| A# |
5704 |
| P&S #: |
5274 |
| DATE: |
November 5, 2003 |
| TO: |
ALL PARTICIPANTS AND SETTLING BANKS |
| ATTENTION: |
MANAGING PARTNER/OFFICER; CHIEF OPERATIONS OFFICER; OPERATIONS PARTNER/OFFICER; COMPLIANCE OFFICER |
| SUBJECT: | APPROVAL OF RULE CHANGE - CONSOLIDATED SETTLEMENT AND SETTLEMENT VIA THE FRB'S NATIONAL SETTLEMENT SYSTEM |
On November 4, 2003, the Securities and Exchange Commission (“SEC”) approved National Securities Clearing Corporation’s ("NSCC" or “the Corporation”) rule change to modify NSCC’s Rules and Procedures (the “Rules”) relating to end-of-day money settlement. The rule change accommodates the centralization 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). These changes will become effective on December 5, 2003, the date on which the Consolidated Settlement System will go live and become the single source of NSCC and DTC settlement data.
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. On December 5, 2003, NSS will become mandatory for NSCC Settling Banks in conjunction with the Consolidated Settlement System.
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 thus eliminates the need for a Settling Bank to initiate a wire transfer in satisfaction of a net-net debit balance, permits the aggregation of such amounts with its DTC balance, and therefore also reduces 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 requires 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. Federal Reserve Operating Circular No.12 is available on the Federal Reserve web site at http://www.frbservices.org/OperatingCirculars/pdf/Oc12.pdf. 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 and will be provided to such banks by Settlement Operations. (See SR-NSCC-2003-19, which is available on NSCC’s website; and Important Notice A 5706 (P&S 5276), issued to NSCC Settling Banks concurrently herewith.) 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 day. [1] 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.
A copy of Procedure VIII, showing these changes, is attached to this Notice. The full text of the rule change (SR-NSCC-2003-19) may be obtained by visiting our web site at www.nscc.com.
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
PROCEDURE VIII. MONEY SETTLEMENT SERVICE
The Money Settlement Service is the end product of a number of other Services. Individual sections of these Procedures and the Rules specify the method of calculation for determining the total net amounts owed to the Settling Member, Insurance Carrier Member or Fund Member or owed by the Settling Member, Insurance Carrier Member or Fund Member for each service. The function of the Money Settlement Service is to record these individual totals or net amounts on the Settlement Statement, together with amounts due to or from the Settling Members as a result of Clearing Agency Cross-Guaranty Agreements, and determine a single net amount owed to or owed by each Settling Member, Insurance Carrier Member or Fund Member.
A. [Initial]
Settlement Statement
Each business day at such
time as determined by Corporation, the Corporation produces a Settlement Statement
for each Settling Member, Insurance Carrier Member and Fund
Member. The Settlement Statement reflects each credit or debit which has
been entered to the Settling Member's, Insurance Carrier Member’s
and Fund Member's account for each service in which it had activity that day
together with amounts due to or from the Settling Members as
a result of Clearing Agency Cross-Guaranty Agreements. All credit and debit
amounts are totaled and the net of the two is calculated. This net amount
represents the amount owed to the Settling Member, Insurance
Carrier Member or Fund Member[, Insurance Carrier Member]
or owed by the Settling Member, Insurance Carrier Member or
Fund Member.
B. Money Settlement
If the net settlement for the day is a debit, the Settling Member, Insurance Carrier Member and/or Fund Member must settle such amount in accordance with Rule 12. If the net settlement for the day is a credit, the Corporation must settle such amount in accordance with Rule 12.
C. Final Settlement Statement
Each business day at such
time as determined by the Corporation, a Final Settlement Statement is produced
for each Settling Member, Insurance Carrier Member or Fund Member
which contains the credit and debit amounts shown on the [Initial]
prior Settlement Statement, any adjustments to those amounts
and the status of the settlement of these amounts. Any resulting debit or
credit amount reflected on such statement is recorded as "Suspense".
Suspense amounts are settled between the Settling Member, Insurance
Carrier Member and/or Fund Member, and the Corporation, in accordance
with the procedures established by the Corporation. Settling
Members, Insurance Carrier Members and Fund Members must verify all figures
on all Settlement Statements and immediately bring any discrepancies to the
attention of the Corporation.
D. Settling Bank Procedures
1. Settling Bank Obligations
Each day at such time as
determined by the Corporation, NSCC will make available to Settling Banks
the final net-debit or net-credit figure for each of its Settling Members’,
Insurance Carrier Members’ and Fund Members’ accounts and the Settling Bank’s
net-net debit or net-net credit figure. This action initiates the settlement
process. If the Settling Bank’s final settlement figure is a net-net debit,
it should pay that amount in the manner provided in Sections 3 and 4
below [wire funds] to NSCC’s Settlement Agent
[account at the bank specified by NSCC at this time] by such
time as established by the Corporation.
By such time as established by the Corporation, Settling Banks, without exception, must acknowledge to NSCC via the terminal system their settlement figures and (1) their intention to settle with NSCC their net-net settlement amount by the settlement deadline, or (2) their refusal to settle for particular Settling Members, Insurance Carrier Members and Fund Members. This acknowledgment must be sent even if the Settling Bank has wired the amount of its net-net debit prior to the acknowledgment cut off time. Notwithstanding the foregoing, a Settling Bank that is a Member and settles solely for its own accounts may opt, pursuant to such procedures as the Corporation may, from time to time, establish, to not acknowledge its settlement balance. 1
If the Settling Bank sends refusal messages and its new net-net settlement amount after the refusal is a credit, it must send a message to NSCC immediately after the refusal messages acknowledging that amount. If its new net-net settlement amount is a debit, the Settling Bank must send a message to NSCC immediately after the refusal messages acknowledging its intention to settle that amount with NSCC by the settlement deadline.
Note:
A Settling Bank that cannot send an acknowledgment
or refusal message to NSCC may telephone its instructions to the number for
Settlement [the Cash Settlement/Treasury] Operations
[Department] specified in NSCC’s notices and membership directory.
If NSCC has not received funds from the Settling Bank with a net-net debit and the Settling Bank has not sent refusal messages and/or an acknowledgment message to NSCC by the deadline, NSCC begins failure-to-settle procedures in respect to the Settling Bank at this time.
A Settling Bank with a net-net debit that
has sent an acknowledgment message to NSCC must settle by the settlement deadline.
(See the payment procedure [for wiring funds to NSCC’s
account under “Settlement Payment by Net-Net Debit Settling Bank”]
below.) If the Settling Bank has acknowledged its net-net settlement debit
and NSCC has not received funds from the Settling Bank by this time, NSCC
begins failure-to-settle procedures in respect to the Settling Bank at this
time.
Note:
A refusal to settle for a Settling Member, Insurance Carrier Member or Fund Member is a refusal to settle all accounts of that Settling Member, Insurance Carrier Member or Fund Member. The Settling Bank cannot refuse to settle only some of the accounts of a Settling Member, Insurance Carrier Member or Fund Member with multiple accounts. A Settling Bank that has sent a refusal message must send an acknowledgement of its new net-net settlement amount.
At such time as the Corporation has received sufficient funds it will initiate payments to Settling Banks with net-net credits.
2. Settlement Agent
DTC provides NSCC with services with respect to NSCC’s money settlement operations as described in, and in accordance with, these procedures. DTC will act as “Settlement Agent” (as that term is used in the Federal Reserve Board’s Operating Circular 12 and in NSCC’s Rule & Procedures) for NSCC and NSCC’s Settling Banks, for purposes of (i) receiving and paying, as NSCC’s settling bank and for the account of NSCC, end-of-day money settlement payments from or to, as applicable, NSCC Settling Banks and participants, (ii) with respect to the Federal Reserve Bank’s (“FRB”) National Settlement Service (“NSS”), as the means of effecting money settlement for NSCC, and (iii) aggregating and netting the settlement balance of those Settling Banks that act as such for both DTC and NSCC participants, and crediting or debiting the account of either NSCC, or DTC, as the appropriate clearing agency, with the settlement amounts determined in accordance with this procedure, as described in item 4 below.
3. Settlement Payment By Net-Net Debit Settling Bank
The Settling Bank with a final net-net debit [should follow the guidelines
below when wiring funds to NSCC’s bank account] must settle
its net-net debit balance via the FRB’s NSS. Note: Any bank or trust company
applying to act as a Settling Bank must execute such agreements authorizing
the Corporation’s Settlement Agent to utilize NSS for end of day money settlement
as the FRB may, from time to time require. Those Settling Banks that also
act as Settling Bank for DTC participants are required to sign a Settler Agreement
with the FRB designating DTC as their NSS Settlement Agent for purposes of
DTC settlement. Accordingly, those banks will not be required to sign new
Settler Agreements to separately cover NSCC’s NSS settlement. Rather the
Settler Agreements they provide to DTC for delivery to the FRB are hereby
deemed to include, as covered in the NSS settlement arrangements, the Settling
Bank’s NSCC settlement obligations as well as their DTC settlement obligations.
After receiving an acknowledgement (if applicable) from the Settling Bank, NSS will allow the Corporation’s Settlement Agent to instruct the FRB to debit the Settling Bank’s account at the FRB by the amount of its net-net debit balance. The Settlement Agent will send a “pre advice” to each Settling Bank, notifying it that the Settlement Agent is about to send its NSS transmission to the FRB.
Any Settling Bank that settles for both participants of NSCC and for participants of DTC will have its net-net credit or debit balances at each corporation aggregated and netted to one consolidated sum (see Section 4 below). At the end of each day, after receiving the applicable acknowledgements from the Settling Bank, DTC, as Settlement Agent will then instruct the FRB to debit the FRB account of each such Settling Bank which has a Consolidated Settlement Debit Amount (as defined in Section 4 below) by the amount determined in accordance with Section 4 below. If the Settling Bank settles only for NSCC participants, then DTC will instruct the FRB to debit such bank’s FRB account by the amount of its net-net debit owed to NSCC. If the Settling Bank’s account at the FRB has sufficient funds, it will be debited. Upon confirmation from the FRB, the Settling Bank will be credited to reflect payment to NSCC of its net-net debit amount. If the Settling Bank’s account has insufficient funds, DTC will receive notification from the FRB that the account was not debited. If this occurs, DTC will notify the Settling Bank of the deficiency. Any Settling Bank with a deficiency must then wire the funds to the Settlement Agent.
Note – Settling Banks must monitor their Settling Bank Account Statement to ensure that funds have been credited to their account and that no balance exists. The Settling Bank must be prepared to wire payment to the Settlement Agent if funds are not available or if the NSS is unavailable or inoperable. NSCC requires that a bank representative authorized to wire funds be available at the Settling Bank until settlement is complete. 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.
If funds need to be wired to the Settlement Agent’s account at the FRBNY for any reason the following guidelines for sending settlement wires should be used. The format of the instructions conforms to Fedwire standards for funds transfers. Other formats are acceptable as well. NSCC expects to receive settlement payments by the settlement deadline.
Fedwire Message Entry Instructions
Receiving Bank
ABA Number: Enter
Settlement Agent’s [NSCC’s Bank’s] ABA Number
Receiving Bank
Name: Enter the
name of the Settlement Agent [NSCC’s bank as identified
by NSCC from time to time]
[Favor Of: Enter National
Securities Clearing Corporation
Account Number: Enter such number as identified
by NSCC from time to time]
[Reference for] SET (indicating Settlement
as the purpose of the wire)
Originator to Beneficiary
[Enter Part NBR and your four digit NSCC Member
Information (OBI): number]
Type Code: Settling Banks
should use type code 1600 for Settlement wires. Type code wires may be wired
to the Settlement Agent [NSCC] after the Interdistrict
Fedwire cutoff, whereas the type code 1000 wires cannot. In the event a Settling
Bank experiences system problems which delay its outgoing wires, use of type
code 1600, the Fedwire code for settlement wires, will prevent the bank’s
wire to the Settlement Agent [NSCC] from being
rejected by the Fed due to the Interdistrict cutoff.
Other Information: The bank will complete other required fields in the Fedwire structured format according to the bank’s standard procedures.
The Settlement Agent will advise as
to the receipt of any wires. [NSCC will receive an advice message over its
communications link with its designated bank.]
4. DTC/NSCC Settling Bank Netting Arrangements
Any Settling Bank that settles for both participants of the Corporation and for participants of DTC will have its net-net credit or debit balances at each clearing corporation aggregated and netted, and shall pay, or be paid, as follows:
(i) For purposes of this item 4, the following terms have the meanings specified:
(a) “Common Settling Bank” means any entity that has qualified and acts as a Settling Bank for both DTC and NSCC in accordance with their respective rules and procedures.
(b) “ DTC Credit Amount” or “NSCC Credit Amount” means, as applicable, any net-net credit settlement payment due from the relevant clearing agency to a Common Settling Bank, as determined in accordance with the Rules and Procedures of the relevant clearing agency.
(c) “DTC Debit Amount” or “NSCC Debit Amount” means, as applicable, any net-net debit settlement payment due to the relevant clearing agency from a Common Settling Bank, as determined in accordance with the respective Rules and Procedures of the relevant clearing agency.
(d) “Consolidated Settlement Debit Amount” means on any settlement day the net sum, if a negative number (i.e. debits being deemed negative numbers, and credits being deemed positive numbers) of a Common Settling Bank’s applicable DTC Debit or Credit Amount, plus its applicable NSCC Debit or Credit Amount.
(ii) For each Common Settling Bank on each settlement day, DTC, as Settlement Agent, shall aggregate and net the DTC Credit and/or Debit Amount of the Common Settling Bank with the applicable NSCC Credit or Debit Amount of such Common Settling Bank and:
(a) If the Common Settling Bank has both a DTC Debit Amount and an NSCC Debit Amount, then following the acknowledgement of those respective balances by such bank in accordance with DTC’s procedures and NSCC’s procedures, DTC shall (i) advise the Common Settling Bank of its intention to transmit debit instructions to the FRB, and (ii) instruct the FRB via NSS to debit the FRB account of such Common Settling Bank by the aggregate sum of such debit balances. DTC, upon receipt of such monies, shall credit NSCC with the amount of the NSCC Debit Amount, and credit DTC with the amount of the DTC Debit Amount, from such Common Settling Bank.
(b) If the Common Settling Bank has both a DTC Credit Amount and an NSCC Credit Amount, then at the time established in DTC’s and NSCC’s procedures, DTC shall credit payment to the FRB account of the Common Settling Bank with the aggregate sum of such credit balances, and shall debit NSCC with the amount of the NSCC Credit Amount, and debit DTC with the amount of the DTC Credit Amount, for such Common Settling Bank.
(c) If the Common Settling Bank has a Debit Amount at one clearing agency and a Credit Amount at the other, then:
--if the sum of such DTC Credit Amount and NSCC Debit Amount (or DTC Debit Amount and NSCC Credit Amount, as the case may be) is a positive number, that excess amount (i.e. equal to the positive number) shall be paid by the Settlement Agent for the account of the clearing agency with the Credit Amount to the Common Settling Bank, and the clearing agency with the Credit Amount shall pay the other clearing agency an amount equal to the Common Settling Bank’s Debit Amount owed to the other clearing agency. Payments made as so provided shall be in full satisfaction of the settlement obligation of (i) the clearing agency that owes the Credit Amount to the Common Settling Bank and (ii) the Common Settling Bank to the other clearing agency.
--if the sum of such DTC Credit Amount and NSCC Debit Amount (or DTC Debit Amount and NSCC Credit Amount, as the case may be) is a negative number, then the absolute value of that amount shall be paid by the Common Settling Bank to the Settlement Agent for the account of the clearing agency to which the Common Settling Bank has a Debit Amount, via NSS in the manner provided above in full satisfaction of the settlement obligation of the Common Settling Bank to such clearing agency, and the clearing agency with the Credit Amount shall pay the other clearing agency an amount equal to the Credit Amount, in full satisfaction of the settlement obligation of the clearing agency from whom such Credit Amount was owed to the Common Settling Bank.
--if the sum of such amounts equals zero (i.e. the Credit Amount due from one clearing agency equals the Debit Amount owed to the other clearing agency), then the clearing agency that owes the Credit Amount to the Common Settling Bank shall pay the amount of such Credit Amount to the other clearing agency in full satisfaction of both the settlement obligation of the Common Settling Bank to the clearing agency owed the Debit Amount and the settlement obligation of the clearing agency that owes the Credit Amount to such Common Settling Bank. In that instance, no payment shall be due to or from such Common Settling Bank to or from either DTC or NSCC.
(iii) Notwithstanding the foregoing, if any Common Settling Bank fails to pay its Consolidated Settlement Debit Amount in full by the time specified in DTC and NSCC’s procedures, then (i) if that bank has an NSCC Debit Amount, NSCC shall implement its failure to settle procedures, and (ii) if that bank has a DTC Debit Amount, DTC shall implement its failure to settle procedures.
(iv) Under FRB Operating Circular No. 12, DTC, as Settlement Agent, has certain responsibilities in allocating an indemnity claim made by an FRB as a result of NSS. In making such an allocation, NSCC and DTC will first apportion any such liability between them (and their respective participants) in proportion to the amount of the net-net debit due to each clearing agency by the Settling Bank to which the indemnity claim relates. If that Settling Bank owed a debit to one and had a credit due from the other clearing agency, then the entire indemnity amount will be allocated to the clearing agency to which the Settling Bank owed the debit amount (and for which, via NSS, its FRB account was debited) relating to the indemnity claim. NSCC and DTC will then further allocate the FRB claim among their participants for whom the Settling Bank was then acting. If for any reason such allocation is not sufficient to fully satisfy the FRB indemnity claim, then the remaining loss will be allocated pro rata among all the applicable clearing agency’s participants in the same manner as provided in NSCC’s and DTC’s Rules with respect to a general (i.e., non-system related) loss.
5[3].
Settlement Payment To Net-Net Credit Settling Bank
As soon as NSCC is advised by its Settlement
Agent that [receives advices from its bank for] settlement
payments made by Settling Banks with net-net debits have been received,
and it has sufficient available funds [it] the Settlement
Agent will begin to wire funds to Settling Banks with net-net credits.