A#

5682

P&S #:

5252
   

DATE:

September 26, 2003
   

TO:

ALL PARTICIPANTS AND SETTLING BANKS
   

ATTENTION:

MANAGING PARTNER/OFFICER; CHIEF OPERATIONS OFFICER; OPERATIONS PARTNER/OFFICER; COMPLIANCE OFFICER
   

FROM:

 Merrie Faye Witkin
   
SUBJECT: RULE CHANGE - CONSOLIDATED SETTLEMENT AND SETTLEMENT VIA THE FRB'S NATIONAL SETTLEMENT SYSTEM

National Securities Clearing Corporation ("NSCC" or “the Corporation”) has filed a rule change with the Securities and Exchange Commission ("SEC") pursuant to Section 19(b)(2) of the Securities Exchange Act of 1934, to modify NSCC’s Rules and Procedures (the “Rules”) relating to end-of-day money settlement. The purpose of the rule change is to accommodate the consolidation of NSCC’s and DTC’s settlement systems, as previously described in Important Notices A 5611 (P&S 5181, May 12, 2003) and A 5612 (P&S 5182, May 12, 2003).

In addition, to reduce settlement risk and permit Settling Banks to settle their net-net debits at NSCC and also at DTC with a single payment, NSCC is amending the Rules to require that NSCC Settling Banks satisfy their daily net-net debit balances at NSCC through the use of the National Settlement Service (“NSS”) of the Federal Reserve Bank (the “FRB”). The change being sought is consistent with DTC’s requirement that its Settling Banks utilize NSS. NSS has been mandatory for DTC settlement since September 2, 2003. Once approved, NSS will become mandatory for NSCC Settling Banks in conjunction with the consolidated settlement system at a date to be announced.

NSS will allow DTC, as NSCC’s Settlement Agent, to submit instructions to the Fed to charge the Settling Banks’ accounts at the Fed for their NSCC net-net debit balances. Utilization of NSS will thus eliminate the need for a Settling Bank to initiate a wire transfer in satisfaction of a net-net debit balance, will permit the aggregation of such amounts with its DTC balance, and therefore also reduce the risk a Settling Bank may incur a late payment fee due to a delay in wiring settlement funds. By reducing the likelihood of late payments, the aggregation of settlement payments, together with usage of NSS, reduces the likelihood that such payment will delay completion of NSCC settlement. (Should NSS not be available for any reason, then Settling Banks will be obligated to settle their NSCC (and DTC) obligations by wire transfer.)

Finally, certain technical corrections are being made to the Rules to assure that defined terms and other provisions are used consistently.
Accordingly, the rule change will require Settling Banks to use NSS and it provides the procedures whereby Settling Banks that act as such for both NSCC and DTC (“Common Settling Banks”) will have their settlement balances at both clearing agencies aggregated and netted into a single payment or credit amount.

Prior to using NSS, Settling Banks will be required to sign a Settler Agreement with an FRB which incorporates a requirement that the Settling Bank agrees to the terms of the FRB’s Operating Circular No. 12. The signed Settler Agreement must be on the Settling Bank’s letterhead, must be signed by an authorized signer recognized by the FRB, and must be submitted to the FRB through DTC, as NSCC’s Settlement Agent. The form of NSS Settler Agreement for NSCC-only Settling Banks is attached to the filing. Those Settling Banks that also act as Settling Bank for DTC participants are already required to sign a Settler Agreement with the FRB designating DTC as their NSS Settlement Agent. Accordingly, they will not be required to sign new Settler Agreements to cover NSCC’s NSS settlement. Instead, as provided in Procedure VIII, the Settler Agreements they provide to DTC for delivery to the FRB will, upon the approval and effectiveness of this rule filing, be deemed to include, as covered in the NSS settlement arrangements, the Settling Bank’s NSCC Settlement obligations as well as their DTC Settlement obligations.

As is currently required, each Settling Bank will be required to acknowledge its NSCC net-net balance at the end of the day1. DTC will not send a Settling Bank’s NSCC net-net debit balance to a FRB for collection until the Settling Bank has acknowledged its balance.

As NSCC’s Settlement Agent, DTC will send a “pre-advice” to each Settling Bank, notifying the settling bank that DTC is about to send its NSS transmission to the FRB. If a Settling Bank does not have sufficient funds in its FRB account to enable DTC to debit the full amount of its settlement balance, or should NSS not be available to a Settling Bank for any reason, the Settling Bank will be obligated to wire all such amounts to DTC prior to the designated cut-off time. 2

A new item 4 in Procedure VIII sets forth the netting and payment obligations among Common Settling Banks, NSCC and DTC. For each Common Settling Bank, DTC, as Settlement Agent, will aggregate and net the net-net debit or credit (as applicable) due by or to such bank to or from NSCC and DTC. If the Common Settling Bank owes a settlement debit to both clearing agencies, DTC will debit the FRB account in the sum of such debit amounts; if the bank is owed a credit from both, DTC will wire the bank the aggregate sum of such credit amounts. Where the Common Settling Bank owes a debit to one clearing agency and is owed a credit from the other, then the Common Settling Bank will be obligated to pay the net amount of that sum (if a net debit) or be entitled to receive the net amount (if a net credit); and the clearing agency which, pre-net, owes the settlement credit to the Common Settling Bank will pay the net credit difference to the other clearing agency. If any Common Settling Bank fails to pay its aggregate NSCC/DTC net debit amount (referred to as its “Consolidated Settlement Debit Amount”) in full by the time specified in NSCC and DTC’s procedures, then if that bank had a net-net debit to NSCC before aggregation of such amounts with the Common Settling Bank’s DTC settlement balance, NSCC will implement its failure to settle procedures.

The full text of the rule change (SR-NSCC-2003-19) may be obtained by visiting our web site at www.nscc.com. Federal Reserve Operating Circular No.12 is available on the Federal Reserve web site at http://www.frbservices.org/OperatingCirculars/pdf/Oc12.pdf.

Written comments on the proposed rule filing may be addressed to Lisa T. Siebold, Assistant Secretary, National Securities Clearing Corporation, 55 Water Street, New York, New York 10041, and your comments will be forwarded to the SEC. You may also address your written comments to the Secretary of the Commission, Securities and Exchange Commission, 450 Fifth Street NW, Washington, D.C. 20549. We request that you provide NSCC with a copy of your comments.

Questions regarding the above filing should be directed to the undersigned at (212) 855-3208, or to Diane Brennan at (212) 855-3320.


Merrie Faye Witkin
Vice President and Senior Counsel

1. A Settling Bank that is a Member and settles solely for its own account may elect not to acknowledge its net-net settlement balance in the manner provided in the Procedures.

2. If a Settling Bank is experiencing extenuating circumstances and, as a result, needs to opt out of NSS for one business day and send its wire directly to DTC's FRBNY account for its debit balance, that Settling Bank must notify the Settlement Department prior to acknowledging its settlement balance.