by Craig Donner
National Securities Clearing Corporation (NSCC) recently released the new record layout formats for its enhanced Cost-Basis Reporting Service (CBRS), which is scheduled to roll out later this year. The service will help the industry comply with a January 1, 2011, federal mandate for firms to report cost-basis information for equities between financial intermediaries.
The new law, included in The Emergency Economic Stabilization Act signed in October 2008, will require firms to pass cost-basis information between financial intermediaries when assets move from one institution to another. It is part of a broader effort by Congress to ensure the reporting of accurate cost-basis information to investors and the U.S. Internal Revenue Service.
Quick to market
NSCC is leveraging the existing CBRS technology to automate and standardize the movement of cost-basis information among broker/dealers, transfer agents, issuers, mutual funds and custodian banks in a secure electronic environment. The current version of CBRS allows financial firms to pass customer cost-basis information on assets transferred through NSCC’s Automated Customer Account Transfer Service (ACATS). The enhanced service will handle both ACATS and non-ACATS transactions. CBRS will not calculate or store cost-basis information for firms.
“This represents a win-win for the industry,” said Susan Cosgrove, DTCC managing director, Clearance and Settlement/Equities. “It solves a complex challenge for firms by leveraging an existing service to meet the upcoming federal mandate without requiring a significant capital investment – and in a fraction of the time it would normally take to develop such a capability. It also introduces and promotes standards while effectively eliminating the potential nightmare of endless paper trails, added cost and more operational risk if firms had to manually process the information themselves.”
New record layouts
With the release of the record layouts, firms can begin making their own system changes to accommodate the new fields. NSCC is also enhancing web access to CBRS so firms have the option of receiving automated files or logging onto the service via the Internet.
While many aspects of CBRS will remain unchanged, one major improvement is the increase from one to four records at the asset level, a change the industry requested to increase functionality and also to meet the requirements of the new regulations. Firms will complete an asset record for each asset requiring the transmittal of cost-basis information.
The four records are the:
- Original: Contains the cost-basis information.
- Corrected: Updates the original record with any new cost-basis information resulting from a corporate action or some other event.
- Firm Reject: Sent from the receiving firm to the delivering firm and indicates an error in the cost-basis information.
- Request: Sent from the receiving firm to the delivering firm requesting the cost basis on a transferred asset.
Centralizing a regulatory function
With Congress and regulators working to make the most significant changes to the laws that govern the financial system in more than 70 years, DTCC seeks to support the most cost-effective compliance possible by leveraging infrastructure and promoting standardization and centralization. In the case of CBRS, the industry approached NSCC in 2009 to seek help complying with this new reporting requirement.
As a result, NSCC began participating in the Cost Basis Steering Committee, a broad coalition of market participants, to begin developing a solution and establish best practices for cost-basis reporting. The committee includes broker/dealers, transfer agents, mutual fund companies and industry organizations such as the Investment Company Institute, the Securities Transfer Association and the Shareholder Services Association.
“As the industry came to understand the complexity of what would be needed to meet the CBRS mandate under such a short timeframe, many firms grew concerned over having to spend limited resources to build and support multiple systems and processes,” said Thomas Sakaris, DTCC vice president, Clearance and Settlement/Equities. “They understood that NSCC could develop a solution to help them meet the regulatory requirements, while also driving down the cost of compliance and improving overall processing efficiencies. With the reporting and communication pieces of the puzzle solved, our customers can now focus on complying with the other parts of the new law.”
NSCC expects participant testing to begin in 3Q2010 and the service to be operational by the January 1, 2011, deadline. Over the course of the year, NSCC will conduct a webcast and hold conference calls with customers to discuss changes to the system and also to train users on the new functionality.
NSCC plans to enhance the service over the next two years to allow firms to comply with other parts of the law, including the requirement to transfer cost-basis information on mutual funds by January 1, 2012, and debt, options and other securities by January 1, 2013. @