[Federal Register Volume 69, Number 100 (Monday, May 24, 2004)]
[Notices]
[Pages 29605-29607]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11647]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49717; File No. SR-NSCC-2004-01]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Modify the 
National Securities Clearing Corporation's Continuous Net Settlement 
System

May 17, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 23, 2004, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on March 26, 
2004, amended the proposed rule change described in Items I, II, and 
III below, which items have been prepared primarily by NSCC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change 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 Change

    NSCC is seeking to modify its Continuous Net Settlement (``CNS'') 
system.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    As part of the securities industry's straight-through processing 
(``STP'') initiative, NSCC has been engaged in a project to update and 
revise its CNS system (``CNS Rewrite''). The major aspects of the CNS 
Rewrite include a completely new platform on which the CNS system will 
run that will accommodate real-time updates to the system, will improve 
access to CNS and depository information for members, and will provide 
the capability to add trades to the settlement process on a real-time 
basis until 11:30 a.m. on settlement day.
    The new CNS system, with a targeted implementation date of July 
2004, will be able to take in trades until 11:30 a.m. on settlement day 
and net and settle them that day.\3\ Two additional Consolidated Trade 
Summaries that will report trades settling on settlement date have been 
developed to support this. CNS will produce the Supplemental 
Consolidated Trade Summary at or about 2 a.m. and at or about 1 p.m. on 
each settlement date. In addition, so that members can update their CNS 
positions immediately, CNS will provide intraday messages for activity 
that occurs after the start of the day cycle \4\ as a result of 
settling trades and miscellaneous activity going into CNS on settlement 
date. These messages will be optional to the member because the same 
information will also be reported in the second Supplemental 
Consolidated Trade Summary made available at 1 p.m. and in the Daytime 
Miscellaneous Activity Report \5\ issued later in the afternoon on each 
settlement date. In addition, members will be able to view their CNS 
positions on a real-time basis on the Participant Browser Service 
(``PBS'') developed by The Depository Trust Company (``DTC''). The CNS 
Cash Reconciliation Statement will be updated on a real-time basis and 
will be available on PBS after night cycle processing.
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    \3\ At the current time, trades in debt securities compared or 
recorded through NSCC's Real-Time Trade Matching (``RTTM'') system 
will not utilize this same day settling capability. Instead, as-of 
trades in such securities compared or recorded through RTTM after 
its cutoff time on T+2 will not settle in the normal settlement 
cycle but will be assigned a new settlement date which will be the 
settlement day following the day the trade is compared or recorded 
by NSCC.
    \4\ In general, the day cycle currently begins at approximately 
7 a.m. and ends at 3:10 p.m., and the night cycle begins at 
approximately 7:00 p.m. and ends at 12:00 a.m.
    \5\ The Daytime Miscellaneous Activity Report will also include 
corporate actions, stock borrows, and any other miscellaneous 
activity received in CNS after the start of the day cycle.
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    Another new STP feature available in the new CNS system will be the 
ability to create automated Deliver Orders (``DOs'') for non-CNS, 
depository eligible securities.\6\ Today, NSCC creates receive and 
deliver instructions, or balance orders, for non-CNS depository 
eligible securities which its members then have to enter as DOs at DTC. 
To automate and streamline the processing of trades in non-CNS, 
depository eligible issues, at the request of the delivering member, 
NSCC will create delivery versus payment DOs that will automatically be 
transmitted to DTC for processing. This is an optional feature that can 
be activated by the delivery of standing instructions to NSCC that will 
cover all of the deliverer's balance orders and special trades.\7\
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    \6\ Transactions in securities that are not eligible for CNS are 
processed through NSCC's Balance Order Accounting Operation. Such 
securities are referred to as ``Balance Order Securities.''
    \7\ All such DOs will be subject to DTC's applicable DO fees. 
The DO standing instructions will cover all of the member's NSCC 
balance orders and special trades. The delivering member can use 
DTC's Inventory Management System if it wishes to control the timing 
and flow of any particular balance order transaction.
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    Other new features that will be implemented include the enhancement 
of the CNS Stock Borrow Program to include acceptance of borrowing 
instructions for the day cycle and the acceptance and real-time 
application of CNS ``Fully Paid For'' securities instructions. The CNS 
Stock Borrow Program enhancement is intended to maximize the use of 
excess collateral and reduce the number of CNS fails. In addition to 
providing instructions for securities available for borrowing in the 
night cycle, members will now also be able to provide CNS with a new 
file of available excess collateral from 5 a.m. until 1 p.m. for use in 
the day cycle.
    The real-time acceptance of CNS ``Fully Paid For'' instructions is 
intended to further facilitate members' compliance with securities 
segregation requirements. At the current time, a member that delivers 
securities in its possession or control in anticipation of receiving 
securities from CNS as a result of allocations during the night cycle 
may instruct NSCC to move the open CNS long position from its CNS A 
(long valued) Account to its Fully-Paid-For E

[[Page 29606]]

Subaccount to meet its customer segregation requirements. NSCC makes 
such movements at the end of the processing day and concurrently debits 
the member's settlement account for the value of the position in the E 
subaccount. NSCC then segregates the funds received as a result of such 
debit so that it constitutes a control location within the meaning of 
Securities Exchange Act Rule 15c3-3.\8\
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    \8\ 17 CFR 240.15c3-3.
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    The proposed CNS changes modify this procedure to (a) expand the 
capability of a member to utilize the Fully-Paid-For E Subaccount in 
anticipation of CNS allocations in the day cycle as well as the night 
cycle and (b) permit fully-paid instructions to be received and applied 
on a real-time basis during the day cycle up through 2:45 p.m. By 
accepting such instructions on a real-time basis, any securities 
received into a member's Fully-Paid-For E subaccount can automatically 
be updated to the member's memo seg position at DTC on an intraday 
basis at the member's election through standing instructions.\9\
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    \9\ For a description of DTC's memo seg service, refer to 
Securities Exchange Act Release No. 26250 (November 3, 1988), 53 FR 
45638 [File No. SR-DTC-88-16].
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    The following is a summary of the proposed rule changes needed to 
implement the modifications to the CNS system:
    (1) Rule 11, ``CNS System,'' is being amended to reflect the 
addition of the Supplemental Consolidated Trade Summaries that will be 
produced on each settlement day. Because of the new system's ability to 
take in trades, net them, and update CNS processing on a real-time 
basis on settlement day, Rule 11 is also being amended to make clear 
that with respect to trades settling on that day, a member's obligation 
to deliver or pay for and receive CNS securities will be fixed each 
time the member's net settling position is determined using CNS 
processing and the net settling position is made available by NSCC.
    In addition, Section 9 of Rule 11 is being amended to provide the 
mechanism whereby a member with trades in CNS or Balance Order 
securities designated as ``Special Trades'' (which must be settled on a 
member-to-member basis) may issue NSCC standing instructions to provide 
automated DO instructions to DTC.\10\ Any such instructions will cover 
all of the delivering member's balance orders and Special Trades.
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    \10\ A technical change is also being made to this section to 
delete the reference to such trades having the status of ``security 
balance orders.'' This deletion should have been made at the same 
time Rule 18 was amended in 2000 clarifying that Special Trades are 
to be settled directly between the members. Securities Exchange Act 
Release No. 42747 (May 2, 2000), 65 FR 30170 [File No. SR-NSCC-98-
14].
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    (2) Rule 44, ``Deliveries Pursuant to Balance Orders,'' is being 
amended to provide the mechanism whereby a delivering member can issue 
standing instructions to NSCC to provide automated delivery 
instructions to DTC. Any such instructions will cover all of the 
delivering member's balance orders and Special Trades.\11\
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    \11\ Once this functionality is implemented, NSCC will no longer 
provide the PDQ Delivery System for Compare Municipal Transactions. 
This service currently provides for automated DTC delivery 
instructions for compared municipal bond transactions.
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    (3) Procedures II, ``Trade Comparison Service,'' and III, ``Trade 
Recording Service (Interface Clearing Procedures),'' are being amended 
to make conforming changes to account for same day settling trades by 
indicating that the cutoff times for trade comparison and recording of 
as-of trades to settle on their originally designated settlement 
schedules will now be the cutoff time set on T+3 (instead of T+2). T+3 
and older as-of trades received thereafter will be assigned a new 
settlement date, which will be the following settlement day.\12\
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    \12\ At this time, no corresponding change is being made to 
Procedure II.D. because both the Fixed Income Transaction System 
(``FITS'') and its successor, RTTM, do not have same day settling 
trade capability. They will continue to maintain their current T+2 
cutoff times so that trades received for comparison or recording by 
FITS or RTTM after T+2 will be assigned a new settlement date, which 
will be the settlement day following the date the trade is compared 
or recorded. A subsequent rule filing will be made to make any 
necessary conforming changes at such time as the RTTM system is 
modified to accept and process same day settling trades.
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    (4) Procedure V, ``Balance Order Accounting Operation,'' is being 
amended to reflect that security balance orders will be shown on the 
initial and Supplemental Consolidated Trade Summaries issued on each 
settlement day. An indicator will be added to these reports to reflect 
any standing instructions given by the member for the issuance of DOs 
for balance orders and Special Trades.
    (5) Procedure VII, ``CNS Accounting Operation,'' is being amended 
to reflect (a) NSCC's ability to accept through 11:30 a.m. and process 
on a real-time basis on settlement date trades settling on that day, 
(b) the issuance of the two Supplemental Consolidated Trade Summaries 
on each settlement day, (c) the updated reports and methods of 
reporting information (including through real-time message updates, the 
web-based PBS screens which report updated CNS positions on a real-time 
basis, and additional Miscellaneous Activity Reports), and (d) certain 
conforming changes to properly reflect current processing.
    In addition, the Fully-Paid-For Account procedures included in 
Procedure VII, ``CNS Accounting Operation,'' are being amended to 
reflect the extension of this program to the day cycle allocation 
process, the real-time acceptance of instructions through the day 
cycle, and the real-time application of such instructions. Also the 
Note accompanying Procedure VII.E.5. is being modified because the 
portion relating to stock loan recalls is no longer applicable.\13\
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    \13\ The portion of the Note relating to stock loan recalls was 
made inapplicable pursuant to a no-action letter dated June 28, 1985 
from Michael Macchiaroli, Assistant Director, to Robert J. Woldow, 
Senior Vice President and General Counsel, NSCC (June 28, 1985).
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    (6) Addendum C, ``NSCC Automated Stock Borrow Procedures,'' is 
being amended to reflect the extension of this service to the daytime 
processing cycle and to provide the mechanism whereby members can loan 
their available securities to NSCC in the morning of settlement day. 
These securities will be used for any shortfalls that the CNS system 
has in the day cycle.
    The daytime stock borrow process will be separate from the 
nighttime stock borrow process. Securities that members make available 
for the nighttime process will not be applied in the daytime process. 
Members will have the option to participate in the nighttime stock 
borrow program, the daytime stock borrow program, or in both programs. 
The proposed changes also reflect the member's ability to be advised of 
any borrows through intraday messages so that members have the ability 
to make movements into their Fully-Paid-For Accounts as needed.
    (7) Addendum G, ``Fully-Paid-For Account,'' is being amended to 
reflect that this application will be available to members on a real-
time basis during the day cycle on each settlement day in order to 
facilitate members' compliance with their securities possession or 
control requirements.
    At this time a clarification is also being made to Rule 12, 
``Settlement,'' consistent with NSCC's collection and segregation of 
amounts debited with respect to positions in the Fully-Paid-For 
Account. It has always been understood that the movement into the E 
(Fully-Paid-For) subaccount was contingent upon the member's due 
payment of the funds debited with respect to the value of that 
position. It is the collection and segregation of such funds that 
permits NSCC to guarantee

[[Page 29607]]

the position ``free of payment'' by a SIPC trustee and thus be a 
``control location.'' Thus, Rule 12 is being amended to make clear that 
any movement of a long valued position to the Fully-Paid-For E 
subaccount will not become final until the member satisfies its end-of-
day money settlement obligation.
    (8) Addendum K, ``Interpretation of the Board of Directors--
Application of Clearing Fund,'' is being amended to reflect that with 
respect to trades received by NSCC after commencement of the nighttime 
processing cycle and prior to 11:30 a.m., on each settlement day, 
NSCC's trade guaranty will attach to such trades as of the completion 
of trade comparison or trade recording processing of such trades.
    (9) Consistent with NSCC's extension of its trade guaranty to same-
day settling trades, Rule 15, ``Financial Responsibility and 
Operational Capability,'' is being amended to make clear that 
additional clearing fund payments that may be assessed on members may 
also include charges relative to such same-day settling trades.
    In addition, the proposed rule change will make a number of 
technical corrections, including the following:
    (1) It will define the terms ``Settlement Date''\14\ and 
``settlement day''\15\ which are used throughout NSCC's Rules & 
Procedures and will make clear that the Consolidated Trade Summary is 
issued on each day that is a settlement day.
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    \14\ ``Settlement Date'' is defined as the date specified for a 
transaction to settle.
    \15\ ``Settlement day'' is defined as any business day on which 
settlement may be made through NSCC's facilities.
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    (2) It will revise Procedure I, ``Introduction,'' to delete 
references to SIAC as NSCC's facilities manager and to codify NSCC's 
longstanding established practice of setting data submission thresholds 
to minimize data transmission errors and data field requirements.
    (3) It will change the heading of Procedure II, ``Trade Comparison 
Service,'' to ``Trade Comparison and Recording Service,'' to reflect 
that this procedure covers trade recording as well as trade comparison.
    Subject to Commission approval, NSCC intends to implement these 
changes on or about July 9, 2004. At that time, all CNS Rewrite 
functionality will be implemented except for processing same-day 
settling trades and the two supplemental Consolidated Trade Summaries 
that support same-day trade settlement. NSCC intends to begin 
processing same-day settling trades and the supporting Consolidated 
Trade Summaries on or about August 5, 2004.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \16\ and the rules and 
regulations thereunder applicable to NSCC because it will promote the 
prompt and accurate clearance and settlement of securities transactions 
by providing greater functionality and capacity to CNS and by allowing 
members to focus less attention on exception processing.
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    \16\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have an 
impact on or impose a burden on competition.

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

    No written comments relating to the proposed rule change have been 
solicited or received. NSCC will notify the Commission of any written 
comments received by NSCC.

III. Date of Effectiveness of the Proposed Rule Change 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 change or
    (B) institute proceedings to determine whether the proposed rule 
change 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an E-mail to [email protected]. Please include 
File Number SR-NSCC-2004-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. All submissions should refer to File Number 
SR-NSCC-2004-01. This file number should be included on the subject 
line if e-mail is used. To help the Commission process and review your 
comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 office of NSCC and on NSCC's Web site at http://www.nscc.com/legal. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NSCC-2004-01 and should be submitted on or before June 14, 2004.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-11647 Filed 5-21-04; 8:45 am]
BILLING CODE 8010-01-P