Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
FINRA is proposing to amend Rule 11900 (Clearance of Corporate Debt Securities) to except certain transactions in corporate debt securities.
The text of the proposed rule change is available on FINRA's website at
In its filing with the Commission, FINRA 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. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
Rule 11900 under FINRA's Uniform Practice Code (the “Rule”) sets forth members' obligations with respect to the use of a registered clearing agency (a “clearing agency”) to clear over-the-counter transactions in corporate debt securities.
FINRA is proposing to amend the Rule to provide an exception for over-the-counter transactions between members (the “parties”) where the same
FINRA has filed the proposed rule change for immediate effectiveness. The proposed rule change will become operative 30 days after the date of filing.
FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,
FINRA notes that the proposed exception would not alter counter-party clearing risks, such as financial exposure, because where a member or its agent utilizes the exception provided for under this proposal, it would serve as the central party on both the purchase and the sale side of the transaction and would clear and settle the transaction internally through book-keeping transfers. As such, no net settlement obligation would be created on the level of the clearing firm, and the risks and inefficiencies that the Rule is intended to protect against would not be present. Thus, FINRA believes the proposed rule change strikes an appropriate balance between providing relief uniformly to members where the Rule does not provide the intended benefits, while preserving the protections of the Rule for all other eligible transactions between members in corporate debt securities executed over the counter. Accordingly, FINRA believes the proposal promotes just and equitable principles of trade, and protects investors and the public interest.
FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The proposed exception would apply uniformly where the same carrying member clears and settles both the purchase and the sale side of a transaction in a corporate debt security through book-keeping transfers between the parties' accounts at the carrying member. FINRA discussed the proposed exception with its Uniform Practice Code and Fixed Income Committees, who supported the proposed amendment. FINRA also discussed the proposal with SIFMA's Clearing Firms Committee, which also supported the proposal.
Under Rule 11900, each member or its agent that is a participant in a clearing agency is required to send eligible over-the-counter transactions between members in corporate debt securities to a clearing agency for clearing. For transactions where the same carrying member is clearing both the purchase and sale side of the transaction, the funds and the securities are reflected in each party's account at the carrying member. Thus, the clearing of such transactions can be done effectively through book-keeping transfers between the parties' accounts at the carrying member, without sending the transaction for central clearing. Specifically, because no net settlement obligation is created between the carrying member and the clearing agency for such transactions, clearing these transactions through a clearing agency does not provide the additional benefits of reducing or eliminating the risks and inefficiencies that central clearing usually provides.
However, while the current rule requiring carrying members to clear these transactions through a clearing agency does not provide the benefits that the rule was designed to provide (
Currently, each member or its agent that is a participant in a clearing agency is required under Rule 11900 to send eligible over-the-counter transactions between members in corporate debt securities to a registered clearing agency for clearing and settlement. The National Securities Clearing Corporation (NSCC), a subsidiary of The Depository Trust & Clearing Corporation (DTCC), provides central clearing services for corporate debt securities, among other products. According to NSCC's website calculator, clearing fees consist of three parts: A tiered “clearance fee” based on the number of trades; a “value into net fee” based on the total value traded; and a “value out of net fee” based on the value that does not get netted.
When internally clearing a transaction, the delivery of the corporate debt security and money by the respective parties to settle a transaction can be effected through book-keeping transfers between the buyer's and seller's accounts at the carrying member. Under the proposed exception,
FINRA understands that internalizing the clearance of such transactions alone would not affect the clearing agency's margin calculation for a clearing firm availing itself of the exception. Based on a conversation with DTCC, margin is collected when there is a net debit after performing mark-to-market of the trades submitted. Therefore, when clearing firms choose to internalize the clearance of transactions that create no net settlement obligations, we understand that the margin required by the clearing agency is not changed.
When a carrying firm chooses to clear transactions internally, DTCC may lose revenues from the clearing fees collected from that firm (assuming the fee structure remains unchanged). NSCC generally charges lower clearing fees for transactions that can be netted out.
FINRA expects that the proposed amendment will improve the efficiency of the clearing process by removing a step that does not provide the intended benefit and allowing over-the-counter transactions in corporate debt securities that create no net settlement obligation to be internally cleared by the carrying firm, as described above. Carrying firms will potentially save on clearing costs for such transactions in circumstances where central clearing would not provide the additional protections related to counterparty risks or improved efficiency over bilateral clearing that were envisioned at the time Rule 11900 was adopted.
Clearing firms that serve more customers engaging in eligible over-the-counter transactions in corporate debt securities likely may benefit more from the proposed exception. The percentage of such transactions that can be internalized may in turn be higher than that of smaller clearing firms. To the extent smaller firms have eligible transactions that may be internalized under the proposal, they also should benefit from the proposal should they choose to internalize clearing, where permitted, and avoid related central clearing costs.
No alternatives were considered for this proposal.
FINRA received an email from Pershing LLC (“Pershing”) relating to the need for the proposed rule change.
Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.