A 5097 - May 15, 2000
P&S 4659

TO: ALL PARTICIPANTS

ATTENTION: MANAGING PARTNER/OFFICER; OPERATIONS PARTNER/OFFICER

SUBJECT: RULE CHANGE REGARDING NSCC'S PROCEDURES FOR WHEN THE CORPORATION DECLINES OR CEASES TO ACT FOR A SETTLING MEMBER

On May 2, 2000, the Securities and Exchange Commission ("SEC") approved a rule change filed by National Securities Clearing Corporation ("NSCC" or the "Corporation") regarding modifications to NSCC’s Rules concerning procedures for when the Corporation declines or ceases to act for a Settling Member. A copy of the rule change is attached to this Important Notice.

The changes to Rule 18 will (i) eliminate the distinction between those instances where NSCC declines or ceases to act for a Settling Member because such Settling Member is insolvent and where NSCC declines or ceases to act for a Settling Member for a reason other than insolvency, and (ii) permit NSCC to complete certain open RVP/DVP transactions of an insolvent broker-dealer who is a Settling Member or clears through a Settling Member.

NSCC has determined that, except in certain limited circumstances, there is no longer a substantive reason for continuing the distinction in Rule 18 between those instances where NSCC declines or ceases to act due to the insolvency of a Settling Member (Section 3 of Rule 18) and those instances where NSCC declines or ceases to act for a reason other than insolvency (Section 2 of Rule 18). Therefore, other than under those limited circumstances where it is necessary to draw such a distinction, the rule change merges these two Sections.

The rule change includes a new section (Section 3) permanently incorporating into NSCC’s Rules procedures relating to the completion of open RVP/DVP transactions and allows NSCC to complete certain wholly executory, receipt-versus-payment or delivery-versus-payment transactions ("RVP/DVP Transactions"); these transactions may be CNS or Balance Order trades. The RVP/DVP Transactions covered by Section 3 are those in which the customer ("RVP/DVP Customer") executes its purchase and sale transaction with the defaulting broker-dealer (directly, if such defaulting party is a Settling Member, or through a clearing Member), but takes delivery of the underlying cash or securities from the defaulting broker-dealer on an RVP/DVP basis at its custodian bank or other depository agent in the absence of the defaulting broker’s liquidation.

After NSCC has declined or ceased to act for a Settling Member, NSCC will attempt to complete (1) all open RVP/DVP transactions, of which NSCC is aware, to the extent they did not increase the size of the position in any security that NSCC will have to close-out, and (2) any additional open RVP/DVP transactions to the extent deemed appropriate by NSCC’s Board of Directors. NSCC’s obligation set forth in (1) holds regardless of whether NSCC would gain or lose money by completing such transactions, any determinations by the NSCC Board to close-out additional RVP/DVP Transactions will be made without regard to the potential profit or loss for NSCC in any individual transaction. In either case, NSCC will have no obligation to complete any open RVP/DVP Transaction if (i) NSCC believes it could not complete all RVP/DVP Transactions in the same issue that it would be obligated to attempt to complete under this new provision, (ii) there are allegations of fraud with respect to such trades or such trades are otherwise questionable or (iii) NSCC believes such trades could not be completed on a timely basis.

The Rules require NSCC to provide notice to the trustee or receiver of the Settling Member (if, in the case of an insolvent Settling Member, one has been appointed) and the relevant RVP/DVP Customers or the RVP/DVP Customer’s depository agent or its depository agent’s depository, of the RVP/DVP Transactions NSCC intends to attempt to complete. Such notice will alert the RVP/DVP Customer that completion of any such transaction with NSCC constitutes a presumed waiver by the RVP/DVP Customer of any claim arising out of such transactions against the Settling Member for whom the Corporation has declined or ceased to act, or, in the case of an insolvent Settling Member, the receiver or trustee (or any successor trustee) or SIPC. This notice will typically take the place via The Depository Trust Company’s electronic message dissemination system.

Questions regarding the rule filing should be directed to the undersigned at (212) 855-3203.

Karen L. Saperstein
Managing Director and Secretary

ATTACHMENT

DEFINITIONS AND DESCRIPTIONS [additions only]

Rule 1.

CNS Position
The term "CNS Position" has the meaning specified in Rule 18.

Net Close Out Position
The term " Net Close Out Position" has the meaning specified in Rule 18.

RVP/DVP Transaction
The term "RVP/DVP Transaction" means any wholly executory receipt-versus-payment or delivery-versus-payment transaction between a Settling Member and an RVP/DVP Customer.

RVP/DVP Customer
The term "RVP/DVP Customer" means a party who has executed a RVP/DVP Transaction with a Settling Member for whom the Corporation has declined or ceased to act, or with an introducing broker who clears through a Settling Member for whom the Corporation has declined or ceased to act.

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PROCEDURES FOR WHEN THE CORPORATION

DECLINES OR CEASES TO ACT

Rule 18. SEC. 1. When the Corporation has declined or ceased to act for a Settling Member, Municipal Comparison Only Member, Insurance Carrier Member, TPA Member or Fund Member pursuant to Rule 46, it shall provide Settling Members, Municipal Comparison Only Members, Insurance Carrier Members, TPA Members and Fund Members with notice pursuant to the provisions of Section 3 of Rule 45.

SEC. 2. (a) Except as otherwise may be determined by the Board of Directors or a Committee thereof, in any particular case, the following transactions of a Settling Member for which the Corporation has declined or ceased to act shall be excluded from all operations of the Corporation applicable to such transactions:

(i) any CNS trade which, at the time the Corporation declined or ceased to act for such Settling Member, was not guaranteed by the Corporation pursuant to Addendum M;

(ii) any Balance Order trade which, at the time the Corporation declined or ceased to act for such Settling Member, was not guaranteed by the Corporation pursuant to Addendum K; and

(iii) any security orders issued in respect of Special Trades and transactions in Foreign Securities.

Any transactions so excluded shall be settled between the parties and not through the Corporation.

(b) All CNS transactions and Balance Order transactions not excluded pursuant to paragraph (a) of this Section shall be handled as provided for in this Rule.

SEC. 3. (a) Notwithstanding any other provision of this Rule, promptly after the Corporation has declined or ceased to act for a Settling Member, the Corporation shall attempt to complete, in accordance with the provisions of this Section, the open RVP/DVP Transactions of such Settling Member. The Corporation shall notify the relevant RVP/DVP Customer and the trustee or receiver of the Settling Member (if one has been appointed) of the Corporation’s intent to attempt to complete such RVP/DVP Transactions. Such notice shall also contain a statement notifying RVP/DVP Customers of the presumed waiver stated in paragraph (f) of this Section. Such notice shall be given by any commercially reasonable means, which shall not be limited to those means specified in Rule 45, and include, but are not limited to, important notice or notification to the RVP/DVP Customer’s depository agent or its depository agent’s depository.

For purposes of this Rule 18, (i) the "CNS Position" shall be equal to the net of the Settling Member’s Long Positions and Short Positions in a CNS Security (which includes, without limitation, any position not excluded by the Corporation pursuant to Section 2), and (ii) the "Net Close Out Position" with respect to a CNS Security shall be equal to the sum of the (X) Long Position or Short Position in such CNS Security plus (Y) the quantity of each RVP/DVP Transaction pertaining to that CNS Security that the Corporation has completed pursuant to this Rule. In determining a CNS Position, the Corporation shall consider Long Positions to be positive numbers and Short Positions to be negative numbers. In determining the Net Close Out Position, the Corporation shall consider any quantity of securities it receives upon completion of an RVP/DVP transaction to be a positive number, and any quantity of securities it delivers upon completion of an RVP/DVP Transaction, to be a negative number.

(c)(i) Subject to paragraph (d) below, the Corporation shall be obligated to attempt to complete all RVP/DVP Transactions in a CNS Security of which the Corporation is aware prior to declining or ceasing to act, but only to the extent that the completion of such RVP/DVP Transactions would not cause the absolute value of the Net Close Out Position in such CNS Security to be greater than the absolute value of the CNS Position in such CNS Security. To the extent that this paragraph requires the Corporation to attempt to complete some but not all of the RVP/DVP Transactions in a particular CNS Security, the Corporation shall determine which of those RVP/DVP Transactions it shall attempt to complete in the same manner that it may, pursuant to subparagraph (ii), determine to attempt to complete any additional RVP/DVP Transactions.

(ii) In determining whether to attempt to complete any additional RVP/DVP Transaction beyond those RVP/DVP Transactions that the Corporation is required to attempt to complete pursuant to subparagraph (c)(i), the Board of Directors may consider any factor it, in its sole discretion, deems appropriate, including the willingness of an RVP/DVP Customer to guaranty fulfillment of its obligation to receive or deliver securities from or to the Corporation, but shall not consider the expected profit or loss arising from any individual RVP/DVP Transaction.

(d) Notwithstanding the provisions of paragraph (c), the Corporation may determine not to complete any open RVP/DVP Transaction pertaining to a particular CNS Security if (i) the Corporation reasonably believes that it cannot complete all RVP/DVP transactions in such CNS Security that it would be obligated to attempt to complete pursuant to paragraph (c)(i), whether due to the inability of the Corporation or the RVP/DVP Customer to make delivery or payment, the unwillingness of the RVP/DVP Customer to make delivery or payment, or otherwise, (ii) there exists allegations of fraud or otherwise questionable activities with respect to such CNS Security, or (iii) the Corporation believes that the completion of an RVP/DVP Transaction in such CNS Security can not be consummated on a timely basis. If the Corporation makes such a determination, then it shall have no further obligations with respect to completing such RVP/DVP Transactions, and shall notify the RVP/DVP Customer (or its depository agent or its depository agent’s depository) and the trustee or receiver of the Settling Member (if any) of such determination.

(e) The Corporation will apply the same procedures to open positions arising from security Balance Orders with respect to which there are RVP/DVP Transactions, to the extent to do so is practicable.

(f) All notices to RVP/DVP Customers (or the RVP/DVP Customer’s depository agent or its depository agent’s depository) shall include language to the effect that the RVP/DVP Customer, by completing the RVP/DVP Transaction, shall be conclusively presumed to have waived any claim with respect to such completed RVP/DVP Transaction, including, but not limited to, any net equity claim, against (i) the Settling Member, (ii) the Settling Member’s appointed trustee or receiver (or any successor trustee or receiver), if any, or (iii) the Securities Investor Protection Corporation (SIPC), if the Settling Member is subject to a SIPC liquidation order.

(g) The Net Close Out Positions shall be closed out by the Corporation as provided in Section 6.

SEC. 4. (a)(i) After the Corporation has declined or ceased to act for a Settling Member generally, the Corporation may accept from him envelopes to be delivered to other Settling Members (whether such deliveries are pursuant to security balance orders issued by the Corporation or are otherwise provided for in these Rules) or it may decline to accept any such deliveries, in which case such Settling Member shall make such deliveries and obtain payment therefor otherwise than through the Corporation.

(ii) After the Corporation has declined or ceased to act for a Settling Member generally, it shall decline to accept from other Settling Members envelopes or orders to be delivered to such Settling Member, in which case such other Settling Members shall make such deliveries to such Settling Member and obtain payment therefor otherwise than through the Corporation; provided, however, that the Corporation may accept such envelopes in order to complete open RVP/DVP Transactions pursuant to paragraph (e) of Section 3.

SEC. 5 After the Corporation has declined or ceased to act for a Settling Member generally, the Corporation may, in respect of the CNS System, take any of the following actions:

(i) accept from such Settling Member deliveries through the facilities of a Qualified Securities Depository;

(ii) continue to instruct the Qualified Securities Depository designated by such Settling Member to deliver CNS Securities from such Settling Member's account at the Qualified Securities Depository to the Corporation's account in respect of such Settling Member's Short Positions; or

(iii) continue to instruct the Qualified Securities Depository designated by such Settling Member to deliver from the Corporation's account at the Qualified Securities Depository CNS Securities received into the Corporation's account to the Settling Member in respect of his Long Positions and may in connection therewith accord the Settling Member priority, as provided in the Procedures, in respect of all other Settling Members;

provided however, in the event insolvency proceedings have commenced against such Settling Member, the actions contemplated by subparagraphs (ii) and (iii) may be taken to the extent permitted by the applicable rules of the relevant insolvency regime. In the event the Corporation declines to take the actions permitted by the foregoing subparagraphs, the open positions of such Settling Member shall be closed out as provided in paragraph (a) of Section 6.

SEC. 6. (a) Promptly after the Corporation has given notice that it has declined or ceased to act for the Settling Member, and in a manner consistent with the provisions of Section 3, the Net Close Out Position with respect to each CNS Security shall be closed out (whether it be by buying in, selling out or otherwise liquidating the position) by the Corporation; provided however, if, in the opinion of the Corporation, the close out of a position in a specific security would create a disorderly market in that security, then the completion of such close-out shall be in the discretion of the Corporation.

If, in the aggregate, the closing out of CNS securities deliverable to or deliverable by such Settling Member results in a profit, said profit shall be credited to the account of such Settling Member with the Corporation. If, in the aggregate, the selling out and buying in of CNS securities deliverable to or deliverable by such Settling Member results in a loss, said loss shall be debited to the account of such Settling Member with the Corporation.

(b) Except as otherwise may be determined by the Board of Directors or a Committee thereof in any particular case:

(i) securities deliverable to or by the Settling Member for whom the Corporation has declined or ceased to act pursuant to security balance orders (except such securities as shall at the time the Corporation so declined or ceased to act have been delivered pursuant to such orders) relating to Balance Order transactions not excluded pursuant to paragraph (a) of Section 2 shall be sold out or bought in by the Settling Members named in such security balance orders without unnecessary delay in the best available market, subject to such terms and conditions as the Corporation may require, and the delivery of and payment for securities deliverable pursuant to such balance orders shall be governed by the provisions of this paragraph (b);

(ii) Separate accountings as to each business day, as hereinafter provided, shall be had with respect to the profits and losses of other Settling Members (computed on the basis of the Settlement Prices shown on the security balance orders) resulting from the buying in or selling out of Balance Order Securities deliverable to or by the Settling Member for whom the Corporation has declined or ceased to act under security balance orders calling for such delivery on such day; provided, however, in the event that the Corporation instructs a Settling Member that the buy in or sell out of an open Balance Order position must be for cash or guaranteed delivery, as the case may be, then any loss relating to such a buy in or sell out shall only be included in such accountings if such Settling Member complied with such instructions.

(iii) With respect to each separate accounting for the close outs of Balance Order transactions directed by the Corporation:

(A) If a profit results from the selling out or the buying in of Balance Order Securities deliverable to or deliverable by the Settling Member for whom the Corporation has declined or ceased to act under a security balance order, the Settling Member realizing such profit shall at once send a statement of the transaction to the Corporation and shall pay over such profit to it. Such profit shall be applied by the Corporation to the payment of losses incurred by such Settling Member or by other Settling Members in selling out or buying in Balance Order Securities deliverable to or deliverable by the Settling Member, for whom the Corporation has declined or ceased to act, under other security balance orders calling for delivery on the same day.

(B) If a loss results from the selling out or buying in of Balance Order Securities deliverable by the Settling Member for whom the Corporation has declined or ceased to act, under a security balance order the Settling Member sustaining such loss shall at once send a statement of the transaction to the Corporation, which shall pay him the amount of the loss in the manner and to the extent hereinafter provided.

(C) (i) If, in the aggregate, the selling out and buying in of Balance Order Securities deliverable to or deliverable by the Settling Member for whom the Corporation has declined or ceased to act under security balance orders calling for delivery on the same day results in a profit, said profit shall be credited to the account with the Corporation of the Settling Member for whom the Corporation has declined or ceased to act.

(ii) If, in the aggregate, the selling out and buying in of Balance Order Securities deliverable to or deliverable by the Settling Member for whom the Corporation has declined or ceased to act under security balance orders calling for delivery on the same day results in a loss, the Corporation shall pay the same to the Settling Members sustaining such losses, and debit the net amount to the account with the Corporation of the Settling Member for whom the Corporation has declined or ceased to act.

SEC. 7. (a) After the Corporation has declined or ceased to act for a Settling Member, Municipal Comparison Only Member, Insurance Carrier Member, TPA Member or Fund Member either in respect to a particular transaction or transactions generally, the Corporation shall nevertheless have the same rights and remedies in respect to any debit balance due from such Settling Member, Municipal Comparison Only Member, Insurance Carrier Member, TPA Member or Fund Member or any liability incurred on his behalf as though it had not ceased to act for him.

(b) As security for any and all liabilities now existing, or hereafter arising, of a Settling Member to the Corporation, the Corporation shall maintain a lien on all property placed by a Settling Member in its possession, including but not limited to, securities and cash in the process of clearance or on deposit with, or pledged to, the Corporation in satisfaction and/or in excess of a Settling Member's Clearing Fund deposit pursuant to Rule 4, Section 1, and Rule 12, Section 1; provided, however, that in no event shall the Corporation have any lien on securities carried by a Settling Member for the account of its customers where such lien would be prohibited under Commission Rules 8c-1 and 15c2-1.