Document ID: SEC-2010-0154-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Eliminate Guarantee of Payment in Connection With the Envelope Settlement Service
Posted Date: 2010-01-29T05:00Z

[Federal Register: January 29, 2010 (Volume 75, Number 19)]
[Notices]               
[Page 4896-4897]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ja10-126]                         

[[Page 4896]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61415; File No. SR-NSCC-2010-01]

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

January 25, 2010.
    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 January 4, 2010, the 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 purpose of the proposed rule change is to make modifications to 
NSCC's Rules & Procedures (``Rules'') to eliminate NSCC's guarantee of 
payment in connection with the Envelope Settlement Service (``ESS'') as 
provided for under Rule 9, Addendum D, Addendum K, and Procedure XV of 
the Rules.

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 these 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The Envelope Settlement Service (``ESS'') is primarily provided for 
under Rule 9 and Addendum D of the Rules with related provisions in 
Addendum K and Procedure XV, each of which is proposed to be amended as 
further described below.
    ESS allows an NSCC member (``Member'') through the facilities of 
NSCC, to physically deliver a sealed envelope \4\ 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.
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    \4\ 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.
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    The delivering Member must attach to each envelope (in duplicate), 
a credit list, which reflects the total money value, if any, of the 
envelope's contents. If after receipt of the envelope NSCC determines 
that the envelope delivered is properly listed on the accompanying 
credit list, NSCC stamps the duplicate credit list and makes it 
immediately available to the Member's representative making the 
delivery. Envelopes 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 that that amount is the contract 
amount.
    Pursuant to this rule change, the NSCC will amend Rule 9 and 
related provisions so that the NSCC does not guarantee the payment 
obligation to the receiving Member in an ESS delivery and so that 
credits and debits of the payment amount of an envelope may be 
reversed. The rationale for these changes is to protect the NSCC 
against the risk of Member non-payment.
    The payment reversal may be effected by the 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.
    The primary substantive changes are in Rule 9, Addendum D and 
Addendum K with a conforming change to Procedure XV. Technical clean-up 
changes are also made in each.
    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 the NSCC under Section 
2 of Rule 12 but also to the new reversal provision in Section 4 of 
Rule 9.
    Addendum D is similarly amended to conform to amended Rule 9 to 
state that ESS is not guaranteed and that payment credits and debits 
may be reversed as provided in Rule 9. Clarification that settlement 
processing is subject to the rights of NSCC under Rule 9, new Section 
4, and Rule 12, Section 2, is also carried over to Addendum D. Addendum 
D also covers other services for which no change is being made in this 
filing. Therefore, certain of the revisions to Addendum D clarify that 
the amendments are limited to ESS. Historical statements in Addendum D 
have been eliminated.
    The change to Addendum K deletes the provision that formerly 
provided a guarantee for ESS and thereby deemed ESS to be a ``System'' 
within the meaning of Rule 4; without the guarantee, ESS will not be 
considered a ``System.''
    Consistent with this change, clearing fund deposits allocated to 
ESS will be eliminated under Procedure XV, which will reduce the cost 
to members using ESS. The change to Procedure XV clarifies 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. The proposed rule 
changes will therefore conform to current market expectations.
    However, Members expressed a strong desire for NSCC to maintain the 
central delivery service. The proposed changes are designed to meet 
this expressed need of certain Members while reducing risk to NSCC and 
its Members generally. The burden of risk is shifted to those that 
should bear it, outside NSCC's facilities. The changes will also 
insulate other Members from any impact on net settlement due to an ESS 
payment dispute.

[[Page 4897]]

    NSCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder applicable to NSCC because the proposed rule 
change facilitates the prompt and accurate clearance and settlement of 
securities transactions by protecting the NSCC's net settlement process 
while continuing to provide a central delivery point for physical 
deliveries of envelopes with constrained payment processing. The 
changes will reduce the NSCC's exposure to potential losses from Member 
defaults, insolvencies, mistakes, and fraud and will appropriately 
shift the risk outside NSCC, to the contracting Members in an ESS 
transaction.
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    \5\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change would impose 
any burden on competition.

(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 been 
solicited or received. 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 thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date 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 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

     Use the Commissions Internet comment form (http://
www.sec.gov/rules/sro.shtml) or Send an e-mail to rule-
comments@sec.gov. Please include File Number SR-NSCC-2010-01 on the 
subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NSCC-2010-01. This 
file number should be included on the subject line if e-mail 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 inspection 
and copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of the 
NSCC and on NSCC's Web site at http://www.dtcc.com/downloads/legal/
rule_filings/2010/nscc/2010-01.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-2010-01 and should be submitted on 
or before February 19, 2010.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-1852 Filed 1-28-10; 8:45 am]
BILLING CODE 8011-01-P