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ACATS

The term ACATS is an acronym that means Automated Customer Account Transfer System. The ACAT System is an NSCC system that provides for the timely and orderly systemic transfer of customer accounts between brokerage firms - when directed to do so by the brokerage client.

There are several reasons why a brokerage client might request that his or her investment account be transferred from one brokerage firm to another. Two frequent explanations for the transfer are:

  1. The client's stockbroker has taken a job with a different brokerage firm and the client wishes to remain a client of that stockbroker
  2. The client is unhappy with his or her current brokerage firm and wishes to take the business elsewhere

No matter what the reason the brokerage firm must accommodate the client's transfer request. The current ACAT System was created out of necessity. First, brokers were not very eager to facilitate the loss of a client to the competition. Also, a brokerage firm calculates its net value - in part - by determining the aggregate market value of the securities held in custody on behalf of its brokerage clients.

As such, prior to the development of the ACAT System there was not much incentive for an unscrupulous brokerage firm (of course we all know that there is no such thing as a unscrupulous brokerage firm) to expedite the transfer of customer assets to another firm.

The NSCC ACAT System therefore, is intended to satisfy two important goals:

  1. Facilitation of the customer account transfer process through automation
  2. Safe guarding of the brokerage client's investment assets

How the ACAT System works:

The ACAT process begins when the brokerage client instructs his or her new firm to receive the account from the prior brokerage firm. At the time of the request the client must provide the new firm - the receiving firm - with the following information regarding the account to be transferred:

  • The Account Number to be transferred
  • The Account Registration - the name of the beneficial owner or owners
  • The type of account - cash, margin etc.
  • Tax ID or Social Security Number

With this information the receiving firm (the new firm) initiates the ACAT process through the NSCC ACAT System.

Where's the incentive?

Once the client requests an account transfer, both firms (delivering firm and receiving firm) have a limited number of days to agree on the account assets (both securities and money) to be transferred. This process is coordinated through the NSCC - creating legal obligations for both sides of the account transfer.

Once both firms agree on the account assets to be transferred the market value of those assets is calculated. The delivering firm is required to surrender to the receiving firm a cash amount equal to the calculated market value of the assets to be transferred. As the assets are transferred the receiving firm returns the surrendered cash back to the delivering firm.

For example, assume our investor - Slick Sam - desires to transfer his brokerage account from Firm A to Firm B. Upon receiving the transfer request from Sam, Firm B initiates the ACAT transfer through the NSCC ACAT System.

Let's Assume that both firms agree on the following account assets to be transferred:

Account Asset

Market Value

1000 Shares XYZ Co.

$250,000

200 Shares Gamma Ray Gun

$ 75,000

Total Market Value

$325,000

Firm A is required to surrender - to Firm B - cash totaling $325,000 - the calculated market value of the assets to be transferred. At such time that Firm A delivers 1000 shares of XYZ Co. to Firm B, Firm B is required to return $250,000 to Firm A - the market value of the 1000 shares of XYZ Co.

Similarly, when the 200 shares of Gamma Ray are received by Firm B, the remainder of the surrendered cash - $75,000 (the calculated market value of the Gamma Ray shares) - is returned to Firm A - thus completing the ACAT transfer.

The ACATS Cycle

Barring any complications, the typical ACATS transfer using the NSCC ACAT System - once initiated by the receiving firm - takes 6 business days to complete - the ACATS Cycle.

On each day of the ACATS Cycle a different procedure is performed by the firm's ACATS Department.

Business Day

ACAT Cycle Day

Day 1

Request 1

Day 2

Request 2

Day 3

Request 3

Day 4

Review 1

Day 5

Settle Prep

Day 6

Settle Close

Day 1 - Request 1

On the first business day of the ACATS Cycle the delivering firm receives the ACAT request - initiated by the receiving firm on the prior business day - through the NSCC ACAT System. The ACATS Department of the delivering firm verifies the account details on the transfer request and verifies the accuracy of the following information:

  • Account Number (at the delivering firm)
  • Account Title or Registration (name of the account)
  • Account Type (single, joint, custodial, cash, margin etc.)
  • Tax ID and/or Social Security Number

If the account details on the ACAT request match the actual account records at the delivering firm, the ACAT request is approved by the ACAT Department of the delivering firm.

If the account details on the ACAT request do not match the actual account records as known by the delivering firm, the ACAT request is flagged by the ACATS Department for review.

Depending on the severity of any discrepancy the ACATS Department can:

  • Accept the ACAT request as is - thereby continuing the ACAT transfer
  • Reject the ACAT request - effectively terminating the ACAT transfer. In this case, the receiving firm must verify the account details with the brokerage client and re-submit the ACAT request to the NSCC ACAT System
  • Verify the account information directly with the ACATS Department at the firm initiating the ACAT request. This is typically accomplished by calling the requesting ACATS Department directly via telephone

Day 2 - Request 2

Request 2 - the second business day of the ACATS Cycle - is primarily used to resolve any account information discrepancies that still remain from Request 1. Many firms charge the transferring client with a termination fee or penalty. This termination fee is often processed to the client's account on Request 2 (day 2).

Day 3 - Request 3

On Request 3 - the third business day of the ACATS Cycle - the delivering firm typically "Validates" the account assets for transfer. To validate the assets, a 'snap shot' is taken of all settled assets in the account (both securities and money). Settled Assets are those purchases and sales of securities that have reached Settlement Date in the brokerage trade cycle.

A list of the validated assets - the client assets to be transferred - is submitted to the NSCC ACAT System on Request 3.

Day 4 - Review 1

On Review 1 - the fourth business day of the ACATS Cycle - both firms (the delivering firm and the receiving firm) verify the validated assets as submitted to the NSCC ACAT System.

The delivering firm reviews all activity in the validated account to ensure that there have been no changes to the validated assets, that is, that no validated assets (assets to be transferred) have been sold (or otherwise disposed of) by the client prior to the ACAT transfer.

The delivering firm has the ability to delete - or stop the transfer of - any validated assets (on an asset by asset basis) that are no longer legally owned by the transferring client.

****

For example, recall the previous ACAT example in which our client - Slick Sam - had requested the transfer of his brokerage account from Firm A to Firm B.

On Request 3 - the third business day of the ACATS Cycle - the following settled assets were validated by Firm A and submitted to the NSCC ACAT System:

XYZ Co.

1000 Shares

Gamma Ray Gun Corp.

200 Shares

Let's further assume that, on Request 2 - the second business day of the ACATS Cycle - our client, Sam, sold the 200 shares of Gamma Ray Gun Corp. for Regular Way Settlement.

Because the sale of 200 Gamma has not reached Settlement Date by Request 3 - the settled position of 200 shares remains in the client's account on Request 3, and as such, is included in the 'snap shot' of validated assets.

On Review 1, the fourth business day of the ACATS Cycle - the ACATS Department of Firm A reviews the unsettled activity in Sam's account, identifies the unsettled sale of 200 Gamma Ray shares, and deletes the 200 shares from the ACAT transfer - effectively preventing the transfer of the sold securities.

As a result, the remaining validated asset in the account to be transferred is the 1000 share position of XYZ Co.

****

The receiving firm also reviews the validated assets on Review 1. If the validated assets are not in order, the receiving firm has the option to decline the ACAT transfer. Unlike the delivering firm, the receiving firm cannot delete - or stop the transfer of - assets on an asset by asset basis.

By declining the ACAT request the receiving firm terminates the entire account transfer - that is, no assets are transferred. After all issues are resolved, the receiving firm must re-initiate the ACAT request, that is, start the ACAT process again - from the beginning. The ACAT must pass through the entire ACAT cycle for a second time.

Day 5 - Settle Prep

On Settle Prep - the fifth business day of the ACATS Cycle - all validated assets are "locked" into transfer. Once the assets are locked into transfer neither the delivering firm nor the receiving firm can adjust or delete the ACAT transfer.

The market value each validated asset is obtained at the close of business on Settle Prep, and is used to derive the market value of the ACAT account.

Day 6 - Settle Close

On Settle Close - the sixth and final business day of the ACATS Cycle - assets begin to transfer. The delivering firm transfers to the receiving firm an amount of cash equal to the closing market value of the validated ACAT assets (as of the close of business on Settle Prep).

As the ACAT assets are transferred - delivered - to the receiving firm, the cash representing the market value of those assets is returned to the delivering firm.

ACATS Settlement

The delivery of validated ACAT assets is primarily the responsibility of the Cashiers Department. The key features of this process are reviewed in this section. For a more complete discussion of trade settlement and clearance please refer to the following sections:

  • Cashiers
  • Securities Settlement
  • Money Settlement

The majority of ACAT asset settlements fall into one of four categories:

  1. CNS Settlement
  2. Non-CNS Settlement
  3. Mutual Fund Settlement
  4. OCC (Options) Settlement

The settlement methodology is determined by the type of investment security being transferred and the clearing house eligibility of the asset. It is important to keep in mind that within a single account transfer several different settlement methods might be required - due to the variety of different asset types that can be held within a single investment account.

CNS Settlement

The vast majority of ACAT transfers are settled via the NSCC Continuous Net Settlement (CNS) System. In order to be settled via CNS the asset being transferred must, obviously, be eligible for CNS settlement.

Assets delivered and received through CNS as part of an ACAT transfer are netted (combined) against the firm's CNS position (resulting from settling trades and other CNS settlement activity). As with other CNS settlements, on Settle Close both firms - delivering firm and receiving firm - settle the ACAT transfer directly with CNS. No delivery of CNS eligible assets takes place directly between the two ACAT participants.

Non-CNS Settlement

The vast majority of US security ACAT transfers are settled through CNS. Securities that are not eligible for CNS settlement (excluding Open End Mutual Funds and Options, which will be discussed separately) result in a Non-CNS ACAT Settlement - the Non-CNS ACAT Settlement is very similar to the Non-CNS Settlement of US security trades.

The major difference between Non-CNS ACAT Settlements and Non-CNS Trade Settlement is that during the ACATS Cycle a cash amount - equal to the market value of the securities to be delivered - is transferred from the delivering brokerage firm to the receiving brokerage firm through CNS.

It is important to note that the transfer of cash - equal to the net market value of the assets to be transferred - is processed through CNS regardless of whether or not the actual ACAT settlement will be process via CNS - ie. Non-CNS eligible securities.

On Settle Close (similar to Settlement Date in the Brokerage Trade Cycle) the delivering brokerage firm receives - from NSCC - an ACAT Deliver Balance Order. The quantity on the ACAT Deliver Order is equal to the share or bond quantity of the ACAT transfer. The dollar amount on the ACAT Deliver Order represents the cash market value of the Non-CNS asset as calculated at the close of business on Settle Prep.

The ACAT Deliver Order is an official instruction from the NSCC that directs the delivering firm to settle the ACAT transaction - and is a legal obligation for the delivering firm.

Also on Settle Close, the receiving brokerage firm receives - from NSCC - an ACAT Receive Balance Order for the same quantity and amount as the ACAT Deliver Order received by the delivering firm.

The ACAT Receive Balance Order is an official instruction from the NSCC that directs the receiving firm to accept the ACAT transfer from the delivering firm and - upon receipt of the transferred securities - to return the cash market value of the transferred assets to the delivering firm.

In the Non-CNS ACAT Settlement securities are typically transferred via DTC or by the delivery of physical securities. Non-CNS ACAT Settlements might also be processed via other settlement systems such as the FED (Government issued securities) or Euroclear (International bonds) or another appropriate delivery system as required by the specific asset to be transferred.

Open End Mutual Fund Settlement

The majority of Open End Mutual Fund ACAT transfers are settled via the NSCC Mutual Fund ACAT Fund/SERV System. To qualify for ACAT Fund/SERV settlement the client account must be "Networked" at both the delivering brokerage firm and at the receiving brokerage firm.

ACAT transfers for networked Mutual Fund accounts follow the same six day ACATS Cycle as with all other ACAT transfers. The primary difference for ACAT transfers of Open End Mutual Funds is the submission of the validated account and validated asset details to the ACAT Fund/SERV System for settlement.

Similar to a Non-CNS ACAT transfer, the cash representing the market value of the asset to be transferred is passed from the delivering firm to the receiving firm via CNS - even though the ultimate movement of the securities will not occur through CNS.

When the client's account is networked at both the delivering firm and the receiving firm the movement of securities is facilitated by the NSCC ACAT Fund/SERV System - which instructs the Mutual Fund (or its designated agent) to change the account registration from the delivering firm to the receiving firm. For more information on book entry Mutual Fund systems please refer to Mutual Fund Processing.

The market value of the transferred asset is then returned to the delivering broker dealer via the ACAT Fund/SERV System.

It is important to remember that the vast majority of Mutual Funds track ownership of securities via electronic book entry accounting systems and, as such, there is no physical movement of securities at the time the ACAT transfer occurs. To facilitate the transfer the Fund simply changes the broker dealer on the networked account from the delivering firm to the receiving firm. Once this change is made the receiving firm has complete access to the networked account and the Fund will no longer accept any instructions pertaining to the account from the delivering firm.

In the event that the client account to be transferred is not a networked account at one or both of the ACAT participants - the ACAT transfer is rejected from the ACAT Fund/SERV system. Balance Orders are generated for both the delivering and receiving firms, and the associated movement of securities and return of funds is manually completed by each firm's respective Mutual Funds and ACATS Departments.

Option Securities

The ACAT transfer of Option Securities follows the same six-day ACATS Cycle as most other securities. As with Mutual Funds, the primary difference for ACATS involving Option securities is that the actual movement of the Option position from one firm to the other takes place at the Options Clearing Corporation (OCC), not CNS or ACAT Fund/SERV.

Similar to a Non-CNS ACAT transfer, the cash representing the market value of the asset to be transferred is passed from the delivering firm to the receiving firm via CNS - even though the ultimate movement of the securities will not occur through CNS.

Once the Option position is transferred from the delivering firm to the receiving firm by OCC, the delivering firm receives the cash market value of the security. The return of the cash market value also occurs at the Option Clearing Corporation.

Because the movement of both cash and securities process by OCC is automated - Balance Orders are neither generated nor required.





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