[Federal Register Volume 59, Number 174 (Friday, September 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22209]


[[Page Unknown]]

[Federal Register: September 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34629; File No. SR-NSCC-94-12]

 

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Permanent Approval of the New York Window 
Service

September 1, 1994.
    On July 15, 1994, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-94-12) under 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ 
seeking permanent approval of the New York Window Service. Notice of 
the proposal was published in the Federal Register on August 1, 
1994.\2\ No comments were received. This order permanently approves the 
New York Window Service.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 34470 (August 1, 1994), 
59 FR 40396.
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I. Description

    On April 26, 1993, the Commission approved on a temporary basis a 
proposed rule change filed by NSCC to establish a pilot program 
relating to the receipt, delivery, and handling of physical securities 
for participants located in New York City (``New York Window Service'' 
or ``New York Window'').\3\ On January 31, 1994, the Commission 
approved a proposed rule change filed by NSCC expanding the New York 
Window Service to offer limited money settlement services to two New 
York Window Service participants and to extend the temporary approval 
of the New York Window Service until January 31, 1995.\4\ On August 1, 
1994, the Commission approved on a temporary basis a proposed rule 
change filed by NSCC expanding the limited money settlement service to 
an additional New York Window participant.\5\ This order grants 
permanent approval of the New York Window Service including the limited 
money settlement service and supersedes the orders granting approval 
until January 31, 1995.
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    \3\Securities Exchange Act Release No. 32221 (April 26, 1993), 
58 FR 26570 [File No. SR-NSCC-93-03] (order approving pilot program 
until April 30, 1994).
    \4\Securities Exchange Act Release No. 33558 (January 31, 1994) 
59 FR 5807 [File No. SR-NSCC-93-14] (order approving proposed rule 
change until January 31, 1995).
    \5\Securities Exchange Act Release No. 34476 (August 1, 1994) 59 
FR 40634 [File No. SR-NSCC-94-14] (notice of proposed rule change 
and order granting accelerated approval until January 31, 1995).
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    The New York Window Service provides for the processing and 
deliveries of physical securities. The New York Window Service also 
provides facilities for the custody of custodial related services for 
physical securities. NSCC designed this service at the request of 
several participants located in New York City. These participants have 
been experiencing a continual decline in their activity associated with 
the processing of physical securities primarily due to the increase in 
book-entry eligibility of securities that previously were not book-
entry eligible and had to be settled physically. These participants no 
longer find it desirable to maintain their own window operations.
    The services offered through the New York Window include: (i) Over-
the-Window Service;\6\ (ii) interfacing with NSCC's Envelope Settlement 
Service;\7\ (iii) Funds Only Settlement Service;\8\ (iv) Dividend 
Settlement Service;\9\ (v) processing transfers of physical 
securities;\10\ (vi) processing deposits to and withdrawals from The 
Depository Trust Company (``DTC'');\11\ and (vii) processing deliveries 
to designated agents in connection with reorganizations and other 
corporate actions.\12\
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    \6\The Over-the-Window service receives securities, verifies 
negotiability, and makes appropriate turnaround deliveries. 
Deliveries are made according to participants' turnaround 
instructions or from inventory.
    \7\The participants' Envelope Settlement service includes 
retrieving envelopes, verifying securities for negotiability, 
processing receive and deliver entries, packaging securities, 
preparing credit lists, and processing reclamations for New York 
Window participants and their correspondents.
    \8\The Funds Only Settlement Service related activities 
including retrieving and delivering envelopes, preparing credit 
lists, verifying charges, and processing reclamations.
    \9\The Dividend Settlement Service receives dividend settlement 
envelopes, accepts notices of intent, and verifies daily Dividend 
Settlement Service charges against participant instructions.
    \10\Physical transfer processing includes accepting prepackaged 
items from participants or preparing inventory items for delivery to 
transfer agents. Also included in retrieval of securities or 
proceeds from transfer agents and effecting participant's 
instruction for completed transfers.
    \11\Participants can have securities held in custody or received 
through the Over-the-Window or Envelope Settlement Services packaged 
and delivered to DTC for deposit. Participants also can deliver 
prepackaged securities for deposit at DTC. At the request of a 
participant, NSCC also will retrieve withdrawals and rejected 
securities deposits from DTC.
    \12\Physical reorganization processing includes receiving 
corporate action instructions from participants, delivering 
securities from inventory to agents, retrieving securities or 
proceeds, and effecting participant instructions for completed 
reorganizations.
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    The limited money settlement service also will be offered as part 
of the permanent New York Window Service.\13\ Under the limited money 
settlement service, to the extent that the New York Window processes a 
participant's New York Window ``receives'' that result in next-day 
funds debits for that participant, NSCC will issue a check in payment 
of such debits. NSCC will not issue a check until it has verified the 
receipt of same-day funds from the participant in an amount equal to 
the gross amount of the participant's payment obligation for that day. 
When the New York Window processes a participant's ``deliveries'' that 
result in next-day funds credits, NSCC will pay the participant the 
aggregate amount of all checks received and deposited by NSCC for the 
participant each day. If checks received for a participant are less 
than the next-day funds credits resulting from the processing of the 
participant's deliveries, NSCC will pay only the received amount. 
NSCC's payments to participants will be made in same-day funds on the 
day following receipt and deposit of checks by NSCC. To the extent that 
receives or deliveries processed by the New York Window result in same-
day funds debits or credits, wire transfers payments will continue to 
be made directly between the New York Window participants and the other 
parties to the transactions. Same-day funds credits and debit result 
from the processing of instruments such as same-day funds payments will 
not be made using the limited money settlement service.
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    \13\For a complete description of the limited money settlement 
service, refer to Securities Exchange Act Release No. 33558 (January 
31, 1994) 59 FR 5807 [File No. SR-NSCC-93-14], supra Note 4.
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    NSCC will offer the permanent New York Window Service under the 
same conditions as the pilot program was offered. First, NSCC acts as 
agent for the participants using the New York Window Service and not as 
principal for its own account. Third, each New York Window participant 
agrees that it will not be entitled to reimbursement from NSCC for any 
losses suffered or liabilities incurred as a result of New York Window 
services.\14\ Second, all actions taken by NSCC in connection with the 
New York Window Service will be based on instruments from participants.
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    \14\In compliance with New York law, there is an exception for 
losses resulting from NSCC's gross negligence or willful misconduct. 
As with any NSCC operations, a participant's lack of entitlement to 
reimbursement for losses does not prevent NSCC from determining in 
its sole and absolute discretion to provide reimbursement in 
particular instances.
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    Under the pilot program, each New York Window participant provided 
NSCC with its individual system for processing and settling 
transactions in physical securities. NSCC personnel directly accessed 
the participants' systems to process instruments and to update the 
participants' individual systems.
    NSCC's permanent New York Window Service is a NSCC proprietary 
system which replaces the New York Window participants' individual 
systems.\15\ Under the permanent New York Window Service, participants 
transmit processing instructions to NSCC's proprietary system in either 
a batch mode or in an on-line real-time mode. Each participant sets up 
individualized instrument profiles which inform the New York Window how 
various transactions should be processed for that participant and 
automatically prompt the next step in the processing procedure. NSCC's 
personnel act upon the instructions and update NSCC's New York Window 
system. New York Window participants will be able to change instruments 
or add instruments throughout the day. NSCC will be able to 
interactively communicate with participants with respect to instruments 
being processed and each day will report to participants the results of 
that day's processing. NSCC also will provide each participant with an 
updated stock record indicating the items being held in custody for the 
participant under the New York Window Service.
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    \15\On September 1, 1994, NSCC will begin to phase-in its 
proprietary system for current New York Window participants. NSCC 
will preplace one at a time each of the participant's systems with 
NSCC's proprietary system. However, the limited money settlement 
service will be available to all participants on September 1, 1994.
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II. Discussion

    Section 17A(a)(1)(B) of the Act sets forth Congress' findings that 
inefficient procedures for clearance and settlement of securities 
transactions impose unnecessary costs on investors and persons 
facilitating transactions by and acting on behalf of investors.\16\ 
Section 17A(a)(1)(D) states Congress's findings that linking of all 
clearance and settlement facilities and the development of uniform 
standards and procedures for clearance and settlement will reduce 
unnecessary costs and increase the protection of investors and persons 
facilitating transactions by and acting on behalf of investors.\17\
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    \16\15 U.S.C. 78q-1(a)(1)(B) (1988).
    \17\15 U.S.C. 78q-1(a)(1)(D) (1988).
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    The Commission believes that NSCC's permanent New York Window 
Service should help to minimize inefficient procedures employed by 
individual New York City participants by concentrating these operations 
in one centralized facility. As a result, the individual participants 
will be able to eliminate there own operations and the high fixed costs 
associated with them and will be able to rely upon NSCC's experience in 
providing these services.
    Implementation of NSCC's proprietary New York Window Services 
system also should help minimize personnel errors because NSCC's 
personnel will have to operate only one system as compared to the pilot 
program where NSCC personnel had to be able to operate each individual 
participant's system. In addition, the participant instruction profile 
component of the New York Window system automatically prompts the next 
step in the processing procedure thereby eliminating certain clerical 
intervention which also should help reduce personnel errors.
    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in its custody or control or for which it is responsible.\18\ 
NSCC will continue to employ in the permanent New York Window Service 
the safeguards established in the New York Window pilot program to 
comply with this statutory mandate. NSCC will act only as agent for the 
New York Window participants and will act only upon the instructions of 
the participants. NSCC will limit its liability for losses resulting 
from NSCC's gross negligence or willful misconduct. NSCC will not make 
any payment on behalf of or to a limited money settlement service 
participant unit NSCC has received funds sufficient to cover the amount 
of NSCC's payment.
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    \18\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    NSCC also will continue to take precautionary measures to help 
ensure the safety of the securities for which it has custody under the 
New York Window program. NSCC will continue to maintain separate vault 
space at DTC to hold only securities processed through the New York 
Window Service and access to that vault space will be restricted to 
NSCC personnel. NSCC will continue to be responsible for keeping the 
books and records for securities held under the New York Window 
program. Securities belonging to different participants will not be 
commingled, and NSCC will follow participants' instructions regarding 
the segregation of customer accounts. Securities in NSCC's custody will 
not be held in NSCC's nominee name. The Commission believes the 
measures taken by NSCC enable NSCC to meet its statutory responsibility 
regarding safeguarding the securities in its custody or control or for 
which it is responsible under the New York Window.

III. Conclusion

    For the reasons stated above, the Commission finds that NSCC's 
proposal is consistent with Section 17A of the Act.\19\
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    \19\15 U.S.C. 78q-1 (1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (File No. SR-NSCC-94-12) be, and 
hereby is, approved.
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    \20\15 U.S.C. 78s(b)(2) (1988).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-22209 Filed 9-8-94; 8:45 am]
BILLING CODE 8010-01-M