ACATS
Spring Seminar 2011
Welcoming Remarks
Joseph Zaets – Morgan Stanley
President - SIFMA CAT Section
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SIFMA
Report
Thomas P. Tierney
Vice President
Operations, Technology and
BCP
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Questions?
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DTCC Update
Louis Lepore
DTCC
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Agenda
I.


II.
III.
IV.
V.
Non-CNS ACATS Proposal
Mutual Funds
Other Non-CNS Settling Assets
ACATS Default Pricing
ACATS Fund Registration (FR) Modifications
ACATS Other
ACATS Statistics
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Non-CNS ACATS Proposal
Risk Today
 If NSCC ceases to act for a Member and initiates a close-out of its
account, non-CNS ACATS money incentive charges may be reversed as
they are not guaranteed
Many of these assets settle away from DTCC
 This may create settlement exposure for Members as transactions may have
settled versus money in the various settlement market places
 This may require contra Members to negotiate claims of settlement reversal
money incentive charges directly with the SIPC trustee

Solution
 Industry working group was created to address these issues
 DTCC issued the “Proposed Enhancements to Track Non-CNS ACATS
Settlement Obligations “ Plan in Q4 2010
 Proposed plan was vetted with regulators and approved by SIFMA’s
Customer Account Transfer and Securities Operations Divisions
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Mutual Funds Proposal
Defined Proposed Modifications
1) Add Settle-Prep Status 300 to all non standard ACATS transfers that
contain a mutual fund asset with settlement location 10 (ACATSFund/SERV)
Ensures ACATS settlement date of transfer always equals last day Mutual Fund
Company can respond to re-registration
 Impacts the following non-standard transfer types:
 Partial Transfer Receiver (PTR)
 Partial Transfer Deliverer (PTD)
 Residual Credit (RCR)

2) Segregate all mutual fund transaction activity (settlement location 10
ACATS- Fund/SERV) within NSCC money settlement code 007
Original incentive charges for these assets will be removed from NSCC money
settlement code 006/008 for consolidation and tracking purposes
 Acknowledgement reversal charges will continue to be applied under NSCC
money settlement code 007

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Mutual Funds Proposal
Defined Proposed Modifications (continued)
3) Create a new MRO Reversal File and/or MRO Comma Delimited File for
reversals resulting from a Member close-out event
4) Create a new NSCC money settlement code for posting of mutual fund
asset incentive money reversals resulting from a Member close-out event
Next Steps




Finalize requirements with industry working group - Q1 2011
Begin development and issue important notices - Q2 2011
Begin testing - Q3 2011
Implementation - Q4 2011
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Other Non-CNS ACATS Assets Proposal
Conceptual Proposed Solution
For the following non-CNS ACATS assets excluding cash, foreign
assets and limited partnerships:
 Members would settle these assets effectively “free of value” on ACATS
settlement date
 NSCC would utilize its Obligation Warehouse (OW) to track the settlement
status of these ACATS Obligations
 NSCC would apply incentive charges only on those transactions which
have not completed or failed
 Members would receive instructions from NSCC to re-price the settlement
money on these failed transactions to the original ACATS market value
 Members would subsequently settle these failed transactions versus the
original ACATS market value
Next Steps
 Begin design of this solution with industry working group - Q2 2011
 Implementation - Q4 2012
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 9
ACATS Default Pricing
Current Process
 When ACATS cannot find a price for a security it uses the greater
of the submitter’s value or the default price determined by the
Asset Pricing category chosen by the submitter on asset validation
 Currently, asset pricing categories EQU, FEQU, FDEB are capped at
$20,000
Proposed Process
 If ACATS cannot find a price for a security, always use submitter’s
value
 When entering assets in an ACATS transfer, the submitting firm
should value each asset based the “value” reported on their
customer’s statement
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ACATS Fund Registration (FR) Modifications
The following changes will be made to support the passage of cost
basis on mutual fund transactions and be uniform with the changes on
the Fund/SERV 018 record
 Add a new social code value 63 – S Corporation
 Update the values on the “Cost Basis Code” field as follows:
Value
Description
0=
Unknown
1=
FIFO (First In First Out)
2=
LIFO (Last In First Out)
3=
High Cost
4=
Low Cost
5=
Average Cost
6=
Select Lot
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ACATS Other
I. Fund/SERV 018 Record – Support Passage of Cost Basis
 The following fields will be added on Fund/SERV 018 record and extracted
from ACATS “TI” record for a Position Transfer Fund (PTF) transfer type only

Originating Receiver Firm Number field
•

Originating Deliverer Firm Number field
•

To be populated when firm = receiver and Fund/SERV agent was appointed
To be populated when firm = deliverer and Fund/SERV agent was appointed
Originating Receiver Customer Account Number at Firm field
•
To be populated on all PTF transfers when firm = receiver
 No programming changes required for firms
II. Common Data Transfer System - ACATS Calendar Date
 Change the existing 8:00 p.m. calendar date change to immediately after
cycle 5 input cutoff
III. ACATS Master File
 Change from submitting weekly on Friday to daily
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ACATS Statistics
Users
Firm Type
142
Brokers
37
Banks
106
Mutual Funds (PTF’s Only)
Month
Transfer Type
# Submitted
February 2011
Full (broker to broker)
240,568
January 2011
Full (broker to broker)
247,427
February 2011
Full (bank on at least one side)
4,130
January 2011
Full (bank on at least one side)
4,010
February 2011
PTF (firm and fund)
20,836
January 2011
PTF (firm and fund)
18,892
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Questions?
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Process Service Improvement
Subcommittee Updates
Scott Brady
Merrill Lynch
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Process Service Improvement
Subcommittee Update





Committee meets monthly
Discusses potential enhancements to the
ACAT system
Reviews DTCC changes and updates
We encourage new ideas and creative
thinking
To join contact Scott Brady

scott_brady@ml.com
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2011 Subcommittee Priorities

Non-ACAT Transfers






“Hard to Transfer” assets
Transfers with Banks
Cost Basis
ACAT Settlement Enhancements
Non-Purpose Loans
Reducing Rejects
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Current or Recent Initiatives

Non-ACAT Working Group





Identifying and sharing best practices
Improving Firm to Firm communication
Reducing rejects and DK’ed transfers
Improving transfer timeframes
Transfers with Banks

Bank ACATS
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Current or Recent Initiatives

Cost Basis


Identifying and sharing best practices
Non-Purpose Loans


Transfers of Client Collateral Accounts
Different ways of doing this across the
industry
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Reducing Rejects

Industry Average of 10%



Improving
We can do better
Rejects Lead to:



Re-work
Complaints
Unhappy clients
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Questions?
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Seminar Break
Seminar will resume in 15
minutes
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Alternative Investments
LeeAnne Calciano
JP Morgan Clearing Corp
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Alternative Investments
UTILIZING A
CENTRALIZED PROCESS
 REDUCE COST
 IMPROVE PRODUCTIVITY
 MINIMIZE RISK OF FINES AND PENALTYS
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OVERVIEW
Moving Forward Together
 Broker Dealer Challenges
Surrounding Alternative Investments
 Standard Process for Alternative Investment
One Stop Shopping
 Introduction to the DTCC AIP Platform and
Related Benefits
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 25
Challenges
Daily “Points of Pain” – Adding Complexity
 Meeting 15C3-3 Regulatory Requirements
 Monthly Balancing with Sponsors
 Non-Bank Custodial Responsibilities
 Pricing Alternative Investments
 Late Tax Filing
 Completion of the Entire ACAT Transfer Process
 Identification of Adequate Contact Information
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 26
Standard Stream-Lined Process
Closing Loopholes
 Benefits of Developing a Standard Practice
Across the Broker Dealer Community
 Creation of Standardized Agreements
For all Broker Dealers
 Require Sponsors to Join DTCC AIP Platform
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 27
Introduction to the DTCC and AIP
Safeguarding Our Industry
 AIP is Based on Fund/SERV Mutual Fund Model
 AIP Platform or Conduit Links Global Market Participants
- brokers/dealers, fund managers, administrators and
custodians - provide straight through processing
 AIP is Intended to Standardize Industry Communication
- security, investor holdings, orders and activities
 AIP Provides Scalability and Improved Efficiencies
- reduced operational risk and lower costs
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 28
Current Members of AIP System
Gaining Traction
Status
Firms
Funds
Fund Admin
Service Provider
Total
Live on AIP
3
6
5
AIP Application
Complete / In-Testing
4
9
Testing AIP /
Application Pending
2
24
9
1
36
Preparing to Test AIP
4
13
3
2
22
13
52
17
3
85
14
13
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 29
Next Steps
Open Discussion
UTILIZING A
CENTRALIZED PROCESS
 REDUCE COST
 IMPROVE PRODUCTIVITY
 MINIMIZE RISK OF FINES AND PENALTYS
Leeanne Calciano
Associate
1-347-643-1920
Leeanne.Calciano @JPMorgan.com
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 30
Questions?
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Cost Basis Working Group
Discussions
Ellen Bocina - Fidelity
Kevin McCosker - Pershing
Louis Lepore – DTCC
Derek Yen – Edward Jones
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 32
Final Regs
Cost Basis Reporting . . . A Long Journey
Cmnt
Period
Comment
Period
Industry Dialog with GAO, Senate Finance, Joint
Committee on Taxation and Treasury
Proposed Regs
Issued
36 Q’S
Final Legislation to
Implementation
Various versions of Draft Legislation
2005
2006
2007
2008
2009
2010
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Transfers

Challenges with Non-ACAT
Transfers


Third Party Transfers
Accommodating Mutual
Funds

Matching

Manual statements

Corrections

Average Cost

Gifted / Inherited

Original Cost

Transfer Reversals

Conversions


File Changes
Test with Mutual Funds
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S Corporations

S Corporations (other than financial institutions) will begin to
receive 1099-Bs in 2013 for sale, redemption or exchange
transactions in covered securities on or after January 1, 2012

S Corporations vs. C Corporations

Special eyeball test

Final IRS Form W-9 (Rev. January 2011) issued January 31,
2011

S Corporations that are financial institutions are not subject to
1099-B reporting
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Changes to IRS 1099 B
>\
Box 1b: requires the date of
acquisition (allows for combining
non-covered, short-term covered
and long-term covered lots)
Box 3: requires the reporting
of cost or other basis of the
security
Box 5: requires the reporting
of disallowed wash sale losses
Box 6: requires notification
if the security is uncovered
Box 7: requires reporting of
the amount of the gain or loss
Box 8: requires identification
of the gain or loss as short-term
or long-term
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Tax Forms

Substitute Forms 1099-B

Include all new required information

Easy for clients to follow

Supplemental Information

Display of dispositions of covered and noncovered
securities

Reconciliation with the breakdown of lots on 1099-B
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Education, Communication and Support
Internal
Branch
Client
Educational Tools





Policies and Procedures
Training Guides
Webinars
Round Tables
White Papers
Support Needs



Phone Calls
Service Requests
Self Service Tools
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 38
Cost Basis Regulations 2011 and Beyond
Phase 2: January 1, 2012—Mutual fund shares and stock
in dividend reinvestment plans (DRPs)
> Objectives include:
– Expanding the ability Select Tax Lots to Mutual Funds
– Establishing default disposition methods
– Allowing multiple disposition methods at a CUSIP level
– Separately identifying S Corporations
– Expanded IRS and client 1099-B reporting
– Modifications to the PES Portfolio System (PORT)
Phase 3: January 1, 2013—Other types of securities,
principally debt instruments and options
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 39
Cost Basis Reporting Service (CBRS) Update
 Service enhanced to help the industry comply with the new cost basis
legislation on the “passage” of cost basis

Cross-functional industry group defined requirements


Consists of representatives from transfer agents, mutual fund companies,
custodians, broker-dealers, service bureaus, and industry groups
Supports additional transactions and client types

Provide access to new counterparties such as transfer agents and mutual funds

Additional fields to help users comply with IRS regulations

New CBRS Master file that is issued daily
40
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 40
Cost Basis Reporting Service (CBRS) Update
 New system implemented to production on December 10, 2010
 Firms are required to sign documentation to use the new service

Service moved from NSCC to DTCC Solutions to support non-traditional
DTCC participants/members
 CBRS Working Group meets monthly

Addresses questions/inquires about CBRS service

Chaired by Lydia Midwood, Product Manager at DTCC
 CBRS User guide has been created for best practices

Available on CBRS Website

Working document
41
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CBRS – Website Links
 CBRS File Formats and User Guide
 http://www.dtcc.com/products/documentation/cs/cbrs.php#layouts_one
 CBRS Frequently Asked Questions (FAQs)
 http://www.dtcc.com/customer/participant/cbrs/index.php
 Important Notices
 http://www.dtcc.com/legal/imp_notices/dtccsolutions/2010.php
 http://www.dtcc.com/legal/imp_notices/dtccsolutions/2011.php
 CBRS Customer Support Hotline
 (888) 382-2721, Option 6, then 7, then 2
42
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CBRS STATS

197 firms signed up to use the service


83 firms using the system in Production


29 Banks, 98 Brokers, 70 Transfer Agents
11 Banks, 62 Brokers, 10 Transfer Agents
2011 Projects:



Excel Upload
Mutual Fund enhancements
Change timing of CDTS input job to 8:00 p.m. eastern time
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 43
Industry Communication/Participation

SIFMA CAT Cost Basis Sub Committee





Various sub groups
Contact List
DTCC CBRS Conference Call
BDAC Cost Basis Task Force
Future collaboration of all 3 groups
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Questions?
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Lunch Break
Reminder
Lunch break
Seminar will resume in 45 minutes
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Mutual Fund
Panel Discussion
Teri Maglio – Charles Schwab
Kelle Hennier – DST Systems
Jeff Naylor – Sungard
Scott Brady – Merrill Lynch
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 47
Mutual Fund Transfers

Mutual Fund Transfer Challenges

Inconsistent Document Requirements
Original vs. Copy
 Medallion Signature requirement varies


Inconsistent Delivery Requirements
Email
 Fax
 Overnight


No Dedicated Contacts
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Mutual Fund Transfers

Mutual Fund Transfer Challenges





Unable to Obtain Status of Transfer
Account Mask on Client Statement
CUSIP’s not Enrolled for ACATS Fund/SERV
Enforcing Purchase Minimums on Transfers
Inconsistent Processing Timeframes
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Mutual Fund Transfers

Mutual Fund Best Practices





Dedicated Back Office Contacts
Electronic Delivery of Transfer Instructions
and Supporting Documents
ACAT Fund/SERV Activation
PTF Activation
No Minimums to Transfers
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PTF Transfers

PTF Challenges





IRA Fees
Reject codes used inconsistently
Unclear Account Mask on Client Statement
Fund CUSIP is not ACATS Fund/SERV eligible
Purged or No Response from Fund Company
or Transfer Agent
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PTF Transfers

PTF Best Practices




Consistent use of reject codes
IRA Account Processing
Dedicated Contacts for PTF Transfers
Fund code excluded as part of fund account
number when initiating transfer
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PTF Transfers

Current Users



17 firms submitted records in February 2011
106 Funds participating as of February 2011
What can make it easier to pass basis?

Increased participation by firms and funds

CBRS already has transaction types established for PTF transfers




Transaction Type 46 – Fund Deliverer/Firm Receiver
Transaction Type 51 – Firm Deliverer/Fund Receiver
Parties will use Fund/SERV Control Number from PTF as Transfer Control Number
Funds making more of their securities eligible for ACATS-Fund/SERV


This would reduce manual transfers between firms and firms
This would reduce manual transfers between firms and funds
 Also eliminate system rejects on PTF transfer submission
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Non-CNS Enhancements

Non-CNS Enhancements - Phase II

ACATS Fund/SERV
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 54
Mutual Fund Cost Basis

Investment Company Institute (ICI)




Tax Committee
TA Advisory (TAAC)
Broker-Dealer Advisory (BDAC)
BDAC CBR Task Force Activities



Lot Depletion
ACATS-Fund/SERV, Networking, Manual
Best Practices / Documentation
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 55
Average Cost Considerations


Default Elections and Shareholder Impact
Affirmative Election and Revocation



Timing
Activities
Transfers


During Revocation Period
After Revocation Period
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 56
Mutual Fund Cost Basis

Next Steps




Fund Default Elections
ICI Cost Basis Workshop – Irvine, CA
CBR for Mutual Funds – DTCC document
Fund Onboarding for Mutual Funds
Complete Development
 Testing


Operational preparations for January, 2012
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 57
BDAC Sharelot Task Force


Background and objectives
Reconciliation

Networking enhancements
Impact to CBRS
 Timeline


Future enhancements
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 58
Best Practice Recommendation
Tax Reporting

Firm initiated Fund/SERV redemption
activity on fund controlled accounts




Current practice
Best practice effective January 1, 2012
Justification
Maintenance of dealer controlled accounts
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 59
Questions?
412 Customer Account Transfer Section, Inc. A Section of SIFMA - 60