Document ID: SEC-2011-1148-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2011-08-10T04:00Z

[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]
[Notices]
[Pages 49511-49512]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20241]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65032; File No. SR-NSCC-2011-04]

Self-Regulatory Organizations; The National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change To Amend 
Rules Relating To Discontinuing Dividend Settlement Service, Funds Only 
Settlement Service, Data Distribution Box Services, and Changes to the 
Envelope Settlement Service

August 4, 2011.

I. Introduction

    On June 15, 2011, The National Securities Clearing Corporation 
(``NSCC'') filed proposed rule change SR-NSCC-2011-04 with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposed rule change was published in the Federal Register on July 
6, 2011.\2\ The Commission received no comment letters. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 64769 (June 29, 2011), 
76 FR 39463 (July 6, 2011).
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II. Description

    As operated prior to this rule change, the Dividend Settlement 
Service (``DSS''), the Funds Only Settlement Service (``FOSS''), and 
the Envelope Settlement Service (``ESS'') were non-guaranteed services 
of NSCC through which NSCC members were able to exchange physical 
envelopes through a centralized location at NSCC. Pursuant to Rule 43 
of NSCC's Rules and Procedures, DSS centralized claims processing for 
collection and payment of dividends and interest between NSCC members 
through the exchange of envelopes through the facilities of NSCC. 
Pursuant to Rule 41 of NSCC's Rules and Procedures, FOSS centralized 
money-only settlements for NSCC members through the exchange of 
paperwork delivered to and received by NSCC members through NSCC's 
facilities.\3\ Pursuant to Rule 9 and Addendum D of NSCC's Rules and 
Procedures, ESS allowed an NSCC member to physically deliver a sealed 
envelope containing securities and such other items as NSCC from time 
to time permitted to a specified NSCC member. The money settlement 
associated with ESS, DSS, and FOSS transactions occurred through NSCC's 
end-of-day settlement process.
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    \3\ FOSS was created in 1983 to remove money-only settlement 
activity, which prior to that time was included in ESS, from ESS in 
order to facilitate what was then NSCC's guaranty of settlement of 
securities transactions processed through ESS. The guaranty of ESS 
settlement was in effect from 1983 until 2010. Exchange Act Release 
No. 61618 (March 1, 2010) (File No. SR-NSCC-2010-01), 75 FR 10542 
(March 8, 2010).
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A. Consolidation and Elimination of Certain Services

    The use of each of these services has steadily declined in recent 
years due to increased dematerialization of securities and automation 
of transaction processing. In light of this decline and the elimination 
of the guaranty of ESS transactions, NSCC is amending its rules to 
discontinue the separate DSS and FOSS services and to allow members to

[[Page 49512]]

process dividends and funds-only settlement activities through ESS.\4\
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    \4\ In order to distinguish securities transfers from other ESS 
activity, NSCC is adding a required indicator for input by members 
to disclose whether or not a security is included in an envelope.
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    In addition, NSCC will amend its rules to discontinue its Data 
Distribution Box Service (``DDBS''). DDBS was traditionally used to 
distribute hard copy Important Notices, clearing reports, and other 
informational documents to NSCC members. Today members: (a) Receive 
Important Notices through the Web site of NSCC's parent, The Depository 
Trust & Clearing Corporation, at http://www.dtcc.com, (b) receive 
clearing reports through electronic communications, and (c) exchange 
other information that previously might have been transferred through 
DDBS, by use of e-mail, facsimile transmission, courier services, the 
U.S. Postal Service, and other delivery mechanisms. The DDBS service 
has become obsolete as a result of the use of these other more 
efficient means of distribution and therefore will be eliminated.

B. ESS Processing Changes

    NSCC performs certain regulatory tracking, monitoring, and 
reporting functions (e.g., OFAC screening) for securities transactions 
processed through NSCC. With respect to some NSCC services, such as 
Continuous Net Settlement (``CNS''),\5\ NSCC electronically receives 
information about security identification and transaction size that 
facilitates such tracking and reporting. However, similar electronic 
information is not available for securities transferred through ESS. In 
order to facilitate NSCC's tracking, monitoring, and reporting, the 
rule change will allow NSCC (1) To require its members to provide a 
security identifier (i.e., CUSIP or ISIN) and to include quantity 
delivered for all securities delivered through ESS, (2) to restrict 
members to one security issue per envelope, and (3) to prohibit the 
comingling of securities with other items. The rule change will also 
allow NSCC to require its members to provide it with additional 
information that NSCC from time to time deems necessary to facilitate 
ESS processing.
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    \5\ CNS is an automated accounting system operated by NSCC which 
nets today's settling trades with yesterday's closing positions in 
eligible securities to produce new short or long settlement 
positions per security issue for each NSCC member.
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    Additionally, the rule change will also allow for automatic updates 
to NSCC's Obligation Warehouse service with respect to securities 
transactions that settle though ESS where the delivering member 
includes an Obligation Warehouse control number with the respective 
envelope delivery to ESS. However, this feature will not be implemented 
concurrently with the other changes described in this approval order 
but instead will be implemented through announcement by Important 
Notice at a later date.\6\
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    \6\ For information on the Obligation Warehouse service, see 
Exchange Act Release No. 63588 (December 21, 2010), 75 FR 82112 
(December 29, 2010) (File No. SR-NSCC-2010-11).
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    Pursuant to this rule change, NSCC's rules will be updated to 
change references to ESS deliveries and receives occurring through 
NSCC's New York City facility to use general language allowing NSCC to 
provide this service through any NSCC facility as announced by 
Important Notice. As mentioned above, the rule change will also require 
that members not comingle different issues of securities in the same 
envelope or with other activity conducted through ESS. Accordingly, 
NSCC will also be allowed to prohibit comingling between funds-only and 
dividend settlement items.

C. Fee Structure

    NSCC's Fee Schedule will be revised to delete charges for the 
discontinued services mentioned above. Under the rule change, all 
services offered under the newly combined ESS will be subject to the 
existing ESS charge for deliveries and receives.\7\
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    \7\ In addition, two separate line items relating to ESS fees 
will be consolidated into one to reflect that the combined fee 
applies to all ESS deliveries and receives (including intercity). 
Also, as a technical change, fees relating to the New York Window 
Service will be deleted from the Fee Schedule since that service is 
no longer being offered by NSCC and certain other fees relating to 
physical processing functions that have become obsolete (which 
appear in the Fee Schedule as items A through F under the heading 
``Other Service Fees'') will also be deleted. For additional 
information on the discontinuation of the New York Window Service at 
NSCC, see Exchange Act Release No. 40179 (July 8, 1998), 63 FR 38221 
(July 15, 1998) (File Nos. SR-DTC-98-09, SR-NSCC-98-05).
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D. Addendum D--Statement of Policy--Envelope Settlement Service, Mutual 
Fund Services, Insurance and Retirement Processing and Other Services 
Offered by the Corporation

    Addendum D, a statement of policy with regard to ESS and other NSCC 
services, provides, among other things, that money-only settlement 
charges should not be processed through ESS. NSCC will amend Addendum D 
to conform to the changes approved pursuant to this rule change. The 
revised Addendum D will also include a technical change that clarifies 
that NSCC may reverse a member's debits or credits that are related to 
the Commission Bill Service.

E. Implementation Date

    The implementation date for the approved rule changes will be 
announced by Important Notice; however, the elimination of DDBS will 
not take effect until approximately, but no less than, 30 days from the 
date of this approval order.

III. Discussion

    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 and to 
remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and settlement of securities 
transactions.\8\ The Commission finds that NSCC's rule change should 
facilitate the prompt and accurate clearance and settlement of 
securities transactions by increasing processing efficiencies through 
the merger of several similar services for physical processing and by 
eliminating obsolete services.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    Accordingly, for the reasons stated above the Commission believes 
that the proposed rule change is consistent with NSCC's obligation 
under Section 17A of the Exchange Act, as amended, and the rules and 
regulations thereunder.\9\
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    \9\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
particularly with the requirements of Section 17A of the Act, and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-2011-04) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\

    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20241 Filed 8-9-11; 8:45 am]
BILLING CODE 8011-01-P