[Federal Register Volume 68, Number 217 (Monday, November 10, 2003)]
[Notices]
[Pages 63831-63833]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28148]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48744; File Nos. SR-NSCC-2003-19 and SR-DTC-2003-11]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; The Depository Trust Company; Order Granting Accelerated 
Approval of a Proposed Rule Change Relating to the Consolidation of 
Settlement Processing Operations and to the Use of the Federal Reserve 
Banks' Net Settlement Service

November 4, 2003.

I. Introduction

    On September 26, 2003, the National Securities Clearing Corporation 
(``NSCC'') and The Depository Trust Company (``DTC'') filed with the 
Securities and Exchange Commission (``Commission'') proposed rule 
change File No. SR-NSCC-2003-19 and proposed rule change File No. SR-
DTC-2003-11 pursuant to Section 19(b)(1) of

[[Page 63832]]

the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the 
proposal was published in the Federal Register on October 17, 2003.\2\ 
No comment letters were received. For the reasons discussed below, the 
Commission is granting accelerated approval of the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 48614 (October 9, 2003), 
68 FR 59834.
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II. Description

    The NSCC and DTC proposed rule changes propose that NSCC and DTC 
consolidate their settlement processing operations. The NSCC proposed 
rule change proposes that NSCC require all its settling banks to use 
the Federal Reserve Banks' (``FRBs'') Net Settlement Service (``NSS'') 
to satisfy their end-of-day settlement obligations.\3\
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    \3\ 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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1. Consolidated Settlement Processing Operation

    Today, 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.) through the Participant Terminal 
System (``PTS'') on 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 customers in an 
``acknowledgement'' process and then transmit or receive funds to or 
from DTC's account and to or from NSCC's 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.
    As part of the new consolidated settlement processing operation, 
DTC and NSCC participants/members and their settling banks will be 
provided 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. This 
requirement is consistent with DTC's requirement that its settling 
banks utilize NSS.\4\
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    \4\ Supra note 3.
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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 
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. This should reduce the risk a 
settling bank would be unable to meet its settlement obligations 
because of operational problems and should reduce the occurrences of 
late payment fees due to delays in wiring settlement funds.\5\
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    \5\ Should NSS not be available for any reason, then settling 
banks are obligated to settle their NSCC and DTC obligations by wire 
transfer.
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    As part of requiring the use of NSS, NSCC is making 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 a 
definition of ``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'' as used with respect to a member, 
insurance carrier member, or fund member means the amount by which 
the member's, insurance carrier member's, or fund member's gross 
debit balance for a business day exceeds its gross credit balance on 
that 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 with an 
FRB a ``Settler Agreement'' 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 would be conducted in a manner as is 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. Settling banks that also act as settling banks for 
DTC participants previously had to sign a Settler Agreement with the 
FRB designating DTC as their NSS settlement agent. Accordingly, these 
settling banks will not be required to

[[Page 63833]]

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 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 an NSCC 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\
    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.
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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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    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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III. Discussion

    Section 19(b)(2)(B) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. 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 which are in the custody or control of the 
clearing agency or for which it is responsible.\10\ Because the 
proposed rule changes reduce the risk that a clearing bank will be late 
in fulfilling its settlement obligation, the proposed rule changes 
should better enable DTC and NSCC to fulfill their safeguarding 
obligations under Section 17A(b)(3)(F).
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    NSCC and DTC have requested that the Commission approve the 
proposed rule changes prior to the thirtieth day after the date of 
publication of notice of the filing. The Commission finds good cause 
for approving the proposed rule changes prior to the thirtieth day 
after the date of publication of the notice of the filing because 
accelerated approval will give DTC and NSCC adequate time to notify 
their participants/members and to provide their participants/members 
with sufficient time to prepare for implementation of the proposed rule 
changes before year end.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular Section 17A 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 changes (File Nos. SR-NSCC-2003-19 and SR-DTC-
2003-11) be and hereby are approved on an accelerated basis.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28148 Filed 11-7-03; 8:45 am]
BILLING CODE 8010-01-P