Document ID: SEC-2010-0350-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2010-03-08T05:00Z

[Federal Register Volume 75, Number 44 (Monday, March 8, 2010)]
[Notices]
[Pages 10542-10543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-4738]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61618; File No. SR-NSCC-2010-01]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Eliminate 
Guarantee of Payment in Connection With the Envelope Settlement Service

March 1, 2010.

I. Introduction

    On January 4, 2010, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2010-01 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 January 29, 2010.\2\ No comment letters were received on 
the proposal. This order approves the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 61415 (January 25, 
2010), 75 FR 4896.
---------------------------------------------------------------------------

II. Description

    NSCC's the Envelope Settlement Service (``ESS'') allows an NSCC 
member to physically deliver through the facilities of NSCC a sealed 
envelope \3\ containing securities and such other items as NSCC may 
permit from time to time to a specified receiving member. NSCC then 
delivers the envelope to the receiving member. ESS is provided for

[[Page 10543]]

primarily pursuant to Rule 9 and Addendum D with related provisions in 
Addendum D with related provisions in Addendum K and Procedure XV. The 
primary substantive changes of this proposed rule change are in Rule 9, 
Addendum D, and Addendum K with a conforming change to Procedure XV. 
Technical clean-up changes are also being made in each.
---------------------------------------------------------------------------

    \3\ Rule 9 provides that except as NSCC may determine to be 
appropriate or necessary, NSCC will not examine the contents of the 
envelopes or verify the amounts of money shown on the credit list, 
and it shall not be responsible with respect thereto except to 
deliver the envelopes accepted by it to the authorized 
representatives of the members to whom they are addressed.
---------------------------------------------------------------------------

    The delivering member must attach to each envelope, a credit list 
(in duplicate), which reflects the total money value, if any, of the 
envelope's contents. If after receipt of the envelope NSCC determines 
that the envelope is properly listed on the accompanying credit list, 
NSCC stamps the duplicate credit list and makes it immediately 
available to the delivering member's representative. An envelope listed 
on the credit list shall be deemed to have been accepted by NSCC when 
the duplicate credit list is stamped.
    As a related feature of ESS, the payment shown on the credit list 
is processed as part of the members' daily end of day net money 
settlement obligations in reliance on the agreement between the 
delivering and receiving parties outside NSCC that the amount listed is 
the contract amount.
    In order to protect the NSCC against the risk of member non-payment 
NSCC is amending Rule 9 and related provisions so that NSCC does not 
guarantee the payment obligation to the receiving member in an ESS 
delivery and so that the credits and debits of the payment amount of an 
envelope may be reversed. The payment reversal may be effected by NSCC 
even if the receiving member has taken possession of the envelope; 
however, if the receiving member has not yet taken possession of the 
envelope at the time of a payment reversal, NSCC will return the 
envelope to the delivering member. Any dispute between the delivering 
and receiving members must be resolved by them outside the facilities 
of the NSCC.
    Changes to Rule 9 affirmatively provide that NSCC does not 
guarantee the payment obligation in ESS and that payment credits and 
debits may be reversed. Technical and conforming changes clarify the 
concepts of delivering and receiving members and that settlement 
processing is subject not only to the rights of NSCC in Section 2 of 
Rule 12 but also to the new reversal provision in Section 4 of Rule 9.
    To conform to amended Rule 9, Addendum D is similarly being amended 
to state that ESS is not guaranteed and that payment credits and debits 
may be reversed as provided in Rule 9. Language making it clear that 
settlement processing is subject to the rights of NSCC under new 
Section 4 of Rule 9 and Section 2 of Rule 12, was also carried over to 
Addendum D. Because Addendum D also covers other services for which no 
change is made by this filing, certain of the revisions to Addendum D 
clarify that the revisions are limited to ESS. Historical statements in 
Addendum D are being eliminated.
    The change to Addendum K is to delete the provision whereby NSCC 
provided a guarantee for ESS and thereby deemed ESS to be a ``System'' 
within the meaning of Rule 4. Without the guarantee, ESS is not 
considered to be a ``System.'' Consistent with the change, Procedure XV 
is modified so that when the clearing fund component titled ``For Other 
Transactions'' (that is, for other than CNS transactions and balance 
order transactions) is computed, ESS will not be included.
    In considering the elimination of the guarantee, NSCC surveyed 
selected members and learned that they did not consider it vital that 
NSCC be responsible for their ESS payment obligations and that they do 
not rely on the NSCC to guarantee such payments. However, these members 
expressed a strong desire for NSCC to maintain the centralized delivery 
service. NSCC designed the proposed rule changes to meet the expressed 
need of certain members while reducing risk to NSCC and its members 
generally. NSCC believes that it is shifting the burden of risk to 
those that should bear it and to outside NSCC's facilities.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act \4\ and the rules and regulations 
thereunder applicable to NSCC. In particular, the Commission believes 
that by amending its rules, NSCC's exposure to potential losses from 
member defaults, insolvencies, mistakes, and fraud will be reduced and 
the risk of such potential losses will be appropriately shifted to the 
contracting members in an ESS transaction outside NSCC. The proposal is 
therefore consistent with the requirements of Section 17A(b)(3)(F),\5\ 
which requires, among other things, that the rules of a clearing agency 
are designed to promote the prompt and accurate clearance and 
settlement of securities transactions.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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 \6\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (File No. SR-NSCC-2010-01) be, 
and hereby is, approved.\8\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 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.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-4738 Filed 3-5-10; 8:45 am]
BILLING CODE 8011-01-P