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Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving a Proposed Rule Change Relating to the Modification of Fixed Income Transaction System in Preparation for the Implementation of Real Time Trade Processing

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Start Preamble March 13, 2003.

On November 5, 2002, the National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 [1] proposed rule change File No. SR-NSCC-2002-10. Notice of the proposal was published in the Federal Register on January 31, 2003.[2] No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

I. Description

NSCC will modify its Trade Comparison Service rules to enhance its Fixed Income Transaction System (“FITS”) in order to begin the move to real time trade matching processing (“RTTM”) for fixed income securities that are eligible for processing by NSCC.

RTTM was implemented by the Government Securities Clearing Corporation (“GSCC”), an NSCC affiliate, in the fourth quarter of 2000 for the processing of government securities. It was designed with a vision to also use the platform for other fixed income securities. Once RTTM was deployed for government securities, GSCC and MBS Clearing Corporation (“MBSCC”) worked together to adapt RTTM to support the requirements of mortgage-backed securities. MBSCC implemented RTTM on September 27, 2002. NSCC believes that the next logical extension of RTTM is to further adapt it for fixed income securities that are eligible for processing by NSCC. NSCC currently Start Printed Page 13976plans to implement RTTM for corporate bonds, municipal bonds, and Unitary Investment Trusts (“UIT”) in the fourth quarter of 2003. RTTM will eventually replace NSCC's current FITS.

One of NSCC's main objectives will be to ensure an orderly transition to RTTM. In order to prepare participants for the new RTTM functionality, NSCC proposes that certain modifications be made to FITS during March 2003. These modifications will enable participants to become familiar with RTTM-type processing. In addition, some lesser-utilized FITS functionality that will not be incorporated into RTTM will be eliminated from FITS. The modifications have been endorsed by the RTTM Working Group, which consists of representatives of participants that hold key positions in The Bond Market Association, the Securities Industry Association, and the Regional Municipal Operations Association.

The following is a summary of the modifications to FITS:

  • FITS will automatically compare a trade even if the counterparties submit data on the trade in different pieces, a process known as “trade summarization.” [3]
  • Except for trades where the settlement date is the same business day as or the business day after the trade date,[4] FITS will be modified to accept (instead of reject) trade submissions with a contractual settlement date of the day of input or of prior dates and will automatically assign a settlement date of the next business day to the trades.
  • Corporate bond trades in quantities of other than multiples of a thousand (round-lots) must be divided into separate data submissions of the round lot quantity and the odd-lot quantity (multiples of less than one thousand).

The following is a summary of functions that NSCC proposes to eliminate from FITS:

  • Demand As Of processing.[5]
  • One Sided Deletes for compared, secondary market municipal security trades. In order to delete these trades, both counterparties will be required to submit Withholds that match in all respects.[6]
  • Trade Submit and Carry Forward Totals will not be reported on the Supplemental and Added Trade Contracts.
  • Regular Way Extended Settlement Carry Forward Totals.[7]

Along with these changes, NSCC will change the current cutoff time for trade date submission from midnight to 8 p.m. and will require the submission of certain additional trade data.[8] Finally, NSCC will make a technical correction to the use of the term “business day” in its rules. During the preparation of this filing, NSCC realized that the use of upper and lower case letters for the term is inconsistent in the rules. In order to carry out the intention of the drafters of the rules, NSCC will use the term “business day” (lower case) throughout its rules as is specified in the definition of that term in NSCC Rule 1-1.

II. Discussion

The Commission finds that NSCC's proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder and particularly with the requirements of section 17A(b)(3)(F)[9] of the Act. Section 17A(b)(3)(F) requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions. The Commission finds that NSCC's rule change meets this requirement because it will enable NSCC to prepare its participants for the new RTTM functionality that will eventually enable NSCC to process trades in a more efficient and timely manner. By effecting an orderly transition to RTTM, NSCC's participants should become familiar with RTTM-type processing and thereby enable NSCC to continue to promote the prompt and accurate clearance and settlement of securities transactions.

III. 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 and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-NSCC-2002-10) be, and hereby is, approved.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[10]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  Securities Exchange Act Release No. 47206 (Jan. 16, 2003), 68 FR 5067 (Jan. 31, 2003).

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3.  For example, Firm A submits one trade for $30 million and Firm B “breaks down” the trade into three $10 million pieces. Alternatively, Firm A and Firm B may execute five separate trades each worth $10 million. Firm A submits each trade separately while Firm B “bunches” the five trades into one $50 million piece. In both of these examples, the trades will be compared.

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4.  NSCC will continue to reject trades where the settlement date is the same business day as or the business day after the trade date regardless of the date of submission.

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5.  The As Of capability will still be available to compare trades that do not initially compare in FITS. The As Of capability requires the submission by each counterparty of data that matches in all respects whereas the Demand As Of capability permitted a trade to be “force compared” on the submitter's terms even it the counterparty did not respond.

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6.  One Sided Deletes functionality will be retained for syndicate takedown transactions and for uncompared municipal bond, corporate bond, and UIT trades.

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7.  Carry Forward Totals will be retained on New Issue Contracts.

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8.  The details for these technical changes can be found in NSCC's Important Notice No. A5487 (October 7, 2002).

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9.  15 U.S.C. 78q-1(b)(3)(F).

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[FR Doc. 03-6830 Filed 3-20-03; 8:45 am]