[Federal Register Volume 79, Number 103 (Thursday, May 29, 2014)]
[Notices]
[Pages 30912-30914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12419]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72223; File No. SR-NSCC-2014-04]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change to Effect Processing 
Enhancements to the NSCC Automated Customer Account Transfer Service

May 22, 2014.

I. Introduction

    On March 27, 2014, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule change SR-NSCC-2014-04 (``Proposed Rule Change'') \3\ to 
implement processing enhancements \4\ to NSCC's Automated Customer 
Account Transfer Service (``ACATS'').\5\ The Proposed Rule Change was 
published for comment in the Federal Register on April 11, 2014.\6\ The 
Commission did not receive comments on the Proposed Rule Change. This 
order approves the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Defined terms not defined herein have the meaning set forth 
in NSCC's Rules and Procedures (``Rules''), available at http://
dtcc.com/~/media/Files/Downloads/legal/rules/nscc--rules.ashx.
    \4\ NSCC will announce the implementation of this Proposed Rule 
Change via an Important Notice to Members.
    \5\ The Depository Trust Company (``DTC'') filed a corresponding 
proposed rule change with the Commission. See Release No. 34-71886 
(Mar. 27, 2014), 79 FR 20260 (Apr. 11, 2014) (SR-DTC-2014-04) (``DTC 
Proposal'').
    \6\ Release No. 34-71887 (Mar. 27, 2014), 79 FR 20290 (Apr. 11, 
2014) (SR-NSCC-2014-04).
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II. Description

A. Current ACATS Process

    ACATS enables NSCC Members (``Members'') to automatically transfer 
customer accounts among themselves.\7\ A Member to whom a customer's 
securities account is to be transferred (``Receiving Member'') may 
initiate the account transfer process by submitting a Transfer 
Initiation Request to NSCC. When the Member who is to deliver the 
customer's securities account through ACATS (``Delivering Member'') 
accepts the request, NSCC will cause eligible securities in that 
account to enter NSCC's Continuous Net Settlement Accounting Operation 
(``CNS'') prior to the settlement cycle on the day before Settlement 
Date. Securities that are not eligible for CNS but are eligible for 
settlement at DTC (``Non-CNS DTC-Eligible Securities'') may be settled 
either through another NSCC service or outside of NSCC, depending on 
the asset type.
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    \7\ ACATS is a non-guaranteed service and transfers are not 
subject to risk management by NSCC.
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    In order to incentivize the Delivering Member to make delivery of 
the securities, the Delivering Member is charged with a money 
settlement debit and the Receiving Member with a money settlement 
credit (``Incentive Charges''). Incentive Charges are then reversed 
when the securities transfer is complete.
    For ACATS transfers of CNS-eligible securities, NSCC tracks the 
receive and deliver obligations in CNS so that NSCC is able to reverse 
the uncompleted transfers of a Member that is party to the transfer but 
fails to meet its money settlement obligation to NSCC or NSCC ceases to 
act for such Member (collectively, ``Fails to Settle''). However, if 
two or more Members Fail to Settle, then NSCC may not be able to 
identify completed versus uncompleted transfers because ACATS 
securities that settle via CNS are fungible with CNS's other activity 
and are netted with the guaranteed trades in the same securities that 
settle in CNS. As a result, in such a scenario, NSCC may have to 
reverse all ACATS transfers relating to those Members, whether or not 
the transactions were completed, in order to eliminate the Incentive 
Charges.
    For ACATS transfers of Non-CNS DTC-Eligible Securities, the 
Delivering Member that fails to make delivery of the securities 
(``Fails to Deliver'') will receive a money debit (i.e., an Incentive 
Charge) for the full value of the securities. However, NSCC does not 
track the completion of those transfers. Thus, if the Delivering Member 
ultimately Fails to Settle, NSCC will reverse the Member's ACATS 
transfers in order to eliminate the associated money debit.

B. New ACATS Process

    The Proposed Rule Change will create a new ACATS process (``ACATS 
Settlement Accounting Operation'') for both CNS-eligible and Non-CNS 
DTC-Eligible Securities that will operate outside of CNS. The 
initiation of an ACATS transfer will remain the same. However, all 
transfers through the ACATS Settlement Accounting Operation will be 
made without the application of Incentive Charges (i.e., the transfers 
will be made free-of-value). Additionally, applicable ACATS transfers 
will be aggregated into one receive and one deliver obligation per 
security, per Member. Those obligations will be processed through the 
Member's corresponding receive or deliver subaccounts at NSCC, which 
NSCC will require each Member participating in the ACATS Settlement 
Accounting Operation to establish and maintain.\8\ NSCC will not net 
the obligations between a Member's subaccounts.
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    \8\ An NSCC account at DTC will be established to accommodate 
processing of these transfers.
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    Under the Proposed Rule Change, after NSCC receives securities from 
Delivering Members, NSCC will allocate those securities to Receiving 
Members. The allocation of these securities will be governed by an 
algorithm formulated by NSCC. To maximize customer account deliveries, 
NSCC will instruct DTC to deliver shares out of a Delivering Member's 
account to satisfy first the Delivering Member's ACATS obligations, and 
then the Delivering Member's outstanding CNS obligations.
    The ACATS Settlement Accounting Operation will enable NSCC to track 
ACATS obligations at the Member level, so NSCC can identify and 
reverse, as necessary, any uncompleted ACATS transfers in the event 
that one or more Members Fail to Settle on the scheduled ACATS 
settlement date.\9\ An ACATS transfer of a Member that Fails to Settle 
will be deemed uncompleted if the Member is: (i) the Delivering Member 
and it has Failed to Deliver to NSCC all or a portion of the securities 
associated with the ACATS transfer, or (ii) the Receiving Member and it 
has failed to receive from NSCC all or a portion of the securities 
associated with the ACATS transfer (``Fail to Receive''). However, in 
either case, where the Delivering Member has made a partial

[[Page 30913]]

delivery for an amount of the securities to NSCC (``Delivered Amount'') 
the transfer will be: (i) deemed completed for any amount of the 
securities received from NSCC by the Receiving Member up to an amount 
not to exceed the Delivered Amount (``Received Amount''), and (ii) 
deemed uncompleted for any amount of the securities scheduled for 
delivery other than the Received Amount, in which case only the 
uncompleted portion of the obligation will be subject to reversal.
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    \9\ The current process only provides for tracking of a single 
Member default for this purpose.
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    In the event that a Delivering Member and Receiving Member to the 
same ACATS transfer Fail to Settle on the same settlement day, then any 
transfer deemed uncompleted for the Delivering Member will also be 
deemed uncompleted as to the Receiving Member, and vice versa. NSCC 
will then notify firms with the details associated with the securities 
subject to the reversal and firms will need to reestablish customer 
positions accordingly.
    The fact that deliveries will be made free-of-value in the new 
ACATS process will obviate any need to reverse completed 
transactions.\10\ Securities associated with completed ACATS transfers 
will remain with the Receiving Member, thus ensuring that customer 
account transfers to new firms are maximized.
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    \10\ DTC will inform NSCC through the DTC/NSCC interface as to 
when deliveries are complete.
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    If a scheduled securities delivery or receive through ACATS 
Settlement Accounting Operation for a transaction Fails to Deliver or 
Fails to Receive at the end of the day, but the corresponding Member 
has not Failed to Settle, NSCC will apply a funds settlement debit to 
the Delivering Member and a funds settlement credit to the Receiving 
Member prior to final settlement. For CNS-eligible securities, the 
money amount will be 100 percent of the CNS market value.\11\ For Non-
CNS DTC-Eligible Securities, the money amount will be 100 percent of 
the ACATS market value. When the Member makes final money settlement, 
the failed obligations will take one of two paths depending on whether 
they involve CNS-eligible or Non-CNS DTC-Eligible Securities.
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    \11\ If a market price is unavailable, then NSCC will use the 
value provided by the Delivering Member.
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    For an ACATS obligation in CNS-eligible securities where there has 
been a Fail to Deliver or Receive but not a Fail to Settle, the 
obligation will enter the applicable Member's general CNS account. The 
obligation will then be netted with regular CNS processing. Because 
NSCC has collected the full value on the securities, NSCC will 
guarantee settlement for the obligations upon their inclusion in CNS.
    For Non-CNS DTC-Eligible Securities, NSCC will provide instructions 
to both the Delivering Member and Receiving Member to settle the failed 
obligation directly with each other. These transactions will be 
automatically entered into NSCC's Obligation Warehouse system, if 
eligible.
    The new ACATS process will also provide for ``Level 1'' delivery 
exemptions that will allow Members to indicate that deliver obligations 
in the ACATS Settlement Accounting Operation should not be 
automatically settled against their current DTC position. With respect 
to same day settling transactions, Members may select a standing 
exemption to permit all such short positions to be delivered. 
Additionally, during the daytime cycle, a Member may override the one-
day settling exemption, as well as other exemptions entered by the 
Member the previous evening. To use this feature, the Member should 
prepare a Delivery Order (``DO'') and submit it to DTC in the normal 
manner.
    With this Proposed Rule Change, NSCC will also ensure that neither 
DTC nor NSCC will have a lien on securities delivered to a receiver as 
a result of an ACATS transfer. Because the new ACATS process will 
allocate shares to the Receiving Member via an algorithm that NSCC will 
establish for this purpose, as discussed above, DTC will credit the 
shares to the Receiving Members Minimum Amount (``MA'') or non-lien/
non-collateral account at DTC.
    Final accounting reports for the ACATS Settlement Accounting 
Operation will be provided in conjunction with the final CNS accounting 
reports. However, reporting along with the CNS accounting reports will 
have no effect on the status of the reported ACATS transactions as non-
guaranteed.

C. Elimination of Short Cover Charge and Long Allocation Reversals

    An ACATS short cover charge is a dollar amount guaranteed by NSCC 
to DTC for the value of securities delivered from a DTC Participant 
account to NSCC for CNS processing by NSCC. NSCC's guaranty to DTC for 
the short cover charge will no longer be applicable because, under the 
new ACATS process, the deliveries no longer present risk to DTC. As 
such, DTC will delete provisions in its procedures related to ACATS 
short cover charges.\12\ No change to NSCC's Rules is required.
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    \12\ See DTC Proposal, 79 FR 20260.
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    At NSCC, under the current ACATS process, long allocations may be 
reversed if the NSCC Member Fails to Settle. Because ACATS transfers 
under the new process will not generate any funds settlement 
obligations, this reversal is eliminated. As such, DTC will delete 
provisions in its procedures describing the reversal of ACATS long 
allocations.\13\ No change to NSCC's Rules is required.
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    \13\ Id.
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III. Discussion and Commission Finding

    Section 19(b)(2)(C) of the Act \14\ 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 rules and regulations thereunder applicable 
to such organization. Section 17A(b)(3)(F) of the Act \15\ requires 
that the rules of a clearing agency be designed to, among other things, 
``promote the prompt and accurate clearance and settlement of 
securities transactions and . . . 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.'' \16\ The Commission 
finds that the Proposed Rule Change is consistent with these 
requirements because the new ACATS processing system will enhance 
NSCC's ability to track receive and deliver obligations associated with 
ACATS activity and preclude the reversal of completed ACATS transfers 
in the event that multiple Members Fail to Settle.
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    \14\ 15 U.S.C. 78s(b)(2)(C).
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    Further, Commission Rules 17Ad-22(d)(3) \17\ and 17Ad-22(d)(12) 
\18\ require that registered clearing agencies establish, implement, 
maintain and enforce written policies and procedures reasonable 
designed to ``[h]old assets in a manner that minimizes risk of loss or 
of delay in its access to them . . .'' \19\ and ``[e]sure that final 
settlement occurs no later than the end of the settlement day; and 
require that intraday or real-time finality be provided where necessary 
to reduce risks.'' \20\
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    \17\ 17 CFR 240.17Ad-22(d)(3).
    \18\ 17 CFR 240.17Ad-22(d)(12).
    \19\ 17 CFR 240.17Ad-22(d)(3).
    \20\ 17 CFR 240.17Ad-22(d)(12).
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    Currently, if two or more Members Fail to Settle, NSCC may need to 
reverse all ACATS transactions relating to those Members, whether or 
not the transactions are completed. The potential that NSCC may be 
required to reverse all transactions, including transactions that have 
already

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completed, may delay a Receiving Member's ability to access the account 
being transferred and delay final settlement of the ACATS transfer. 
Under the Proposed Rule Change, NSCC will be able to identify and 
reverse only uncompleted ACATS obligations in the event of a multiple 
Member default, thus minimizing the risk of delayed access to settled 
ACATS transfers. As such, the Commission finds the Proposed Rule Change 
consistent with Rules 17Ad-22(d)(3) \21\ and 17Ad-22(d)(12).\22\
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    \21\ 17 CFR 240.17Ad-22(d)(3).
    \22\ 17 CFR 240.17Ad-22(d)(12).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \23\ and the 
rules and regulations thereunder.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NSCC-2014-04 be, and it hereby is, 
approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12419 Filed 5-28-14; 8:45 am]
BILLING CODE 8011-01-P