[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38579-38581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16108]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62385; File No. SR-NSCC-2010-05]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Enhance the
Process for Transfers Through the Automated Customer Account Transfer
Service
June 25, 2010.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and rule 19b-4 thereunder \2\ notice is hereby given that
on June 4, 2010, National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been substantially prepared by NSCC. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The purpose of this proposed rule change is to enhance NSCC's
process for transfers through the Automated Customer Account Transfer
Service (``ACATS'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
NSCC's ACATS system enables Members to effect automated transfers
of customer accounts among themselves.\3\ For ACATS transfers processed
through NSCC's Continuous Net Settlement (``CNS'') system,\4\ long and
short positions are passed against Members' positions at The Depository
Trust Company (``DTC'') and available securities are delivered from
short Members' accounts at DTC and allocated to long Members' accounts
by book-entry.
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\3\ ACATS complements a Financial Industry Regulatory Authority
(``FINRA'') rule requiring FINRA members to use automated clearing
agency customer account transfer services and to effect customer
account transfers within specified time frames.
\4\ CNS is an ongoing accounting system which nets today's
settling trades with yesterday's closing positions to produce a net
short or long position for a particular security for a particular
Member. NSCC is the counter party for all positions. The positions
are then passed against the Member's designated depository positions
and available securities are allocated by book-entry. This
allocation of securities is accomplished through an evening cycle
followed by a day cycle. Positions which remain open after the
evening cycle may be changed as a result of trades accepted for
settlement that day. CNS allocates deliveries in both the night and
day cycles using an algorithm based on priority groups in descending
order, age of position within a priority group, and random numbers
within age groups.
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NSCC is proposing changes to its ACATS system in connection with a
concurrent rule change proposed by DTC.\5\ NSCC is proposing these
changes for two general reasons. First, NSCC would like to enhance
protection for customer securities in ACATS transfers so that customer
account transfers to new firms would be maximized in the event of a
Member failure. Accordingly, NSCC would modify its ACATS processing and
its Rules so that deliveries or receives processed through CNS would
satisfy a Member's ACATS receive or deliver obligation prior to
satisfying another CNS-related obligation of that Member in the same
security. NSCC would also track CNS ACATS items to prevent reversal of
completed items in the event of a Member's failure. Second, NSCC would
like to facilitate compliance by its Members with their securities
possession and control requirements.\6\ To that end, NSCC proposes
modifying its Rules to clarify that in no event does NSCC have a lien
on securities carried by a Member for the account of its customers that
are delivered through the CNS ACATS service.\7\
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\5\ DTC is proposing its concurrent rule change with the
Commission in filing SR-DTC-2010-09.
\6\ Commission Rule 15c3-3 provides that a broker-dealer shall
promptly obtain and shall thereafter maintain the physical
possession or control of all fully paid securities and excess margin
securities carried for the account of customers.
\7\ DTC's Settlement Service Guide currently provides that
securities delivered to a receiving DTC Participant's account from
CNS are classified as collateral which may otherwise be made
available to NSCC in the event that the DTC Participant fails to
meet its NSCC settlement obligation. Pursuant to a separate rule
filing, DTC is proposing revisions to its service guide so that ACAT
deliveries from CNS would be designated by the DTC Participant as
``Minimum Amount Securities'' when credited to the Participant's
account. This designation would prevent the securities from being
designated as collateral for either this purpose or for purposes of
DTC's Rules. DTC Rule 1 for the definition of Minimum Amount
Securities.
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1. ACATS Transfers Through the CNS System
Through ACATS, an NSCC Member to which a customer's securities
account is to be transferred (``Receiving Member'') may submit a
Transfer Initiation Request to initiate the account transfer process.
When a Receiving Member accepts a customer account transfer, NSCC
causes all CNS-eligible items in that customer account to enter NSCC's
CNS accounting operation on the day before settlement date unless the
Receiving Member notifies NSCC that
[[Page 38580]]
certain items should be withheld from CNS processing.\8\
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\8\ NSCC Rule 50 (Automated Customer Account Transfer Service).
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Ordinary CNS items enter the system at contract value, but ACATS
items enter CNS unvalued. This reflects the nature of the ACATS CNS
items as ``free'' transfers. To incentivize deliveries, ACATS items are
marked-to-the-market on the morning of settlement date using their full
CNS value as of the prior day's closing price. Consequently, the
Delivering Member's CNS projection report shows a short securities
position, and its CNS cash reconciliation report shows a cash debit for
the ``full value'' mark. Conversely, the Receiving Member's projection
report shows a long securities position, and its cash reconciliation
report shows a cash credit equal to the ``full value'' mark. If the
Delivering Member fulfills its ACATS delivery obligation, then its
short position is cancelled, and the debit for the mark is offset by a
credit. Likewise, upon receipt of the securities by the Receiving
Member, the Receiving Member's long position is offset, and the credit
for the mark is offset by the debit. The net result is a ``free''
transfer of securities because no money is paid by either the
Delivering Member or Receiving Member.
For transactions processed through CNS, NSCC normally becomes the
counter party to the transaction and guarantees settlement.\9\ However,
a CNS ACATS transfer is not guaranteed for a party that fails to pay
any portion of its money settlement obligation on settlement date.\10\
In this circumstance, NSCC may reverse uncompleted ACATS items and any
associated debits or credits calculated using the marking process
described above would be eliminated.
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\9\ Pursuant to Addendum K of its Rules, NSCC generally
guarantees the completion of Continuous Net Settlement (``CNS'') and
Balance Order trades that reach the later of midnight of T+1 or
midnight of the day they are reported to Members. Shortened process
trades, such as same-day and next-day settling trades, are
guaranteed upon comparison or trade recording processing.
\10\ This includes failure by a Member to pay a mark-to-market
charge.
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Currently, ACATS transfers settled through CNS are fungible with
all other CNS activity. The CNS system does not distinguish between
ACATS transactions and other transactions, which means that CNS ACATS
receives and delivers are netted with guaranteed settling trades in the
same securities. Pursuant to this proposal, NSCC would begin tracking
ACATS receive and deliver obligations in CNS, and CNS allocations would
be applied to ACATS receive and deliver obligations for a Member in a
security before satisfying another obligation in the same security.\11\
At the end of each processing day, CNS ACATS fails would continue to be
marked to the full-market value and netted with all other CNS
obligations under NSCC's Rules.
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\11\ This includes a trade-related obligation.
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In the event of a Member failure, NSCC would use this proposed
automated tracking capability to differentiate between completed and
uncompleted CNS ACATS transactions. In a failure to settle situation,
NSCC would therefore be able to reverse pending ACATS obligations for
uncompleted transfers of a failing Member while still allowing assets
associated with completed ACATS transfers to remain with the Receiving
Member. NSCC believes this would help maximize CNS-related transfers of
customer accounts to new firms.
An ACATS transfer of a failing Member would be deemed uncompleted
if the failing Member is a Delivering Member and it failed to deliver
to CNS all or a portion of the securities associated with the ACATS
transfer. If the failing Member is a Receiving Member and it failed to
receive all or a portion of the securities associated with the ACATS
transfer from CNS, then the transfer would likewise be deemed
uncompleted. In either case, if the Delivering Member makes a partial
delivery of securities to CNS then the transfer would be deemed
completed for the amount of securities received from CNS by the
Receiving Member to the extent that amount does not exceed the amount
delivered to CNS by the Delivering Member. The transfer would be deemed
uncompleted as to any remaining securities beyond that amount, and only
the uncompleted portion of the item would be subject to reversal.
Transfers would also be deemed uncompleted when the failing Member is
the Delivering Member and it has a flat or overall long CNS position or
when the failing member is the Receiving Member and it has a flat or
CNS short position.
In the event a Delivering Member and Receiving Member fail on the
same settlement day and have an ACATS transfer obligation between them,
any transfer deemed uncompleted for the Delivering Member would also be
deemed uncompleted for the Receiving Member. NSCC would notify the
affected Members of the details associated with the assets subject to
the reversal and the affected Members would have to reestablish
customer positions accordingly.
2. Possession and Control Requirements
To facilitate the compliance of Members with their securities
possession and control requirements in ACATS transfers processed
through CNS, NSCC proposes modifying its Rules to clarify that it does
not maintain a lien over ACATS assets delivered to a Receiving Member
through CNS.
3. Amendments to Rules and Procedures
To provide for the modifications to ACATS described in this filing,
NSCC proposes amending its rules as described in the summaries below.
The proposed changes to NSCC's Rules and Procedures can be found in
Exhibit 5 to proposed rule change SR-NSCC-2010-05 at http://www.dtcc.com/downloads/legal/rule_filings/2010/nscc/2010-05.pdf.
(a) Amend Rule 18 (Procedures for When NSCC Declines or Ceases to
Act).
Section 7 of Rule 18 (Procedures for when the Corporation Declines
or Ceases to Act) provides that NSCC maintains a lien on all property
placed in its possession by a Member as security for any and all
liabilities of that Member to NSCC. An existing exception to this rule
is where such a lien would be prohibited under Commission Rules 8c-1
and 15c2-1. NSCC proposes modifying this section to clarify that it
does not maintain a lien on ACATS assets that have been delivered to a
Receiving Member through CNS.
(b) Procedure VII (CNS Accounting Operation).
NSCC proposes modifying Procedure VII to provide for the tracking
of customer transfers by stating that deliveries of a particular
security through CNS would be designated to apply to a Member's ACATS
receive and deliver obligations before satisfying another obligation,
such as a trade-related obligation of that Member. In addition, the
modified language would indicate that this designation would be
provided to the Member's Designated Depository to facilitate its
processing of the item.
(c) Rule 50 (ACATS).
NSCC would amend Rule 50 to clarify that NSCC may reverse
uncompleted ACATS items when either the Delivering or Receiving Member
failed to meet its settlement obligation to NSCC. In addition, this
Rule would be revised to note that in the event of such a reversal of
uncompleted CNS ACAT obligations, NSCC would make files available to
each Member to show each open security position due to settle that day
that would be subject to the reversal as well as such other information
as NSCC may deem advisable. The
[[Page 38581]]
proposed change also includes a technical correction to clarify that
ACATS transactions enter the CNS Accounting Operation on the day before
Settlement Date (SD-1), rather than T+1.
NSCC proposes implementing the changes proposed in this filing
during the third quarter of 2010 and advising Members of the
implementation date through issuance of NSCC Important Notices.
NSCC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act \12\ and the rules and
regulations thereunder because the proposed modifications would
facilitate NSCC's prompt and accurate clearance and settlement of
securities transactions by implementing a tracking mechanism to
distinguish ACATS activity from other items processed through CNS and
by clarifying that NSCC does not maintain a lien on ACATS assets
delivered to a Receiving Member through CNS.
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\12\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition
NSCC does not believe that the proposed rule change would impose
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. NSCC will notify the Commission of any written
comments received by NSCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) By order approve the proposed rule change or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
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:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
Send an e-mail to [email protected]. Please include
File Number SR-NSCC-2009-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSCC-2010-05. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Section, 100 F Street,
NE., Washington, DC 20549-1090, on official business days between the
hours of 10 a.m. and 3 p.m. Copies of such filings will also be
available for inspection and copying at the principal office of the
NSCC and on NSCC's Web site at http://www.dtcc.com/downloads/legal/rule_filings/2010/nscc/2010-05.pdf.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-NSCC-2009-05
and should be submitted on or before July 23, 2010.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16108 Filed 7-1-10; 8:45 am]
BILLING CODE 8010-01-P