[Federal Register Volume 69, Number 139 (Wednesday, July 21, 2004)]
[Notices]
[Pages 43650-43653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16561]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50026; File No. SR-NSCC-2004-01]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change To 
Modify the National Securities Clearing Corporation's Continuous Net 
Settlement System

July 15, 2004.

I. Introduction

    On February 23, 2004, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on March 26, 2004, amended proposed rule change 
File No. SR-NSCC-2004-01 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ Notice of the proposed rule change 
was published in the Federal Register on May 24, 2004.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is now granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 49717 (May 17, 2004), 69 
FR 29605.
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II. Description

    As part of the securities industry's straight-through processing 
(``STP'') initiative, NSCC has been engaged in a project to update and 
revise its Continuous Net Settlement (``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 August 
2004, will be able to take in trades until 11:30 a.m. on settlement day 
and to net and settle them that day.\3\ To support this, NSCC has 
developed new Supplemental Consolidated Trade Summaries that will 
report trades settling on settlement date.

[[Page 43651]]

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 as a result of settling trades and miscellaneous 
activity going into CNS on settlement date.\4\ 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 
issued later in the afternoon on each settlement date.\5\ In addition, 
members will be able to view their CNS positions on a real-time basis 
using 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 p.m. and ends at 12 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. Its members then have to enter the balance orders 
as DOs at DTC. To automate and streamline the processing of trades in 
non-CNS, depository eligible issues, at the request of the member with 
the delivery obligation, NSCC will create delivery versus payment DOs 
that will automatically be transmitted to DTC for processing.\7\ 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.\8\
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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\ The Commission recently approved DTC's establishing an 
interface to accommodate this transmission. Securities Exchange Act 
Release No. 50025 (July 15, 2004) [File No. SR-DTC-2004-04].
    \8\ 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 law 
requirements concerning possession or control of customer securities. 
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 Subaccount to meet its customer possession or 
control 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.\9\
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    \9\ 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 in 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.\10\
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    \10\ 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 NSCC rules that have to be changed 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, to net them, and to 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 by 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.\11\ Any such instructions will cover 
all of the delivering member's balance orders and Special Trades.
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    \11\ 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 to clarify 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.\12\
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    \12\ Once this functionality is implemented, NSCC will no longer 
provide the PDQ Automated Municipal Bond Settlement Facility. 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.\13\
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    \13\ 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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[[Page 43652]]

    (4) Procedure V, ``Balance Order Accounting Operation,'' is being 
amended to reflect that security balance orders will be shown on the 
Consolidated Trade Summary 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.\14\
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    \14\ The portion of the Note relating to stock loan recalls was 
made inapplicable pursuant to a no-action letter to Robert J. 
Woldow, Senior Vice President and General Counsel, NSCC, from 
Michael Macchiaroli, Assistant Director, Division of Market 
Regulation, Securities and Exchange Commission (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 during 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 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 in connection with positions in the Fully-Paid-For E 
subaccount. It has always been understood that the movement into this 
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 
the position ``free of payment'' and thus constitute a valid ``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 the 
trade comparison process or the trade recording process for 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 rule change makes a number of technical 
corrections, including the following:
    (1) It defines the terms ``Settlement Date'' \15\ and ``settlement 
day'' \16\ which are used throughout NSCC's Rules & Procedures and 
makes clear that the Consolidated Trade Summary is issued on each day 
that is a settlement day.
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    \15\ ``Settlement Date'' is defined as the date specified for a 
transaction to settle.
    \16\ ``Settlement day'' is defined as any business day on which 
settlement may be made through NSCC's facilities.
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    (2) It revises 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 changes 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.
    NSCC intends to implement changes to the CNS system on or about 
August 6, 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 Supplemental Consolidated Trade Summaries on or 
about August 19, 2004.\17\
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    \17\ The dates for implementation in the Notice have been 
adjusted. E-mails from Merrie Witkin, NSCC (June 10, 2004 and June 
14, 2004).
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III. Discussion

    Section 17A(b)(3)(F) of the Act requires among other things that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\18\ The 
Commission finds that NSCC's proposed rule change is consistent with 
this requirement because the changes being made to the NSCC's CNS 
system will promote the prompt and accurate clearance and settlement of 
securities transactions by providing greater functionality and capacity 
and by allowing members to focus less attention on exception 
processing.
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    \18\ 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.

[[Page 43653]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (File No. SR-NSCC-2004-01) be 
and hereby is approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16561 Filed 7-20-04; 8:45 am]
BILLING CODE 8010-01-P