[Federal Register Volume 59, Number 122 (Monday, June 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15491]


[[Page Unknown]]

[Federal Register: June 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34238; File No. SR-NASD-94-28]

 

Self-Regulatory Organizations; Filing of Proposed Rule Change by 
the National Association of Securities Dealers, Inc. Relating to 
Clearance and Settlement Requirements for NASD Member Firms That Are 
Market Makers in the Nasdaq Stock Market or the OTC Bulletin 
Board Service

June 20, 1994.
    Pursusant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on May 
23, 1994, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the NASD. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to Section 19(b)(1) of the Act, the NASD hereby files a 
proposed rule change that deals with clearance and settlement 
requirements applicable to NASD member firms functioning as market 
makers in The Nasdaq Stock Market (``Nasdaq'') or the OTC Bulletin 
Board Service (``OTCBB''). Below is the text of the proposed 
rule change. (Additions are italicized and deletions are bracketed.)

Scheduled D--Part V: Requirements Applicable to NASDAQ Market 
Makers

Sec. 7  Clearance and Settlement
    (a) A market maker shall clear and settle transaction in Nasdaq 
securities [other than securities in SOES] through the facilities of a 
registered clearing agency [where clearing facilities are located 
within 25 miles of the market maker.] that uses a continuous net 
settlement system. This requirement may be satisfied by direct 
participation, use of direct clearing services, or by entry into a 
correspondent clearing arrangement with another member that clears 
trades through such an agency.
    (b) [Notwithstanding its proximity to a particular clearing 
facility, a market maker may also clear and settle its transactions in 
a security that is not a SOES security through any registered clearing 
facility using a continuous net settlement system; enter into a 
correspondent clearing arrangement with a member that clears through a 
continuous net settlement clearing facility; settle transactions ``ex-
clearing'' provided both parties to the transaction agree; or use 
direct clearing services.] Notwithstanding paragraph (a), transactions 
in Nasdaq securities may be settled ``ex-clearing'' provided that both 
parties to the transaction agree.
    (c) No change.

OTC Bulletin Board Service Rules

Section 4.  Requirements Applicable to Market Makers
    (d) Clearance and Settlement
    (1) A market maker shall clear and settle transactions in OTCBB-
quoted securities through the facilities of a registered clearing 
agency that uses a continuous net settlement system. This requirement 
applies only to transactions in OTCBB securities that are clearing 
eligible.
    (2) The foregoing requirement may be satisfied by direct 
participation, use of direct clearing services, or by entry into a 
correspondent clearing arrangement with another member that clears 
trades through such an agency.
    (3) Notwithstanding paragraph (d)(1), transactions in OTCBB-quoted 
securities may be settled ``ex-clearing'' provided that both parties to 
the transaction agree.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NASD has prepared summaries, set forth in Sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this rule change is to mandate market maker 
utilization of the facilities of a registered clearing agency to ensure 
efficient clearance and settlement of securities transactions. For 
securities listed on Nasdaq, this will be accomplished by eliminating 
the ``25 mile exception''' from Section 7(a) in Part V of Schedule D to 
the NASD By-Laws. (Part V articulates the basic requirements applicable 
to Nasdaq market makers.) Even today, this exception is quite limited 
in that it is only available to market makers who are located more than 
25 miles from a clearing facility, limit their Nasdaq market making 
activity to Nasdaq SmallCapSM securities, and do not participate 
in the Small Order Execution System (``SOES'').\1\ With respect to 
equity securities quoted in the OTCBB, a new requirement is being 
proposed to mandate market maker participation in a registered clearing 
agency for clearance and settlement of transactions in OTCBB securities 
that are clearing eligible.\2\ As a result, parallel requirements will 
exist for the two largest equity market segments in which NASD members 
function as market makers and utilize the Automated Confirmation 
Transaction Service (``ACT'') for trade reporting and comparison 
purposes.\3\
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    \1\Although registered market makers in Nasdaq National Market 
securities must be SOES participants, SOES participation is 
voluntary with respect to market makers in SmallCap issues.
    \2\As of April 30, 1994, approximately 87% of all securities 
quoted in the OTCBB were clearing eligible. Clearing eligible status 
is noted in the OTCBB symbol directory and in the electronic 
directory accessible via Nasdaq Workstation PCs.
    \3\The NASD estimates that fewer than 10 member firms that 
function as market makers would be required to establish clearing 
arrangements as a result of this rule proposal.
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    ACT is the primary facility for collecting, processing, and 
disseminating transaction reports on Nasdaq securities as well as 
equity issues quoted in the OTCBB. ACT also facilitates the clearance 
and settlement of inter-member transactions by locking-in trade details 
for transmission to the National Securities Clearing Corporation 
(``NSCC''). The generation of locked-in trades by ACT enhances the 
overall efficiency of the clearance and settlement process and 
virtually eliminates a members risk exposure respecting uncompared 
trades. These benefits cannot be realized, however, unless the broker-
dealers on both sides of the trade have some form of participation in a 
registered clearing agency.
    This rule proposal is believed to be consistent with the provisions 
of Sections 11A(a)(1), 15A(b)(6), and 17A(a)(1) of the Act. Section 
11A(a)(1) contains the Congressional findings that have guided 
development of the National Market System. These findings include a 
directive to apply state-of-the-art data processing and communications 
techniques to achieve more efficient and effective market operations 
and to ensure the economical execution of securities orders. Similarly, 
Section 15A(b)(6) requires, among other things, that the rules of a 
national securities association be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, and processing 
information with respect to and facilitating transactions in 
securities. Finally, Section 17A(a)(1) reflects the statutory goals of 
a national system for clearance and settlement of securities 
transactions. These goals include the application of new data 
processing and communications techniques to create the opportunity for 
more efficient, effective, and safe procedures for clearance and 
settlement. The NASD believes that this proposed rule change is fully 
consistent with these statutory requirements. In sum, the primary 
objectives of this rule change are to minimize risk exposure from 
uncompared trades and foster optimal usage of ACT to lock-in the 
details of individual trades prior to their submission to a registered 
clearing agency.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD believes that the rule change will not result in any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The NASD did not solicit or receive written comments on this rule 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to file number SR-NASD-94-28 and 
should be submitted by July 18, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15491 Filed 6-24-94; 8:45 am]
BILLING CODE 8010-01-M