1. Joseph Zaets – Morgan Stanley President - SIFMA CAT Section
Spring Seminar 2011
Welcoming Remarks
Joseph Zaets – Morgan Stanley
President - SIFMA CAT Section

2. Thomas P. Tierney Vice President Operations, Technology and BCP
SIFMA Report
Thomas P. Tierney
Vice President
Operations, Technology and BCP

3. Questions?

4. DTCC Update
Louis Lepore
DTCC

5. Agenda Non-CNS ACATS Proposal Mutual Funds
Other Non-CNS Settling Assets
ACATS Default Pricing
ACATS Fund Registration (FR) Modifications
ACATS Other
ACATS Statistics

6. 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

7. Mutual Funds Proposal Defined Proposed Modifications
Add Settle-Prep Status 300 to all non standard ACATS transfers that contain a mutual fund asset with settlement location 10 (ACATS- Fund/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)
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

8. Mutual Funds Proposal Defined Proposed Modifications (continued)
Create a new MRO Reversal File and/or MRO Comma Delimited File for reversals resulting from a Member close-out event
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

9. 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

10. 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

11. 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

12. 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
To be populated when firm = receiver and Fund/SERV agent was appointed
Originating Deliverer Firm Number field
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

13. 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
247,427
Full (bank on at least one side)
4,130
4,010
PTF (firm and fund)
20,836
18,892

14. Questions?

15. Process Service Improvement Subcommittee Updates
Scott Brady
Merrill Lynch

16. 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

17. 2011 Subcommittee Priorities
Non-ACAT Transfers
“Hard to Transfer” assets
Transfers with Banks
Cost Basis
ACAT Settlement Enhancements
Non-Purpose Loans
Reducing Rejects

18. 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

19. 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

20. Reducing Rejects Industry Average of 10% Rejects Lead to: Improving
We can do better
Rejects Lead to:
Re-work
Complaints
Unhappy clients

21. Questions?

22. Seminar will resume in 15 minutes
Seminar Break
Seminar will resume in 15 minutes

23. Alternative Investments
LeeAnne Calciano
JP Morgan Clearing Corp

24. Alternative Investments
UTILIZING A
CENTRALIZED PROCESS
REDUCE COST
IMPROVE PRODUCTIVITY
MINIMIZE RISK OF FINES AND PENALTYS

25. Moving Forward Together
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

26. Daily “Points of Pain” – Adding Complexity
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

27. 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

28. 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

29. Current Members of AIP System
Gaining Traction
Status
Firms
Funds
Fund Admin
Service Provider
Total
Live on AIP 3 6 5 14
AIP Application
Complete / In-Testing 4 9 13
Testing AIP /
Application Pending 2 24 1 36
Preparing to Test AIP 22 52 17 85

30. MINIMIZE RISK OF FINES AND PENALTYS
Next Steps
Open Discussion
UTILIZING A
CENTRALIZED PROCESS
REDUCE COST
IMPROVE PRODUCTIVITY
MINIMIZE RISK OF FINES AND PENALTYS
Leeanne Calciano Associate

31. Questions?

32. Cost Basis Working Group Discussions
Ellen Bocina - Fidelity
Kevin McCosker - Pershing
Louis Lepore – DTCC
Derek Yen – Edward Jones

33. Cost Basis Reporting . . . A Long Journey
2005
2006
2007
2008
2009
2010
Final Regs
Cmnt Period
Proposed Regs Issued
Comment Period
36 Q’S
Industry Dialog with GAO, Senate Finance, Joint Committee on Taxation and Treasury
Final Legislation to Implementation
Various versions of Draft Legislation

34. Transfers Challenges with Non-ACAT Transfers Matching
Manual statements
Corrections
Gifted / Inherited
Transfer Reversals
Conversions
Third Party Transfers
Accommodating Mutual Funds
File Changes
Average Cost
Original Cost
Test with Mutual Funds

35. 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 B reporting

36. 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

37. Tax Forms Substitute Forms 1099-B Supplemental Information
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

38. 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

39. 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

40. 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 40

41. 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 41

42. CBRS – Website Links CBRS File Formats and User Guide
CBRS Frequently Asked Questions (FAQs)
Important Notices
CBRS Customer Support Hotline
(888) , Option 6, then 7, then 2
Fees
Benefit of transaction is that receiver in most cases is getting security to custody
Maintains current fee of $0.09 cents to receiver and adds a small fee to deliverer ($0.01)
Billing – DTCC part – DTC bill
NSCC PART - NSCC Bill
TA – credit card or ACH 42 42

43. CBRS STATS 197 firms signed up to use the service
29 Banks, 98 Brokers, 70 Transfer Agents
83 firms using the system in Production
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

44. 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

45. Questions?

46. Seminar will resume in 45 minutes
Lunch Break Reminder
Lunch break
Seminar will resume in 45 minutes

47. Mutual Fund Panel Discussion
Teri Maglio – Charles Schwab
Kelle Hennier – DST Systems
Jeff Naylor – Sungard
Scott Brady – Merrill Lynch

48. Mutual Fund Transfers Mutual Fund Transfer Challenges
Inconsistent Document Requirements
Original vs. Copy
Medallion Signature requirement varies
Inconsistent Delivery Requirements
Fax
Overnight
No Dedicated Contacts

49. 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

50. 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

51. 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

52. 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

53. PTF Transfers Current Users What can make it easier to pass basis?
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

54. Non-CNS Enhancements
Non-CNS Enhancements - Phase II
ACATS Fund/SERV

55. 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

56. Average Cost Considerations
Default Elections and Shareholder Impact
Affirmative Election and Revocation
Timing
Activities
Transfers
During Revocation Period
After Revocation Period

57. 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

58. BDAC Sharelot Task Force
Background and objectives
Reconciliation
Networking enhancements
Impact to CBRS
Timeline
Future enhancements

59. 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

60. Questions?