
[Federal Register Volume 75, Number 249 (Wednesday, December 29, 2010)]
[Notices]
[Pages 82112-82115]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32730]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63588; File No. SR-NSCC-2010-11]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change to 
Enhance the Reconfirmation and Pricing Service, Including the Creation 
of the Obligation Warehouse

December 21, 2010.

I. Introduction

    On October 10, 2010, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2010-11 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on October 
25, 2010.\2\ The Commission received no comment letters. 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\ Securities Exchange Act Release No. 63126 (October 18, 
2010), 75 FR 65546 (October 25, 2010).
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II. Description

    Reconfirmation and Pricing Service (``RECAPS'') is NSCC's automated 
fail clearance system for eligible securities. Through RECAPS, members 
are provided with an opportunity on a quarterly basis to reconfirm and 
reprice compared transactions which remain unsettled (i.e., fail 
transactions). As approved, the rule change modifies RECAPS to run on a 
more frequent basis, enhances RECAPS, and renames the RECAPS process 
the Obligation Warehouse (``OW'' or ``OW Service''). As more fully 
described below, the new enhanced service will provide: (1) Comparison 
of transactions that are not otherwise submitted by the applicable 
marketplaces or members themselves for trade comparison or recording 
through other NSCC trade capture services; (2) tracking, storage, and 
maintenance of unsettled obligations either compared through the 
service or forwarded to it from other NSCC services in accordance with 
NSCC rules including trades involving securities exited from NSCC's 
Continuous Net Settlement (``CNS'') system, non-CNS Automated Customer 
Account Transfer Service (``ACATS'') items,\3\ NSCC Balance Order 
transactions, and Special Trades (collectively ``OW Obligations''); \4\ 
and (3) repricing and netting of fail obligations. The tracking, 
storage, and maintenance functionality of the OW will provide 
transparency, will make information available to its users, will serve 
as a central depository of open (i.e., failed or unsettled) broker-to-
broker obligations, and will allow users to manage and to resolve 
exceptions (e.g., ``don't know'' or ``DK'' obligations) in an efficient 
and timely manner. The OW will also simultaneously provide on-going 
maintenance and servicing of open OW Obligations such as adjustments 
for corporate actions and regular scans for CNS eligibility.\5\
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    \3\ Only non-CNS eligible ACATS items and CNS-eligible ACATS 
items that have been designated as ex-CNS shall be forwarded to the 
OW. Non-CNS ACATS items for mutual funds, limited partnerships, and 
safekeeping items, however, will not be eligible for OW.
    \4\ Balance Orders will be forwarded to the OW after netting and 
allotting has occurred in accordance with NSCC's Procedures.
    \5\ These functionalities will be made available at a date no 
less than ten business days following announcement of implementation 
by Important Notice.
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    Currently RECAPS allows members \6\ to periodically reconfirm open, 
aged fails (i.e., fails that are five or more days old), reprice such 
fails to the current market value, and when possible, net the 
reconfirmed and repriced fails. As part of the RECAPS process, those 
CNS-eligible recompared fails are forwarded to CNS for processing and 
settlement. Transactions in non-CNS eligible issues are repriced, 
netted, and allotted, when applicable, and Balance Orders generated for 
them or they are designated to settle trade-for-trade.
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    \6\ All NSCC members that are also members of the Financial 
Industry Regulatory Authority (``FINRA'') are required to 
participate in the RECAPS service, however, the service is available 
to all NSCC members. See FINRA Rule 11190(a).
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    RECAPS provides reject and DK capabilities for received advisories. 
Advisories that are either ``unresponded to'' or ``DK'd'' are subject 
to close-out action under the rules of the appropriate marketplace. 
RECAPS requires members to respond through batch overnight submissions 
to all open fails submitted by a contraparty. RECAPS provides for a 
one-day settlement capability for all compared fails.

Obligation Warehouse

    Many of the transactions submitted to RECAPS by members are subject 
to noncentralized, manual processes for purposes of comparison of fail 
details and fail confirmation. Under this rule change, NSCC will 
enhance and rename the RECAPS service as the OW to which members may 
submit and may subsequently maintain and manage their unsettled 
transactions. As part of these enhancements, NSCC will provide a trade 
matching and confirmation process pursuant to which members may submit 
to NSCC information on certain obligations that are not otherwise 
submitted to NSCC by the applicable marketplaces or by the members 
themselves through NSCC's other trade comparison or recording 
services.\7\ Comparison of transactions submitted through the OW will 
occur in real-time. Obligations will be tracked and maintained within 
the OW and will be made available for RECAPS processing (as described 
below) until settled or otherwise cancelled. In addition, transactions 
exited from CNS, non-CNS-eligible ACATS items, Balance Orders, and 
Special Trades will also be forwarded to the OW for storage and 
maintenance and RECAPS processing.\8\ Compared items stored in the OW 
(whether compared by the OW or forwarded to it from other NSCC services 
or systems) will be referred to as ``OW Obligations.'' In order to 
further reduce manual processing by members, NSCC may automatically 
adjust any OW Obligations for certain mandatory reorganization events, 
which will initially be limited to adjustments for forward splits, name 
changes, redemptions, mergers (both cash and stock), and full calls 
with respect to bonds.\9\
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    \7\ Procedure II (Trade Comparison and Recording Service) sets 
forth the procedures for comparison of direct submissions by members 
and for trade recording of locked-in transactions. In accordance 
with Municipal Securities Rulemaking Board (``MSRB'') rules, NSCC 
reports transactions in municipal securities compared through its 
Real-time Trade Matching (``RTTM'') service to the MSRB on behalf of 
members; however, transactions submitted through the OW will not be 
reported by NSCC to the MSRB. In order to remain compliant with MSRB 
reporting requirements, members will have to continue to make 
submissions subject to MSRB rules through RTTM.
    \8\ Such items will be subject to the validation criteria of the 
systems or services that forwarded them to the OW; therefore, the 
matching or validation criteria (which are set forth in footnote 9 
below) will not apply.
    \9\ Adjustments for mandatory reorganization events are expected 
to be available shortly after February 4, 2011, or a date no less 
than 10 business days following announcement of its implementation 
by Important Notice.
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    As approved, the OW Service will now forward to CNS on a daily 
basis (or such other time frame as NSCC determines from time to time) 
OW Obligations in CNS-eligible securities.\10\ However, the OW will not 
be a guaranteed service, and an obligation forwarded to CNS will only 
be guaranteed to the extent that the member pays its full settlement 
obligation on the date the item is originally scheduled to settle in 
CNS.

[[Page 82113]]

Transactions eligible for submission will have to have a valid CUSIP or 
ISIN and be denominated in U.S. Dollars or such other currencies as 
NSCC may designate from time to time. NSCC may determine from time to 
time and shall announce by Important Notice which items are eligible 
for submission to OW. Initially, government, mortgage-backed, and 
foreign securities will all specifically not be eligible. Further, cash 
trades will be processed by OW only after settlement failure of these 
trades.
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    \10\ This functionality is anticipated to be rolled out in early 
March 2011.
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OW Comparison and Trade Resolution Procedures

    As approved, the rule change will provide that once a party enters 
the required transaction information,\11\ the contraparty will receive 
an advisory to which it must respond by submitting identical 
transaction details to facilitate a compared obligation or by 
submitting a DK.\12\ If a member does not act on an advisory submitted 
against it by the close of business on the day after submission, NSCC 
may impose a fee upon the member. If the deliverer and receiver submit 
trade data that matches in all required respects, the trade will be 
deemed compared.\13\ NSCC may permit uncompared trade details to be 
modified or cancelled by the submitter on the submission date through 
the use of the appropriate instruction.\14\ Upon comparison, NSCC may 
permit obligations to be cancelled if both receiver and deliverer agree 
by submitting a cancel request or if one party accepts the other 
party's cancel request. Each OW Obligation will receive an ``OW Control 
Number'' to facilitate tracking the obligation through its settlement, 
cancellation, or closure.
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    \11\ Data required for a valid submission will include security 
identification, quantity to which party is deliverer or receiver, 
contrabroker, deliverer's final money, settlement date, market 
participation identification (MPID) (if applicable), Member's unique 
reference number (``x-ref'') whether a transaction should be 
excluded from CNS processing, and other identifying details as NSCC 
may require or permit.
    \12\ Obligations will be able to be submitted to the OW in real-
time. Required matching criteria will include the data required for 
a valid submission (i.e., specific criteria listed in the 
immediately preceding footnote except for the x-ref), and other 
identifying details as NSCC may require or permit. Any submission of 
a DK must include the applicable reason code pertaining to the 
Member's disagreement with the transaction.
    \13\ For purposes of deeming a trade compared, NSCC will use an 
initial money tolerance of $5 per million. The amount of the money 
tolerance may change from time to time pursuant to the filing of a 
proposed rule change by NSCC.
    \14\ Modification of transaction details will result in the 
cancellation of the existing entry and the opening of a new 
submission. Transaction details that have been DK'd by a contraparty 
will be deleted from processing in accordance with time frames 
specified by NSCC from time to time. Initially, such transaction 
details will be deleted on the fifth business day following 
submission of the DK by the contraparty.
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    NSCC will have no responsibility for determining whether any trade 
submission is duplicative of an earlier trade submission. All trade 
submissions will be treated as separate submissions. NSCC may delete 
trade input which is not matched by such time frames as it determines 
from time to time.

Maintenance and Tracking

    As a result of the rule change, the OW service will permit members 
to track each OW Obligation for the life of the obligation until it has 
been (i) settled, (ii) cancelled by the members that are the parties to 
the obligation, or (iii) otherwise closed in the OW Service by NSCC 
pursuant to NSCC Rules (e.g., when the obligation becomes CNS-eligible 
and is sent to CNS for settlement). NSCC may adjust any compared OW 
Obligation with respect to certain mandatory reorganization events, 
which will initially be limited to forward splits, name changes, 
redemptions, mergers (both cash and stock), and full calls with respect 
to bonds. In the case of such a mandatory reorganization, at such time 
on or after the effective date of the reorganization as NSCC shall 
determine and to the extent NSCC has the relevant information, the 
affected OW Obligation may be adjusted in accordance with the terms of 
the reorganization event. With respect to name changes and forward 
splits, OW positions in the subject security will be converted into the 
equivalent positions of the new securities, cash, or both and a new 
obligation will be created automatically as part of the processing in 
the OW. Any cash component associated with a mandatory reorganization 
will be included as part of the member's daily money settlement with 
NSCC.\15\
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    \15\ In the event that NSCC ceases to act for a member pursuant 
to Rule 18, NSCC will reverse credits and debits relating to such a 
cash adjustment.
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    Unless otherwise excluded by a member, all CNS-eligible OW 
Obligations that reach the status of settlement date minus one (``SD-
1'') or that have reached or passed their scheduled settlement date, 
may be forwarded to CNS by NSCC on a daily basis.\16\ However, the 
settlement of any such item forwarded to CNS will be guaranteed only to 
the extent that the member pays its full settlement obligation on the 
date the item is scheduled to settle in CNS. An item forwarded to CNS 
from the OW may be exited from CNS to the extent the member fails to 
complete its settlement obligation. If NSCC exits an item, any credits 
received by a member arising from the corresponding payment obligation 
shall be reversed, and settlement of the item shall be effected between 
the receiving and delivering member outside the facilities of NSCC.
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    \16\ This functionality is expected to be rolled out by March 
2011 or on a date no less than 10 business days following 
announcement of its implementation by Important Notice.
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    OW Obligations for which deliveries are made through The Depository 
Trust Company (``DTC'') through either The New York Window (``NYW'') or 
electronic book-entry deliver order will be updated to indicate that 
they have settled in accordance with proper instructions from DTC or 
the member, respectively. In order to give effect to such an update, 
members must provide DTC with instructions in accordance with DTC's 
procedures and must include the OW Control Number. In the event of a 
partial delivery through DTC, NSCC will update the records for the 
respective OW Obligation accordingly based on information received 
either from DTC or the member's update to their own OW Obligation 
records. Other items will be recorded as settled upon the submission of 
appropriate instructions by the counterparties. Obligations that have 
been reflected in the OW as settled may be reopened (either partially 
or fully) as a result of a delivery reclaim message sent by either 
party to the obligation to OW. Updates to reflect reclaims of settled 
transactions will be made once one party enters details of the original 
transaction and the original transaction's OW Control Number.\17\ Once 
these details are submitted, an advisory of the reclaim will be sent to 
the contraparty that must then submit either identical transaction 
details to facilitate the reclaim and reopening of the obligation in OW 
or notification that it does not accept the reclaim details entered by 
the initiating party. Updates for reclaims may only be submitted to the 
OW for a period of two business days following the actual settlement 
date of the relevant obligation. If the reclaim message is not accepted 
by the contraparty, it will be deleted from the OW, and the parties 
will need to generate a new reclaim message in OW. If the original 
obligation has been settled for longer than two business days, any 
reclaim message will be rejected.
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    \17\ Transaction details required will be identical to those 
required when comparing an obligation. Supra note 7.
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    Pursuant to the approved rule change, if NSCC ceases to act for a 
member, all open activity relating to that member

[[Page 82114]]

will be deleted from the OW. However, the reports relating to such 
activity will be maintained in accordance with NSCC's record retention 
requirements.

Modified RECAPS Process

    Pursuant to the rule change, the existing RECAPS process will 
continue to function but in a modified form.\18\ Upon implementation of 
OW, the RECAPS process will be incorporated into OW and will require 
one day to complete. It is anticipated that the process will occur more 
frequently than the current quarterly schedule.\19\
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    \18\ It is expected that the first RECAPS process in the OW will 
run in late March or early April 2011.
    \19\ Upon implementation of the changes described herein, NSCC 
anticipates operating the RECAPS process on a monthly cycle. Members 
will be notified of changes in the processing cycle, if any, by an 
NSCC Important Notice.
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    On a day specified by NSCC, each OW Obligation eligible for RECAPS 
\20\ will be re-priced, if appropriate,\21\ renetted and allotted, if 
appropriate, the settlement date will be updated to the next business 
date, and a new OW Obligation will be opened. Securities that are not 
CNS-eligible or that are designated as trade-for-trade will not be 
netted and allotted. Obligations eligible for RECAPS in the OW can be 
excluded from the RECAPS process if so designated by the member.
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    \20\ Obligations that are matched and have a settlement date of 
at least two days prior to the date on which the RECAPS process 
commences will be considered for inclusion in the RECAPS process. 
Fail items not already in the OW but eligible for RECAPS processing 
must be submitted to OW by the member prior to RECAPS processing.
    \21\ In the event that the current market price for a security 
is not available, the obligation will be priced at the amount at 
which the obligation was previously matched.
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    All new obligations arising from the RECAPS process will be tracked 
and processed in accordance with the OW procedures described above. If 
a fail was open over an interest payment date, the parties to the trade 
will be required to settle that interest payment outside of NSCC. Any 
net cash adjustments resulting from the RECAPS process will be sent to 
NSCC as they are under the current process.

Reporting

    Under the new rule, each member will receive real-time updates 
regarding its OW activity. In addition, NSCC will make available to 
each member an end-of-day report that reflects all end-of-day positions 
of such member in OW, which may be accessed by members through NSCC's 
systems. Accordingly, NSCC will discontinue issuance of all RECAPS 
reports (e.g., RECAPS Contracts/Supplemental Contracts and RECAPS 
Compared Trade Summaries).
    The rule change also creates a new Rule 51 (Obligation Warehouse) 
and Procedure IIA (Obligation Warehouse) to reflect the changes and 
enhancements as described above. Rule 51 provides: (i) A general 
description of the OW service, (ii) a provision relating to the 
settlement of OW Obligations and the non-guaranteed nature of the 
service, and (iii) a limitation of liability on the part of NSCC with 
respect to obligations processed through the OW. Furthermore, the 
provisions of Procedure IIA will supersede those set forth in Procedure 
II, Section F (RECAPS), and thus Section F will be deleted.
    In addition, NSCC will make conforming changes to:
    a. Rule 1 (Definitions) to add a definition for ``Obligation 
Warehouse'' and ``OW Obligation'';
    b. Rule 7 (Comparison and Trade Recording Operation) to remove 
language from the rule relating to submission of data to NSCC for 
reconfirmation and repricing of trade data with respect to transactions 
already compared through the facilities of NSCC or other facilities, as 
this service will now occur pursuant to Rule 51 and Procedure XVII;
    c. Rule 11 (CNS System) to provide that obligations arising from 
Special Trades will be automatically entered into the OW;
    d. Rule 18 (Procedures for When NSCC Ceases to Act) to reflect that 
(i) the OW Obligations that have been forwarded to CNS for settlement 
relating to a member for which NSCC has ceased to act will be removed 
from the CNS Accounting Operation and that any outstanding OW 
Obligations of the member will be removed from the OW service and (ii) 
NSCC will reverse any cash adjustments that were forwarded to 
settlement relating to the OW activity of a member for which NSCC has 
ceased to act;
    e. Rule 50 (Automated Customer Account Transfer Service) to reflect 
that non-CNS ACATS items (as well as CNS-eligible items designated to 
be delivered ex-CNS) will be automatically entered into the OW;
    f. Procedure V (Balance Order Accounting Operation) to reflect that 
Balance Orders will be automatically entered into the OW; and
    g. Procedure VII (CNS Accounting Operation) to reflect (i) the 
addition of CNS-eligible OW activity to the CNS Miscellaneous Activity 
Report and (ii) securities removed from CNS that result in CNS Receive 
or Deliver Instructions will be entered into the Obligation Warehouse 
service.

Pilot and Participant Testing

    NSCC implemented a pilot program of the OW process in early 
February 2010 for firms that had completed systems changes necessary to 
participate in the process. This pilot program ended at the beginning 
of June 2010 as additional discussions ensued between NSCC and its 
participant members regarding the additional functionalities, which are 
described in this filing, sought to be included within the service. 
Prior to implementation of OW, a participating member testing period 
will take place between November 2010 and January 2011. An industry-
wide test of the OW RECAPS process will be scheduled for some time in 
the first quarter of 2011.

Implementation Time Frame

    NSCC will implement the changes set forth in this filing for all 
members during the first quarter of 2011 with the first settlement date 
expected to be on January 24, 2011. Mandatory reorganization events are 
anticipated to be applied to OW Obligations shortly after February 4, 
2011, on a date no less than 10 business days following announcement of 
the implementation by Important Notice. Similarly, at the request of 
the industry, the functionality providing for OW Obligations to be 
reviewed for CNS-eligiblility and if eligible sent to CNS will be 
implemented several weeks after the initial launch to give members time 
to familiarize themselves with the OW settlement tracking 
functionality. Accordingly, after March 4, 2011, or on a date no less 
than 10 business days following announcement of its implementation by 
Important Notice obligations in the OW will be reviewed for CNS-
eligibility and if eligible will be closed and sent to CNS. The first 
RECAPS process in the OW will be run in late March or early April 2011. 
NSCC members will be advised of the implementation dates through 
issuance of NSCC's Important Notices.\22\
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    \22\ The dates set forth in this section are the dates NSCC 
anticipates taking action. As stated above, NSCC will keep its 
members informed of actual implementation and action dates by 
Important Notice.
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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 and to 
remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and

[[Page 82115]]

settlement of securities transactions.\23\ With the rule change 
modifying and enhancing the RECAPS to establish the OW service, NSCC 
will provide for greater efficiency and transparency with respect to 
securities transactions obligations processed through the OW. 
Furthermore, the modifications and enhancements will allow NSCC to 
improve its service by providing prompt and automated confirmation, 
comparison, and tracking of fail transactions.\24\
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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    Accordingly, for the reasons stated above the Commission believes 
that the rule change is consistent with NSCC's obligation under Section 
17A of the Exchange Act, as amended, and the rules and regulations 
thereunder.

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 with the requirements of 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 change (File No. SR-NSCC-2010-11) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32730 Filed 12-28-10; 8:45 am]
BILLING CODE 8011-01-P


