Document ID: SEC-2012-1387-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2012-08-22T04:00Z

[Federal Register Volume 77, Number 163 (Wednesday, August 22, 2012)]
[Notices]
[Pages 50736-50738]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20576]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67673; File No. SR-NSCC-2012-06]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Enhance the 
Default Pricing Methodology Used by NSCC's Automated Customer Account 
Transfer Service

August 15, 2012.
    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 August 7, 2012, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I, II and 
III below, which Items have been prepared primarily 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 Substance 
of the Proposed Rule Change

    The proposed rule change involves Rule 50 of NSCC's Rules and 
Procedures. NSCC proposes to amend this rule to eliminate the use of a 
default pricing matrix to assign values to certain items transferred 
through NSCC's 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 and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements and comments 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.\3\
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    \3\ The Commission has modified the text of the summaries 
provided by NSCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Background
    ACATS enables NSCC Members to effect automated transfers of 
customer accounts among themselves.\4\ Pursuant to Rule 50, an NSCC 
Member to whom a customer's full account will be transferred 
(``Receiving Member'') will initiate the transfer by submitting to NSCC 
a transfer initiation request, which contains the customer detail 
information that the NSCC Member in possession of the account 
(``Delivering Member'') requires in order to transfer the account. 
Delivering Members that have neither rejected the account transfer 
request nor sought corrections to the request within the allotted time 
must submit to NSCC certain detailed customer account asset data.
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    \4\ ACATS complements Financial Industry Regulatory Authority 
(``FINRA'') Rule 11870 regarding Customer Account Transfers, which 
requires FINRA members to use automated clearing agency customer 
account transfer services, and to effect customer account transfers 
within specified time frames.
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    For items transferred through ACATS that are not eligible to be 
processed through NSCC's Continuous Net Settlement (``CNS'') system \5\ 
(and for CNS-eligible items that are designated to be delivered ex-
CNS), NSCC will produce ACATS Receive and Deliver Instructions. These 
ACATS transfers then settle either outside of NSCC or through a 
separate service at NSCC.\6\ In order to incentivize the timely 
completion of ACATS transfers, at the start of the day on ACATS 
settlement date, the Delivering Member's NSCC money settlement account 
will include a debit, or an incentive charge (``Incentive Charge''), 
equal to the aggregate market value of the items the Delivering Member 
is transferring through ACATS; the Receiving Member's NSCC money 
settlement account includes a credit in the same amount.\7\ Once 
delivery of an item is complete, the Incentive Charge associated with 
that item is effectively offset when the Receiving Member pays the 
Delivering Member for the transferred items. This Incentive Charge is 
intended to encourage the Delivering Member to make delivery of the 
item in a timely manner.\8\
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    \5\ CNS is an ongoing accounting system that nets today's 
Settling Trades with yesterday's Closing Positions, producing net 
short or long positions per security issue for each Member. NSCC is 
always contraside 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 that remain open after the evening cycle may be 
changed as a result of trades accepted for settlement that day. To 
allocate deliveries in both the night and day cycles, CNS uses an 
algorithm based on priority groups in descending order, age of 
position within a priority group, and random numbers within age 
groups.
    \6\ For example, non-CNS ACATS may settle at (i) The Depository 
Trust Company (``DTC''), for DTC-eligible items; (ii) NSCC's 
automated ACATS-Fund/SERV interface, for eligible mutual fund 
assets; (iii) NSCC's ACATS-IPS interface, for eligible annuities; 
and (iv) the Options Clearing Corporation, where transfers in 
customer-options positions take place, for options.
    \7\ Incentive Charges are not calculated for the transfer of 
options or annuities.
    \8\ It also allows the Receiving Member to record the customer 
position on its books, regardless whether the item is actually 
delivered on settlement date. This process supports the requirements 
of FINRA Rule 11870.
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    Each item transferred through ACATS must be assigned a market value 
in order to calculate the Incentive Charge. CNS-eligible items being 
transferred through ACATS are assigned a market

[[Page 50737]]

value through the CNS system. Non-CNS eligible items, however, are 
assigned a market value pursuant to NSCC Rule 50, which calls for a 
market value based on either (i) the price obtained from a pricing 
source, if available or, if a pricing source is not available, (ii) the 
greater of (a) the price in U.S. dollars assigned by the Delivering 
Member (``Submitter's Value''), which, in most cases, must be the 
current market value of the item,\9\ or (b) the value ascribed to such 
item pursuant to a default pricing matrix, as established from time to 
time by NSCC. The current default pricing matrix assigns a value to an 
item based on its ``asset category type,'' as classified by the 
Delivering Member in the detailed customer account asset data submitted 
to NSCC. For example, the current default pricing matrix assigns 
equities a default price of $1 per share, with a cap of $20,000, and 
assigns U.S. government securities and U.S. government agency 
securities a default price of the face amount. The default pricing 
matrix was developed in close coordination with industry participants 
and the National Association of Securities Dealers shortly after the 
initial development of ACATS.
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    \9\ See Section (d)(5)(A) of current FINRA Rule 11870, stating 
that a customer statement delivered in connection with a transfer 
instruction, ``must include a then-current market value for all 
assets so indicated. If a then-current market value for an asset 
cannot be determined (e.g., a limited partnership interest), the 
asset must be valued at original cost.''
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    It has been observed that the default pricing matrix may, in some 
cases, overvalue items being transferred through ACATS. When this 
occurs, on ACATS settlement date the Delivering Member will be debited 
an Incentive Charge based on a higher market value than the actual 
value of the item being transferred. Delivering Members will not 
receive the offset for this Incentive Charge until they deliver the 
related ACATS item. Therefore, a Delivering Member that does not 
deliver the ACATS item on ACATS settlement date will be required to pay 
the Incentive Charge associated with that item. If the default pricing 
matrix has overvalued an ACATS Incentive Charge, a Delivering Member 
that has failed to deliver the item will be faced with an unexpected 
inflated settlement charge on ACATS settlement date.
2. Proposed Rule Change
    In order to reduce the risk of overcharging a Delivering Member, 
NSCC is proposing a rule change that will require NSCC to assign the 
Submitter's Value to items when the system cannot otherwise find a 
price for the security, thereby eliminating the use of the ACATS 
default pricing matrix altogether. Under the proposed rule change, in 
the case of non-CNS eligible items transferred through ACATS, NSCC will 
assign a market value to those items as either (i) the price obtained 
from a pricing source, if available or, if a pricing source is not 
available, the assigned market value will be (ii) the price in U.S. 
dollars assigned by the Delivering Member (i.e., the Submitter's 
Value), which, in most cases, must be the current market value of the 
security.\10\
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    \10\ See note 9, supra.
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    According to NSCC, this proposed rule change will reduce the risk 
that a non-CNS eligible item transferred through ACATS is assigned an 
inflated value based on its asset category, as it will require that the 
market value of these items be obtained either from a pricing source or 
from the Delivering Member.
3. Statutory Basis for Proposed Rule Change
    NSCC believes the proposed rule change will facilitate the prompt 
and accurate clearance and settlement of securities transactions, a 
policy underlying ACATS. As a result, it is NSCC's view that the 
proposal is consistent with the requirements of the Act \11\ and the 
rules and regulations thereunder applicable to NSCC.
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    \11\ 15 U.S.C. 78s(b)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have any 
impact, or impose any burden, on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    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 45 days of the date of publication of this notice in the 
Federal Register, or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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 may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or by sending an email to rule-comments@sec.gov. Please 
include File No. SR-NSCC-2012-06 on the subject line.
     Paper comments should be sent in triplicate to Elizabeth 
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NSCC-2012-06. To 
help the Commission process and review your comments more efficiently, 
please use only one method of submission. 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 Room, 100 F 
Street NE., Washington, DC 20549, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of NSCC 
and on NSCC's Web site at:  http://www.dtcc.com/downloads/legal/rule_filings/2012/nscc/SR-NSCC-2012-06.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-2012-06 and 
should be submitted on or before September 12, 2012.

[[Page 50738]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20576 Filed 8-21-12; 8:45 am]
BILLING CODE 8011-01-P