[Federal Register Volume 59, Number 20 (Monday, January 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2014]
[[Page Unknown]]
[Federal Register: January 31, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33515; File No. SR-MSRB-93-11]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Approving Proposed Rule Change Relating to Automated
Confirmation/Acknowledgement of Delivery vs. Payment and Receipt vs.
Payment Customer Transactions
January 24, 1994.
On December 2, 1993, the Municipal Securities Rulemaking Board
(``MSRB'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-MSRB-93-11)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ The proposed rule change requires the use of an automated
confirmation/acknowledgement system for all delivery vs. payment and
receipt vs. payment (``DVP/RVP'') customer transactions that are
eligible for processing in such systems. The Commission published
notice of the proposed rule change in the Federal Register on December
22, 1993.\2\ No comments were received as a result of the Federal
Register notice.\3\ For the reasons discussed below, the Commission is
approving the proposed rule change, with an effective date of July 1,
1994.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 33323 (December 10,
1993), 58 FR 67882.
\3\In August 1991, the MSRB published the proposed rule change
for comment as well as other draft amendments to Rules G-12(f) and
G-15(d). Sixteen comment letters were received. Twelve commenters
generally supported the August 1991 draft amendments, two were
opposed, and two commenters addressed a possible modification
without specifically supporting or opposing the draft amendments.
There were no comments specifically opposing this particular
proposed rule change.
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I. Description
The proposed rule change amends MSRB Rule G-15(d)(ii), relating to
automated confirmation/acknowledgement of customer transactions.\4\ The
proposed rule change eliminates the exemption in Rule G-15(d)(ii) which
previously did not require use of the automated confirmation/
acknowledgement system if one or both of the parties to the transaction
were not members of a registered clearing agency performing automated
confirmation/acknowledgement services. All dealers with institutional
customers will now be required to have access to a confirmation/
acknowledgement system and will have to ensure that all of their
customers receiving DVP/RVP privileges have access to an automated
confirmation/acknowledgement system operated by a registered clearing
agency. The proposed rule change will become effective July 1, 1994.
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\4\The term ``confirmation/affirmation'' has been used in lieu
of ``confirmation/acknowledgement'' in previous MSRB documents and
rules. The work affirmation is being changed to ``acknowledgement''
in the proposed rule change at the request of The Depository Trust
Company (``TDC''). DTC's planned changes to its Institutional
Delivery system incorporate the term ``matching'' along with
``affirming'' to achieve ``acknowledgement'' of a transaction.
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II. Written Comments
As noted earlier, the MSRB published for comment the proposed rule
change as well as other draft amendments to MSRB Rules G-12(f) and G-
15(d) and received sixteen comment letters.\5\ There were no comments
specifically opposing this particular proposed rule change.
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\5\See letter from Philip Lanz, Managing Director, Bear, Stearns
Securities Corp., to Harold L. Johnson, Deputy General Counsel, MSRB
(December 16, 1991); letter from Jan Fenty, President, The Cashier's
Association of Wall Street, Ins., to Harold L. Johnson, Deputy
General Counsel, MSRB (December 3, 1991); letter from William J.
Winter, Vice President, Cashiers Department, A.G. Edwards and Sons,
Inc., to Harold J. Johnson, Deputy General Counsel, MSRB (December
13, 1991); letter from Kathleen Graffam, First Chicago Capital
Markets, Inc., to Harold L. Johnson, Deputy General Counsel, MSRB
(December 13, 1991); letter from Steve Harris, Executive Vice
President, Golden Harris Capital Group, Inc., to Harold L. Johnson,
Deputy General Counsel, MSRB (October 7, 1991); letter from John J.
Lynch, Jr., Executive Vice President, J.F. Hartfield and Co., Inc.,
to Harold L. Johnson, Deputy General Counsel, MSRB (December 3,
1991); letter from John F. Lee, President, New York Clearing House,
to Harold L. Johnson, Deputy General Counsel, MSRB (December 18,
1991); letter from Harold Durk, Duke McElroy & Company, to Harold L.
Johnson, Deputy General Counsel, MSRB (December 3, 1991); letter
from Lawrence Morillo, Senior Vice President, Pershing, to Harold L.
Johnson, Deputy General Counsel, MSRB (December 6, 1991); letter
from James H. Pyle, Managing Partner, Terry L. McCullough, Partner,
Richard E. Whalen, Partner, and Benita I. Simon, Partner, Elmer E.
Powell and Company, to Harold L. Johnson, Deputy General Counsel,
MSRB (November 27, 1991); letter from George Brakatselos, Vice
President, Public Securities Association, to Harold L. Johnson,
Deputy General Counsel, MSRB (November 19, 1991); letter from Thomas
Sargant, Vice President, The Regional Municipal Operations
Association, to Harold L. Johnson, Deputy General Counsel, MSRB
(December 12, 1991); letter from George J. Minnig, Chairman,
Regulatory and Clearance Committee, Securities Industry Association,
to Harold L. Johnson, Deputy General Counsel, MSRB (December 6,
1991); letter from Jerome Clair, Managing Director, and Robert
Mattei, Assistant Manager, Smith Barney, Harris Upham & Co., Inc.,
to Harold L. Johnson, Deputy General Counsel, MSRB (December 9,
1991); letter from Roger Springate, Jr., Springate and Company, to
Harold L. Johnson, Deputy General Counsel, MSRB (December 13, 1991);
and letter from Rick Farrell, Assistant Vice President, United
Missouri Bank, N.A., to Harold L. Johnson, Deputy General Counsel,
MSRB (November 5, 1991).
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The commenters who supported the draft amendments, including the
proposed rule change, stated that they generally believed that the
amendments would increase the efficiency of transaction settlement
through the more universal use of automated confirmation/
acknowledgement systems and book-entry deliveries. The primary reason
cited for this increased efficiency was the elimination of exemptions
which allow for the clearance and settlement process to occur outside
of automated systems. These commenters indicated that a primary benefit
of the draft amendments would be the elimination of the time consuming
exception processing necessary when a transaction is confirmed,
cleared, and settled outside of the automated systems.
One commenter stated specifically that there are a substantial
number of institutional customer transactions that currently are
settled by book-entry, but which are not confirmed/acknowledged in an
automated system.\6\ Of the several amendments which were part of the
August 1991 draft amendments, the MSRB made the proposed rule change
the last for implementation so that dealers would have time to make
DVP/RVP settlement arrangements with customers that have not previously
made arrangements to use automated confirmation/acknowledgement
systems. As stated above, there were no opposing comments relating
specifically to the proposed rule change.
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\6\See supra, note 5, letter from First Chicago Capital Markets,
Inc.
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In addition, the MSRB's proposed implementation timetable for the
draft amendments was published for comment in April 1992. Two comment
letters were received.\7\ The commenters generally supported the
implementation plan as it related to the proposed rule change.
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\7\See letter from Margaret Sullivan, Assistant Vice President,
The First National Bank of Chicago, to Harold L. Johnson, Deputy
General Counsel, MSRB (May 26, 1992) and letter from Mario P.
DeAngelo, Vice President, Alex. Brown & Sons, Inc., to Harold L.
Johnson, Deputy General Counsel, MSRB (April 29, 1992).
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III. Discussion
The Commission believes that the MSRB's proposed rule change is
consistent with Sections 15B and 17A of the Act.\8\ Section 15B, among
other things, requires that the MSRB's rules be designed to foster
cooperation and coordination with persons engaged in clearing,
settling, and processing information with respect to, and facilitating
transactions in, municipal securities, to remove impediments to and
perfect the mechanism of a free and open market in municipal
securities, and, in general, to protect investors and the public
interest.\9\ Section 17A mandates the creation of a national system for
automated clearance and settlement of securities transactions. While
municipal securities are defined generally as exempted securities under
the Act,\10\ municipal securities are specifically included for
purposes of Section 17A of the Act.\11\
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\8\15 U.S.C. 78o-4 and 78q-1 (1988).
\9\15 U.S.C. 78o-4(b)(2)(C) (1988).
\10\15 U.S.C. 78c(a)(12)(A)(ii) (1988).
\11\15 U.S.C. 78c(a)(12)(B)(ii) (1988).
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The clearance of institutional customer transactions in municipal
securities is accomplished in large part through the use of automated
confirmation/acknowledgement systems operated by clearing corporations
registered with the Commission. The automated confirmation/
acknowledgement process allows a dealer to send a confirmation to an
institutional customer electronically. The customer (or the customer's
clearing agent) then can electronically acknowledge the transaction
after it receives the confirmation. This process provides substantial
efficiencies and cost savings to the municipal securities market by
ensuring timely settlement of the transaction, and eliminates much of
the time consuming and expensive manual processing associated with
paper confirmations by providing an electronic record of the
transaction.
Currently, MSRB Rule G-15(d)(ii) requires that DVP/RVP customer
transactions eligible for automated confirmation/acknowledgement
systems be confirmed/acknowledged through such a system if each party
to the transaction is a member of a registered clearing agency offering
confirmation/acknowledgement services or uses a clearing agent for the
transaction that is a member of such a clearing agency. The current
rule does not require use of the automated confirmation/acknowledgement
system if one or both of the parties are not members of the registered
clearing agency performing automated confirmation/acknowledgement
services. The current exemption in the rule was provided to allow
dealers to make DVP/RVP settlements with customers that have not made
arrangements to use the automated confirmation/acknowledgement systems.
The exemption was intended to exist only during the transition period
to full use of automated clearance and settlement systems in the
municipal securities market.
The proposed rule change, which will now require the use of an
automated confirmation/acknowledgement system for all DVP/RVP customer
transactions that are eligible for processing in such systems, is the
third and final phase of the MSRB's overall plan to complete the
transition of the municipal securities market to automated techniques
of clearance and settlement.\12\ Due to various difficulties that have
been reported by dealers in using automated confirmation/
acknowledgement systems and in obtaining the full co-operation from
institutional customers and their clearing agents in acknowledging
transactions, the proposed rule change was selected by the MSRB to be
the final phase of the implementation plan.
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\12\For further details concerning the MSRB's overall plan, see
Securities Exchange Act Release Nos. 32640 (July 22, 1993), 58 FR
39260 and 33275 (December 2, 1993), 58 FR 64992.
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The Commission believes that the proposed rule change furthers the
goals of Section 17A of the Act by reducing reliance on inefficient
manual procedures for clearing trades in municipal securities. In
addition, the Commission believes the proposed rule change is
consistent with Section 15B of the Act because the proposed rule change
is designed to foster cooperation and coordination with persons engaged
in clearing, settling, and processing information with respect to, and
facilitating transactions in, municipal securities, to remove
impediments to and perfect the mechanism of a free and open market in
municipal securities, and, in general, to protect investors and the
public interest.
Significantly, the Commission also notes that the proposed rule
change is consistent with the recommendations of the Backmann Task
Force\13\ and the Group of Thirty concerning automated clearance and
settlement.\14\ Furthermore, the proposal is consistent with Securities
and Exchange Commission Chairman Levitt's request to the MSRB in
October 1993 that the MSRB develop a plan to compress the current fifth
day after trade date (``T+5'') regular-way settlement cycle in the
municipal securities market to a third day after trade date (``T+3'')
settlement by June 1, 1995.\15\ The Commission believes that the
proposed rule change will facilitate T+3 settlement by increasing the
efficiency of the clearance process through the use of automated
confirmation/acknowledgement systems which are capable of providing
transaction and settlement information much faster than mailed
confirmations.
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\13\The Bachmann Task Force was a panel of financial industry
leaders formed to study improvements necessary to the clearance and
settlement system. For further details concerning the
recommendations of the Bachmann Task Force, see Report of the
Bachmann Task Force on Clearance and Settlement Reform in U.S.
Securities Markets (May 1992).
\14\The Group of Thirty is an independent, non-partisan, non-
profit organization established in 1978 whose function is to study
international economic and financial issues. The Group of Thirty's
recommendations are discussed in Group of Thirty, Clearance and
Settlement Systems in the World's Securities Markets (March 1989).
\15\See letter from Arthur Levitt, Chairman, Commission, to
David Clapp, Chairman, MSRB (October 7, 1993).
June 1, 1995 is the implementation date for Rule 15c6-1 under
the Act that establishes three business days instead of five
business days as the standard settlement timeframe for broker-dealer
transactions. See Securities Act Release No. 7022; Securities
Exchange Act Release No. 33023; and Investment Company Act Release
No. 19768 (October 6, 1993), 58 FR 52891.
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The MSRB requested that implementation of the proposed rule change
be delayed until July 1, 1994 to allow dealers sufficient time to make
any changes that may be necessary in their clearance practices. The
Commission agrees with the MSRB that July 1, 1994 is both a sufficient
and an appropriate amount of time in which to allow dealers to make any
changes that may be necessary in their clearance practices and
therefore is delaying the effective date of the rule change until July
1, 1994.
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the Act, and in particular with
Sections 15B and 17A of the Act, and with the rules and regulations
thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (File No. SR-MSRB-93-11) be, and
hereby is, approved. Consistent with the MSRB's request, the proposal
is approved with an effective date of July 1, 1994.
\16\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2014 Filed 1-28-94; 8:45 am]
BILLING CODE 8010-01-M