A 4825 - September 1, 1998
P&S 4389

TO: ALL PARTICIPANTS

ATTENTION: MANAGING PARTNER / OFFICER, OPERATIONS PARTNER / OFFICER, DATA PROCESSING MANAGER, MANAGER MUTUAL FUNDS OPERATIONS, DIRECTOR OF OPERATIONS, YEAR 2000 COORDINATOR

Re: NSCC YEAR 2000 READINESS DISCLOSURE

SUBJECT: NSCC MANDATED YEAR 2000 TESTING

National Securities Clearing Corporation (NSCC) has determined that settling participants will be required to demonstrate a sufficient level of Year 2000 (Y2K) readiness. To that end, NSCC is mandating participation in the Securities Industry Association (SIA) coordinated testing effort beginning in March 1999. In addition, Connectivity and Point-To-Point testing with NSCC are prerequisites to SIA coordinated testing.

I. Year 2000 Mandate

NSCC is mandating all settling participants that directly submit or receive computer to computer files, or on whose behalf exchanges and utilities submit files to NSCC, for Equity, Mutual Fund and/or Fixed Income products to demonstrate Year 2000 (Y2K) readiness. Testing of these NSCC products will be executed in conjunction with the SIA coordinated testing schedule (to be announced in the fall). At the conclusion of Y2K testing, participants will be required to provide NSCC with written confirmation that files, which were subject to testing, have been received from NSCC and successfully processed in a Y2K compliant manner.

Recently, the securities industry successfully conducted a Y2K Beta Test that tested the clearance and settlement infrastructure. This test included NSCC, the major exchanges, the NASD, The Depository Trust Company, and twenty-eight participants. The Beta Test was successful and will serve as a model for SIA coordinated testing.

II. Testing Process

There are three distinct testing processes: Connectivity, Point-To-Point and SIA Coordinated Testing that must be completed in the sequence presented below:

Connectivity testing to NSCC’s dedicated Y2K testing environment (K-box) must be completed. NSCC will use existing communication lines for the transmission of files. However, participants may elect to use new test lines for Y2K testing. If participants will be using new lines they must be established prior to year-end 1998, to ensure the proper setup and testing of the lines before SIA coordinated testing. Connectivity testing must be completed prior to Point-To-Point testing. Participants are strongly encouraged to contact NSCC’s Participant Testing Group (212-412-8505) to initiate this first prerequisite step for Y2K testing. Once a participant completes connectivity testing, the Participant Testing Group should be contacted to schedule Point-To-Point Testing.

Point-To-Point Testing, consisting of the sending and receiving of files with Y2K dates in a Y2K environment, must be initiated prior to year-end 1998. All files submitted to and received from NSCC must be tested in a Point-To-Point manner in preparation for SIA coordinated testing. Point-To-Point Testing will be conducted with a system date of January 3, 2000. A review of the Beta Test indicated that considerable effort is necessary to conduct the Point-To-Point testing and that effort expended during this phase contributes significantly to a successful test. Accordingly, participants are urged to initiate testing as promptly as possible.

SIA Coordinated Testing will begin in March 1999. This testing consists of a full-scale process among NSCC, participants, exchanges and utilities in a Y2K environment to demonstrate readiness for Y2K.

III. Relevant Testing Information

Scripted Testing

Results of the July Beta test indicate that predetermined transactions, coordinated among participants, promote a great degree of successful testing. NSCC, in conjunction with other exchanges and utilities, is working to finalize scripted transactions and pairing of participants.

NSCC Omnibus Trading Account

NSCC will offer participants an omnibus trade account to assist in the testing of scripted transactions for Fixed Income and Equity products. This capability is not a replacement for the pairing of participants. However, it will allow firms to test predetermined conditions during the SIA coordinated testing in the event that a testing partner experiences difficulties. NSCC, in conjunction with the SIA Mutual Fund Focus Group, has determined that, due to the unique relationships of Broker/Dealers and Mutual Funds, omnibus trade accounts will not adequately test Mutual Fund transactions. Therefore, omnibus trade accounts will not be offered for the Mutual Fund products.

Service Bureau Representation

Participants utilizing a service bureau for the submission of all tested transactions should notify NSCC in writing that the service bureau will be conducting tests on their behalf. Participants who submit files directly to NSCC, in addition to service bureau submissions, will be required to test the directly submitted files.

PC Web Direct

This recently implemented service is Y2K compliant. Therefore, participants submitting and receiving files solely via PC WEB Direct are exempt from Y2K tests. However, PC Web Direct will be available to support SIA coordinated testing.

ACATS/Annuity Services

ACATS and Annuities have been developed in a Y2K compliant design. NSCC will coordinate participant testing of these services in a separate testing process. Further information on Y2K testing of these services will be available in subsequent Important Notices.

Format Testing

Since 1997, NSCC has been providing opportunities for participants to migrate to expanded input and output formats. In preparation for the SIA coordinated testing, participants electing to submit eight digit formats must complete format testing by year-end 1998. If testing is not initiated by year-end 1998, participants will be required to stay at the current formats.

IV. Compliance is mandated by NSCC Board of Directors

NSCC’s Board of Directors has approved the Year 2000 testing mandate, as previously outlined in this Notice. Failure to participate (absent a waiver from NSCC’s President) will permit NSCC to take appropriate actions (i.e. initiate disciplinary proceedings) in accordance with NSCC rules.

V. Initiating Testing: How to Contact Us

All participants are strongly encouraged to contact NSCC to initiate Connectivity and Point-To-Point Testing immediately. A Participant Testing Group (PTG) responsible for all Y2K testing activities related to NSCC products and services has been created. The PTG hotline number is (212) 412-8505.

VI. Where to Find Information on Year 2000 Testing

NSCC’s web site; www.y2000.org provides an overview and specific details regarding Y2K testing. The site contains details on connectivity and communication standards, testing processes, description of testing phases, files covered by testing and pertinent information on the SIA coordinated testing. This web site offers information and direction on NSCC’s Y2K testing efforts and will be updated regularly to reflect current testing status. Additional information on the industry effort can by reviewed on the SIA’s web-site, www.sia.com/html/year_2000_intro.html.

NSCC is committed to working with the industry in establishing a value added testing process which will demonstrate Y2K readiness of its participants. NSCC will conduct several awareness seminars later this year to discuss NSCC requirements and address participant issues. A series of Important Notices, one to be issued later this month, will clearly define NSCC’s requirements for the testing process and scheduling of testing events.

Any questions regarding this Notice may be directed to the undersigned by e-mail at jfitzgerald@nscc.com or by telephone at (212) 412-8435.

John Fitzgerald

Managing Director