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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

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Start Preamble 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.

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]

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.

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”).

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 Start Printed Page 20291are 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.

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]

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.

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 Start Printed Page 20292Delivering 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]

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.

(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

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 (​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 (​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.

Start Signature

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12

Kevin M. O'Neill,

Deputy Secretary.

End Signature End Preamble


3.  Terms not defined herein have the meaning set forth in the Rules.

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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​en/​legal/​rules-and-procedures.aspx.

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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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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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7.  Completed transactions, however, are not reversed.

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8.  An NSCC account at DTC would be established to accommodate processing of these transfers.

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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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10.  The current process only provides for tracking for this purpose if there is a single Member default.

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11.  15 U.S.C. 78q-1(b)(3)(F).

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[FR Doc. 2014-08122 Filed 4-10-14; 8:45 am]