Document ID: SEC-2012-1626-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2012-10-05T04:00Z

[Federal Register Volume 77, Number 194 (Friday, October 5, 2012)]
[Notices]
[Pages 61033-61035]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24540]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67947; File No. SR-NSCC-2012-06]

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

September 28, 2012.

I. Introduction

    On August 7, 2012, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2012-06. The proposed 
rule change, which was filed pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ was published for comment in the Federal Register on 
August 22, 2012.\3\ The Commission received no comment letters 
regarding the proposal. 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\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 67673 (August 15, 2012), 
77 FR 50736 (August 22, 2012).
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II. Description

    The proposed rule change will amend Rule 50 of NSCC's Rules and 
Procedures 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'').
    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

[[Page 61034]]

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 receive 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 receives 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 item. 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 each day's 
Settling Trades with the prior day'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 transfers 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 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 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.
    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.

III. Discussion

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to 
approve a self-regulatory organization's proposed rule change if it 
determines that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \12\ 
requires, among other things, that the rules of a clearing agency be 
designed to promote the prompt and accurate clearance and settlement of 
security transactions, and to assure the safeguarding of securities and 
funds that are in the custody or control of such clearing agency, or 
for which it is responsible.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission concludes that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to NSCC. The proposed rule change 
should ensure that NSCC members will no longer be surprised with 
inflated settlement charges in connection with ACATS transfers. By 
allowing NSCC members to gauge their liabilities more accurately, the 
proposed rule change will foster the prompt and accurate clearance and 
settlement of security transactions, and will assure the safeguarding 
of securities and funds in NSCC's custody or control, or for which NSCC 
is responsible.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, in particular 
with the requirements of Section 17A of the Act \13\ and the rules and 
regulations thereunder.
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    \13\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-

[[Page 61035]]

NSCC-2012-06) be, and hereby is, APPROVED.\15\
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 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.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24540 Filed 10-4-12; 8:45 am]
BILLING CODE 8011-01-P