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The National Securities Clearing Corporation (NSCC) and the Depository Trust Company (DTC) have been engaged in a four-phase project designed to improve the efficiency and reduce risks associated with transactions processed through NSCC’s Automated Customer Accounts Transfer Service (ACATS).

The ACATS system automates and standardizes procedures for the transfer of assets in a customer account from one broker-dealer and/or bank to another. ACATS also has an interface with NSCC’s Fund/SERV that facilitates the transfer of mutual fund assets between two broker-dealers, or a broker-dealer and a fund company. ACATS revolutionized asset transfers by significantly reducing the time it took to move assets from weeks to just a few days.

Phases 1 and 2 were implemented in 2010 and 2011, respectively. The first phase addressed assets transferred via ACATS that are eligible to be settled in the Continuous Net Settlement system (CNS). The second phase focused on mutual fund assets transferred via ACATS that are eligible to settle in NSCC’s Fund/SERV system.

Phase 3 of the project began participant testing on January 24, 2014, and is scheduled to be migrated to production starting on May 30, 2014. The current phase deals with assets transferred via ACATS that are eligible to settle at DTC but not in CNS (“non-CNS DTC-eligible” securities). Phase 4, which has not yet been scheduled, will focus on assets that do not fall into a category covered by phases 1, 2 or 3; assets such as foreign securities and government bonds transferred at the Fed.

Lydia Midwood, DTCC Director, Clearing Services, spoke with @dtcc about the ACATS reversals initiative and how it will benefit clients.

What modifications are being made to the ACATS system?

This initiative accomplishes three things to ensure customer protection and to help manage risk associated with the reversal of ACATS obligations.  First, it creates functionality for NSCC to track non-CNS DTC-eligible ACATS obligations on ACATS settlement date and reverse only uncompleted transactions in these securities for a defaulted broker. Second, the modifications will allow NSCC to track CNS-eligible ACATS obligations in case of multiple broker defaults on ACATS settlement date. The process currently in effect is able to reverse CNS eligible obligations only in the event of a single member default.

Lastly, revised processing will ensure that NSCC will not have a lien on shares received at DTC as a result of the settlement of a non-CNS DTC-eligible ACATS obligation. These shares will be credited to the broker’s no lien location, as CNS eligible ACATS obligations are currently.

Why is the ACATS system being modified?

In the aftermath of the financial crisis of 2008 and the Lehman Brothers bankruptcy, DTCC initiated a review of its family of services and processes to determine ways to further reduce systemic risk.  This analysis included how the ACATS application and procedures performed when a broker-dealer fails to settle, and the related need to reverse ACATS obligations of a failing broker-dealer.  (ACATS obligations are not guaranteed, so DTCC may reverse the obligations of a broker in distress.) In this regard, DTCC has been working with regulators and our clients to discuss ways to address identified issues, and develop a solution for tracking and, if necessary, reversing ACATS obligations.  Addressing these issues ultimately protects the individual investor, ensuring that the broker-dealers involved in an ACATS transfer know where the investor’s assets are located in the case that DTCC reverses ACATS obligations.

What are some of the challenges you faced during this initiative?

The main challenge for each phase was minimizing impact on industry. There are changes clients have to make but we have tried to keep the new process as similar to the current process as possible, to limit the burden on our clients.  DTCC has been very careful to include the industry and regulators throughout the design process to work together to understand the impact the initiative has on DTCC’s clients.

Another challenge of this project is its broad scope: the project has some changes to ACATS, but the bulk of the changes are in CNS and DTC settlement systems.  There are also changes to the Obligation Warehouse. Relationship management and product management have worked hard to reach out to clients and let them know how this initiative affects all four systems.

How will clients benefit from this initiative?

There will be greater clarity around where customer assets reside in the event that ACATS obligations are reversed.  This initiative expands the scope of the ACATS obligations whose settlement is tracked to include non-CNS DTC eligible assets.  Expanding ACATS’ ability to reverse only uncompleted obligations helps as many customer transfers as possible complete successfully in a broker default. 

In addition to this initiative, DTCC is pursuing other ways to broaden ACATS functionality in broker-dealer distress and default situations.  For example, it may be possible to expand ACATS to support transfers after a broker-dealer has defaulted.