[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