Document ID: SEC-2010-0976-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2010-07-02T04:00Z

[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38579-38581]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16108]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62385; File No. SR-NSCC-2010-05]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Enhance the 
Process for Transfers Through the Automated Customer Account Transfer 
Service

June 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 June 4, 2010, 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 substantially prepared 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 the 
Substance of the Proposed Rule Change

    The purpose of this proposed rule change is to enhance NSCC's 
process for transfers through the 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 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.

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

    NSCC's ACATS system enables Members to effect automated transfers 
of customer accounts among themselves.\3\ For ACATS transfers processed 
through NSCC's Continuous Net Settlement (``CNS'') system,\4\ long and 
short positions are passed against Members' positions at The Depository 
Trust Company (``DTC'') and available securities are delivered from 
short Members' accounts at DTC and allocated to long Members' accounts 
by book-entry.
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    \3\ ACATS complements a Financial Industry Regulatory Authority 
(``FINRA'') rule requiring FINRA members to use automated clearing 
agency customer account transfer services and to effect customer 
account transfers within specified time frames.
    \4\ CNS is an ongoing accounting system which nets today's 
settling trades with yesterday's closing positions to produce a net 
short or long position for a particular security for a particular 
Member. NSCC is the counter party 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 which remain open after the 
evening cycle may be changed as a result of trades accepted for 
settlement that day. CNS allocates deliveries in both the night and 
day cycles using an algorithm based on priority groups in descending 
order, age of position within a priority group, and random numbers 
within age groups.
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    NSCC is proposing changes to its ACATS system in connection with a 
concurrent rule change proposed by DTC.\5\ NSCC is proposing these 
changes for two general reasons. First, NSCC would like to enhance 
protection for customer securities in ACATS transfers so that customer 
account transfers to new firms would be maximized in the event of a 
Member failure. Accordingly, NSCC would modify its ACATS processing and 
its Rules so that deliveries or receives processed through CNS would 
satisfy a Member's ACATS receive or deliver obligation prior to 
satisfying another CNS-related obligation of that Member in the same 
security. NSCC would also track CNS ACATS items to prevent reversal of 
completed items in the event of a Member's failure. Second, NSCC would 
like to facilitate compliance by its Members with their securities 
possession and control requirements.\6\ To that end, NSCC proposes 
modifying its Rules to clarify that in no event does NSCC have a lien 
on securities carried by a Member for the account of its customers that 
are delivered through the CNS ACATS service.\7\
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    \5\ DTC is proposing its concurrent rule change with the 
Commission in filing SR-DTC-2010-09.
    \6\ Commission Rule 15c3-3 provides that a broker-dealer shall 
promptly obtain and shall thereafter maintain the physical 
possession or control of all fully paid securities and excess margin 
securities carried for the account of customers.
    \7\ DTC's Settlement Service Guide currently provides that 
securities delivered to a receiving DTC Participant's account from 
CNS are classified as collateral which may otherwise be made 
available to NSCC in the event that the DTC Participant fails to 
meet its NSCC settlement obligation. Pursuant to a separate rule 
filing, DTC is proposing revisions to its service guide so that ACAT 
deliveries from CNS would be designated by the DTC Participant as 
``Minimum Amount Securities'' when credited to the Participant's 
account. This designation would prevent the securities from being 
designated as collateral for either this purpose or for purposes of 
DTC's Rules. DTC Rule 1 for the definition of Minimum Amount 
Securities.
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1. ACATS Transfers Through the CNS System
    Through ACATS, an NSCC Member to which a customer's securities 
account is to be transferred (``Receiving Member'') may submit a 
Transfer Initiation Request to initiate the account transfer process. 
When a Receiving Member accepts a customer account transfer, NSCC 
causes all CNS-eligible items in that customer account to enter NSCC's 
CNS accounting operation on the day before settlement date unless the 
Receiving Member notifies NSCC that

[[Page 38580]]

certain items should be withheld from CNS processing.\8\
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    \8\ NSCC Rule 50 (Automated Customer Account Transfer Service).
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    Ordinary CNS items enter the system at contract value, but ACATS 
items enter CNS unvalued. This reflects the nature of the ACATS CNS 
items as ``free'' transfers. To incentivize deliveries, ACATS items are 
marked-to-the-market on the morning of settlement date using their full 
CNS value as of the prior day's closing price. Consequently, the 
Delivering Member's CNS projection report shows a short securities 
position, and its CNS cash reconciliation report shows a cash debit for 
the ``full value'' mark. Conversely, the Receiving Member's projection 
report shows a long securities position, and its cash reconciliation 
report shows a cash credit equal to the ``full value'' mark. If the 
Delivering Member fulfills its ACATS delivery obligation, then its 
short position is cancelled, and the debit for the mark is offset by a 
credit. Likewise, upon receipt of the securities by the Receiving 
Member, the Receiving Member's long position is offset, and the credit 
for the mark is offset by the debit. The net result is a ``free'' 
transfer of securities because no money is paid by either the 
Delivering Member or Receiving Member.
    For transactions processed through CNS, NSCC normally becomes the 
counter party to the transaction and guarantees settlement.\9\ However, 
a CNS ACATS transfer is not guaranteed for a party that fails to pay 
any portion of its money settlement obligation on settlement date.\10\ 
In this circumstance, NSCC may reverse uncompleted ACATS items and any 
associated debits or credits calculated using the marking process 
described above would be eliminated.
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    \9\ Pursuant to Addendum K of its Rules, NSCC generally 
guarantees the completion of Continuous Net Settlement (``CNS'') and 
Balance Order trades that reach the later of midnight of T+1 or 
midnight of the day they are reported to Members. Shortened process 
trades, such as same-day and next-day settling trades, are 
guaranteed upon comparison or trade recording processing.
    \10\ This includes failure by a Member to pay a mark-to-market 
charge.
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    Currently, ACATS transfers settled through CNS are fungible with 
all other CNS activity. The CNS system does not distinguish between 
ACATS transactions and other transactions, which means that CNS ACATS 
receives and delivers are netted with guaranteed settling trades in the 
same securities. Pursuant to this proposal, NSCC would begin tracking 
ACATS receive and deliver obligations in CNS, and CNS allocations would 
be applied to ACATS receive and deliver obligations for a Member in a 
security before satisfying another obligation in the same security.\11\ 
At the end of each processing day, CNS ACATS fails would continue to be 
marked to the full-market value and netted with all other CNS 
obligations under NSCC's Rules.
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    \11\ This includes a trade-related obligation.
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    In the event of a Member failure, NSCC would use this proposed 
automated tracking capability to differentiate between completed and 
uncompleted CNS ACATS transactions. In a failure to settle situation, 
NSCC would therefore be able to reverse pending ACATS obligations for 
uncompleted transfers of a failing Member while still allowing assets 
associated with completed ACATS transfers to remain with the Receiving 
Member. NSCC believes this would help maximize CNS-related transfers of 
customer accounts to new firms.
    An ACATS transfer of a failing Member would be deemed uncompleted 
if the failing Member is a Delivering Member and it failed to deliver 
to CNS all or a portion of the securities associated with the ACATS 
transfer. If the failing Member is a Receiving Member and it failed to 
receive all or a portion of the securities associated with the ACATS 
transfer from CNS, then the transfer would likewise be deemed 
uncompleted. In either case, if the Delivering Member makes a partial 
delivery of securities to CNS then the transfer would be deemed 
completed for the amount of securities received from CNS by the 
Receiving Member to the extent that amount does not exceed the amount 
delivered to CNS by the Delivering Member. The transfer would be deemed 
uncompleted as to any remaining securities beyond that amount, and only 
the uncompleted portion of the item would be subject to reversal. 
Transfers would also be deemed uncompleted when the failing Member is 
the Delivering Member and it has a flat or overall long CNS position or 
when the failing member is the Receiving Member and it has a flat or 
CNS short position.
    In the event a Delivering Member and Receiving Member fail on the 
same settlement day and have an ACATS transfer obligation between them, 
any transfer deemed uncompleted for the Delivering Member would also be 
deemed uncompleted for the Receiving Member. NSCC would notify the 
affected Members of the details associated with the assets subject to 
the reversal and the affected Members would have to reestablish 
customer positions accordingly.
2. Possession and Control Requirements
    To facilitate the compliance of Members with their securities 
possession and control requirements in ACATS transfers processed 
through CNS, NSCC proposes modifying its Rules to clarify that it does 
not maintain a lien over ACATS assets delivered to a Receiving Member 
through CNS.
3. Amendments to Rules and Procedures
    To provide for the modifications to ACATS described in this filing, 
NSCC proposes amending its rules as described in the summaries below. 
The proposed changes to NSCC's Rules and Procedures can be found in 
Exhibit 5 to proposed rule change SR-NSCC-2010-05 at http://www.dtcc.com/downloads/legal/rule_filings/2010/nscc/2010-05.pdf.
    (a) Amend Rule 18 (Procedures for When NSCC Declines or Ceases to 
Act).
    Section 7 of Rule 18 (Procedures for when the Corporation Declines 
or Ceases to Act) provides that NSCC maintains a lien on all property 
placed in its possession by a Member as security for any and all 
liabilities of that Member to NSCC. An existing exception to this rule 
is where such a lien would be prohibited under Commission Rules 8c-1 
and 15c2-1. NSCC proposes modifying this section to clarify that it 
does not maintain a lien on ACATS assets that have been delivered to a 
Receiving Member through CNS.
    (b) Procedure VII (CNS Accounting Operation).
    NSCC proposes modifying Procedure VII to provide for the tracking 
of customer transfers by stating that deliveries of a particular 
security through CNS would be designated to apply to a Member's ACATS 
receive and deliver obligations before satisfying another obligation, 
such as a trade-related obligation of that Member. In addition, the 
modified language would indicate that this designation would be 
provided to the Member's Designated Depository to facilitate its 
processing of the item.
    (c) Rule 50 (ACATS).
    NSCC would amend Rule 50 to clarify that NSCC may reverse 
uncompleted ACATS items when either the Delivering or Receiving Member 
failed to meet its settlement obligation to NSCC. In addition, this 
Rule would be revised to note that in the event of such a reversal of 
uncompleted CNS ACAT obligations, NSCC would make files available to 
each Member to show each open security position due to settle that day 
that would be subject to the reversal as well as such other information 
as NSCC may deem advisable. The

[[Page 38581]]

proposed change also includes a technical correction to clarify that 
ACATS transactions enter the CNS Accounting Operation on the day before 
Settlement Date (SD-1), rather than T+1.
    NSCC proposes implementing the changes proposed in this filing 
during the third quarter of 2010 and advising Members of the 
implementation date through issuance of NSCC Important Notices.
    NSCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \12\ and the rules and 
regulations thereunder because the proposed modifications would 
facilitate NSCC's prompt and accurate clearance and settlement of 
securities transactions by implementing a tracking mechanism to 
distinguish ACATS activity from other items processed through CNS and 
by clarifying that NSCC does not maintain a lien on ACATS assets 
delivered to a Receiving Member through CNS.
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    \12\ 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 Commission's 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-2009-05 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-2010-05. 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 Web site viewing and 
printing 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/2010-05.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-2009-05 
and should be submitted on or before July 23, 2010.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16108 Filed 7-1-10; 8:45 am]
BILLING CODE 8010-01-P