[Federal Register Volume 60, Number 113 (Tuesday, June 13, 1995)]
[Notices]
[Pages 31177-31179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14436]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35807; File No. SR-NSCC-95-03]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change Relating to 
Implementation of a Three-Day Settlement Standard

June 5, 1995.
    On March 1, 1995, National Securities Clearing Corporation 
(``NSCC'') filed a proposed rule change (File No. SR-NSCC-95-03) with 
the Securities and Exchange Commission (``Commission'') pursuant to 
Section 19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
March 27, 1995, NSCC filed an amendment to the proposed rule change.\2\ 
Notice of the proposal was published in the Federal Register on April 
14, 1995, to solicit comments from interested persons.\3\ No comments 
were received. As discussed below, this order approves the proposed 
rule change.

    \1\ 15 U.S.C. Sec. 78s(b) (1988).
    \2\ Letter from John P. Barry, Associate Counsel, NSCC, to 
Christine Sibille, Senior Counsel, Division of Market Regulation, 
Commission (March 27, 1995).
    \3\ Securities Exchange Act Release No. 35577 (April 6, 1995), 
60 FR 19104.
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I. Description

    In October 1993, the Commission adopted Rule 15c6-1 under the Act 
which will become effective June 7, 1995.\4\ Rule 15c6-1 establishes 
three business days after the trade date (``T+3''), instead of five 
business days (``T+5''), as the standard settlement cycle for most 
securities transactions. The purpose of NSCC's proposed rule change is 
to amend NSCC's rules to be consistent with Rule 15c6-1 and with a T+3 
settlement standard for most securities transactions.

    \4\ Securities Exchange Act Release Nos. 33023 (October 6, 
1993), 58 FR 52891 (adopting Rule 15c6-1) and 34952 (November 9, 
1994), 59 FR 59137 (changing effective date from June 1, 1995, to 
June 7, 1995).
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    In order to accommodate a T+3 settlement cycle, many of the time 
frames contained in NSCC's rules are being shortened. These changes 
include such things as all references to a five day settlement time 
frame being changed to reflect a three day settlement 
[[Page 31178]] time frame.\5\ Trades compared after such time as 
established on T+2 will not be included in the normal settlement 
cycle.\6\ All transactions entered into NSCC's balance order accounting 
operation or into the foreign security accounting on T+2 or thereafter 
will be processed on a trade-for-trade basis.\7\ The proposed rule 
change will amend NSCC Rules to provide dividend protection to an ``as 
of'' trade entered at least two business days prior to the payable 
date.\8\ Only trades in balance order securities executed on the New 
York Stock Exchange (``NYSE''), American Stock Exchange (``Amex''), and 
over-the-counter (``OTC'') compared on T and T+1 will be netted, and 
the net balance orders will be issued on T+2.\9\ Continuous Net 
Settlement (``CNS'') eligible items will be entered into the CNS 
accounting operation for transfers through NSCC's Automated Customer 
Account Transfer (``ACAT'') Service on T+1.\10\ All time frames 
relating to voluntary corporate reorganizations processed through 
NSCC's CNS Reorganization Processing System will be shortened by two 
days.\11\ NSCC's Procedures will require that the adjustment contract 
totals represent the combined input for T through T+2 that is 
compared.\12\ Trades reported on the Consolidated Trade Summary will 
include trades compared through T+1.\13\ As-of-trades submitted two 
days prior to payable date will be included in the dividend activity 
report.\14\ A member will be informed of its potential liability from a 
short position on T+2.

    \5\ Procedures III.D, VII.B., VII.C., XIII, and Addendum K. In 
addition, the time frame for NSCC's guarantee of trades contained in 
Addendums K and M will begin on T+2. References to a five day 
settlement time frame contained in Procedures II.I.2 and 3 and III.C 
will be deleted.
    \6\ Procedures II.B.1(c), II.C.2(f), II.D.2(i), and III.E.
    \7\ Procedures V.B and VI.B.
    \8\ Rule 11, Section 8(d).
    \9\ Procedure V.C.
    \10\ Rule 50, Section 10.
    \11\ Procedure VII.H.4(b).
    \12\ Procedure II.B.1(c).
    \13\ Procedure VI.A.
    \14\ Procedure VII.G.2.
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    The proposed rule change also makes a certain ancillary 
modifications to NSCC's Rules and Procedures in order to delete 
references to obsolete services, procedures, forms, and methods of 
communications. All references to the SCC Division of the NSCC are 
being eliminated.\15\ Cross-references to specific rules which contain 
timing provisions are being changed to refer to the rules generally. 
Furthermore, the clauses beginning with ``up to and including'' in the 
definitions of ``Comparison Operation'', Foreign Security Accounting 
Operation'', and ``Balance Order Accounting Operation'' also are being 
eliminated.\16\

    \15\ The SCC was one of the predecessors of NSCC, and its rules 
were incorporated into NSCC's rules. To ease the transition at the 
time of NSCC's formation, NSCC retained the reference to the SCC by 
indicating that the rules were for the SCC Division.
    \16\ Rule 1.
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    The definitions of ``Basket Trade'' and ``Mini Basket'' contained 
in Rule 1 are being deleted because NYSE no longer offers these types 
of products, and therefore, NSCC does not clear it. Accordingly, 
references to Basket Trades and Mini Baskets contained in NSCC's 
Procedures and fees for processing these trades are being deleted.\17\

    \17\ Procedures II.A and H and Addendum A, Section 1.E.
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    References to nonmembers' ability to use NSCC's New York State 
Transfer Taxes service are being eliminated because no nonmember has 
requested the use of NSCC's facility to pay these taxes in over ten 
years.\18\ NSCC is limiting the number of banks which can hold 
securities pledged by members for the NSCC clearing fund by providing 
that these banks will be chosen by NSCC and not by the members.\19\

    \18\ Rule 3, Section 2 and Rules 14 and 26.
    \19\ Rule 4, Section 1.
    There are several places in NSCC's rules where changes are being 
made to reflect the continuing automation of systems and the 
elimination of paper intensive processes. These include the elimination 
of the use of certain forms, changing references to data received 
rather than tickets delivered, and the elimination of the requirement 
of acknowledging transactions through paper submission.\20\

    \20\ Such changes can be found in the following sections.

    Rule 5, Section 1
    Rule 7, Sections 3 (eliminates need of member to confirm to NSCC 
contract lists)
    Rule 12, section 1
    Rule 18, Sections 2 and 3 (eliminates return of tickets when 
NSCC ceases to act for a member)
    Procedure VII.D.2(c)
    Procedure VII.I
    Procedures VIII.A and B (eliminates clearance/settlement 
statement)
    Procedure X.B
    Procedure XIV
    Addendum A, Sections IV.S and V.B
    Addendum C, Section 1

    NSCC is amending rules to clarify that NSCC has the right to deny 
access to additional services to members that are not currently using 
the service if NSCC does not have adequate capability to perform that 
service.\21\ NSCC is amending its rules to reflect the current practice 
of NSCC preparing all checks sent to members.\22\

    \21\ Rule 2, Section 3 and Procedure IV.D.
    \22\ Rule 5, Section 2.
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    The exchanges and the NASD have rules concerning good delivery of 
physical securities.\23\ NSCC is amending its rules to require that 
deliveries must meet such good delivery requirements.\24\ NSCC's rules 
on good delivery are being deleted.\25\

    \23\ See, e.g., NYSE Rules 175-226.
    \24\ Rule 9, Section 1.9 and Rule 44, Section 7.
    \25\ Rule 44, Sections 8-39.
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    Pursuant to Addendum F, members who have failed to pay timely 
amounts due have been required to settle amounts greater than $100,000 
in Federal Funds. NSCC's settlement rule is being amended to reflect 
this longstanding practice.\26\

    \26\Rule 12, Section 1.
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    NSCC is eliminating the ability of members to charge an amount to 
their account at NSCC.\27\ Members may use NSCC's Funds Only Settlement 
Service to achieve the same objective. NSCC is deleting references to 
the Signature Distribution Service because the service was never 
implemented and has been made obsolete with the introduction of current 
Medallion Program.\28\ NSCC will require that close outs be completed 
promptly when NSCC ceases to act for a member.\29\

    \27\ Rule 13.
    \28\ Rule 17.
    \29\ Rule 18, Section 2.
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    NSCC is amending its rules to provide that only the board of 
directors, the chairman of the board, the president, executive vice 
president, and certain designated officers of NSCC may suspend the 
rules when necessary or expedient.\30\ NSCC will inform the Commission 
of any change in the officers designated to suspend the rules.\31\ 
Similarly, NSCC rules now will provide that except where action of the 
board of directors is specifically required, only the chairman, the 
president, any executive vice president, the secretary, and certain 
designated officers may take action on behalf of NSCC.\32\

    \30\ Rule 22.
    \31\ Letter from John P. Barry, Associate Counsel, NSCC, to 
Jonathan Kallman, Associate Director, Division of Market Regulation, 
Commission (March 27 1995).
    \32\ Rule 23.
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    NSCC's Procedures now will include references to when-distributed 
transactions, which result from stock splits and are treated in the 
same manner as when-issued transactions.\33\ NSCC's Procedures will 
state that the settlement date for corporate debt new 
[[Page 31179]] issues now will be established by the appropriate 
regulatory authority.\34\

    \33\ Procedures II.A and E.
    \34\ Procedure II.E.2.
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    NSCC's Reconfirmation and Pricing Service (``RECAPS'') now will be 
run from time to time to provide flexibility in the event of 
operational necessities.\35\ The CNS Accounting Operation will no 
longer use subaccounts for the settlement of option exercises.\36\ NSCC 
is eliminating its Delivery to Clearing Service.\37\

    \35\ Procedure II.G. NSCC intends to run RECAPS on a quarterly 
basis.
    \36\ Procedure II.G.
    \37\ Procedures VII.C.5, G.3, and H.7. Members usually deliver 
securities to The Depository Trust Company (``DTC'') to cover short 
positions instead of NSCC.
    NSCC is amending its Procedures to conform to the practice that Net 
CNS Money Settlement Amounts calculated by members may be verified 
against the Settlement Activity Statement but are not required to be 
verified.\38\ NSCC is eliminating the ability of members to select an 
alternate clearing corporation on an item-by-item basis.\39\ NSCC is 
amending its procedures to provide that it may require members to 
submit certain securities to NSCC before those securities are deposited 
with DTC on behalf of such member.\40\

    \38\ Procedure VII.F.2.
    \39\ Procedure IX.A.
    \40\ Procedure IX.B.
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    NSCC is eliminating its P&S service for direct clearing.\41\ 
References to the New Jersey City office will be deleted because that 
office no longer exists.\42\ NSCC is amending its rules to delete fees 
for hard copy output.\43\ NSCC is amending its Automated Stock Borrow 
Procedures to reflect that NSCC will no longer borrow physical 
securities for the settlement of non-DTC eligible items.\44\

    \41\ Procedure IX.D. Conforming amendments will be reflected in 
Procedure IX.E, Addendum A, Section IV (to eliminate fees for Remote 
Trade Comparison Handling and Preparation of T+1 input), and 
Addendum B, Section V.B. (to eliminate fees for options cage 
processing and stock loan rebate payment service).
    \42\ Addendum A, Section III.
    \43\ Addendum A, Section V.B.
    \44\ Addendum C.
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II. Discussion

    The Commission believes the proposal is consistent with the 
requirements of Section 17A of the Act.\45\ Specifically, Section 
17A(b)(3)(F) \46\ states that the rules of a clearing agency must be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, to assure the safeguarding of securities and 
funds which are in the clearing agency's custody or control or for 
which it is responsible, and to foster cooperation and coordination 
with persons engaged in the clearance and settlement of securities 
transactions.

    \45\ 15 U.S.C. Sec. 78q-1 (1988).
    \46\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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    Several of NSCC rules are based on the standard time frame for 
settlement of securities transactions. On June 7, 1995, as mandated by 
the Commission's Rule 15c6-1, the new settlement cycle of T+3 will be 
established. As a result, many of NSCC's current rules will be 
inconsistent with this rule. This proposal amends NSCC's rules to 
harmonize them with a T+3 settlement cycle. By enabling trades to 
settle in the shortened settlement cycle, the proposal should promote 
the prompt and accurate clearance and settlement of securities 
transactions. The Commission believes that the proposal should ensure 
safeguarding of securities and funds by eliminating obsolete services 
and streamlining NSCC's processes. The proposed rule change also should 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions by conforming 
NSCC's rules on settlement time frames with the rules of other self-
regulatory organizations.

III. Conclusion

    For the reasons stated above, the Commission finds that NSCC's 
proposal is consistent with Section 17A of the Act.\47\

    \47\ 15 U.S.C. Sec. 78q-1 (1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-95-03) be and hereby is 
approved for effectiveness on June 7, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14436 Filed 6-12-95; 8:45 am]
BILLING CODE 8010-01-M