The National Securities Clearing Corporation will modify its OTC Equity Clearance System in the third of three phases on Monday evening, August 17, in support of Nasdaq’s ACT/TARS Migration ¹ (occurring this month from August 17 through August 31 with the main software release occurring August 31). Participants were previously advised of this system change in NSCC’s Important Notices of December 19 (A 4694, P&S 4262), March 17 (A 4734, P&S 4301), and April 14 (A 4749, P&S 4314).² These modifications continue the series of system changes undertaken by the Clearing Corporation as part of its general effort to process Year 2000 dates, to provide a decimal matching option, and to increase the system’s efficiency and cost-effectiveness for OTC equity transactions. In concert with these changes, the Nasdaq Stock Market has required NSCC’s support in its efforts to migrate the functionality of its Trade Acceptance and Reconciliation Service (TARS) into its Automated Confirmation Transaction system (ACT).

MINOR IMPACT TO NSCC PARTICIPANTS

The bulk of NSCC’s Phase 3 changes entail internal modifications made in support of Nasdaq’s ACT/TARS Migration referenced above. The changes NSCC is making to the OTC Equity Trade Comparison system on August 17 will have only a minor impact on Participants as follows:

Contract Money display on machine-readable output (MRO) and printed contract reports: Calculations effecting prices and contract moneys submitted will be subject to standard arithmetic rounding ³ rather than algorithmic truncation.⁴ For example: In the table below both trades A and B were executed as 100 shares @ ³¹/₃₂ of a dollar-- currently, the system truncates the pennies in trade A’s displayed contract money, but after Phase 3, it will round them as depicted in trade B’s displayed contract money.

Please note that trades A1 and B1, submitted in contract money terms, cannot match against any of the others because the system matches exact price to the sixth place past the decimal, and no longer performs fractional price normalization to the nearest 256th of a dollar in accordance with industry-wide price decimalization implemented as part of Phase 2 on May 1 (please see Recommendations, on page 3).

OTHER PHASE 3 CHANGES:

• Beginning August 17, Nasdaq will discontinue TARS contract queries and advisory stamping capabilities -- at that point, the NSCC contract file and report output will become the sole source of contract information for NSCC participants and participants using TARS must reconcile advisory trades by submitting matching TARS As-ofs or Withholds;

• Beginning August 31, Nasdaq will discontinue TARS entirely and all reconciliation activity formerly performed via TARS must be performed via ACT’s new T+2 and older trade reconciliation facility. NSCC will return all records of trades locked-in by ACT’s new T+2 and older reconciliation facility on the current OTC Locked-in Contracts machine-readable output (OTC Locked-in Trades MRO File - AutoRoute ID # 02020183 - Original Format - 02022183 - Y2K Format) and on a new T+2 and Older section of the OTC Locked-in Trades Contracts Report (AutoRoute ID # 02020184).

RECOMMENDATIONS: To reduce the likelihood of trade breaks on low-order decimal price differences, participants are encouraged to:

• Use Nasdaq’s ACT system for on-line matching and risk management of these trades wherever possible;

• Migrate to NSCC’s new input formats and submit in price terms (this technique will reduce, but not eliminate, the number of such breaks);

• Identify step-outs and parts-of-baskets with the appropriate indicators.

FILE FORMATS and TESTING: Both the current six-digit and the new eight-digit file formats are available on NSCC's Year 2000 World Wide Web site at URL www.y2000.org/nscc. Contact your firm's NSCC Year 2000 Coordinator to obtain a user ID and password to access the site (if you don't have Web access, contact NSCC Participant services at 212-412-8432 for hardcopies). Contact the NSCC Year 2000 Testing Control Group at 212-412-8505 to set up testing if your firm is opting to migrate to the new formats.

Keep in mind that part of Nasdaq’s system changes involve the elimination of the Trade Acceptance and Reconciliation Service (TARS). If your firm does not already receive NSCC contracts, contact NSCC Participant Services at (212) 412-8432 in order to begin receiving contract output before TARS is eliminated.

If you have additional questions, please call the undersigned at (212) 412-8558.

Raymond F. Nolting
Director, Product Development

footnotes:
(1) A special information letter from Nasdaq's Trading & Market Services department sent to ACT-TARS users this week (dated August 4) as well as Nasdaq's Notice to Members 98-40, Nasdaq to Incorporate Trade Acceptance and Reconciliation Service into Automated Confirmation Transaction Service and a recent Uniform Practice Advisory 47-98 address these modifications to the NASD membership. For further information, contact Peter Forde at Nasdaq Market Operations (203) 378-0166.

(2) The Phase 2 changes are specifically detailed in the March 17 notice, OTC Optimization - Nasdaq ACT/TARS Migration: Phase 2 Implementation.

(3) Increase the lowest-order digit by one if the subsequent digit is 5 or greater; leave the lowest-order digit unchanged if the subsequent digit is less than 5.

(4) Leave the lowest-order digit unchanged, dropping all lower-order digits entirely.

(5) Please see details of format changes in NSCC’s Important Notice of March 17 (A 4734, P&S 4301).

(6) Here the actual contract money calculated is $96.875 with the lowest-order digit being truncated, leaving the displayed money as $96.87.