04-4432. Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Implement Real-Time Trade Matching for Fixed Income Securities

February 23, 2004.

I. Introduction

On June 27, 2003, the National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-NSCC-2003-15 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).^[1] Notice of the proposal was published in the Federal Register on January 16, 2004.^[2] No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

II. Description

NSCC is seeking to implement a real-time trade matching system (“RTTM”) for certain NSCC-eligible corporate bonds, municipal bonds, and unit investment trusts (“NSCC debt securities”).^[3] RTTM was implemented in the fourth quarter of 2000 by the former Government Securities Clearing Corporation (“GSCC”),^[4] an NSCC affiliate, for the processing of government securities transactions.^[5] It was designed so that the platform could be used for other fixed income securities. Accordingly, it was implemented in 2002 for mortgage-backed securities transactions processed by the former Mortgage Backed Securities Clearing Corporation (“MBSCC”).^[6] The purpose of the proposed rule change is to implement RTTM for NSCC debt securities. RTTM will eventually replace NSCC's current Fixed Income Transactions System (“FITS”).^[7]

The two areas of NSCC debt securities processing rules that require changes to implement RTTM are those governing (1) inbound submissions to NSCC and (2) NSCC's reporting of information related to such submissions to participants. Specifically, interactive messages and the RTTM Web User Interface (“RTTM Web”) ^[8] will be added as ways in which participants can submit trade data and subsequent related trade processing instructions.^[9] With respect to output issued by NSCC, initially upon implementation end-of-day reports will continue to be produced by FITS whereas intraday reports will be produced by RTTM. In addition, NSCC will make output available for interactive message users and RTTM Web users in those respective media.

The following is a summary of the key proposed rule changes needed to implement RTTM:

(1) References to “Contract Lists” will be replaced with references to “output” or to “information made available” by NSCC to cover the additional types of output that could be generated by RTTM.

(2) References to the names of specific instructions that participants may submit to resolve uncompared trades (e.g., “Delete of Original Trade Input”) will be replaced with general references to “appropriate instructions” to include similar instructions which have different names that may be submitted by interactive message users and RTTM Web users.^[10]

(3) With respect to trades submitted for two-sided comparison processing, interactive message users, and RTTM Web users will be able to modify their trades, subject to the timeframes and requirements imposed by NSCC from time-to-time and will also be able to remove an unmatched trade from processing by sending an instruction indicating that they do not agree with the terms of a trade that has been submitted against them.^[11] Locked-in trade sources and syndicate managers that are interactive message users or RTTM Web users will also be able to modify their trade submissions.

(4) RTTM will accept cash and next-day transactions for comparison-only processing. RTTM will add an intraday money tolerance pursuant to which NSCC will compare a trade using the seller's contract amount if the contract amounts submitted by the buyer and seller are within a net $2 difference for trades of $1 million or less or $2 per million for trades greater than $1 million.^[12] In addition, RTTM will compare a trade if trade data matches in all respects, including contract amounts which have been compared pursuant to the money tolerances, except for trade date. In this case, the earlier of the two trade dates submitted will be used. RTTM will not use the summarization process used to compare trades currently set forth in NSCC Procedure II, Section D.1(e).

(5) NSCC's rules and procedures will continue to provide that the submission of a locked-in trade or a syndicate takedown trade results in a compared trade. However, RTTM will provide members on behalf of whom locked-in and syndicate takedown trades are submitted (“LI/ST contrasides”) the option of submitting matching trade details for their internal reconciliation purposes. In order to facilitate the participants' internal reconciliation process, RTTM has been designed to issue output that indicates a status of “unmatched” or “match request” upon receipt of a locked-in or syndicate takedown trade. Notwithstanding the output indicating unmatched and match request, the proposed rule changes make clear that the submission of matching trade data by LI/ST contrasides will have no legal effect on the status of locked-in and syndicate takedown trades as compared trades. In addition, notwithstanding that output is made available by NSCC as a result of subsequent processing information submitted by LI/ST contrasides that are not specifically provided for in NSCC's rules and procedures, the proposed rule changes make clear that such submissions will have no legal effect and that RTTM has been designed to accept such submissions for participants' internal reconciliation purposes only.

In addition to the above, NSCC is proposing the following additional technical changes and corrections:

(1) References to the “Automated Bond System” (“ABS”) will be deleted because ABS trades submitted by the New York Stock Exchange are locked-in trades and are covered by provisions dealing with locked-in trades. In addition, references to the “AMEX Order File System” will be deleted because that system is no longer operational.

(2) Technical corrections will be made throughout the debt when-issued section of NSCC's Procedure II, Section E to clarify the submission requirements for a transaction to be treated as a when-issued transaction. It should be noted that due to the systems development schedule, RTTM will not be available with respect to when-issued corporate debt securities transactions upon implementation. NSCC will file a rule change pursuant to Section 19(b)(3) of the Act and will notify members when the service becomes available for these transactions.

(3) Technical corrections will be made to the use of the term “settlement date” so that when referenced with upper case letters it means the settlement date as established by NSCC.^[13]

III. Discussion

Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions.^[14] The Commission finds that NSCC's proposed rule change is consistent with this requirement because it should permit the accurate clearance and settlement of securities by enabling NSCC to process fixed income trades more efficiently.

IV. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular section 17A of the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-NSCC-2003-15) be and hereby is approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[15]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Act Release No. 49051 (January 12, 2004), 69 FR 2639.

3.  The proposed rule change does not apply to debt securities transactions that are submitted to NSCC via its correspondent clearing service, by regional exchanges/marketplaces, or through qualified securities depositories as defined in NSCC's rules because such transactions will not be processed by RTTM.

4.  On January 1, 2003, MBS Clearing Corporation (“MBSCC”) was merged into GSCC and GSCC was renamed the Fixed Income Clearing Corporation (“FICC”). The functions previously performed by GSCC are now performed by the Government Securities Division of FICC, and the functions previously performed by MBSCC are now performed by the Mortgage-Backed Securities Division of FICC. Securities Exchange Act Release No. 47015 (December 17, 2002), 67 FR 78531 [File Nos. SR-GSCC-2002-09 and SR-MBSCC-2002-01].

5.  Securities Exchange Act Release No. 44946 (October 17, 2001), 66 FR 53816 [File No. SR-GSCC-2001-01].

6.  Securities Exchange Act Release No. 45563 (March 14, 2002), 67 FR 13389 [File No. SR-MBSCC-2001-02].

7.  In March 2003, the Commission approved certain modifications to FITS in order that NSCC could prepare its participants for the new RTTM functionality. Securities Exchange Act Release No. 47494 (March 13, 2003), 68 FR 13975 [File No. SR-NSCC-2003-10].

8.  The RTTM Web will replace NSCC's PC Web application for NSCC fixed income securities.

RTTM will be implemented in phases in 2004. Participants will be notified of specific implementation dates by Important Notice. Conversation with Nikki Poulos, Vice President and Associate General Counsel, FICC (January 9, 2004).

9.  Initially, RTTM will support the current batch method of data input.

10.  For example, in the current version of NSCC's procedures there is a reference to an instruction called a “Delete of Original Trade Input” that is used by batch participants to delete uncompared trade data they have submitted. Interactive message users and RTTM Web users will use an instruction called a “Cancel” to accomplish the same result. Therefore, references to “Delete of Original Trade Input” will be replaced by references to “appropriate instruction” in order to cover the equivalent interactive message and RTTM Web instruction.

11.  RTTM Web users will also be able to subsequently restore a trade to processing by submitting the requisite instruction.

12.  No changes are being proposed to NSCC's existing end-of-day money tolerance currently contained in Procedure II, Section D.1(a).

13.  For example, if a trade is executed on September 15 with a contract settlement date of September 18 but the trade does not match until September 18 or later, NSCC will provide the Settlement Date.

14.  15 U.S.C. 78q-1(b)(3)(F).

15.  17 CFR 200.30-3(a)(12).