Document ID: SEC-2014-0605-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2014-04-11T04:00Z

[Federal Register Volume 79, Number 70 (Friday, April 11, 2014)]
[Notices]
[Pages 20290-20293]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-08122]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71887; File No. SR-NSCC-2014-04]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Effect 
Processing Enhancements to the NSCC Automated Customer Account Transfer 
Service

April 7, 2014.
    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 March 27, 2014, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as 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 consists of modifications to the Rules & 
Procedures (``Rules'') of NSCC regarding processing enhancements that 
it proposes to undertake with respect to its Automated Customer Account 
Transfer Service (``ACATS'').\3\
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    \3\ Terms not defined herein have the meaning set forth in the 
Rules.
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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 of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements 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 such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
i. Introduction
    ACATS \4\ enables Members to transfer customer accounts among 
themselves in an automated fashion.\5\ Since its inception in 1985, 
ACATS has provided Members with an efficient automated means for the 
prompt transfer of customer accounts. ACATS is a non-guaranteed service 
and transfers are not subject to risk management by NSCC.
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    \4\ Currently, through ACATS, an NSCC Member (``Member'') to 
whom a customer's securities account is to be transferred (the 
``Receiving Member'') may initiate the account transfer process by 
submitting a Transfer Initiation Request (a ``TIF'') to NSCC. When a 
Member who is delivering securities through ACATS (a ``Delivering 
Member'') accepts a customer account transfer (and all other 
preconditions to the processing of an ACATS transfer pursuant to 
NSCC's Rules have been met), NSCC will cause CNS-eligible items in 
that account to enter NSCC's CNS Accounting Operation (``CNS'') 
prior to the settlement cycle on the day before Settlement Date. 
``Non-CNS ACATS'' transactions may be settled either through or away 
from NSCC depending on the asset type. See Rules, Rule 50 (Automated 
Customer Account Transfer Service), available at http://www.dtcc.com/en/legal/rules-and-procedures.aspx.
    \5\ ACATS complements Financial Industry Regulatory Authority 
(``FINRA'') Rule 11870 requiring FINRA members to use automated 
clearing agency customer account transfer services to effect 
customer account transfers within specified time frames.
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    NSCC and The Depository Trust Company (``DTC'') have been engaged 
with the industry in a series of initiatives designed to improve the 
efficiency and reduce risks associated with transactions processed 
through ACATS.\6\ As a next step in this series of initiatives, and as 
more fully described below, NSCC is proposing a new ACATS process 
(separate from CNS) for enhanced efficiency and risk reduction and to 
support final completion of settlement for ACATS transfers of: (i) CNS-
eligible securities and (ii) securities that are otherwise eligible for 
settlement at DTC (``Non-CNS DTC-Eligible Securities'').
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    \6\ Previous initiatives in this regard focused on improvements 
relating to tracking of assets eligible for processing through 
NSCC's Continuous Net Settlement Accounting Operation (``CNS'') and 
mutual fund ACATS obligations.
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    The new process would facilitate completion of ACATS transactions 
as described below regardless of the fact that: (i) A Member that is 
party to the transfer may fail to meet its money settlement obligation 
to NSCC, or (ii) if NSCC ceases to act for such Member (collectively, 
``Fails to Settle''). The revised processing would also ensure that 
Non-CNS DTC-Eligible Securities

[[Page 20291]]

are credited to a no lien location, as CNS eligible items are 
currently.
ii. Discussion
Current Treatment of CNS-Eligible ACATS Transactions
    Today, when a CNS ACATS transaction is staged for delivery on 
Settlement Date, in order to incent the Delivering Member to make 
delivery of the securities, the Delivering Member is charged with a 
money settlement debit and the Receiving Member with a money settlement 
credit. These charges are reversed when the securities transfer is 
complete.
    ACATS transfers settled via CNS are fungible with all other CNS 
activity. Specifically, CNS ACATS receives and delivers are netted with 
guaranteed settling trades in the same securities. NSCC tracks ACATS 
receive and deliver obligations in CNS so that NSCC is able to reverse 
the uncompleted CNS ACATS obligations of a Member that Fails to 
Settle.\7\ However, if two or more Members Fail to Settle, because of 
the fungibility of ACATS securities with other CNS activity, NSCC may 
not be able to identify completed versus uncompleted transactions. As a 
result, NSCC would then reverse all ACATS transactions relating to 
those Members whether or not the transactions are completed in order to 
eliminate the debits and credits generated as described above. This 
adds uncertainty as to the finality of any given CNS-eligible ACATS 
transaction until money settlement is complete.
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    \7\ Completed transactions, however, are not reversed.
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Current Treatment of Transfers in Non-CNS DTC-Eligible Securities
    Similar to CNS ACATS transactions, the Delivering Member for a non-
CNS eligible transaction that fails to make securities delivery 
receives a money debit for the full value of the securities. Under 
current processing, NSCC does not track which of these transactions has 
been completed. Thus, if at the end of the day the Delivering Member 
Fails to Settle, NSCC would reverse the Member's ACATS transactions in 
order to erase the associated money debit. This also adds uncertainty 
as to the finality of any given non-CNS DTC-eligible ACATS transaction 
until money settlement is complete.
New Process for ACATS Transfers of CNS-Eligible Securities and Non-CNS 
DTC-Eligible Securities
    The proposed rule change would create a new ACATS process for both 
CNS-eligible and Non-CNS DTC-Eligible Securities.
    In this new design, ACATS would send obligations in CNS-eligible 
securities and Non-CNS DTC-Eligible Securities into a new, non-
guaranteed ACATS process for such obligations on ACATS settlement date. 
The process would be known as the ``ACATS Settlement Accounting 
Operation.'' All transfers through this new accounting operation would 
be made ``free-of-value'' without the application of incentive charges 
applied in the current process (as described above).\8\
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    \8\ An NSCC account at DTC would be established to accommodate 
processing of these transfers.
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    Each Member participating in ACATS would maintain two NSCC 
subaccounts with respect to the ACATS Settlement Accounting Operation 
to accommodate the processing of receive obligations and deliver 
obligations, respectively. Under this process, the impacted ACATS 
transactions would be aggregated into one receive obligation and one 
deliver obligation per security per Member and included in either the 
Member's ``receive'' or ``deliver'' subaccounts established for this 
purpose. NSCC would not net the obligations between a Member's 
subaccounts. These accounting measures would allow NSCC to track 
obligations at the Member level, so NSCC may identify and reverse only 
uncompleted securities obligations if one or more Members default on 
the scheduled ACATS settlement date.\9\ The fact that deliveries would 
be made free-of-value would obviate any need to reverse completed 
transactions. Also, as more fully described below, NSCC's guaranty to 
DTC for short cover payment obligations would no longer be applicable 
because the deliveries no longer present risk to DTC.
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    \9\ DTC would provide information to NSCC through the DTC/NSCC 
interface as to when deliveries are complete. Please note such 
reversals of uncompleted transactions for defaulting Members would 
remain necessary due to the application of NSCC charges for failed 
securities deliveries as described below.
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Delivery Exemptions
    The new process would also provide for ``Level 1'' delivery 
exemptions that would allow Members to indicate that deliver 
obligations in the ACATS Settlement Accounting Operation should not be 
automatically settled against their current DTC position. With respect 
to same day settling transactions, Members may select a standing 
exemption to permit all such short positions to be delivered. 
Additionally, during the daytime cycle, a Member may override the one 
day settling exemption as well as other exemptions entered by the 
Member the previous evening. To do so, the Member should prepare a 
Delivery Order (``DO'') and submit it to DTC in the normal manner.
ACATS Settlement Accounting Operation Allocation Algorithm
    The proposed rule change would provide that after securities are 
received by NSCC from Delivering Members, they would be allocated to 
Receiving Members. The allocation of these securities would be governed 
by an algorithm as formulated by NSCC from time to time as to not to 
benefit any one Member. In addition, to maximize customer account 
deliveries, the default process would be for NSCC to instruct DTC to 
first deliver shares out of a Delivering Member's account to satisfy 
its ACATS obligations and then outstanding CNS obligations.
Failures To Deliver or Receive Securities through the ACATS Settlement 
Accounting Operation
    If a scheduled securities delivery or receive through the ACATS 
Settlement Accounting Operation for a transaction fails at the end of 
the day (a ``Fail-to-Deliver or Receive'') but has not Failed to 
Settle, NSCC would apply a funds settlement debit to the Delivering 
Member and a funds settlement credit to the Receiving Member prior to 
final settlement. The money amount would be 100 percent of the CNS 
market value of the fail for each CNS-eligible item (unless a market 
price is unavailable in which case NSCC would use the value provided by 
the Delivering Member), and 100 percent of the ACATS market value for 
each Non-CNS DTC-Eligible Securities. When the Member pays final money 
settlement, ACATS obligations for which there was a Fail-to-Deliver or 
Receive securities would take one of two paths depending on whether 
they involve CNS-eligible or Non-CNS DTC-Eligible Securities:
     For uncompleted CNS-eligible ACATS obligations: An ACATS 
obligation in a CNS-eligible security where there has been a Fail-to-
Deliver or Receive securities (but a Member to the transaction does not 
Fail to Settle) would enter the applicable Member's general CNS 
account. The obligation would then be netted with regular CNS 
processing. Because NSCC has collected the full mark on these 
transactions, NSCC would guaranty [sic] settlement for the obligations 
upon their inclusion in CNS.
     For uncompleted non-CNS DTC ACATS obligations: For non-CNS 
DTC-eligible transactions, NSCC would provide instructions to both the

[[Page 20292]]

Delivering Member and Receiving Member to settle the failed obligation 
directly with each other. These transactions would be automatically 
entered into NSCC's Obligation Warehouse system, if eligible.
    If one or more Members Fail(s) to Settle, the tracking and reversal 
functionality associated with the ACATS Settlement Accounting Operation 
would allow NSCC to reverse uncompleted ACATS obligations as necessary. 
This would enable NSCC to reverse pending ACATS obligations for only 
uncompleted transfers of Member(s) that Fail to Settle and allow assets 
associated with completed ACATS transfers to remain with the Receiving 
Member, thus ensuring that customer account transfers to new firms are 
maximized. This enhances NSCC's ACATS process for CNS-eligible 
securities and Non-CNS DTC-Eligible Securities by allowing for tracking 
of obligations and reversal of only uncompleted transactions in the 
event of a multiple Member default scenario.\10\
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    \10\ The current process only provides for tracking for this 
purpose if there is a single Member default.
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    For purposes of this proposal, an ACATS transfer of a Member that 
Fails to Settle would be deemed uncompleted if the Member is: (i) the 
Delivering Member and it has Failed to Deliver to NSCC all or a portion 
of the securities associated with the ACATS transfer, or (ii) the 
Receiving Member and it has Failed to Receive from NSCC all or a 
portion of the securities associated with the ACATS transfer. However, 
in either such case, where the Delivering Member has made a partial 
delivery for an amount of the securities to NSCC (the ``Delivered 
Amount'') the transfer would be: (i) Deemed completed for any amount of 
the securities received from NSCC by the Receiving Member up to an 
amount not to exceed the Delivered Amount (the ``Received Amount''), 
and (ii) uncompleted for any amount of the securities scheduled for 
delivery other than the Received Amount (in which case, only the 
uncompleted portion of the item would be subject to reversal). In the 
event either a Delivering Member and Receiving Member to the same ACATS 
transfer Fails to Settle on the same settlement day, then any transfer 
deemed uncompleted for the Delivering Member would also be deemed 
uncompleted as to the Receiving Member, and vice versa. NSCC would 
notify firms with the details associated with the assets subject to the 
reversal and firms would need to reestablish customer positions 
accordingly.
Elimination of Short Cover Charge
    An ``ACATS short cover charge'' is a dollar amount guaranteed by 
NSCC to DTC for the value of securities delivered from a Participant's 
DTC account to NSCC for CNS processing by NSCC. NSCC's guaranty to DTC 
for the short cover charge will no longer be applicable because the 
deliveries no longer present risk to DTC. In a related rule filing, SR-
DTC-2014-04, DTC proposes to eliminate the provision in its procedures 
relating to ACATS short charges. No change to NSCC's rules text is 
required in respect to short charges.
Long Allocations
    At NSCC, under current rules, long allocations may be reversed if 
the NSCC Member fails to meet its settlement obligation. Because ACATS 
transactions would not generate any funds settlement obligations, this 
reversal is eliminated. In its related filing, DTC proposes to delete a 
provision describing the reversal of ACATS long allocations from its 
procedures. No change to NSCC's rules text is required in this regard.
Delivery of Securities to a ``No Lien'' Location
    The associated changes would also ensure that neither DTC nor NSCC 
has a lien on shares delivered to a receiver as a result of ACATS 
transfers. As this new process allocates shares to the long broker via 
an algorithm that NSCC would establish for this purpose, DTC would 
credit the shares to the broker's Minimum Amount (``MA'') or non-lien/
non-collateral account at DTC.
Reporting of Transactions
    Final accounting reports for the ACATS Settlement Accounting 
Operation would be provided in conjunction with the final CNS 
accounting reports, however, reporting along with the CNS accounting 
reports would have no effect on the status of the reported ACATS 
transactions as non-guaranteed.
iii. Implementation Timeframe
    NSCC proposes to implement the changes set forth in this rule 
filing during the second quarter of 2014. Pending Commission approval, 
Members will be advised of the implementation date through issuance of 
NSCC Important Notices.
2. Statutory Basis
    The proposed rule change provides for enhancements relating to the 
processing of customer securities which would enable the implementation 
of: (i) The tracking of receive and deliver obligations associated with 
ACATS activity, and (ii) preclude the reversal of completed ACATS 
transfers in the event that Member Fails to Settle. Therefore, NSCC 
believes the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to NSCC, 
and in particular Section 17A(b)(3)(F) \11\ of the Act which requires 
that NSCC's Rules be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, in general, to 
protect investors and the public interest.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC believes that the proposed rule change would not impose any 
burden on competition as it applies to all Members that utilize the 
ACATS service and the new process has been developed in close 
coordination with the industry.

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

    Written comments relating to the proposed rule change have not yet 
been solicited or received with respect to this filing.

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 such 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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or

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     Send an email to rule-comments@sec.gov. Please include 
File No. SR-NSCC-2014-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-NSCC-2014-04. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. 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 the 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/legal/sec-rule-filings.aspx). 
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 No. SR-NSCC-2014-04 and 
should be submitted on or before May 2, 2014.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-08122 Filed 4-10-14; 8:45 am]
BILLING CODE 8011-01-P