A 5163 - October 17, 2000
P&S 4723

TO: ALL PARTICIPANTS

ATTENTION: MANAGING PARTNER/OFFICER; OPERATIONS PARTNER/OFFICER; MANAGER P&S DEPARTMENT; MANAGER DATA PROCESSING DEPARTMENT

SUBJECT: NSCC ENHANCES ITS DOMESTIC INDEX SHARE SERVICE TO PROCESS CUSTOMIZED STANDARD BASKETS

The National Securities Clearing Corporation (NSCC) has enhanced its domestic index share service to include customized standard baskets. These products will be customized versions of the current exchange traded funds (ETFs) processed by NSCC’s domestic index share system. As needed, the enhanced system will allow for multiple custom baskets for each of these ETFs. These custom baskets will accommodate those broker/dealers that can not trade their own stock, which may be part of one of the standard baskets, and provide additional customization based on the needs of the marketplace. NSCC expects to implement its customized index share service by year-end. An exact date will be announced in a subsequent notice.

To accommodate the customized standard baskets, NSCC will produce a new custom portfolio composition file (AutoRoute Product 02260415) and a new custom portfolio composition report (AutoRoute Product 02260414). The format of the custom file is similar to the standard file, with the addition of the NSCC-assigned instruction CUSIP for the custom product. Since currently there is only one NSCC-assigned instruction CUSIP for each trading CUSIP, the current output files contain only the standard trading CUSIP. For the custom baskets, the NSCC-assigned instruction CUSIP is included so the receiver of the file can identify which custom basket is contained within the file.

A complete record layout is available on NSCC’s file format Website http://formats.nscc.com. Similar to the standard portfolio composition file, the custom portfolio composition file will contain multiple custom portfolios, if applicable. Distribution of the custom portfolio composition files will be to those broker/dealers designated by the respective index receipt agents (Transfer Agent/Custodian) for each custom product.

There is no change to the current Portfolio Composition File and Report (AutoRoute Products 02260294 and 02260293 respectively).

There are no new AutoRoute Products for custom creation and redemption instructions. The Index Receipt Detail Report contains data recording the creation and redemption instructions for all index share products processed by the system. All transactions relating to custom creations and redemptions will be included in the current output files and reports, AutoRoute Product 02262292 and AutoRoute Product 02260291 respectively.

Section A: This section lists the custom creation/redemption information on a unit basis.

1. Creation and Redemption Instructions. The custom index creation and redemption instructions are reported and netted by trade date into a "net index share" unit before bursting into the underlying component stocks. The report will indicate the NSCC assigned CUSIP and symbol for the custom product which the instruction pertain.

2. Total Cash Amount: The Total Cash Amount may be different form the estimated cash amount reported on the previous day’s corresponding Custom Portfolio Composition File. The enhanced index share process enables cash substitution for index components. A separate cash component is provided for each custom index share product.

3. Total Debit/Credit: This figure is the net money to be settled and is the sum of the total cash amount and the transaction fee, which is set by the index shares product’s respective Trustee or Transfer Agent. Currently, the net amount for all index share transactions is displayed on the clearing participant’s Final Settlement Statement (print image report - AutoRoute Product 02130058) with the unique identifier "Code 54 – Index Receipt Money Settlement."

For all custom index share products, the net amount to be settled will be displayed on the Final Settlement Statement with a new identifier:

"Code 55 – Customized STD Baskets".

The current settlement identifier will be renamed and used only for the standard products: "Code 54 – Standard Baskets".

1. Net Index Share Instructions Burst into Components. The custom index share’s net unit position are "burst" into their component stocks for proper settlement. The total shares settled for each component will be determined by the share quantity of the component on the respective Custom Portfolio Composition File multiplied by the net unit position.

2. Issuance of Index Shares. In exchange for the component shares, the standard index product will be created or redeemed in blocks of the standard quantity of shares. The total contract value of the standard index product created/redeemed will equal the aggregate of the value of the number of proportionate shares in the custom portfolio (after netting) as multiplied by the trade date’s truncated closing price, plus the cash amount.

 

In order to create and redeem standard and customized baskets, a NSCC participant must enter into a standardized authorized participant agreement with the Transfer Agent/Custodian and Distributor. Participants, who currently are authorized participants for the standard index share products and are interested in the customized baskets, should contact the respective Transfer Agent/Custodian and Distributor for more information.

The Transfer Agent//Custodian must advise NSCC of all authorized participants prior to NSCC accepting any standard or custom creation and redemption instructions on their behalf.

NSCC has pre-formatted custom test files and reports for participants who wish to receive a sample of the new output available for the custom index share system. These include: both a standard and an associated custom pre-formatted portfolio composition file/report, and a pre-formatted instruction detail file/report containing standard and custom data on the same output. Although these files/reports have limited data, they are structured to give an example of the type of output expected for a standard basket with 2 associated custom baskets.

Early November, NSCC expects to have its test facility available for participant testing. Any participant, who plans to test the custom index share process with any of the Transfer Agents/Custodians must be setup in NSCC’s test facility, the Participant Service Environment (PSE), to receive output via AutoRoute. Participants should contact the respective Transfer Agents/Custodians to arrange testing.

Participants interested in receiving the pre-formatted test output and/or participant test output, should contact NSCC’s Participant Test Group (PTG) at (212)-855-5630 and ask to be setup for the appropriate files/reports as follows:

INDEX SHARE PRODUCTS
STANDARD & CUSTOM AUTOROUTE PRODUCTS

Participants interested in receiving the new custom portfolio composition file and/or report should contact DTCC Participant Services at (212) 855-4155 and ask to be setup to receive these products once they become available in production. Refer to previous table for AutoRoute Product numbers.

If you have any questions regarding NSCC’s procedures for clearing and settling standard and custom index share products, please contact DTCC Participant Services at (212) 855-4155, or the undersigned at (212) 412-8686.

Edlyn Meringolo
Vice President
Product Marketing and Development