[Federal Register Volume 77, Number 194 (Friday, October 5, 2012)]
[Notices]
[Pages 61033-61035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-24540]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67947; File No. SR-NSCC-2012-06]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Enhance the
Default Pricing Methodology Used by NSCC's Automated Customer Account
Transfer Service
September 28, 2012.
I. Introduction
On August 7, 2012, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2012-06. The proposed
rule change, which was filed pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ was published for comment in the Federal Register on
August 22, 2012.\3\ The Commission received no comment letters
regarding the proposal. For the reasons discussed below, the Commission
is granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 67673 (August 15, 2012),
77 FR 50736 (August 22, 2012).
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II. Description
The proposed rule change will amend Rule 50 of NSCC's Rules and
Procedures to eliminate the use of a default pricing matrix to assign
values to certain items transferred through NSCC's Automated Customer
Account Transfer Service (``ACATS'').
ACATS enables NSCC Members to effect automated transfers of
customer accounts among themselves.\4\ Pursuant to Rule 50, an NSCC
Member to whom a customer's full account will be transferred
(``Receiving Member'') will initiate the transfer by submitting to NSCC
a transfer initiation request, which contains the customer detail
information that the NSCC Member in possession of the account
(``Delivering Member'') requires in order to transfer the account.
Delivering Members that have neither rejected the account transfer
request nor sought corrections to the request within the allotted time
[[Page 61034]]
must submit to NSCC certain detailed customer account asset data.
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\4\ ACATS complements Financial Industry Regulatory Authority
(``FINRA'') Rule 11870 regarding Customer Account Transfers, which
requires FINRA members to use automated clearing agency customer
account transfer services, and to effect customer account transfers
within specified time frames.
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For items transferred through ACATS that are not eligible to be
processed through NSCC's Continuous Net Settlement (``CNS'') system \5\
(and for CNS-eligible items that are designated to be delivered ex-
CNS), NSCC will produce ACATS Receive and Deliver Instructions. These
ACATS transfers then settle either outside of NSCC or through a
separate service at NSCC.\6\ In order to incentivize the timely
completion of ACATS transfers, at the start of the day on ACATS
settlement date, the Delivering Member's NSCC money settlement account
will receive a debit, or an incentive charge (``Incentive Charge''),
equal to the aggregate market value of the items the Delivering Member
is transferring through ACATS; the Receiving Member's NSCC money
settlement account receives a credit in the same amount.\7\ Once
delivery of an item is complete, the Incentive Charge associated with
that item is effectively offset when the Receiving Member pays the
Delivering Member for the transferred item. This Incentive Charge is
intended to encourage the Delivering Member to make delivery of the
item in a timely manner.\8\
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\5\ CNS is an ongoing accounting system that nets each day's
Settling Trades with the prior day's Closing Positions, producing
net short or long positions per security issue for each Member. NSCC
is always contraside for all positions. The positions are then
passed against the Member's Designated Depository positions and
available securities are allocated by book entry. This allocation of
securities is accomplished through an evening cycle followed by a
day cycle. Positions that remain open after the evening cycle may be
changed as a result of trades accepted for settlement that day. To
allocate deliveries in both the night and day cycles, CNS uses an
algorithm based on priority groups in descending order, age of
position within a priority group, and random numbers within age
groups.
\6\ For example, non-CNS ACATS transfers may settle at (i) The
Depository Trust Company (``DTC''), for DTC-eligible items; (ii)
NSCC's automated ACATS-Fund/SERV interface, for eligible mutual fund
assets; (iii) NSCC's ACATS-IPS interface, for eligible annuities;
and (iv) the Options Clearing Corporation, where transfers in
customer-options positions take place, for options.
\7\ Incentive Charges are not calculated for the transfer of
options or annuities.
\8\ It also allows the Receiving Member to record the customer
position on its books, regardless whether the item is actually
delivered on settlement date. This process supports the requirements
of FINRA Rule 11870.
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Each item transferred through ACATS must be assigned a market value
in order to calculate the Incentive Charge. CNS-eligible items being
transferred through ACATS are assigned a market value through the CNS
system. Non-CNS eligible items, however, are assigned a market value
pursuant to NSCC Rule 50, which calls for a market value based on
either (i) the price obtained from a pricing source, if available or,
if a pricing source is not available, (ii) the greater of (a) the price
in U.S. dollars assigned by the Delivering Member (``Submitter's
Value''), which, in most cases, must be the current market value of the
item,\9\ or (b) the value ascribed to such item pursuant to a default
pricing matrix, as established from time to time by NSCC. The current
default pricing matrix assigns a value to an item based on its ``asset
category type,'' as classified by the Delivering Member in the detailed
customer account asset data submitted to NSCC. For example, the current
default pricing matrix assigns equities a default price of $1 per
share, with a cap of $20,000, and assigns U.S. government securities
and U.S. government agency securities a default price of the face
amount. The default pricing matrix was developed in close coordination
with industry participants and the National Association of Securities
Dealers shortly after the initial development of ACATS.
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\9\ See Section (d)(5)(A) of current FINRA Rule 11870, stating
that a customer statement delivered in connection with a transfer
instruction, ``must include a then-current market value for all
assets so indicated. If a then-current market value for an asset
cannot be determined (e.g., a limited partnership interest), the
asset must be valued at original cost.''
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It has been observed that the default pricing matrix may, in some
cases, overvalue items being transferred through ACATS. When this
occurs, on ACATS settlement date the Delivering Member will be debited
an Incentive Charge based on a higher value than the actual value of
the item being transferred. Delivering Members will not receive the
offset for this Incentive Charge until they deliver the related ACATS
item. Therefore, a Delivering Member that does not deliver the ACATS
item on ACATS settlement date will be required to pay the Incentive
Charge associated with that item. If the default pricing matrix has
overvalued an ACATS Incentive Charge, a Delivering Member that has
failed to deliver the item will be faced with an unexpected inflated
settlement charge on ACATS settlement date.
In order to reduce the risk of overcharging a Delivering Member,
NSCC is proposing a rule change that will require NSCC to assign the
Submitter's Value to items when the system cannot otherwise find a
price for the security, thereby eliminating the use of the ACATS
default pricing matrix altogether. Under the proposed rule change, in
the case of non-CNS eligible items transferred through ACATS, NSCC will
assign a market value to those items as either (i) the price obtained
from a pricing source, if available or, if a pricing source is not
available, the assigned market value will be (ii) the price in U.S.
dollars assigned by the Delivering Member (i.e., the Submitter's
Value), which, in most cases, must be the current market value of the
security.\10\
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\10\ See note 9, supra.
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According to NSCC, this proposed rule change will reduce the risk
that a non-CNS eligible item transferred through ACATS is assigned an
inflated value based on its asset category, as it will require that the
market value of these items be obtained either from a pricing source or
from the Delivering Member.
III. Discussion
Section 19(b)(2)(C) of the Act \11\ directs the Commission to
approve a self-regulatory organization's proposed rule change if it
determines that the 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 \12\
requires, among other things, that the rules of a clearing agency be
designed to promote the prompt and accurate clearance and settlement of
security transactions, and to assure the safeguarding of securities and
funds that are in the custody or control of such clearing agency, or
for which it is responsible.
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\11\ 15 U.S.C. 78s(b)(2)(C).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission concludes that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to NSCC. The proposed rule change
should ensure that NSCC members will no longer be surprised with
inflated settlement charges in connection with ACATS transfers. By
allowing NSCC members to gauge their liabilities more accurately, the
proposed rule change will foster the prompt and accurate clearance and
settlement of security transactions, and will assure the safeguarding
of securities and funds in NSCC's custody or control, or for which NSCC
is responsible.
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act, in particular
with the requirements of Section 17A of the Act \13\ and the rules and
regulations thereunder.
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\13\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No. SR-
[[Page 61035]]
NSCC-2012-06) be, and hereby is, APPROVED.\15\
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\14\ 15 U.S.C. 78s(b)(2).
\15\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24540 Filed 10-4-12; 8:45 am]
BILLING CODE 8011-01-P