[Federal Register Volume 59, Number 111 (Friday, June 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14128]
[[Page Unknown]]
[Federal Register: June 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34153; File No. SR-NYSE-94-08]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating to the Same-Day
Comparison of Initial Trade Data in Listed Stocks Through the NYSE's
On-Line Comparison System
June 3, 1994.
On March 10, 1994, the New York Stock Exchange, Inc. (``NYSE'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-NYSE-94-08) under section 19(b) of
the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the
proposed rule change was published in the Federal Register on May 18,
1994, to solicit comments from interested persons.\2\ No comments were
received by the Commission. This order approves the proposal.
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\1\15 U.S.C. 78s(b) (1988).
\2\Securities Exchange Act Release No. 34023 (May 6, 1994), 59
FR 25979.
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I. Description of the Proposal
The proposed rule change will allow the NYSE to implement its On-
Line Comparison System (``OCS''). With OCS, NYSE clearing members will
be able to submit trade data on listed stocks to NYSE on trade date for
initial comparison. Implementation of NYSE's same-day comparison will
be in a phased-in approach similar to that which was used to implement
next-day (``T+1'') comparison of NYSE transactions.\3\ The NYSE's
target date for full implementation of trade-date comparison is June
30, 1995. The NYSE filed this proposal with the Commission to provide
the NYSE community with almost eighteen months advance notice in order
to afford them time to plan and implement the operational changes that
may be necessary.\4\
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\3\In March 1989, the Commission approved the NYSE's Rule 130.
That rule, which was used to implement overnight comparison over the
eighteen months following its approval, established the principle
that ``regular way'' transactions in listed stocks, rights, and
warrants must be compared or closed out within one business day
after the trade date. Securities Exchange Act Release No. 26627
(March 14, 1989) 54 FR 11470 [File No. SR-NYSE-88-36] (order
approving proposed rule change).
\4\The NYSE has distributed to its members a circular, dated
January 29, 1994, describing implementation of trade date
comparison.
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Beginning on June 1, 1994, the NYSE will require its member
clearing firms to submit to it periodically during the trading day
trade data for transactions in listed stocks, rights, and warrants
effected on the NYSE for ``regular way,''\5\ ``next day,''\6\
``cash,''\7\ and ``seller's option'' settlement.\8\ Trade data for
transactions in listed stocks traded on an ``issued,'' ``when
issued,''\9\ and ``when distributed''\10\ basis also will have to be
submitted periodically during the trading day. The NYSE's existing
Overnight Comparison System will be the main processor of the data
submitted for initial comparison. Accordingly, the NYSE has changed
that system's name to the On-Line Comparison System and will continue
to use the same acronym of OCS. Compared trades will be submitted by
the NYSE to a ``qualified clearing agency''\11\ to complete the
clearance and settlement process.
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\5\The term ``regular way'' settlement means settlement on T+5.
NYSE Rule 64(3).
\6\``Next day'' settlement means settlement on T+1. NYSE Rule
64(2).
\7\``Cash'' settlement means settlement on trade date. NYSE Rule
64(1).
\8\``Seller's option'' settlement means settlement within the
time specified in the contract. NYSE 64(4).
\9\A ``when issued'' stock refers to a stock which trades after
the date of issue but before the certificates have been issued. NYSE
Rule 440B.16; D. Scott, Wall Street Words 385 (1988).
\10\A ``when distributed'' stock refers to a stock which trades
after the date of issue but before the certificates have been
issued. NYSE Rule 440B.16; D. Scott, Wall Street Words 385 (1988).
\11\For this purpose, the term ``qualified clearing agency''
means a clearing agency that is registered under the Act, that
maintains facilities through which NYSE trades may be compared or
settled, that has agreed to supply the NYSE with data in connection
with the NYSE's compliance duties under the Act, and that has agreed
to establish rules and procedures to facilitate comparison of
transactions as provided in NYSE Rule 130. NYSE Rules 130,
Supplementary Material .10, and 132, Supplementary Material .10.
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Implementation of trade-date comparison will require clearing firms
to meet three general requirements. First, they will have to suppress
certain comparison data submissions to qualified clearing agencies as
the NYSE locks-in additional trades. Second, they will have to submit
their comparison data to the NYSE for comparison rather than to a
qualified clearing agency. Third, they will have to submit virtually
all comparison data to the NYSE during the trading session rather than
after the close of trading.\12\
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\12\While the NYSE's ultimate goal is to lock-in all trades
electronically and to have all trades compared during the trading
session, as a practical matter, there will be trades at the close or
immediately before or after the close that are not submitted for
comparison during the trading session. This will be especially true
in the early stages of the proposal's implementation. Conversation
between Harry F. Day, Counsel-Regulation, NYSE; Stanley Jacoby,
Trade Comparison Specialist, Post Trade Services, NYSE; and Thomas
C. Etter, Jr., Attorney, Division of Market Regulation, Commission
(May 27, 1994).
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As mentioned above, the implementation of trade date comparison
will use a phased-in approach, which the NYSE found successful in
implementing T+1 overnight comparison. Beginning June 1, 1994, NYSE
clearing members will be required to submit trade data directly to OCS
within two hours of trade execution. In August or September of 1994,
clearing members will be required to submit trade data within one hour
of execution. In October of 1994, clearing members will be required to
make on-line, real time submissions of trade data. These time frames
are flexible and may be altered by the NYSE as it evaluates clearing
firms' abilities to comply. The NYSE intends to monitor closely the
implementation of each phase and will not implement a new phase until
it is satisfied that no significant operational problems exist.
II. Discussion
For the reasons discussed below, the Commission believes the
proposal is consistent with the Act. Section 6(b)(5) of the Act states
that exchange rules should be designed to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
and processing information with respect to securities transactions; to
remove impediments to a free and open market; and to protect investors
and the public interest.\13\
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\13\15 U.S.C. 78f(b)(5) (1988).
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The risks posed by uncompared trades and by the long span of time
between trade execution and trade comparison (i.e., as long as five
business days) came under intense scrutiny after the Market Break of
October 1987. The leading studies of the Market Break of 1987
identified uncompared trades as a major stress point in post-trade
processing which, together with the unprecedented trading volume and
the unprecedented price volatility during the Market Break, posed an
unacceptable threat to the marketplace.\14\ The Commission, in its
recommendations to Congress in February of 1988, proposed that markets
accelerate their efforts to compare all trades on trade date.\15\
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\14\See Securities Exchange Act Release No. 26627 (March 14,
1989), 54 FR 11470 [File No. SR-NYSE-88-36] (order approving
proposed rule change) and Division of Market Regulation, Market
Analysis of October 13 and 16, 1989, 117-129 (December 1990).
\15\Testimony on the Securities and Exchange Commission's
Recommendations Regarding the October 1987 Market Break delivered by
David S. Ruder, Chairman, Commission, before the Senate Committee on
Banking, Housing and Urban Affairs at 23-24 (February 3, 1988).
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Since 1988, the NYSE, among others, has sought to improve clearing
operations and to reduce exposure to losses associated with market
volatility occurring during the period between execution and
settlement. The NYSE reduced its comparison cycle in stocks first from
T+5 in 1990.\16\ T+1 comparison also was made applicable to NYSE listed
options in 1992\17\ and to NYSE listed bonds in 1993.\18\ Currently,
according to the NYSE, more than seventy-five percent of all trades
executed on the NYSE trading floor are captured and locked-in
electronically. The NYSE views the electronic capture of the remaining
twenty-five percent of its trades, which primarily occur in trading
crowds on its trading floor, as a major goal of OCS.
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\16\Securities Exchange Act Release No. 28285 (July 30, 1990),
55 FR 31030 [File No. SR-NYSE-90-21] (order approving proposed rule
change).
\17\For a discussion of T+1 comparison or close-out for options,
refer to Securities Exchange Act Release No. 30293 (January 27,
1992), 57 FR 4229 [File No. SR-NYSE-91-36].
\18\For a discussion of T+1 comparison of close-out for bonds,
refer to Securities Exchange Act Release No. 31826 (February 4,
1993), 58 FR 8075 [File No. SR-NYSE-92-32].
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The NYSE's main objectives as it moves toward complete
implementation of OCS include: (1) Increasing the percentage of
electronically locked-in trades; (2) maintaining a low rate of
uncompared trades rate during the various phases of the project; (3)
electronic capture and comparison of trades, especially trading crowd
transactions, that currently are not captured by any electronic order
entry system; and (4) elimination of any redundant comparison
processing. Significantly, as the NYSE moves through its various
implementation phases of OCS, its current Rule 130 will remain in
operation. That rule requires that each transaction effected on the
NYSE be compared or closed out by NYSE's close of business on T+1.
The required changes may affect numerous clearing and non-clearing
firms' operations, including such things as trading floor operations,
purchase and sales department procedures, clearing operations, and
internal account balancing and reconciliation procedures. Because of
these significant changes, the NYSE has established two committees, a
steering committee and a working group, to advise it on the best
methods by which trade-date comparison may be achieved. Additionally,
this program of trade-date comparison is being implemented in
conjunction with the National Securities Clearing Corporation and the
American Stock Exchange, Inc.
As stated above, the Commission believes that the proposed rule
change, by shortening the NYSE comparison cycle from T+1 to trade date,
will make NYSE's comparison process safer in terms of the risks
resulting from market price volatility and more efficient in terms of
the time and expense involved in post-trade processing. The Commission
believes that the proposal will offer additional protection to
investors, brokers, and other persons that safeguard investors' funds
and facilitate investors' transactions. In the Commission's view, this
proposal will provide fundamental and important improvements to the
marketplace.
III. Conclusion
For the reasons discussed above, the Commission finds that the
proposed rule change is consistent with the Act, particularly with
sections 6(b)(5) of the Act, and the rules and regulations thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the above-mentioned proposed rule change (File No. SR-NYSE-94-08)
be, and hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-14128 Filed 6-9-94; 8:45 am]
BILLING CODE 8010-01-M