[Federal Register Volume 59, Number 149 (Thursday, August 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18959]


[[Page Unknown]]

[Federal Register: August 4, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34457; File No. SR-NASD-94-28]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change 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

July 28, 1994.
    On May 23, 1994, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder.\2\ The rule change amends 
Section 7 of Part V to Schedule D of the NASD By-Laws\3\ and Section 4 
of the OTC Bulletin Board Service (``OTCBB'') Rules\4\ 
relating to clearance and settlement requirements of NASD member firms 
functioning as market makers in the Nasdaq Stock Market (``Nasdaq'') or 
the OTCBB.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4 (1993).
    \3\NASD Manual, Schedules to the By-Laws, Schedule D, Part V, 
Sec. 7, (CCH) 1823.
    \4\NASD Manual, OTCBB Rules, Sec. 4, (CCH) 2574.
---------------------------------------------------------------------------

    Under the rule as amended, market makers will either be required to 
utilize the facilities of a registered clearing agency that uses a 
continuous net settlement system or, if both parties to a transaction 
agree, to settle the transaction ``ex-clearing.'' The rule change 
applies to market makers in Nasdaq securities as well as to OTCBB 
market makers whose transactions in OTCBB securities are clearing 
eligible.
    Notice of the proposed rule change, together with its terms of 
substance was provided by issuance of a Commission release\5\ and by 
publication in the Federal Register.\6\ No comments were received in 
response to the Notice. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \5\Securities Exchange Act Rel. No. 34238 (June 20, 1994).
    \6\59 FR 33031 (June 27, 1994).
---------------------------------------------------------------------------

    As the NASD indicated in its rule filing, the Automated 
Confirmation Transaction Service (``ACT'') is the primary facility for 
collecting, processing, and disseminating transaction reports on Nasdaq 
securities as well as equity issues quoted in the OTCBB.\7\ 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'').\8\ The generation of locked-in trades 
by ACT enhances the overall efficiency of the clearance and settlement 
process and virtually eliminates a member's 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.\9\
---------------------------------------------------------------------------

    \7\See NASD Manual, Schedules to the By-Laws, Schedule D, Parts 
X, XI and XII, (CCH) 1865-1867G.
    \8\See NASD Manual, ACT Rules, Secs, (d)-(e), (CCH) 2554-2555.
    \9\See NASD Manual, ACT Rules, Sec. (b)(2)(B), (CCH) 2552 
(market makers may not participate in ACT unless the market maker 
satisfies, among other things, the requirement of ``membership in, 
or maintenance of, an effective clearing arrangement with a member 
of a clearing agency registered pursuant to the Securities Exchange 
Act of 1934 * * *'').
---------------------------------------------------------------------------

    The rule change will increase participation in registered clearing 
agencies due to the elimination of the ``25 mile exception'' from 
Section 7(a) in Part V of Schedule D to the NASD By-Laws.\10\ Prior to 
the amendment, the ``25 mile exception'' allowed market makers in 
SmallCapSM securities, that did not participate in the Small Order 
Execution System'' SOES'') and were located more than 25 miles from a 
clearing facility, to bypass the requirement of clearing and settling 
transactions through a registered clearing agency. The rule, as 
amended, eliminates this exception and requires market makers in Nasdaq 
securities to utilize the facilities of a registered clearing agency 
that uses a continuous net settlement system, unless both parties to a 
transaction agree to settle the transaction ``exclearing.''
---------------------------------------------------------------------------

    \10\NASD Manual, Schedules to the By-Laws, Schedule D, Part V, 
Sec. 7(a), (CCH) 1823.
---------------------------------------------------------------------------

    Participation in registered clearing agencies will also increase 
due to the imposition of clearance and settlement requirements on 
market makers in OTCBB securities.\11\ Market makers in these 
securities will be required to clear and settle transactions that are 
clearing eligible\12\ through the facilities of a registered clearing 
agency that uses a continuous net settlement system, unless both 
parties to a transaction agree to settle the transaction 
``exclearing.''
---------------------------------------------------------------------------

    \11\NASD Manual, OTCBB Rules, Sec. 4, (CCH) 2574.
    \12\Clearing eligible status is noted in the OTCBB symbol 
director and in the electronic directory accessible via Nasdaq 
Workstation PCs.
---------------------------------------------------------------------------

    The Commission has determined to approve the NASD's proposal. As a 
result of the amendment, parallel requirements will exist for the two 
largest equity market segments in which NASD members function as market 
makers and utilize ACT for trade reporting and comparison purposes.\13\ 
The Commission finds that the rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the NASD, including the requirements 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-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 
facilitation 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.
---------------------------------------------------------------------------

    \13\The NASD estimates that fewer than 10 member firms that 
function as market makers will be required to establish clearing 
arrangements as a result of this amendment.
---------------------------------------------------------------------------

    The Commission finds that the new clearance and settlement 
requirements are consistent with the foregoing statutory provisions. In 
sum, the rule change will further the objectives of minimizing risk 
exposure from uncompared trades and fostering optimal usage of ACT to 
lock-in the details of individual trades prior to their submission to a 
registered clearing agency.\14\
---------------------------------------------------------------------------

    \14\See NASD Manual, ACT Rules, Sec. (b)(1), (CCH) 2552 
(participation in ACT is mandatory for all brokers that are members 
of a registered clearing agency and all brokers that have clearing 
arrangements with such members).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change, SR-NASD-94-28 be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18959 Filed 8-3-94; 8:45 am]
BILLING CODE 8010-01-M