Umbrales de las puertas

Close-Outs on Reclamations

172. Q: We also need to cover the one exception to the 90 business day time limit. Earlier, in question 91, you indicated that there was one type of situation in which the 90 business day time limit after which a close-out notice couldn’t be issued didn’t apply. What is that?

A: The rule permits a close-out notice to be issued after the 90th business day

following the transaction settlement date only in certain cases where a reclamation of the delivery on the transaction has occurred. In these cases, the rule permits the reclaiming dealer to issue a close-out notice for a short period of time after the date of the reclamation, even though the transaction itself may be considerably more than 90 business days old.

173. Q: What’s a “reclamation?”

A: A reclamation is a return by the purchasing dealer of securities which had

previously been delivered to and accepted and paid for by him. Reclamations occur when the purchasing dealer finds out, after the delivery has been made, that something was wrong with the securities when they were delivered. The problems causing reclamations range from relatively minor ones, like a missing coupon or legal opinion, to serious problems like a delivery of bonds which are counterfeit or stolen. (The specifics of the reclamation provisions are set forth in section (g) of rule G-12.)

174. Q: What happens when a reclamation takes place?

A: When a dealer reclaims a delivery on a transaction, that has the effect of

reinstating that transaction as an open transaction on that dealer’s books, as if the delivery had never been made. The dealer making the reclamation (who had originally purchased the securities) would reinstate an open “fail to receive,” and the dealer who is taking back the reclaimed delivery (the original seller) would reopen a “fail to deliver.”

175. Q: How does this involve the 90 business day time limit?

A: The reclamation rules state certain limits on the time by which the purchasing

dealer must reclaim the delivery, if he is going to do so. Depending on how serious the problem with the delivery is, these limits can be either relatively brief or quite extended. For example, a delivery of a security with a mutilated coupon attached cannot be reclaimed after one business day following the delivery date. In contrast, a delivery of incorrect securities can be reclaimed at any time up to 18 months following the delivery date, and a delivery of counterfeit securities can be reclaimed at any time after the delivery date, even years later. So it’s quite possible that a reclamation could occur well after the 90th business day following the settlement date.

176. Q: What would be the problem if it did?

A: Remember that the reclamation reopens a fail on the reclaiming dealer’s

books, and the reclaiming dealer still expects, and is contractually obligated to accept, a delivery of securities on the transaction; this is true no matter when the reclamation happens, unless the parties to the trade agree otherwise. It’s possible,

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however, that the selling dealer (who’s the recipient of the reclamation) might delay in making delivery on the reclaimed transaction, and therefore, that the purchasing dealer might fail to receive the securities for some period of time. If the 90 business day time limit were to apply in this case of such a reclamation, the reclaiming dealer would not be able to use the close-out procedure to complete the transaction and, therefore, might have an open fail for a long period without any easy means of taking action to get the fail resolved.

177. Q: I see. So the rule permits the reclaiming dealer—the purchaser— to use the procedure, even though the trade is over 90 business days old, so that he has the same protections against the financial exposure from the uncompleted trade that he would on any other fail?

A: That’s right.

178. Q: Let’s say that I’m a dealer reclaiming a delivery after the 90th business day following the settlement date. How does the rule permit me to use the close-out procedure?

A: In the event of a reclamation the rule provides you with an additional 15

business days, counted from the date the reclamation is made, during which time you can initiate the close-out procedure. If you initiate the procedure during that time, the procedure can be completed according to its terms, even though the delivery deadline and the execution period would occur after the 15 business day period has past. If you don’t initiate the procedure during that time, you lose the right to do so, much as in the case of the 90 business day time limit, and must find some other way of ensuring that you receive the delivery on the transaction.

179. Q: Do I follow the normal close-out procedure, or are there differences in the procedure because the transaction has been reclaimed?

A: You follow the regular procedure pretty much as you would on any other failed

transaction. It would be helpful, though, if the close-out notice indicated the date of the reclamation, to help the selling dealer research his records.

180. Q: If I reclaim a delivery, and then initiate a close-out on the reopened transaction two days later, is that close-out considered to be a “first notice,” and therefore subject to a longer waiting period before the delivery deadline and execution dates?

A: That’s correct. The first notice issued after the reclamation has occurred is

considered to be a first notice for purposes of the timing provisions of the rule, even though other notices might have been issued on the transaction before the original delivery took place.

181. Q: So when a reclamation takes place, even if it’s after the 90th business day following the reclaimed transaction’s settlement date, the rule provides me (as the reclaiming dealer) additional time to issue a close-out notice. Is that true for any reclamation?

A: No, the additional time is provided only in the case of certain types of

reclamations. The Board didn’t believe that it would be necessary to reopen the close-out period in the event of a reclamation for a minor problem, like a

mutilated coupon or missing interest payment check, where the reclamation time limit is relatively short. Therefore, the additional 15 days is provided only if the reclamation was made for one of the following five reasons:

1. because of an irregularity in the delivery, such as a delivery of the wrong issue, an over delivery or under delivery, or other similar problem;

2. because of a misdescription of the securities involved in the transaction; 3. because the transfer agent for the securities refused to transfer them because the documentation provided (i.e., the bond power and supporting documents, if any) wasn’t sufficient to authorize the transfer;

4. because the securities were reported to be fraudulent, counterfeit, lost or stolen; or

5. because the securities delivered had been the subject of an “in part” call notice published on or before the delivery date (or an “in whole” call notice published on or before the trade date) and had not been sold as “called” securities.

If the reclamation was made for some other reason, the additional time would not be provided.

182. Q: So, for example, if I reclaimed back a delivery on the 92nd business day after the settlement date because a necessary interest payment check was missing, I would not be able to use the close-out procedure on the reopened fail?

A: That’s right, because the reason for your reclamation is not one of the five

listed above. Note, though, that this problem, like the other problems for which reclamation is allowed for a short period of time, can be easily corrected, so it would be very unlikely that there would be a lengthy delay in the completion of the trade.

183. Q: I know that sometimes the selling dealer wants to get the securities back, and therefore the reclamation is made at his request, not because the purchasing dealer has a problem with the delivery. For instance, if the selling dealer finds out that he had delivered stolen securities, the selling dealer might request that the purchaser reclaim the securities back, so that the seller can return them to the appropriate party. If a reclamation occurs after the 90th business day at the selling dealer’s request, is the additional time provided?

A: Yes. If the reclamation is for one of the five reasons cited in the answer to

question 181 above, then the purchasing dealer has the 15 business day period to initiate a close-out procedure on the reclaimed transaction.

184. Q: Could we walk through an example of this?

A: Sure. Let’s say that dealers A (seller) and B (purchaser) had a trade in $100,000

Municipal County bonds for settlement August 1, 198x. A failed to deliver for several weeks and B issued a close-out notice on the transaction; the delivery was finally made and accepted on September 10, before execution of that close- out. Because of transfer agent problems, however, B reclaims the delivery to A on March 1 of the following year, well after the 90th business day following the August 1 settlement date. As is illustrated on the opposite page, above, B could initiate a close-out procedure on the reclaimed transaction at any time before the close of business on March 22.

185. Q: And if B does?

A: Let’s say that B waits a week, and doesn’t initiate the close-out procedure

until March 7. If he initiates the procedure on March 7, the earliest date he could specify for the delivery deadline is March 21, with the execution period running from March 22 to March 28. Remember that the rule provides that the first notice issued after the reclamation is treated as a “first notice” under the rule, even though, as in this case, other notices may have been issued on the transaction before the original delivery date.

The calendar opposite, below, illustrates this situation.

186. Q: Suppose A resolves the transfer problem and can make redelivery of the securities. Can he “freeze” the execution of the close-out?

A: Yes. The procedure for suspending the execution of a close-out described in

questions 73 to 79 can be used in these situations as well.

187. Q: What about retransmittals? Is it possible that close-outs on reclaimed transactions could involve retransmittals?

A: Yes. It is possible that delivered securities could be reclaimed back through a

chain of dealers, and, therefore, that a close-out notice issued on the reclaimed delivery could be retransmitted. In such a situation, the normal procedure for handling retransmittals should be followed, and the time extensions would apply as on any other retransmitted close-out.

188. Q: This seems fairly straightforward. If a reclamation for certain specified reasons occurs after the 90th business day following the settlement date of the trade being reclaimed, the reclaiming dealer has a 15 business day period following the reclamation date to issue a close-out notice on the reopened fail. If he does, the first such notice is considered an initial notice for purposes of the timing provisions of the rule. Otherwise the procedure would be handled pretty much as any other close-out would be.

A: Correct.

Sunday Monday Tuesday Wednesday Thursday Friday Saturday

1 2 3 4 5 6 8 9 26 25 18 14 19 13 11 20 12 15 22 16 23 10 17 24 7 RECLAMA- TION DATE MARCH 27 28 29 30 31 EXECUTION PERIOD 21 B ISSUES TO A DELIVERY DEADLINE

Sunday Monday Tuesday Wednesday Thursday Friday Saturday

1 2 3 4 5 6 8 9 26 25 18 14 19 13 11 20 12 15 22 16 23 10 17 24 7 RECLAMA- TION DATE MARCH 27 28 21 29 30 31 LAST DAY TO ISSUE 14 16

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