[Federal Register Volume 63, Number 221 (Tuesday, November 17, 1998)]
[Notices]
[Pages 63952-63954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30716]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40657; File No. SR-NSCC-98-06]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Modifying the 
Automated Customer Account Transfer Service

November 10, 1998.
    On June 5, 1998, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-98-06) 
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') and on June 17, 1998, amended the proposed rule change.\1\ 
Notice of the proposal was published in the Federal Register on October 
5, 1998.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s (b)(1).
    \2\ Securities Exchange Act Release No. 40487 (September 28, 
1998), 63 FR 53479.
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I. Description

    NSCC's automated customer account transfer service (``ACATS'') 
enables members of NSCC to effect automated transfers of customer 
accounts among NSCC members.\3\ The proposed rule change expands the 
types of eligible ACATS participants and the kinds of accounts that may 
be transferred. Additionally, it permits NSCC to transmit date to 
clearing agencies in order to expand the automated settlement 
capabilities of ACATS.\4\
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    \3\ ACATS complements New York Stock Exchange (``NYSE'') and 
National Association of Securities Dealers (``NASD'') rules that 
require NYSE and NASD members to use automated clearing agency 
customer account transfer services and to effect customer account 
transfers within specified time frames. For a description of ACATS 
as it was before the revisions approved by this order, refer to 
Securities Exchange Act Release No. 22481 (September 30, 1985), 50 
FR 41274 (SR-NSCC-85-07); Securities Exchange Act Release No. 34879 
(October 21, 1994), 59 FR 54229 (SR-NSCC-94-13); and NSCC Rule 50.
    \4\ NSCC stated that another reason for the redesign is to make 
the ACATS system Year 2000 compliant.
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A. Users

    Currently, only NSCC members, primarily broker-dealers, may 
participate in ACATS. The proposed rule change permits a qualified 
securities depository (``QSD'') to also effect customer account 
transfers through ACATS on behalf of its participants.\5\ Thus the 
proposed rule change permits ACATS transfers between two participants 
of a QSD and between a QSD participant and an NSCC member.
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    \5\ QSD is a defined term in NSCC's Rule 1 as a registered 
clearing agency, pursuant to section 3(a)(23) of the Act, that has 
entered into an agreement with NSCC pursuant to which it will act as 
a securities depository for NSCC and will effect book-entry 
transfers of securities for NSCC with respect to NSCC's continuous 
net settlement system. The Depository Trust Company is the only 
registered clearing agency that has entered into such an agreement 
with NSCC.
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B. Transfers

    The proposed rule change sets forth three categories of ACATS 
transfers: (1) Receiving members \6\ initiated full account transfers; 
(2) delivering member \7\ initiated partial account transfers; and (3) 
receiving member initiated partial account transfers. Categories one 
and two, while previously available are modified by the proposal. 
Category three is a new addition to ACATS.
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    \6\ The proposed rule change defines the receiving member as a 
NSCC member or QSD to who a customer's full account is to be 
transferred.
    \7\ The proposed rule change defines the delivering member as 
the NSCC member or QSD which currently has the account.
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1. Receiving Member Initiated Full Account Transfers
    Under the revised ACATS, a receiving member is required to submit 
transfer information to NSCC in automated format. The ``transfer 
initiation request'' paper form is no longer accepted by NSCC.\8\
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    \8\ A receiving member will be able to continue to utilize the 
facilities of NSCC to submit physical documentation that a 
delivering member may need in order to act upon the receiving 
member's request.
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    Currently, once a delivering member rejects a receiving member's 
transfer request, the receiving member is required to reinitiate the 
ACATS process. The rule filing provides that in response to certain 
enumerated categories of delivering member rejections, the receiving 
member may make corrections to its customer account transfer request. 
This allows a receiving member to adjust its customer account transfer 
request by submitting corrections to NSCC within one business day after 
notification of a delivering member's rejection. A delivering member 
must then either reject the adjusted transfer request by submitting a 
new rejection to NSCC or submit to NSCC detailed customer account asset 
data. If the delivering member fails to respond to the adjusted 
transfer request within the time frame established by NSCC, NSCC will 
delete the request from ACATS and will notify the receiving and 
delivering members.
    To the extent that a receiving member determines that any 
information as reported on the tranfer initiation request is 
inaccurate, the rule filing provides that the receiving member may 
cause an adjustment to be made by submitting corrected data to NSCC. 
Similarly, if a delivering member determines that the account number of 
its customer as reported on the transfer initiation request is 
inaccurate, it may cause that adjustment to be made by submitting 
corrected data to NSCC.
    Under the revisions, upon submission of customer account asset 
data, the delivering member is required to specify the quantity of 
mutual fund services eligible book share mutual fund assets (``mutual 
fund assets'') to be processed, if any, and to indicate whether the 
transfer is a full or a partial transfer. A full transfer will cause 
all mutual fund assets, whether greater or lesser than the quantity 
specified, to be transferred. A partial transfer will cause only the 
quantity specified or, if the account has less than such amount, such 
lesser amount to be transferred. Since the actual quantity registered 
on the records of the mutual fund may be adjusted between the time of 
the transfer request submission and settlement of the ACATS transfer 
(due for example to reinvested dividends or capital gains), this 
modification provides ACATS participants with a means to transfer the 
quantity of assets available on settlement date (i.e., a full 
transfer). In addition, the rule filing states that if the transfer is 
not confirmed or rejected by the mutual fund processor or fund member 
within the time frame established by NSCC, it will be deleted from the 
Fund/Serv system \9\ by NSCC. As a result, such transfer requests will 
no longer pend in NSCC's systems for an indefinite period of time.
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    \9\ For a complete description of NSCC's Fund/SERV system refer 
to Securities Exchange Act Release No. 31937 (March 1, 1993), 58 FR 
12609 (File No. SR-NSCC-92-14) (order approving proposed rule change 
regarding Fund/SERV system).
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    The proposed rule change permits a receiving member to accelerate 
the transfer of a customer account by

[[Page 63953]]

accepting the report detailing the customer account asset data on the 
business day it receives the report from NSCC. However, under these new 
circumstances, if a delivering member submits a timely adjustment to an 
account for which an accelerated acceptance has been received by NSCC, 
it will cause such accelerated acceptance to be void.
    To the extent an ACATS transfer is between two NSCC members, the 
proposed rule change differentiates between the processing of 
continuous net settlement (``CNS'') eligible and non-CNS eligible items 
that are otherwise eligible at The Depository Trust Company (``DTC''). 
The rule filing does not change the processing of CNS eligible items. 
The proposed rule change provides that NSCC will produce ACATS 
instruction files for all non-CNS eligible items that are otherwise 
eligible at DTC. The instruction files will be similar to DTC deliver 
orders (i.e., naming the receiving and delivering participants, the 
quantity of the securities to be delivered, and the value for such 
delivery). Any such deliveries are subject to the rules of DTC. If a 
delivering member does not want instruction files to be submitted to 
DTC, it may request at the time the account asset details are submitted 
or pursuant to a standing instruction filed with NSCC that separate 
receive and deliver instructions be produced. In such instance, it is 
up to the delivering member to initiate the delivery of the asset.
    Under the proposed rule change, foreign currency assets may be 
transferred from a delivering member to a receiving member. ACATS will 
produce receive and deliver instructions but will not specify a value 
for such assets.
    To the extent that either a receiving member or a delivering member 
(or both) is a participant of a QSD, such transfer will be processed as 
ACATS transfers with NSCC members as both the receiving member and the 
delivering member with the exceptions specified below:
    i. For all DTC eligible assets, other than United States dollar 
cash balances (``cash''), assets covered by a standing instruction 
filed by a delivering member with NSCC, and assets for which a receive/
deliver instruction request was received from a delivering member at 
the time asset details were submitted, NSCC will issue an instruction 
file to DTC specifying the quantity of each asset to be delivered with 
a deliver value of zero.
    ii. For all non-DTC eligible assets (other than assets available at 
other registered clearing agencies and cash), assets covered by 
standing instruction filed by a delivering member with NSCC and asset 
for which a receive/deliver instruction request was received from a 
delivering member at the time asset details were submitted, NSCC will 
produce receive and deliver instructions naming the receiving member 
and the delivering member. All such receive and deliver instructions 
will specify no value. Unlike a transfer between NSCC members, NSCC 
will not debit and credit the value of assets being transferred between 
participants of a QSD or between a participant of a QSD and a member of 
NSCC.\10\
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    \10\ Under the current ACATS rule, the delivering firm is 
debited the current market value of the assets and the member 
receiving firm is credited the current market value of the assets. 
The member delivering firm recovers its money by making delivery of 
the assets. Under the proposed rule change, whenever a QSD 
participates in the ACATS process, the assets will be delivered on a 
no value basis.
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    iii. If the account has a cash balance, NSCC will issue an 
instruction to DTC indicating the participants to be debited and 
credited and the corresponding amount.
2. Delivering Member Initiated Partial Account Transfers
    The proposed rule change permits a delivering member to initiate 
some types of partial account transfers. In addition to the transfer of 
residual credit positions, delivering members are able to: Deliver a 
partial account (in the form of cash or securities); initiate the 
delivery of a position which was purchased by the delivering member for 
the benefit of a customer's account and which the customer wants 
custodied at the receiving member; obtain the return of cash previously 
paid with respect to fail positions for which delivery is unable to be 
completed;\11\ and obtain the return of cash or securities mistakenly 
delivered through ACATS other than mutual fund assets and positions 
eligible for processing at The Options Clearing Corporation (``OCC''), 
the Government Securities Clearing Corporation (``GSCC''), or the 
Participants Trust Company (``PTC'').\12\
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    \11\ This service may only be initiated to the extent that the 
fail is between two NSCC members.
    \12\ This service may only be initiated to the extent that the 
delivery is between two NSCC members.
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    A delivering member may initiate a transfer by submitting to NSCC 
those transfer details that are required by NSCC. NSCC will reject the 
transfer if the details contain an edit or format error. NSCC will 
notify the delivering member if a transfer is rejected in which case 
the delivering member must reinitiate the transfer as if it had never 
been previously submitted.
    A receiving member may reject the transfer by submitting 
information on the same day as the transfer request is received. No 
action will be required by the receiving member if it determines to 
accept the transfer. A receiving member may not submit corrections, and 
a delivering member may not make adjustments to such transfer request.
    Settlement date is one business day following the day NSCC receives 
the transfer request unless the request includes option assets which 
are eligible for processing at OCC in which case the settlement date 
for all assets shall be two business days following the day NSCC 
receives the transfer request.
3. Receiving Member Initiated Partial Account Transfers
    Under the proposed rule change, a receiving member may submit a 
request to initiate the transfer of a partial customer account. The 
request will be delivered by NSCC to the delivering member on the same 
day that it is received by NSCC. Each day NSCC will produce a report 
that indicates all of the requests received by NSCC that day. A 
delivering member may respond to a receiving member's request for a 
partial account transfer at any time by the delivering member 
initiating a partial account transfer as described in the delivering 
member initiated transfer section above. No action is required by the 
delivering member if it determines not to respond to a request, and no 
transfer will occur.

C. Agreement With DTC

    NSCC is entering into an agreement with DTC to permit DTC to obtain 
access to ACATS on behalf of its participants.\13\ NSCC's agreement 
with DTC will permit ACATS to be used for the transfer of accounts 
between two DTC participants or between a DTC participant and an NSCC 
member.
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    \13\ This agreement will be similar to the current agreement 
between NSCC and DTC regarding DTC's access to NSCC's mutual funds 
services.
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D. Linkage Agreements

    NSCC currently has an agreement in place with OCC regarding the 
transfer of options positions within customer accounts being 
transferred pursuant to ACATS. The agreement provides that NSCC may 
send instructions to OCC for the delivery and receipt of options 
positions on behalf of ACATS participants that are members of NSCC as 
well as of OCC.
    In order to broaden the types of assets which can be transferred 
through

[[Page 63954]]

ACATS based on instructions from NSCC, the proposed rule change permits 
NSCC to establish links with other registered clearing agencies 
(``RCA''), such as DTC, PTC, and GSCC. Once an agreement has been 
reached with the applicable RCA, to the extent a transfer involves an 
asset position eligible for delivery at such RCA and both the receiving 
member and delivering member have an account there, NSCC will issue 
instructions to the applicable RCA indicating the delivering or 
receiving participant and the quantity of assets to be delivered and 
received. The instructions will not specify a value unless the transfer 
is between two members of NSCC and the assets to be transferred are 
government securities (where a nominal value shall be specified) \14\ 
or mortgage-backed securities. If the assets are mortgage-backed 
securities, on settlement date NSCC will debit the deliverer the value 
and credit the receiver the value of the assets.
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    \14\ On June 17, 1998, NSCC amended the proposed rule change 
(File No. NSCC-98-06) to include the transfer of government 
securities where a nominal value is specified.
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E. Indemnification Provision

    The proposed rule change includes indemnification provisions 
similar to those currently in use by users of ACATS. While the revised 
rule includes such provisions, it does not preclude participants from 
entering into separate indemnification arrangements which are broader 
than those contained in the rule.

II. Discussion

    The Commission finds that the 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).\15\ Section 17A(b)(3)(A)(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 
believes that NSCC's rule change meets this standard because the 
changes to ACATS such as the ability to electronically transfer 
accounts not only to and from broker-dealers but not to and from banks 
and other financial institutions, the ability to do partial transfers, 
the ability to make certain corrections to instructions, and the 
ability to electronically transfer U.S. government and mortgage-backed 
securities, should provide a more efficient method for the transfer of 
customer assets and should encourage use by more financial 
institutions.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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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 sections 17A(b)(3) (A) and (F) 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-98-06) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30716 Filed 11-16-98; 8:45 am]
BILLING CODE 8010-01-M