[4]

Background

CMU transactions that are effected in the over-the-counter markets and submitted to NSCC directly by Members on a bilateral basis are processed through NSCC's Real Time Trade Matching (“RTTM”) platform. Within RTTM, the buy and sell sides of a transaction are validated and matched, resulting in a compared trade that is reported to Members. This process is called “trade comparison.”

Today, with the exception of CMU trades that are submitted to NSCC to settle on a timeframe that is shorter than T+2,^[5] CMU trades submitted to NSCC through RTTM are first compared within RTTM, and then are processed into NSCC's Universal Trade Capture (“UTC”) system, where they are checked for eligibility for settlement either through NSCC's CNS system ^[6] or through its Balance Order Accounting Operation on a trade-for-trade basis.^[7] These CMU trades, those that are scheduled to settle on a T+2 or longer timeframe, are then processed for settlement through the settlement service for which they are eligible, i.e. either the CNS system or the Balance Order Accounting Operation on a trade-for-trade basis. If a CMU trade is not eligible for settlement through either CNS or the Balance Order Accounting Operation, or if it is marked as “comparison-only” when it is submitted to NSCC, it is only processed for trade comparison through RTTM and then it must settle away from NSCC.

Today, all CMU trades submitted to NSCC through RTTM that are scheduled to settle on T+1 are automatically processed as comparison-only in RTTM, and must settle away from NSCC. T+1 CMU trades are processed this way because, historically, NSCC's systems were not able to adequately risk manage CMU trades that settled on this shortened timeframe. NSCC has proposed to amend its Rules so that, following trade comparison through RTTM, T+1 CMU trades will be processed into UTC, where they will be checked for eligibility to settle through either CNS or the Balance Order Accounting Operation on a trade-for-trade basis. If eligible, these CMU trades will settle through the settlement service for which they are eligible, i.e. either the CNS system or the Balance Order Accounting Operation on a trade-for-trade basis.

Pursuant to Addendum K of the Rules, NSCC guarantees the completion of CNS settling trades that have reached the later of midnight of T+1 or midnight of the day they are reported to Members, and guarantees the completion of shortened process trades, such as same-day and next-day settling trades, upon comparison or trade recording processing.^[8] Therefore, for those T+1 CMU trades that are eligible for settlement through CNS, NSCC will guarantee the completion of these trades upon comparison or trade recording processing. T+1 CMU trades that settle through CNS will be subject to all appropriate risk management measures and margining, pursuant to the existing risk management methodology and policies and procedures, including the Specified Activity charge component of its Clearing Fund charges, which applies to trades settling at NSCC on a shortened processing cycle.^[9] NSCC estimates that CMU trades that are designated to settle on T+1 and will be eligible to settle through CNS represent less than half of a percent of all CMU trades processed at NSCC, and less than 2% of the total value of all CMU trades processed at NSCC.^[10] In order to ( printed page 73029) implement this proposed rule change, NSCC will amend Procedure II (Trade Comparison and Recording Service). In particular, these amendments will provide that CMU T+1 transactions will be handled in the same manner as CMU T+2 trades and trades submitted for regular way (or T+3) settlement. Procedure II will also be amended to remove reference to CMU T+1 transactions from the section that identifies those trades that are accepted by NSCC for comparison-only processing.

Implementation

The effective date of the proposed rule change will be announced via an NSCC Important Notice.

II. Discussion and Commission Findings

Section 19(b)(2)(C) of the Act ^[11] 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. The Commission believes the proposal is consistent with section 17A(b)(3)(F) of the Act.^[12]

Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions, as well as, in general, protect investors and the public interest.^[13] By permitting T+1 CMU transactions to settle through CNS or the Balance Order Accounting Operation, the transactions will receive the benefit of NSCC's settlement services, including, in the case of CNS, a trade guarantee. Thus, the proposal will protect investors and the public interest by mitigating NSCC Members' settlement risk and counterparty risk. As such, the Commission believes that the proposal is consistent with section 17A(b)(3)(F) of the Act.^[14]

III. Conclusion

On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of section 17A of the Act ^[15] and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that proposed rule change SR-NSCC-2015-005 be, and hereby is, approved.^[16]