[Federal Register Volume 68, Number 201 (Friday, October 17, 2003)]
[Notices]
[Pages 59834-59837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48614; File Nos. SR-NSCC-2003-19 and SR-DTC-2003-11]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; The Depository Trust Company; Notice of Filing of Proposed 
Rule Changes Relating to the Consolidation of Settlement Processing 
Operations and to the Use of the Federal Reserve Banks' Net Settlement 
Service

October 9, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 26, 2003, the 
National Securities Clearing Corporation (``NSCC'') and The Depository 
Trust Company (``DTC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes (File Nos. SR-
NSCC-2003-19 and SR-DTC-2003-11). The proposed rule changes are 
described in Items I, II, and III below, which items have been prepared 
primarily by NSCC and DTC. The Commission is publishing this notice to 
solicit comments on the proposed rule changes from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Changes

    The NSCC proposed rule change proposes that NSCC require all its 
settling banks to use the Federal Reserve

[[Page 59835]]

Banks' (``FRBs'') Net Settlement Service (``NSS'') to satisfy their 
end-of-day settlement obligations.\2\ The NSCC and DTC proposed rule 
changes propose that NSCC and DTC consolidate their settlement 
processing operations.
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    \2\ On September 2, 2003, DTC implemented the requirement that 
all DTC settling banks use NSS. Securities Exchange Act Release No. 
48089 (June 25, 2003), 68 FR 40314 (July 7, 2003) [File No. SR-DTC-
2002-06].
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, NSCC and DTC included 
statements concerning the purpose of and basis for the proposed rule 
changes and discussed any comments they received on the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. NSCC and DTC have prepared summaries, set 
forth in sections (A), (B), and (C) below, of the most significant 
aspects of these statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by NSCC and DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. Consolidated Settlement Processing Operation
    Currently, DTC and NSCC settlements are run on two separate systems 
each of which is fed throughout the day with debit and credit data 
generated by participant/member activities. At the end of the 
processing day, the data is summarized and reported by product category 
(e.g., in the case of NSCC, continuous net settlement, mutual funds, 
envelope services, etc. and in the case of DTC, delivery orders, stock 
loans, dividends, redemptions, etc.) on the Participant Terminal System 
(``PTS'') via separate DTC and NSCC screens. The data is netted 
separately at DTC and at NSCC to produce an aggregate debit or credit 
at each clearing agency.
    Following the determination of final net numbers for each 
participant/member for each clearing agency, a participant/member's 
credit balance at one clearing agency is netted against any debit 
balance at the other (``cross-endorsement''). The settling banks 
subsequently authorize settlement for their participant customers in an 
``acknowledgement'' process and then transmit or receive funds to or 
from DTC's account and to or from NSCC subaccount at the Federal 
Reserve Bank of New York (``FRBNY'').
    In order to promote operating efficiencies, improve risk 
management, and lower transaction processing costs, DTC and NSCC are 
seeking to introduce a consolidated settlement processing operation. A 
consolidated settlement processing operation will provide participants/
members with consolidated NSCC and DTC settlement reporting, a single 
point of access for both NSCC and DTC settlement information, and 
reduced settlement risk. This consolidation is intended to be 
operational only. It is not intended to affect the legal relationship 
that participants/members and their settling banks have with NSCC or 
DTC.
    The new consolidated settlement processing operation will provide 
DTC and NSCC participants/members and their settling banks with a 
single set of enhanced PTS functions. Each participant/member will be 
able to view its DTC and NSCC settlement activity and will be provided 
a consolidated end-of-day netted DTC/NSCC settlement obligation. A 
participant/member's debits and credits at DTC and at NSCC will be 
separately summarized in one consolidated activity statement which will 
show the final DTC and NSCC balances and the netted amount for each 
participant/member.
2. Net Settlement Service
    To reduce settlement risk and to permit settling banks to settle 
their net-net debits at NSCC and at DTC with a single payment, NSCC is 
amending its procedures to require that NSCC settling banks satisfy 
their daily net-net debit balances at NSCC through the use of NSS.
    The change being sought is consistent with DTC's requirement that 
its settling banks utilize NSS.\4\
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    \4\ Supra note 2.
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    As more fully described below, NSS will permit DTC, as NSCC's 
settlement agent, to submit instructions to have the FRB accounts of 
the NSCC settling banks charged for their NSCC net-net debit balance. 
By centralizing DTC and NSCC's settlement processing and by adopting 
NSS as the payment mechanism, each settling bank's balance at NSCC 
(whether a net-net debit or a net-net credit) will also be aggregated 
or netted with its settlement balance at DTC resulting in only a single 
debit or single credit having to be made to the settling bank's FRB 
account. Utilization of NSS by NSCC members and their settling banks 
will eliminate the need for a settling bank to initiate a wire transfer 
in satisfaction of a net-net debit balance, which should reduce the 
risk a settling bank may incur a late payment fee due to a delay in 
wiring settlement funds and will permit the aggregation or netting of 
such amounts with its DTC balance.\5\
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    \5\ Should NSS not be available for any reason, then Settling 
Banks will be obligated to settle their NSCC and DTC obligations by 
wire transfer.
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    NSCC is proposing certain technical corrections to assure that 
defined terms and other provisions are used consistently. Accordingly, 
NSCC's Rule 1 (Definitions and Descriptions) is being amended to (1) 
include a new definition of ``Settlement Agent'' as DTC will act as 
NSCC's settlement agent in collecting and paying out settlement monies 
and (2) set forth the definition for ``Net Credit Balance'' which is 
currently used in Rule 12 (Settlement) and elsewhere in the Rules.
    NSCC Rule 12 and Rule 55 (Settling Banks) are being amended to make 
clear that in those instances where NSCC permits a Settling Member, 
Insurance Carrier Member, or Fund Member to settle other than through a 
settling bank, it will be deemed to have failed to settle if it fails 
to pay its Net Debit Balance.\6\ In addition, rule language is being 
modified to make clear that settlement of monies will be effected in 
the manner provided for in NSCC's Procedures.
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    \6\ Net Debit Balance for a business day as used with respect to 
a Member, Insurance Carrier Member, or Fund Member means the amount 
by which the Member's, Insurance Carrier Member, or Fund Member's 
gross debit balance for such business day exceeds its gross credit 
balance on such business day.
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    NSCC Procedure VIII (Money Settlement Service) is being amended to 
reflect the requirement that settling banks use NSS and to provide the 
procedures whereby settling banks that act as such for both NSCC and 
DTC (``common settling banks'') will have their settlement balances at 
both clearing agencies aggregated or netted into a single payment or 
credit amount.
    Prior to using NSS, settling banks will be required to sign a 
Settler Agreement with an FRB which incorporates a requirement that the 
settling bank agrees to the terms of the FRB's Operating Circular No. 
12. Under Section 6.4 of Operating Circular No. 12, the settlement 
agent (i.e., DTC acts as settlement agent for NSCC) has certain 
responsibilities regarding allocation among settling banks of a claim 
for indemnity by the FRB. The allocation of any such claim among NSCC's 
members will be as described in NSCC Procedure VIII, Section 4(iv). The 
signed Settler Agreement must be on the settling bank's letterhead, 
signed by an authorized signer recognized by the FRB, and submitted to 
the FRB through DTC as NSCC's settlement agent.

[[Page 59836]]

Settling banks that also act as settling banks for DTC participants 
have to sign a Settler Agreement with the FRB designating DTC as their 
NSS settlement agent. Accordingly, these settling banks will not be 
required to sign new Settler Agreements to cover NSCC's NSS settlement. 
Instead, as provided in NSCC Procedure VIII, the Settler Agreements 
they provide to DTC for delivery to the FRB designating DTC as their 
NSS settlement agent will, upon the approval and effectiveness of 
NSCC's proposed rule change, be deemed to include the settling bank's 
NSCC settlement obligations as well as its DTC settlement obligations.
    As is currently required, each settling bank will be required to 
acknowledge its NSCC net-net balance at the end of the day. However, 
any settling bank that is a Member and settles solely for its own 
account may elect to not acknowledge its net-net settlement balance at 
the end of the day.\7\ This option will not be made available to 
settling banks that settle for others because the acknowledgement 
process includes the option to refuse to pay for a participant for whom 
the settling bank provides settlement services. Unless a settling bank 
has elected not to acknowledge its net-net settlement balance as 
provided above, DTC will not send a settling bank's net-net debit 
balance to a FRB for collection until the settling bank has 
acknowledged its balance.
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    \7\ Settling banks electing not to acknowledge their settlement 
balance will be required to sign an Acknowledgement Option Form. A 
common settling bank may not elect to opt out of acknowledging its 
balances unless it settles solely for its own account at both DTC 
and NSCC in which case that election will cover both the bank's NSCC 
and DTC net settlement balances.
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    As NSCC's settlement agent, DTC will send a ``preadvice'' to each 
settling bank, notifying the settling bank that DTC is about to send 
its NSS transmission to the FRB. If a settling bank does not have 
sufficient funds in its FRB account to enable DTC, as settlement agent, 
to debit the full amount of its settlement balance or should NSS not be 
available to a settling bank for any reason, the settling bank will be 
obligated to wire all such amounts to DTC prior to the designated cut-
off time.\8\
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    \8\ If a settling bank is experiencing extenuating circumstances 
and as a result needs to opt out of NSS for one business day and 
send its wire directly to DTC's FRBNY account for its debit balance, 
that settling bank must notify NSCC/DTC prior to acknowledging its 
settlement balance.
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    A new item 4 in NSCC Procedure VIII sets forth the netting and 
payment obligations among common settling banks, NSCC, and DTC. For 
each common settling bank, DTC, as settlement agent, will aggregate or 
net the net-net debit or net-net credit as applicable due by or due to 
such bank from or to NSCC and DTC. If the common settling bank owes a 
settlement debit to both clearing agencies, DTC will debit the FRB 
account the sum of the debit amounts. If the bank is owed a settlement 
credit from both, DTC will wire the bank the sum of the credit amounts.
    Where the common settling bank owes a debit to one clearing agency 
and is owed a credit from the other, the common settling bank will be 
obligated to pay the net amount of that sum (if a net debit) or be 
entitled to receive the net amount (if a net credit). The clearing 
agency which prenet owes the settlement credit to the common settling 
bank will pay the net credit difference to the other clearing agency if 
the other clearing agency has a prenet debit.\9\ NSCC will implement 
its failure to settle procedures if any common settling bank that had a 
net-net debit to NSCC before aggregation or netting of such amounts 
with the common settling bank's DTC settlement balance fails to pay its 
aggregate NSCC/DTC net debit amount, referred to as the ``consolidated 
settlement debit amount,'' in full by the time specified in NSCC and 
DTC's procedures.
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    \9\ For example, if NSCC owes the common settling bank $5 
million, and DTC is owed $2 million by the common settling bank, 
NSCC will pay DTC $3 million dollars which DTC will pay to the 
common settling bank using NSS.
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    NSCC and DTC believe that the proposed rule changes are consistent 
with the requirements of section 17A of the Act \10\ and the rules and 
regulations thereunder applicable to NSCC and DTC because they are 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agencies or for which they 
are responsible by reducing the risk that the completion of settlement 
will be delayed because a settling bank is late or is unable to wire 
funds to DTC or NSCC in settlement of its obligations.
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    \10\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC and DTC do not believe that the proposed rule changes will 
have an impact on or impose a burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Changes Received From Members, Participants or Others

    NSCC and DTC have discussed this proposal with various participants 
and industry groups, a number of whom have worked closely with NSCC and 
DTC in developing the proposed consolidated settlement system. NSCC and 
DTC will notify the Commission of any written comments received.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date 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 such proposed rule changes or
    (B) Institute proceedings to determine whether the proposed rule 
changes 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File Nos. SR-NSCC-2003-19 and SR-DTC-2003-11. These file numbers should 
be included on the subject line if e-mail is used. To help us process 
and review comments more efficiently, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 inspection and copying in the Commission's 
Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of such filing also will be available for inspection and copying 
at the principal offices of NSCC and DTC.
    All submissions should refer to File Nos. SR-NSCC-2003-19 and SR-
DTC-2003-11 and should be submitted by November 3, 2003.


[[Page 59837]]


    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26258 Filed 10-16-03; 8:45 am]
BILLING CODE 8010-01-P