[Federal Register Volume 69, Number 40 (Monday, March 1, 2004)]
[Notices]
[Pages 9668-9670]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4432]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49294; File No. SR-NSCC-2003-15]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Implement Real-
Time Trade Matching for Fixed Income Securities

February 23, 2004.

I. Introduction

    On June 27, 2003, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2003-15 pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on January 
16, 2004.\2\ No comment letters

[[Page 9669]]

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. 49051 (January 12, 
2004), 69 FR 2639.
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II. Description

    NSCC is seeking to implement a real-time trade matching system 
(``RTTM'') for certain NSCC-eligible corporate bonds, municipal bonds, 
and unit investment trusts (``NSCC debt securities'').\3\ RTTM was 
implemented in the fourth quarter of 2000 by the former Government 
Securities Clearing Corporation (``GSCC''),\4\ an NSCC affiliate, for 
the processing of government securities transactions.\5\ It was 
designed so that the platform could be used for other fixed income 
securities. Accordingly, it was implemented in 2002 for mortgage-backed 
securities transactions processed by the former Mortgage Backed 
Securities Clearing Corporation (``MBSCC'').\6\ The purpose of the 
proposed rule change is to implement RTTM for NSCC debt securities. 
RTTM will eventually replace NSCC's current Fixed Income Transactions 
System (``FITS'').\7\
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    \3\ The proposed rule change does not apply to debt securities 
transactions that are submitted to NSCC via its correspondent 
clearing service, by regional exchanges/marketplaces, or through 
qualified securities depositories as defined in NSCC's rules because 
such transactions will not be processed by RTTM.
    \4\ On January 1, 2003, MBS Clearing Corporation (``MBSCC'') was 
merged into GSCC and GSCC was renamed the Fixed Income Clearing 
Corporation (``FICC''). The functions previously performed by GSCC 
are now performed by the Government Securities Division of FICC, and 
the functions previously performed by MBSCC are now performed by the 
Mortgage-Backed Securities Division of FICC. Securities Exchange Act 
Release No. 47015 (December 17, 2002), 67 FR 78531 [File Nos. SR-
GSCC-2002-09 and SR-MBSCC-2002-01].
    \5\ Securities Exchange Act Release No. 44946 (October 17, 
2001), 66 FR 53816 [File No. SR-GSCC-2001-01].
    \6\ Securities Exchange Act Release No. 45563 (March 14, 2002), 
67 FR 13389 [File No. SR-MBSCC-2001-02].
    \7\ In March 2003, the Commission approved certain modifications 
to FITS in order that NSCC could prepare its participants for the 
new RTTM functionality. Securities Exchange Act Release No. 47494 
(March 13, 2003), 68 FR 13975 [File No. SR-NSCC-2003-10].
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    The two areas of NSCC debt securities processing rules that require 
changes to implement RTTM are those governing (1) inbound submissions 
to NSCC and (2) NSCC's reporting of information related to such 
submissions to participants. Specifically, interactive messages and the 
RTTM Web User Interface (``RTTM Web'') \8\ will be added as ways in 
which participants can submit trade data and subsequent related trade 
processing instructions.\9\ With respect to output issued by NSCC, 
initially upon implementation end-of-day reports will continue to be 
produced by FITS whereas intraday reports will be produced by RTTM. In 
addition, NSCC will make output available for interactive message users 
and RTTM Web users in those respective media.
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    \8\ The RTTM Web will replace NSCC's PC Web application for NSCC 
fixed income securities.
    RTTM will be implemented in phases in 2004. Participants will be 
notified of specific implementation dates by Important Notice. 
Conversation with Nikki Poulos, Vice President and Associate General 
Counsel, FICC (January 9, 2004).
    \9\ Initially, RTTM will support the current batch method of 
data input.
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    The following is a summary of the key proposed rule changes needed 
to implement RTTM:
    (1) References to ``Contract Lists'' will be replaced with 
references to ``output'' or to ``information made available'' by NSCC 
to cover the additional types of output that could be generated by 
RTTM.
    (2) References to the names of specific instructions that 
participants may submit to resolve uncompared trades (e.g., ``Delete of 
Original Trade Input'') will be replaced with general references to 
``appropriate instructions'' to include similar instructions which have 
different names that may be submitted by interactive message users and 
RTTM Web users.\10\
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    \10\ For example, in the current version of NSCC's procedures 
there is a reference to an instruction called a ``Delete of Original 
Trade Input'' that is used by batch participants to delete 
uncompared trade data they have submitted. Interactive message users 
and RTTM Web users will use an instruction called a ``Cancel'' to 
accomplish the same result. Therefore, references to ``Delete of 
Original Trade Input'' will be replaced by references to 
``appropriate instruction'' in order to cover the equivalent 
interactive message and RTTM Web instruction.
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    (3) With respect to trades submitted for two-sided comparison 
processing, interactive message users, and RTTM Web users will be able 
to modify their trades, subject to the timeframes and requirements 
imposed by NSCC from time-to-time and will also be able to remove an 
unmatched trade from processing by sending an instruction indicating 
that they do not agree with the terms of a trade that has been 
submitted against them.\11\ Locked-in trade sources and syndicate 
managers that are interactive message users or RTTM Web users will also 
be able to modify their trade submissions.
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    \11\ RTTM Web users will also be able to subsequently restore a 
trade to processing by submitting the requisite instruction.
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    (4) RTTM will accept cash and next-day transactions for comparison-
only processing. RTTM will add an intraday money tolerance pursuant to 
which NSCC will compare a trade using the seller's contract amount if 
the contract amounts submitted by the buyer and seller are within a net 
$2 difference for trades of $1 million or less or $2 per million for 
trades greater than $1 million.\12\ In addition, RTTM will compare a 
trade if trade data matches in all respects, including contract amounts 
which have been compared pursuant to the money tolerances, except for 
trade date. In this case, the earlier of the two trade dates submitted 
will be used. RTTM will not use the summarization process used to 
compare trades currently set forth in NSCC Procedure II, Section 
D.1(e).
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    \12\ No changes are being proposed to NSCC's existing end-of-day 
money tolerance currently contained in Procedure II, Section D.1(a).
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    (5) NSCC's rules and procedures will continue to provide that the 
submission of a locked-in trade or a syndicate takedown trade results 
in a compared trade. However, RTTM will provide members on behalf of 
whom locked-in and syndicate takedown trades are submitted (``LI/ST 
contrasides'') the option of submitting matching trade details for 
their internal reconciliation purposes. In order to facilitate the 
participants' internal reconciliation process, RTTM has been designed 
to issue output that indicates a status of ``unmatched'' or ``match 
request'' upon receipt of a locked-in or syndicate takedown trade. 
Notwithstanding the output indicating unmatched and match request, the 
proposed rule changes make clear that the submission of matching trade 
data by LI/ST contrasides will have no legal effect on the status of 
locked-in and syndicate takedown trades as compared trades. In 
addition, notwithstanding that output is made available by NSCC as a 
result of subsequent processing information submitted by LI/ST 
contrasides that are not specifically provided for in NSCC's rules and 
procedures, the proposed rule changes make clear that such submissions 
will have no legal effect and that RTTM has been designed to accept 
such submissions for participants' internal reconciliation purposes 
only.
    In addition to the above, NSCC is proposing the following 
additional technical changes and corrections:
    (1) References to the ``Automated Bond System'' (``ABS'') will be 
deleted because ABS trades submitted by the New York Stock Exchange are 
locked-in trades and are covered by provisions dealing with locked-in 
trades. In addition, references to the ``AMEX Order File System'' will 
be deleted because that system is no longer operational.
    (2) Technical corrections will be made throughout the debt when-
issued

[[Page 9670]]

section of NSCC's Procedure II, Section E to clarify the submission 
requirements for a transaction to be treated as a when-issued 
transaction. It should be noted that due to the systems development 
schedule, RTTM will not be available with respect to when-issued 
corporate debt securities transactions upon implementation. NSCC will 
file a rule change pursuant to Section 19(b)(3) of the Act and will 
notify members when the service becomes available for these 
transactions.
    (3) Technical corrections will be made to the use of the term 
``settlement date'' so that when referenced with upper case letters it 
means the settlement date as established by NSCC.\13\
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    \13\ For example, if a trade is executed on September 15 with a 
contract settlement date of September 18 but the trade does not 
match until September 18 or later, NSCC will provide the Settlement 
Date.
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III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to perfect the mechanism of a national 
system for the prompt and accurate clearance and settlement of 
securities transactions.\14\ The Commission finds that NSCC's proposed 
rule change is consistent with this requirement because it should 
permit the accurate clearance and settlement of securities by enabling 
NSCC to process fixed income trades more efficiently.
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is 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 change (File No. SR-NSCC-2003-15) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4432 Filed 2-27-04; 8:45 am]
BILLING CODE 8010-01-P