Day Tradexchange Inc. (SYNJ)

[Dragonwing]

National Securities Clearing Corporation (NSCC)


Equities Clearance and Settlement Trade Capture and Reporting: Over-the-Counter (OTC) Comparison Service

The Over-the-Counter (OTC) Comparison service accepts one-sided transactions from NSCC participants and matches buyers and sellers based upon clearing firm, executing market participant ID, CUSIP or trading symbol, share quantity, price and trade date. Once a match is established the trade is recorded and a contract is forwarded to the participants confirming the comparison. For securities eligible at the depository, the trade data is also forwarded to NSCC's Continuous Net Settlement (CNS) system for settlement as well as risk management systems for risk control.


Continuous Net Settlement (CNS) System

The Continuous Net Settlement (CNS) System is an automated book-entry accounting system that centralizes the settlement of compared security transactions and maintains an orderly flow of security and money balances.

Regardless of volume, CNS nets on a daily basis participants' security obligations to one net long or short position in each issue, minimizing security movements and associated costs.

Through CNS, NSCC becomes the contra-party to each compared trade and guarantees settlement for eligible transactions as of midnight of the day the trade is reported to the member as compared.

Closing fail positions are marked-to-market daily, which reduces risk and ensures the integrity of the system.

While deliveries between CNS and users' depository positions are made automatically, participants can exempt certain short positions (or portions thereof) to avoid segregation violations and effectively meet other delivery needs.

Cash and stock dividends and bond interest are automatically debited or credited to participants' CNS accounts with respect to open fail positions.


How the Service Works

On T+3, all transactions are netted by issue to net long (buy) and net short (sell) positions, and then are further netted with positions that remained open after T+3; this includes positions due to settle that day as well as fail positions. Members' receive and deliver obligations are to and from NSCC.

CNS short positions, which represent securities owed by participants to NSCC, are compared against their DTC accounts to determine issue availability. If shares are available, they are transferred from the member's account at DTC to NSCC's account at DTC to cover participants' short obligations to CNS. To control the automatic delivery of securities from their DTC accounts, participants can use CNS exemption procedures (partial settlements are permissible).

CNS long positions, which represent securities owed by NSCC to participants, are processed in an order determined by an algorithm built into the system. Securities are automatically allocated to users' long positions as the securities are received by NSCC. Participants can request that they receive priority for some or all issues on a standing or override basis. Submission of buy-in notices also will affect the priority of a member's long position.

Daily money settlement is based on the value of all settled trades plus or minus mark-to-the-market figures for all open CNS positions.


Through the CNS System, NSCC offers three ancillary services:

1. The Stock Borrow Program enables participants to lend excess securities in their DTC accounts to CNS so that NSCC can satisfy CNS delivery obligations not filled via normal deliveries.

2.The Fully-Paid-For Account provides an SEC-approved "good control location" for participants' fully-paid-for customer securities in the event of a deficit that results from deliveries made outside CNS in anticipation of CNS receives.

3. Reorganization Sub-Accounts allow participants to take part in voluntary tender and exchange offers in an automated environment.


The Stock Borrow Program

The Stock Borrow Program allows participants to lend NSCC available stocks and fixed income securities from their account at The Depository Trust Company (DTC) to cover temporary shortfalls in NSCC's Continuous Net Settlement (CNS) System.

NSCC credits members' money settlement accounts with the full market value of securities borrowed, and members can earn overnight interest on that value by investing the funds. In addition, members can enhance securities inventory management in a safe, controlled environment through the program.

The Stock Borrow Program enables participants to earn interest on the full current market value of their excess DTC positions borrowed by NSCC, while lending securities in the safety of a controlled environment.

By early evening on each business day, participants forward to NSCC a list of securities that are available for borrowing. The list can be transmitted via CPU-to-CPU link or PCWeb Direct. Early in the morning on the following business day, NSCC determines the securities obligations that remain open after CNS clearance processing. NSCC then attempts to satisfy these obligations by borrowing from participants in the Stock Borrow Program.

NSCC distributes reports to participants each morning, reflecting Stock Borrow activity. In reviewing the report, participants sometimes discover that the securities lent to NSCC are needed for customer securities segregation requirements.

In such cases, at the request of the participant, the long position in the Stock Borrow account is moved into a long position in the Fully-Paid-For (E) account. This results in the member not being credited the current market value of the securities position. The Securities & Exchange Commission treats this "E" position as a good control location for customer securities under Commission rule 15c3-3.