Document ID: SEC-2010-1295-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2010-08-23T04:00Z

[Federal Register: August 23, 2010 (Volume 75, Number 162)]
[Notices]               
[Page 51867-51869]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23au10-136]                         

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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