Specific settlement rules and settlement restrictions - U.S.A.
Settlement restrictions applying to certain securities held with Citibank
Securities held with Citibank that are eligible for custody and settlement in both the DTC and in the FBE can be received from or delivered to counterparties in the FBE only.
Customers must ensure that settlement with U.S. domestic counterparties is arranged accordingly.
Settlement restrictions applying to U.S. customers
CBL offers unrestricted clearing and settlement services for U.S. debt securities. Such securities can be received from and delivered to any counterparties within CBL or across the Bridge with counterparties in Euroclear.
U.S. debt securities, as referred to in this section, are:
- Securities issued by U.S. incorporated institutions pursuant to TEFRA D rules of bearer obligations that are foreign targeted and require certification of non-U.S. beneficial ownership;
- Securities issued by U.S. incorporated institutions pursuant to Rule 144A, SEC registered securities filed on a type “S” form, unitary note structures (one global note representing both the Regulation S and 144 A portions) and all Depository Receipts issued in the U.S.A.;
- All Fedwire-eligible securities, including the securities converted from the DTC-MBS division to FBE in the course of the first quarter of 2002.
In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC), the following restrictions apply to the settlement of U.S. equities in CBL:
- U.S. customers must not receive U.S. equities by internal or Bridge settlement on their CBL account; U.S. customers must not deliver U.S. equities by internal or Bridge settlement from their CBL account.
- Internal or Bridge settlement of U.S. equities by or on behalf of U.S. entities or individuals is a violation of the law and may result in sanctions. Internal or Bridge settlement of U.S. equities by or on behalf of U.S. entities or individuals also constitutes a violation of CBL procedures. It is each customer’s responsibility to ensure that no such violations occur on their account.
U.S. equities, as referred to in this section, are defined as equities and equity products of U.S. issuers (for example, common shares of a company incorporated in a U.S. state, U.S. closed-end mutual funds etc.).
A U.S. customer, as referred to above, is any entity with a U.S. residence (based on the location of its executive office or principal place of business), including, without limitation:
- Any U.S. bank (as defined by Section 3(a)(6) of the Securities Exchange Act of 1934);
- Any broker-dealer registered as such with the SEC even if such broker-dealer does not have a U.S. residence; and
- A foreign branch of a U.S. bank or U.S. registered broker-dealer.
A non-U.S. customer is any CBL customer other than a U.S. customer as defined in the preceding paragraph.
DTC and FBE nominal limitations on settlement instructions
The maximum nominal quantities per instruction are as follows:
- 50,000,000 nominal for FBE settlement;
- 50,000,000 nominal for settlement of DTC Money Market Instruments;
- 999,999,999 nominal for all other DTC instruments.
It is the customer’s responsibility to ensure that these limits are not exceeded.
DTC Minimum Tradable Amount
The validation on the Minimum Tradable Denomination (MTD) on DTC eligible instruments has been adapted to the US market settlement practice which allows settlement for quantities under the MTD.
For securities eligible in DTC, customers must ensure that their holding meets the Minimum Tradable Amount (or multiple of such amount) in order to be eligible for Corporate Actions requiring the adherence to such amount.
Low Priced Securities – risk mitigation and settlement measures
Further to rules promulgated by the Securities and Exchange Commission (SEC), some settlement measures are required for Low Priced Securities (LPS).
Background
In the U.S.A., LPS continues to be a topic of discussion. The SEC approaches the topic largely from an investor protection standpoint and defines LPS as securities priced less than USD 5.00 and which are traded over the counter. Risks associated with some of the LPS make them particularly susceptible to market manipulation or fraud. The SEC has promulgated rules under section 15(h) of the Securities Exchange Act of 1934 requiring broker dealers to make certain disclosures to investors in LPS.
SEC Bulletin: Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities
Broker-dealers AML obligations and regulations governing LPS
The SEC bulletin reminds broker-dealers of their existing AML due diligence and reporting obligations under the Banking Secrecy Act (BSA) and Financial Industry Regulatory Authority (FINRA), for LPS transactions maintained by foreign financial institutions in omnibus accounts. The BSA requires broker-dealers to establish a risk-based AML program, including policies and procedures to detect, monitor and report suspicious activities.
Foreign Financial Institutions (FFI) pose greater AML risks in regard to LPS as there is a lack of transparency into FFI’s underlying client identity.
Measures implemented by Citibank N.A. (Citi) as Clearstream Banking's depository in the U.S.A.
Citi proactively mitigates risk by preventing new or additional LPS holdings into Citi accounts. Citi performs a real-time validation of all securities received from customers based on risk criteria established by the OTC Markets Group as data vendor.
Based on this validation, Citi automatically rejects any receipt transactions for securities identified as LPS according to certain criteria, by transmitting a real-time SWIFT MT548 to its customers, thus preventing the settlement of the LPS transaction in the market. Citi however enables free and against payment delivery transactions of these assets identified as LPS and strongly recommend their customers to reduce or eliminate their LPS holdings.
Citi applies the above settlement procedure to all securities which meet the following criteria established by the OTC Markets Group:
- LPS equity (including convertible instruments and preferred stocks) securities with market value of USD 50 million or less, which are traded on OTC and not on the National Market System (NMS) such as NYSE and NASDAQ.
- “Caveat Emptor” securities: A Caveat Emptor security is a designation the OTC Markets Group places on a security after a determination was made surrounding the company that there may be potential risk to investors which include a questionable stock promotion, known investigation of fraudulent activity committed by the company or insiders. In general, these securities do not qualify to trade on a national market.
- “Grey Market”: In general, securities that are not listed on any stock exchange nor formally quoted on OTC (Over-the-Counter) Markets or OTCBB (Over-the-Counter Bulletin Board), and that do not qualify to trade on a national market.
- “OTC Pink” which consists of companies that depending of the amount of available information, are potentially riskier and more susceptible to fraud, that is with
- Shell Condition or Shell Risk Condition;
- No Information with Shell Condition or Shell Risk Condition;
- Limited with Shell Condition or Shell Risk Condition.
Settlement impact for Clearstream customers holding Low Priced Securities
For Clearstream Banking customers instructing to receive holdings in these LPS via SWIFT MT540/541 from the local market, Clearstream Banking complies with Citi risk criteria as defined here above by the OTC Group Markets. Clearstream Banking will consequently transmit rejection of these receipt settlement instructions via SWIFT MT548 whenever received from Citi.
- If the transaction is received prior to settlement day, Clearstream Banking transmits a SWIFT MT548 status, received from Citi, to inform customers of the impending risk for settlement as follows:
:25D::SETT//PENF
:16R:REAS
:24B::PENF//NARR
:70D::REAS//LPS DOES NOT MEET CITIS REQ
:16S:REAS - If any of the risk measures which Citi is restricting continues to be reported on settlement day by the OTC, Clearstream Banking transmits Citi updated status via SWIFT MT548 to inform its customer of a rejection. The rejection status will also be transmitted for transactions received on settlement day, which Citi is restricting. Please note that no further processing will be performed by Citi and Clearstream Banking once the receipt transaction is rejected.
:25D::IPRC//CAND
:16R:REAS
:24B::CAND//CSUB
:70D::REAS// LPS DOES NOT MEET CITIS REQ
:16S:REAS
For both statuses noted above, Clearstream Banking provides Citi risk measure determined by the OTC in the field :70D::REAS. This will include one of the following:
- OTC CAVEAT EMPTOR
- OTC COND FOR GREY MARKET FOR DOM COMP
- SHELL COMPANY OR SHELL RISK
- DELINQUENT REPORTING
If multiple risks measures apply to the security, field :70D:: will not provide all the risk measures but will instead indicate “LPS DOES NOT MEET CITI’S REQUIREMENTS”.
Absent of any other specific restrictions, free and against payment deliveries or transfers of these LPS will be further processed by Citi and thus supported for processing by Clearstream Banking.
Due diligence requirements
While market counterparts including Citi as Clearstream Banking‘s depository play an active role in the monitoring of these LPS, customers are also required to adopt proactive measures to mitigate the associated risks to these instruments.
Clearstream Banking customers and underlying clients are responsible to ensure their brokers understand market conditions, the AML obligations and the regulations governing these LPS.
There will be no published list with all LPS subject to the OTC risk measures as the content of the LPS list can constantly fluctuate according to market/company financial conditions, for example, the delinquent LPS status can be removed if the company updates its filing.
A list of securities considered as LPS will however be available at customer's request as support and on a non-exhaustive basis by sending an email to CADatabase.cs@clearstream.com with the subject: CBL LPS US Market
It remains the customer‘s entire responsibility to check all these criteria with their respective brokers and counterparties