BULK CUSTOMER ACCOUNT TRANSFER INITIATIVE PHASE 1 - STANDARDIZED NAME & ADDRESS FILE

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1 SEPTEMBER 2015 BULK CUSTOMER ACCOUNT TRANSFER INITIATIVE PHASE 1 - STANDARDIZED NAME & ADDRESS FILE ENHANCING CUSTOMER PROTECTION AND INVESTOR CONFIDENCE

2 About DTCC With over 40 years of experience, DTCC is the premier post-trade market infrastructure for the global financial services industry. From operating facilities, data centers and offices in 16 countries, DTCC, through its subsidiaries, automates, centralizes, and standardizes the post-trade processing of financial transactions, mitigating risk, increasing transparency and driving efficiency for thousands of broker/dealers, custodian banks and asset managers worldwide. User owned and industry governed, the firm simplifies the complexities of clearing, settlement, asset servicing, data management and information services across asset classes, bringing increased security and soundness to the financial markets. In 2014, DTCC s subsidiaries processed securities transactions valued at approximately US$1.6 quadrillion. Its depository provides custody and asset servicing for securities issues from over 130 countries and territories valued at US$64 trillion. DTCC s global trade repository maintains approximately 40 million open OTC positions and processes roughly 280 million messages a week. To learn more, please visit or follow us on

3 Table of Contents Executive Summary 2 Problem Outline 2 Proposed Solution 2 Current Account Transfer Capability 3 Why not use ACATS? 3 Broker-dealer Conversions/Deconversions 3 DTCC s AIT Service: Functionality and Proposed Use 5 AIT Process Flow 5 Proposal for the Standardized Name and Address File Details 6 Solution Summary and Rationale 7 Implementation Plans 8 1

4 Executive Summary PROBLEM OUTLINE Currently the securities industry does not have a common architecture to promptly facilitate bulk transfers, which can be defined as a single movement of many customer brokerage accounts. A common architecture and standardized files could help facilitate the exchange of information and related processing to transfer customer brokerage accounts in bulk and reduce some of the risks of a carrying broker-dealer 1 liquidating its business in a compressed time frame. The Depository Trust & Clearing Corporation ( DTCC ) has been working with a group of industry participants to develop procedures to standardize, facilitate and expedite the account transfer process. The industry has been considering the problem of expediting the bulk transfer of customer accounts for some time, but these concerns have been heightened by recent events, including recent broker failures. Customers face various risks if they are not able to transfer their accounts from a firm in distress that is liquidating its business, including uncertainty of access to their investments. Any delays or obstacles to the transfer of accounts could also impair resolution of the broker-dealer under liquidation or bankruptcy proceedings, if applicable. Broker-dealers in the correspondent clearing business and back office service providers who offer brokerage technology platforms to industry firms routinely transfer customer accounts in bulk, and have well-honed expertise in place for the many tasks required for the conversion process. However, firms not engaged in this activity may not be operationally ready to initiate bulk account transfers or readily accept accounts from the delivering firm, particularly if the delivering firm is in distress and in the process of liquidating its business in a compressed time frame. Further, important files critical to the process are not standardized. The lack of standardized files in these situations require highly technical remapping of data for bulk account transfers to take place and could cause delays that may create additional risks in an already complicated situation when the transfers involve a broker-dealer in distress that may be liquidating its business. PROPOSED SOLUTION Ensuring greater customer protection and the continuity of customer access to their investments can be achieved by improving the operational readiness of firms. This requires advanced staging by the delivering and receiving firms that carry customer accounts, and standardizing the more critical files used for bulk transfers, also referred to as conversion or deconversion events. NSCC s Account Information Transmission Service ( AIT ) would be utilized as the secure data transport infrastructure for the exchange of critical data between firms. Under the proposed solution, firms that carry customer accounts and are NSCC Members would be expected to subscribe to the AIT service and be operationally ready to transmit and receive customer account data. All data would be required to be submitted in a standard format. Those formats will be based upon technical specifications agreed to by the industry before being finalized. This standardization of the formats would improve operational readiness and expedite the process of establishing a customer account record at a receiving broker-dealer to stage the process of transferring assets. 1 Definition from SEC Release , defining carrying broker-dealers as, broker-dealers that maintain custody of customer funds and securities. See also 15c3-1(a)(2)(i). 2

5 Phase 2 of the project will address the bulk transfer of asset files. It is expected that this phase of the project would also leverage AIT, which would support the transmission of standardized security master and position and balance information to facilitate the bulk transfer of customer assets out of the distressed firm to ensure their safety at another broker-dealer. Current Account Transfer Capability WHY NOT USE ACATS? A well-known industry system, NSCC s Automated Customer Account Transfer Service or ACATS, routinely facilitates the transfer of customer accounts from one broker-dealer to another. Stocks, bonds, mutual funds, options, cash and other investment products can be transferred via ACATS. Given the prominent role of this system in the day-to-day process of transferring customer brokerage accounts, ACATS was considered as a possible solution to solve the problem of bulk transfers. However, ACATS was designed to process individual customer-initiated account transfer requests, which is not the basis of bulk transfers. While some firms have the capability to request and receive a significant number of account transfer requests through ACATS, the service does not provide the account opening data required for the bulk transfer process. Account transfers through ACATS are triggered by a customer opening an account at a new firm through positive consent. This is not the case for when a broker-dealer is liquidating its business in a short time frame. In this case, negative customer consent would apply. Further, transfers through ACATS follow a multi-step, three-to-five date settlement process through The Depository Trust Company (DTC), or other depositories and/or custodian banks. While there is some ability to accelerate account transfers through the existing ACATS system, delivering and receiving firms using the system would be challenged to coordinate the validation and settlement of a large volume of account transfers via ACATS in a short timeframe. The data elements of the files used by ACATS have served to provide a preliminary benchmark for customer account data and information, however, enhanced bulk transfer functionality must be accomplished using tools and techniques beyond those of the single account transfer process. Therefore, ACATS will not be utilized for these bulk customer account transfers. BROKER-DEALER CONVERSIONS/DECONVERSIONS Outside of ACATS, industry firms and service providers follow procedures that enable the bulk transfer of customer accounts. Such transfers or conversions, typically involve an extensive array of reference data, including client name and address information, security holdings or account-specific product and service information. For conversions, trading cutoffs are established in a memorandum of understanding between the delivering and receiving firms to synchronize activity and establish the first trade date at the new firm and last trade date at the old firm. Specialized procedures are followed for the more complex brokerage products, such as margin accounts and foreign securities. Customers are notified and conversion teams are put in place with technical resources to map data, coordinate details, and manage various aspects of the conversion process. 3

6 The time and resources necessary to coordinate such details may be in short supply when a firm is liquidating its business in a short timeframe. Therefore, leveraging the tools and techniques that are currently used in a conversion, and pre-staging critical elements of the existing conversion process can help solve the problem of transferring customer accounts out of a firm in distress. The first key step in the conversion process, phase one of this project, is to facilitate the transmission of a standardized file to the receiving firm that contains the name and address information of account holders. Currently, there is no standard format for the essential name and address information generated by the delivering firm during the conversion process to aid the set-up of accounts on the new firm s books and records. Clearing firms and service providers who routinely engage in conversions have knowledge of each other s formats, and remap name and address data as required when circumstances warrant. This leaves a gap with firms who typically do not engage in such activity. The ability to produce a standardized name and address output file would therefore be an important requirement of all industry firms that carry customer accounts to enable the creation of a limited customer account record with a receiving broker-dealer for the bulk transfer of customer accounts in a short time frame. The first file targeted for this project is the name and address file, which carries essential data elements to establish the account at the receiving broker-dealer. Phase 2 of this effort will focus on the requirements for the conversion of assets, and procedures for setting up securities reference data, along with the specific positions and balance information for each customer account. 4

7 DTCC s AIT Service: Functionality and Proposed Use NSCC currently offers a service to broker-dealers known as AIT, which is a secure data transport facility that allows NSCC Members to exchange information files related to customer account conversion events. The AIT system can be used for the exchange of files in an agreed upon, standardized format. Examples of these files are customer name and address files, position and balance records, or supplemental data to support trading and investment activity. Ensuring broker-dealer enrollment in AIT, and periodic testing of the core files required for a conversion, increases the operational readiness of broker-dealers to support bulk customer account transfers. Summarized below is the proposed exchange of standardized files by delivering and receiving broker-dealer through the AIT service, referencing core files, data transmission flows and posting activity. AIT PROCESS FLOW High level outline in the proposed AIT transfer process: 1. Delivering firm transmits customer name and address information in an industry agreed format. 2. NSCC s AIT process serves as the secure pipeline and hub for receipt and transmission of the standardized files. Note: In some cases, there may be multiple receiving firms. The delivering firm would need to provide clear instructions regarding the intended receiving firm for each file. 3. The receiving firm(s) establishes a limited customer account record from the name and address file. 4. Asset details as well as supplemental data and information may be transmitted in a similar, standardized, file formats to establish the holdings and supplemental services for the customer account. Standardized formats for asset detail files will be developed in Phase 2 of the project. 5

8 PROPOSAL FOR THE STANDARDIZED NAME AND ADDRESS FILE DETAILS In order to accomplish this goal, a proposed standard Name and Address file will be used in an agreed upon file format that can be sent and received using a firm s existing communication channels via DTCC with AIT enrollment. The file may be broken down into two sections (fields subject to change): 1. Account Level Information Deliver Customer Account Number (ex - Brokerage Account Number) Account Registration Type (ex single, joint, IRA) Account Type (ex - Cash, Margin, COD, Prime) Investment Advisor Indicator (Yes or No) Discretionary Account Indicator (Yes or No) Corporate Account Qualifier (S-Corp, C-Corp) Option Account Indicator (indicates whether options can be traded in the account) Option Approval Level (describes level of trading allowed if options can be traded) Investment Objectives 2. Customer Account Level Information - Up to 8 Occurrences of Customer allowed Customer Role (ex - Owner, Joint Owner, Beneficiary, Custodian) Customer Role Qualifer ( ex Person, Trust, Corporation, etc.) Full Name of Customer Mailing and Legal Addresses Communication Types (phone, ) Citizenship Tax Status (ex, US Citizen, Non-Resident Alien, etc.) W8/W9 Certifications Annual Income Net Worth Large Trade Id (if applicable) Legal Entity ID (for institutional) 6

9 Solution Summary and Rationale The current lack of a standardized process for quickly transferring customer account information between broker-dealers could create risk in the industry, particularly in the situation when a delivering broker-dealer is in distress and liquidating its business in a compressed timeframe. An industry-agreed upon process for facilitating the prompt bulk transfer of customer accounts out of the delivering firm to a receiving broker-dealer would be in the best interest of both the customers of the broker-dealer and the securities industry at large. The proposed solution of pre-staging a conversion leverages pre-existing industry tools and techniques for the extraction or bulk transfer of customer accounts. The effort is aimed at protecting the assets of customers whose brokerage accounts may hold lifelong savings, such as retirement assets for a secure future. Clearly establishing the accounts that must be transferred on the books and records of a receiving firm that is in a position to accept the accounts is a critical element in the conversion process, and establishes the baseline for subsequent activity to expedite the process. Today, there is very limited interoperability between broker-dealers that carry customer accounts. When a delivering firm is in distress and liquidating its business, establishing new connectivity in order to transfer accounts on an expedited basis could increase risks and exposure to errors. As the industry continuously looks for ways to enhance customer protection, a prudent preemptive planning framework aimed at quickly facilitating the bulk transfer of accounts is a must. The proposed solution is a cost-effective means. 7

10 Implementation Plans Creating a standardized, bulk account information transfer process does not require fully replicating all aspects of the bulk transfer capability of service providers or firms in the clearing business. A series of incremental improvements over time that could be absorbed by all firms that carry customer accounts is envisioned in this proposal, with each step building on the prior step to ultimately cover the core products and services offered by broker-dealers to customers. The proposed implementation plan is divided into phases. Phase 1 - Implement requirements for production of Standardized Name and Address File and AIT enrollment for broker-dealers that carry customer accounts. Phase 2 - Develop Asset Transfer Framework and Protocols utilizing NSCC s AIT service, including standardized files for security master information and position and balance records. An industry working group was established to develop the prototype for a standardized name and address file that could serve as an essential first step in establishing a limited customer account record at a receiving firm. Firms will complete their testing of the file, as firms develop the ability to both create and ingest the new file to be in an improved state of operational readiness. Firms are expected to complete the name and address file component of the project in September of In 2015 By mid-year In early Plans Firms that carry customer accounts will be expected to develop the ability to submit or accept a standardized name and address file through NSCC s AIT service. As the later stages of the name and address file work stream progresses, analysis will be done on the more challenging aspect of the problem, which is to facilitate the bulk transfer of customer assets. In late 2016 through early 2017, it is expected that the design elements of the bulk asset transfer process will be agreed to among industry representatives to move forward with an agreed upon approach. File layouts for supplemental data or optional information not necessary for the actual transfer and safeguarding of assets, but important for trading, servicing or other requirements will be addressed in later initiatives. 8

11 For Further Information about ACATS and DTCC s AIT service, please visit _PS This document is for information purposes only, and does not constitute legal advice. Readers should consult their legal advisors for legal advice in connection with the matters covered in this document. The services described are governed by applicable rules, procedures, and service guides for relevant DTCC subsidiaries, which contain the full terms, conditions, and limitations applicable to the services. If at any time you wish to be removed from our distribution list, please send an to [email protected]. To learn about career opportunities at DTCC, please go to dtcc.com/careers.

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