[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18027]


[[Page Unknown]]

[Federal Register: July 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34394; File No. SR-NSCC-94-07]

 

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval on an Accelerated Basis of a 
Proposed Rule Change Modifying NSCC's Trade Comparison Service

July 15, 1994.
    On June 3, 1994, the National Securities Clearance Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-94-07) 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 June 24, 1994, to solicit comment from interested 
persons.\2\ No comments have been received by the Commission. This 
order approves the proposal.
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    \1\15 U.S.C. Sec. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 34221 (June 16, 1994), 59 
FR 32724.
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I. Description of the Proposal

    The proposed rule change will modify NSCC's Rules and Procedures 
relating to trade comparison. The proposed rule change is designed to 
support the New York Stock Exchange, Inc. (``NYSE'') and the American 
Stock Exchange, Inc. (``Amex'' in their efforts to implement trade-date 
comparison systems.\3\ To achieve trade-date comparison, the NYSE and 
Amex require their member organizations to submit trade comparison data 
to the NYSE and Amex rather than to NSCC for comparison processing.
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    \3\For information on NYSE's and Amex's trade date comparison 
systems, refer to Securities Exchange Act Release Nos. 34153 (June 
3, 1994), 59 FR 30071 [File No. SR-NYSE-94-08] (order approving 
proposed rule change) and 34298 (July 1, 1994), 59 FR 35397 [File 
No. SR-Amex-94-13] (order approving proposed rule change).
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    Prior to the NYSE and Amex implementing their trade-date comparison 
systems, NSCC received locked-in trade data from the NYSE and Amex and 
initial two-sided, uncompared trade data from its member organizations. 
The uncompared trade data from its members were matched by NSCC and 
were reported back to the members on contract lists. The locked-in 
trade data, which is compared at the point of execution by the 
exchanges, bypasses NSCC's comparison process but for record purposes 
is reported back to the members organizations on contract lists.
    Under the new systems, the NYSE and Amex will process the initial 
two-sided, uncompared trade data in their trade-date comparison system. 
When these trades do no compare, the NYSE and Amex will report such 
unmatched trades (known as ``questioned trades'' or ``QTs'' at the NYSE 
and ``don't knows'' or ``DKs'' at the Amex) to NSCC along with the 
matched, two-sided trades and the locked-in trades. The compared trades 
(including the locked-in trades and the matched, two-sided trades) will 
bypass NSCC comparison processing, but the unmatched trades will be 
included in NSCC's comparison process and in NSCC's trade correction 
process if necessary.
    NSCC states that the proposed rule change will permit the NYSE and 
Amex to submit on behalf of NSCC members uncompared trade data relating 
to trades for regular way, when-issued, cash, next day, and sellers-
option settlement in equity securities executed on such exchanges 
directly to NSCC for inclusion in NSCC's comparison process. Even 
though the NYSE and Amex require their members to submit their trade 
data to the exchanges, the revisions to NSCC's Rules and Procedures 
still permit NSCC members to submit such data directly to NSCC in order 
to have the data included in that day's processing. This authority is 
necessary because a member may miss the exchanges' submission time 
frames. NSCC notes that the NYSE and Amex have concurred in this 
procedure.
    As member organizations become accustomed to the NYSE's and Amex's 
trade-date comparison systems, NSCC expects that the NYSE and Amex will 
no longer permit members to submit data directly to NSCC. At the time, 
NSCC, upon the request of the NYSE and Amex, will file a rule change 
under Section 19(b)(2) of the Act eliminating the ability of NSCC 
members to submit such data directly to NSCC other than on an exception 
basis.

II. Discussion

    For the reasons discussed below, the Commission believes the 
proposal is consistent with the Act and particularly with Section 17A 
of the Act. Section 17A(b)(5) of the Act states that the rules of a 
clearing agency should be designed to foster cooperation and 
coordination with person engaged in the clearance and settling of 
securities transactions, to remove impediments to and perfect the 
mechanism of a national system for the clearance and settlement of 
securities transactions, and, in general, to protect investors and the 
public interest.\4\
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    \4\15 U.S.C. Sec. 78q-1(b)(3)(F) (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 for equity trades) 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.\5\ The Commission, in its 
recommendations to Congress in February of 1988, proposed that markets 
accelerate their efforts to compare all trades on trade date.\6\
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    \5\E.g., Division of Market Regulation, The October 1987 Market 
Break, at 10-2 to 10-12 (February 1989); see also Division of Market 
Regulation, Market Analysis of October 13 and 16, 1989, 117-129 
(December 1990).
    \6\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, NSCC, 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 NSCC, together with the NYSE and Amex, reduced the 
comparison cycle in stocks first from T+5 to T+3 in 1989 and then to 
T+1 in 1990.\7\
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    \7\Securities Exchange Act Release Nos. 26785 (May 4, 1989), 54 
FR 20221 [File No. SR-NSCC-89-02] (order approving proposed rule 
change) and 27074 (July 28, 1989), 54 FR 32405 [File No. SR-NSCC-89-
04] (order approving proposed rule change).
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    As stated above, the Commission believes that the proposed rule 
change, by shortening the NYSE and Amex comparison cycles for equity 
trades from T+1 to trade date, will make the comparison process safer 
in terms of the risks resulting from market price volatility. The 
Commission believes that the proposal will offer additional protection 
to NSCC and investors, brokers, and other persons that safeguard 
investors' funds and facilitate investors' transactions. The proposal 
also should help in the implementation under the Act of Rule 15c-6 
which requires settlement of securities transactions on T+3 effective 
on June 1, 1995.\8\ In the Commission's view, this proposal should help 
provide fundamental and important improvements to the marketplace.
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    \8\17 CFR 240.15c-6. Fed. Sec. L. Rep. 23,351 at 20,582 (Oct. 
1993); Securities Exchange Act Release No. 33023 (October 6, 1993), 
58 FR 52891.
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    NSCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of the filing in the Federal Register. 
Accelerated approval will permit NSCC to coordinate with the NYSE and 
Amex in the early phases of those exchanges' efforts to move toward 
trade-date comparison. Therefore, the Commission believes there is good 
cause for approving the proposed rule change prior to the thirtieth day 
after the date of publication of notice of the filing.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act\9\ 
that the above-mentioned proposed rule change (File No. SR-NSCC-94-07) 
be, and hereby is, approved.

    \9\15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18027 Filed 7-22-94; 8:45 am]
BILLING CODE 8010-01-M