[Federal Register: November 10, 2003 (Volume 68, Number 217)]
[Notices]
[Page 63831-63833]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10no03-87]
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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