[Federal Register Volume 75, Number 162 (Monday, August 23, 2010)]
[Notices]
[Pages 51867-51869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20815]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62726; File No. SR-NSCC-2010-05]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Enhance the
Process for Transfers Through the Automated Customer Account Transfer
Service
August 16, 2010.
I. Introduction
On June 4, 2010, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2010-05 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\
The proposed rule change was published for comment in the Federal
Register on July 2, 2010.\2\ No comment letters were received on the
proposal. This order approves the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 62385 (June 25, 2009),
75 FR 38579 (July 2, 2010).
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II. Description
NSCC's Automated Customer Account Transfer Service (``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 movements.
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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 making changes to its ACATS system in connection with a
[[Page 51868]]
concurrent rule change by DTC \5\ and is making these changes for two
reasons. First, NSCC believes the changes will enhance protection for
customer securities in ACATS transfers so that customer account
transfers to new firms will be maximized in the event of a Member
failure. Accordingly, NSCC will modify its ACATS processing and its
Rules so that deliveries or receives processed through CNS will satisfy
a Member's ACATS receive or deliver obligations prior to satisfying
other CNS-related obligations of that Member in the same security. NSCC
will also track CNS ACATS items to prevent reversals of completed
transfers in the event of a Member's failure. Second, NSCC believes the
changes will facilitate compliance by its Members with their securities
possession and control requirements.\6\ To that end, NSCC will modify
its Rules to clarify that in no event does NSCC have a lien on
securities that are carried by a Member for the account of its
customers and that are delivered through the CNS ACATS service.\7\
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\5\ File No. SR-DTC-2010-09. Securities Exchange Act Release
Nos. 62384 (June 25, 2010), 75 FR 38581 (July 2, 2010) and 62385
(June 25, 2009), 75 FR 38579 (July 2, 2010).
\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. 17 CFR 240.15c3-3.
\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 the concurrent DTC
rule change, DTC will revise its Service Guide to provide that ACATS
deliveries from CNS will be designated by the DTC Participant as
minimum amount securities when credited to the Participant's
account. This designation will prevent the securities from being
designated as collateral for either this purpose or for purposes of
DTC's Rules.
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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'') submits a Transfer
Initiation Request to initiate the account transfer process. 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 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 cash debit for the mark is offset
by a cash credit. Likewise, upon receipt of the securities by the
Receiving Member, the Receiving Member's long position is offset, and
the cash credit for the mark is offset by the cash 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,
CNS ACATS transfers are not guaranteed. If a party fails to pay any
portion of its money settlement obligation on settlement Date,\10\ 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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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. However, NSCC will now begin tracking ACATS receive
and deliver obligations in CNS, and CNS allocations will be applied to
ACATS receive and deliver obligations for a Member in a security before
satisfying another obligation in the same security. At the end of each
processing day, CNS ACATS fails will continue to be marked to the full-
market value and netted with all other CNS obligations under NSCC's
Rules.
In the event of a Member failure, NSCC will use this automated
tracking capability to differentiate between completed and uncompleted
CNS ACATS transactions. NSCC will therefore be able to reverse
uncompleted ACATS transfers of a failing Member while allowing assets
associated with completed ACATS transfers to remain with the Receiving
Member. NSCC believes this will help maximize CNS-related transfers of
customer accounts to new firms.
An ACATS transfer of a failing Member will be deemed uncompleted if
the failing Member is a Delivering Member and it has 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 has failed
to receive all or a portion of the securities associated with the ACATS
transfer from CNS, then the transfer will likewise be deemed
uncompleted. In either case, if the Delivering Member makes a partial
delivery of securities to CNS then the transfer will 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 will be deemed
uncompleted as to any remaining securities beyond that amount, and only
the uncompleted portion of the transfer will be subject to reversal.
Transfers will 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
overall short CNS 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 will also be
deemed uncompleted for the Receiving Member. NSCC will notify the
affected Members of the details associated with the assets subject to
the reversal, and the affected Members will have to reestablish
customer positions accordingly.
2. Possession and Control Requirements
To facilitate the compliance of Members with their securities
possession and control requirements of securities subject to ACATS
transfers processed through CNS, NSCC will modify 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 order,
NSCC
[[Page 51869]]
will amend its rules as described in the summaries below.
a. Rule 18 (Procedures for When [the Corporation] Declines or Ceases To
Act)
Section 7 of Rule 18 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 exception to this rule is
where such a lien would be prohibited under Commission Rules 8c-1 and
15c2-1. NSCC will modify the section to clarify that it does not
maintain a lien on ACATS assets that have been delivered to a Receiving
Member through CNS.
b. Rule 50 (ACATS)
NSCC will amend Rule 50 to clarify that NSCC may reverse
uncompleted ACATS obligations when either the Delivering or Receiving
Member has failed to meet its settlement obligation to NSCC. In
addition, this Rule will be revised to note that in the event of such a
reversal of uncompleted CNS ACATS obligations, NSCC will make files
available to each Member to show each open security position due to
settle that day that is subject to the reversal as well as such other
information as NSCC may deem advisable. NSCC will also make a technical
correction to clarify that ACATS transactions enter the CNS Accounting
Operation on the day before Settlement Date (SD-1) rather than the day
after Trade Date (T+1).
c. Procedure VII (CNS Accounting Operation)
NSCC will modify Procedure VII to provide for the tracking of
customer transfers by stating that deliveries of a particular security
through CNS will be used to satisfy a Member's ACATS receive and
deliver obligations before being used to satisfy another obligation,
such as a trade-related obligation of that Member. In addition, the
modified language will indicate that this designation will be provided
to the Member's Designated Depository to facilitate its processing of
the item.
4. Implementation
NSCC intends to implement these changes during the third quarter of
2010 and will advise Members of the implementation date through
issuance of NSCC Important Notices. NSCC has agreed to provide
Commission staff with updates on at least a quarterly basis on the
progress related to industry discussions for processing enhancements
for non-CNS ACAT transfers.\11\
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\11\ In connection with its review of ACATS, NSCC has agreed to
provide Commission staff with updates, not less frequently than once
per quarter, of its ongoing cooperative efforts with industry
participants to determine the feasibility of procedures whereby it
will treat ACATS full account transfers uniformly and it will
execute, delete or reverse the transfers consistently for all the
assets in an account whether those assets are CNS-eligible or not.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act \12\ and the rules and regulations
thereunder applicable to NSCC. In particular, the Commission believes
that the changes NSCC is making to its ACATS system to implement a
tracking mechanism to distinguish ACATS activity from other items
processed through CNS and to clarify that NSCC does not maintain a lien
on ACATS assets delivered to a Receiving Member through CNS are
consistent with NSCC's obligations under Section 17A(b)(3)(F),\13\
which requires, among other things, that the rules of a clearing agency
are designed to protect investors and the public interest.
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\12\ 15 U.S.C. 78q-1.
\13\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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 \14\ and the
rules and regulations thereunder.
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\14\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (File No. SR-NSCC-2010-05) be,
and hereby is, approved.\16\
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\15\ 15 U.S.C. 78s(b)(2).
\16\ In approving the proposed rule change, the Commission
considered the proposal's 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.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20815 Filed 8-20-10; 8:45 am]
BILLING CODE 8010-01-P