NSCC Proposed Rule Change OPEN For Comment: Updates to Accommodate Certain Trades from Fractional Share Trading Program.

Proposed Changes:

NSCC proposes to revise its Rules to allow an exception to the Real-time Trade Submission Requirement for Correspondent Clearing transactions representing aggregated transactions of fractional shares. As described above, NSCC cannot currently process trades on a fractional basis. However, NSCC may accept aggregated transactions from fractional share trading programs for clearing if such transactions are submitted in multiples of one share based on rounding conventions similar to those used for reporting such transactions to trade reporting facilities.

For example, a broker-deal (“Broker A”) may receive an order from a customer to purchase 6.5 shares of GME. Broker A may route that order to an executing broker (“Broker B”) to purchase 6.5 shares. Broker B then executes an order to buy 7 shares of GME on a trading venue such as an exchange or alternative trading system, which only offers trading in full shares. This transaction clears in real-time at NSCC with Broker B as the buyer versus its contra party. Broker B would then submit a Correspondent Clearing transaction 14 to NSCC for 6 shares of GME with Broker B as the seller and Broker A as the buyer. This transaction would also clear in real-time at NSCC. To accommodate the fractional share, Broker A would set up a fail to receive of 0.5 shares of GME versus Broker B, and Broker B would set up fail to deliver of 0.5 shares of GME versus Broker A. Broker B would take principal ownership of the remaining 0.5 shares of GME. This position would be held in Broker B’s omnibus account at the broker-dealer until the account accumulates to at least one (1) full share.

The following day, Broker A may receive another order from a customer to purchase 6.5 shares of GME Broker A again routes the order to executing Broker B to purchase 6.5 shares. This time, Broker B executes an order to buy 6 shares of GME on a trading venue. This transaction clears in real-time at NSCC with Broker B as buyer versus its contra party. Broker B then submits a Correspondent Clearing transaction to NSCC for 6 shares of GME with Broker B as seller and Broker A as buyer. This transaction also clears in real-time at NSCC. Broker B then ultimately submits an additional Correspondent Clearing transaction to NSCC for 1 share of GME with Broker B as seller and Broker A as buyer. This transaction clears at NSCC, and Broker A and Broker B close-out the fail to receive/deliver with one another.

In the example above, the rounding, aggregation and submission of transactions in fractional shares could be interpretated as not satisfying the Real-time Trade Submission Requirement. For example, the Correspondent Clearing transactions containing aggregated fractional shares may not be submitted promptly after execution of the underlying trades executed by the executing broker and the aggregated shares may not be submitted in the form executed. The Real-time Trade Submission Requirement was not designed, however, to prohibit the submission of Correspondent Clearing transactions necessary to accommodate the clearing of fractional shares. NSCC did not consider fractional share trading programs or the clearing of fractional shares when it adopted its Real-time Trade Submission Requirement rules and subsequently amended those rules to address the Correspondent Clearing service.

As a result, NSCC proposes to revise Section 7 of NSCC Rule 7 to allow an additional exception from the Real-time Trade Submission Requirement for Correspondent Clearing transactions that represent aggregated transactions of fractional shares. In addition, NSCC would revise Section 7 of NSCC Rule 7 to include a requirement that trade data representing aggregated transactions of fractional shares must be submitted to NSCC for trade recording in units of full shares and should be submitted as promptly as reasonably practical. NSCC also proposes to make conforming changes to Section A of Procedure II to include trade data representing aggregated transactions of fractional shares in the list of exceptions for the Real-time Trade Submission Requirement.

The proposed rule change would not require NSCC to make any changes to its current operational and risk management processes. As described above, NSCC would continue to receive all transactions in units of full shares, and from an operational perspective, transactions from fractional share trading programs would be recorded and processed in the same manner as any other transaction submitted for clearing. NSCC also does not believe that clearing transactions from fractional share trading programs would require any changes to its risk management processes. While the Correspondent Clearing portion of such transactions would not be subject to the Real-time Trade Submission Requirement, these transactions are not expected to constitute a significant volume of trades relative to NSCC’s total cleared transaction volumes. Transactions from fractional share trading programs would be subject to the same margining and risk management practices as other equity transactions upon trade recording and validation by NSCC, and NSCC does not currently plan to make any changes to its risk management processes in relation to the clearing of the aggregated shares received from fractional share trading programs. NSCC believes that the benefits of bringing these transactions into central clearing (e.g., their inclusion in Continuous Net Settlement (“CNS”) netting, NSCC risk management and NSCC’s trade guaranty) would justify the exception for such transactions from the Real-time Trade Submission Requirement. As noted above, NSCC currently permits other exceptions to the Real-time Trade Submission Requirement for Correspondent Clearing transactions, such as trade data submitted to facilitate a position movement between affiliates or between two unaffiliated clearing brokers on behalf of a common client for custody purposes and transaction data concerning creation and redemption orders for exchange-traded funds.

Wut Mean?:

• NSCC proposes to revise its Rules to allow an exception to the Real-time Trade Submission Requirement for Correspondent Clearing transactions representing aggregated transactions of fractional shares.
  • However, NSCC may accept aggregated transactions from fractional share trading programs for clearing if such transactions are submitted in multiples of one share based on rounding conventions similar to those used for reporting such transactions to trade reporting facilities.
• Currently, the rounding, aggregation and submission of transactions in fractional shares could be interpreted as not satisfying the Real-time Trade Submission Requirement.
  • For example, the Correspondent Clearing transactions containing aggregated fractional shares may not be submitted promptly after execution of the underlying trades executed by the executing broker and the aggregated shares may not be submitted in the form executed.
• As a result, NSCC proposes to revise Section 7 of NSCC Rule 7 to allow an additional exception from the Real-time Trade Submission Requirement for Correspondent Clearing transactions that represent aggregated transactions of fractional shares.
  • In addition, NSCC would revise Section 7 of NSCC Rule 7 to include a requirement that trade data representing aggregated transactions of fractional shares must be submitted to NSCC for trade recording in units of full shares and should be submitted as promptly as reasonably practical.
  • NSCC also proposes to make conforming changes to Section A of Procedure II to include trade data representing aggregated transactions of fractional shares in the list of exceptions for the Real-time Trade Submission Requirement.
• Transactions from fractional share trading programs would be subject to the same margining and risk management practices as other equity transactions upon trade recording and validation by NSCC, and NSCC does not currently plan to make any changes to its risk management processes in relation to the clearing of the aggregated shares received from fractional share trading programs.

How to comment:

1. Use the Commission’s online comment form at www.sec.gov/rules/sro.shtml.
2. Send an email to [email protected]. Make sure to include "File Number SR-NSCC-2024-007" in the subject line.
3. Send paper comments in triplicate to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549.

• Regardless of the method used, include the file number (SR-NSCC-2024-007) in your submission.
• Use only one method to help the Commission process and review your comments more efficiently.
• All comments will be posted on the SEC’s website, and copies will be available for public viewing at the SEC’s Public Reference Room or on the DTCC’s website.
• Do not include personal identifiable information in your submissions.
• The deadline for submission is 21 days from the publication date in the Federal Register.

Potential comment template:

TLDRS:

• NSCC proposes to revise its Rules to allow an exception to the Real-time Trade Submission Requirement for Correspondent Clearing transactions representing aggregated transactions of fractional shares.
  • However, NSCC may accept aggregated transactions from fractional share trading programs for clearing if such transactions are submitted in multiples of one share based on rounding conventions similar to those used for reporting such transactions to trade reporting facilities.
• Currently, the rounding, aggregation and submission of transactions in fractional shares could be interpreted as not satisfying the Real-time Trade Submission Requirement.
  • For example, the Correspondent Clearing transactions containing aggregated fractional shares may not be submitted promptly after execution of the underlying trades executed by the executing broker and the aggregated shares may not be submitted in the form executed.
• As a result, NSCC proposes to revise Section 7 of NSCC Rule 7 to allow an additional exception from the Real-time Trade Submission Requirement for Correspondent Clearing transactions that represent aggregated transactions of fractional shares.
  • In addition, NSCC would revise Section 7 of NSCC Rule 7 to include a requirement that trade data representing aggregated transactions of fractional shares must be submitted to NSCC for trade recording in units of full shares and should be submitted as promptly as reasonably practical.
  • NSCC also proposes to make conforming changes to Section A of Procedure II to include trade data representing aggregated transactions of fractional shares in the list of exceptions for the Real-time Trade Submission Requirement.
• Transactions from fractional share trading programs would be subject to the same margining and risk management practices as other equity transactions upon trade recording and validation by NSCC, and NSCC does not currently plan to make any changes to its risk management processes in relation to the clearing of the aggregated shares received from fractional share trading programs.
• OPEN for comment with potential letter template included in the post.