[Federal Register Volume 60, Number 18 (Friday, January 27, 1995)]
[Notices]
[Pages 5446-5449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2073]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35257; International Series Release No. 776; File No.
SR-NASD-94-55]
Self-Regulatory Organizations; National Association of Securities
Dealers; Notice of Proposed Rule Change Relating to the Access of West
Canada Clearing Corporation and Its Members to the Automated
Confirmation Transaction Service
January 20, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 12, 1994, the
National Association of Securities Dealers, Inc. (``NASD'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared primarily by the NASD. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
\1\15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD proposes to amend its rule regarding the Automated
Confirmation Transaction services (``ACT'') to allow West Canada
Clearing Corporation (``West Canada''), a nonmember of the NASD, and
members of West Canada who are not members of the NASD to access this
service. The NASD also proposes to amend the ACT rule to reflect that
NASD members functioning as market makers in over-the-counter equity
securities are also classified as ACT participants.
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 NASD created and implemented the ACT system in response to
problems experienced in the wake of the October 1987 market break and
at the urging of the Commission to consider accelerating efforts to
generate same day compared trades.\2\ ACT has three primary features:
(1) trade match process (i.e., the comparison of trade information and
the submission of locked-in trades for regular way settlement to
clearing agencies on a trade date or next day [``T+1''] basis);\3\ (2)
trade reporting for transactions in securities that are subject to real
time trade reporting requirements; and (3) risk management features
that provide firms with a centralized, automated environment for
assessing market exposure during and after the trading day and that
permit clearing firms to monitor and respond to the ongoing trading
activities of their correspondents.\4\
\2\For a description of ACT, refer to Securities Exchange Act
Release Nos. 27229 (September 8, 1989), 54 FR 38484 [File No. SR-
NASD-89-25] (order partially approving proposed rule change to
permit ACT to be used by selfclearing firms) and 28583 (October 26,
1990), 55 FR 46120 [File No. SR-NASD-89-25] (order approving
remainder of File SR-NASD-89-25 to permit ACT to be used by
introducing and correspondent broker-dealers).
\3\ACT uses three methods to lock-in trades: (1) trade-by-trade
match, whereby both sides of the trade are reported to ACT and
matched; (2) trade acceptance, whereby one side of the trade is
reported to ACT and accepted by the contra-side; and 93) aggregate
volume match, whereby ACT performs a batch-type comparison at the
end of each day that aggregates previously unmatched trade reports
to effect a match. (For example, two identical trade reports for 300
and 400 shares of the same security may be matched with a 700 share
trade report.)
\4\Among others, ACT has the following risk management
capabilities. First, ACT can compute the dollar value of each trade
report entered thereby allowing member firms to assess their market
exposure during the trading day. Second, clearing firms can
establish daily gross dollar thresholds for each correspondent's
trading activity. If a correspondent reaches or exceeds the
threshold, the clearing firm is so notified. Third, ACT alerts
clearing firms when a correspondent reaches 70% or 100% of its daily
gross dollar threshold. Fourth, ACT has a single trade limit that
provides clearing firms with a 15 minute review period prior to
becoming obligated to clear a trade of $1,000,000 or more executed
by one of its correspondents. Fifth, ACT has a super cap limit set
at two times the gross dollar thresholds for purchases and sales but
in no event less than $1 million that provides clearing firms with a
15 minute review period prior to becoming obligated to clear a trade
of $200,000 or more executed by one of its correspondents once the
limit is surpassed.
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Since its implementation, ACT has functioned as an effective and
efficient [[Page 5447]] vehicle to compress the trade comparison cycle
thereby facilitating the prompt and accurate clearance and settlement
of securities transactions and enabling NASD members to know their
positions and market exposure before trading commences the next day. As
a facility of The Nasdaq Stock Market operated by The Nasdaq Stock
Market, Inc. (``NSMI'') subsidiary of the NASD, access to the ACT
system is limited to NASD members. Recently, the NASD received a
request from West Canada for access to ACT for trade comparison
purposes only.\5\ Presently, when an NASD member effects a transaction
with a West Canada member, the transaction typically is compared,
cleared, and settled in the following manner. The NASD member enters
the trade into ACT with the West Canada member designated as the
contra-party. Because the West Canada member presently is not an ACT
participant, ACT will respond to the NASD member ``contra-side not
ready.'' ACT then will report the trade for trade reporting purposes
and will transmit the trade to the National Securities Clearing
Corporation (``NSCC'') as a one-sided trade for trade comparison. The
West Canada member submits the trade information to West Canada that in
turn sends the trade to the Midwest Clearing Corporation (``MCC''). MCC
then transmits the trade report to NSCC by 2:00 a.m. on T+1 for
comparison. NSCC then compares the trade reports, and assuming there is
a match, NSCC submits the West Canada member's side of the transaction
to MCC for clearance and settlement; the NASD member's side of the
transaction is retained by NSCC for clearance and settlement. If there
is a discrepancy concerning the terms of the transaction, the trade
reconciliation process involves the two clearing corporations and the
two parties to the transaction and can last until T+3. Although the
NASD believes that the facilities of NSCC and MCC have been used to
compare trades between NASD and West Canada members adequately, the
NASD believes the trade comparison procedure for these trades would be
streamlined and made more efficient through the use of ACT.
\5\The present filing solely addresses the access of West Canada
to ACT. Other proposals concerning nonmember access to ACT, if any,
will be raised in separate rule filings submitted pursuant to
Section 19 of the Act.
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The proposal to provide West Canada access to ACT has been
structured so that the primary parties to the arrangement are West
Canada and NSMI, the NASD subsidiary that owns and operates ACT. Rather
than negotiating separate contracts with each individual organization,
the NASD believes that it is more efficient for NSMI to negotiate with
the exchange, market, or clearing entity to which the non-NASD member
belongs, in this case West Canada. Accordingly, under the proposed rule
change, West Canada will operate as a service bureau to input
information into ACT on behalf of West Canada members. Individual West
Canada members will not be able to obtain access to ACT unless there is
first an overriding, umbrella-type agreement reached between NSMI and
West Canada. Thus, whenever NASD members transact with West Canada
members in ACT eligible securities, they will be able to use ACT just
as they do now for comparing regular-way trades with other NASD
members.
In order for West Canada to have access to ACT, proposed Section
(b)(5)(B) of the ACT Rules provides that West Canada must execute a
Non-member Clearing Organization ACT Participant Application Agreement.
This agreement will require West Canada to abide by the ACT rules and
regulations and will ensure that trades processed through ACT by West
Canada on behalf of West Canada members will be accepted for clearance
and settlement. The agreement also will address NSMI concerns over
nonpayment of service charges, the financial exposure and liabilities
of the parties, and methods of redress should West Canada or a West
Canada member fail to comply with the relevant NASD rules and
regulations. In addition, proposed section (b)(5)(B)(6) of the ACT
Rules provides that West Canada will not be able to input information
into ACT on behalf of a West Canada member unless such member also
enters into a Non-Member ACT Access Participant Application Agreement
with NSMI. In the case of a clearing broker, this agreement provides
that the member will accept and will settle each trade that ACT
identifies as having been effected by such member or any of its
correspondents on the regularly scheduled settlement date. In the case
of an order entry firm, the firm must agree to accept and settle each
trade that it has effected or, if settlement is to be made through a
clearing member, guarantee the acceptance and settlement of each ACT-
identified trade by the clearing member on the regularly scheduled
settlement date.
The proposed rule change also provides that a nonmember clearing
organization will not be given access to ACT unless it: (1) Is a
clearing agency registered under the Act; (2) maintains membership in a
registered clearing agency; or (3) maintains an effective clearing
arrangement with a registered clearing agency. West Canada has an
effective clearing arrangement with MCC and thus satisfies this
requirement.\6\ This requirement will ensure that non-NASD members
given access to NASD facilities will otherwise be subject to Commission
regulation in general, and Commission regulation concerning the
comparison, clearance, and settlement of securities, in particular.
\6\In January 1983, MCC, Midwest Securities Trust Company
(``MSTC''), the Vancouver Stock Exchange, and the Vancouver Stock
Exchange Service Corporation (``VSESC''), (now known as West Canada
Clearing Corporation [``WCCC'']) (``VSESC/WCCC'') created the
American and Canadian Connection for Efficient Securities
Settlements (``ACCESS''). Through ACCESS, over-the-counter
securities transactions between the U.S. and Canadian broker-dealers
in both U.S. and Canadian securities are compared, cleared, and
settled. Trades between U.S. and Canadian broker-dealers involving
securities listed on U.S. securities exchanges, Canadian securities
exchanges, or the National Association of Securities Dealers
Automated Quotation (``NASDAQ'') System are eligible for clearance
and settlement through ACCESS. To establish ACCESS, VSESC/WCCC
became an MCC/MSTC participant, and opened separate sponsored MCC/
MSTC accounts for Canadian broker-dealers that were participants of
VSESC. As an MCC/MSTC member, VSESC/WCCC is liable as principal
(i.e., guarantees) all trades that it submits including all trades
in its sponsored accounts. Some safeguards on ACCESS activity
include, contributions by VSESC/WCCC to MCC/MSTC's participant fund
based on VSESC/WCCC's total activity, and a cash reserve of over
250,000 Canadian dollars maintained by VSESC/WCCC to be used to
satisfy the obligations of any VSESC/WCCC participant that may
become insolvent. In addition, VSE guarantees all VSESC/WCCC
liabilities to MCC/MSTC. Letter from Jonathan Kallman, Assistant
Director, Division of Market Regulation, Commission, to Michael
Wise, Associate Counsel, MCC/MSTC (September 12, 1985).
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The proposed rule change also provides that West Canada may permit
its members that operate as clearing brokers or order entry firms to
have direct access to ACT but only if the West Canada member has
executed a Non-Member ACT Participant Application Agreement with NSMI.
This agreement will help to ensure that West Canada members adhere to
relevant NASD and Commission rules and regulations and commit to accept
and settle or guarantee the acceptance and settlement of trades for
which ACT has identified those members as being responsible.
As a result, the inefficiencies inherent in the current practice of
submitting two-sided transaction reports to two separate clearing
corporations for each transaction for comparison will be eliminated.
The compressed comparison cycle in turn also should result in lower
exposure to NASD members and their customers from price movements while
[[Page 5448]] transactions are open or uncompared, faster and more
efficient trade reconciliation and confirmation, and increased
efficiency of back office operations. Finally, the NASD notes that
granting West Canada access to ACT will not affect or modify the
process by which trades between NASD and West Canada members are
cleared and settled. The proposal strictly provides a more efficient
and streamlined method to compare trades between West Canada and NASD
members in preparation for clearance and settlement.
The NASD also does not believe that granting West Canada and West
Canada members access to ACt will jeopardize the integrity of ACT or
any other market facility operated by NSMI. In this regard, before West
Canada or any of its members are granted access to ACT, these entities
must agree to be bound by the terms of the revised ACT Participant
Application Agreements, which establish the terms and conditions under
which West Canada and its members will receive access to ACT. The NASD
believes that the revised Agreements will provide an adequate and
sufficient surrogate for NASD membership which otherwise would provide
the jurisdictional nexus to ensure compliance with applicable NASD
rules and regulations. Initial and continuing access to ACT by
nonmembers will be specifically conditioned upon adherence to the terms
and conditions of these agreements. West Canada and West Canada members
also will be required to maintain the physical security of the
equipment used to input trades into ACT. Based on these factors, the
NASD believes that granting West Canada and West Canada members access
to ACT will not compromise the integrity or operation of ACT. Further,
the NASD notes that the Commission has allowed nonmember access to ACT
in the context of trade reporting for Nasdaq-listed securities traded
on an exchange pursuant to unlisted trading privileges (``UTP'').
Specifically, UTP participants may trade report through ACT to comply
with transaction reporting requirements.
Apart from addressing ACT access by West Canada and West Canada
members, this proposed rule change proposes to amend Section a) 2. of
the ACT Rules which defines the term ``Participant.'' As amended, this
definition will include NASD member firms that function as market
makers in over-the-counter (``OTC'') equity securities that are
eligible for clearing via the NSCC's facilities.\7\ The instant
modification will clarify that ACT participant status encompasses NASD
members that function as market makers in such securities via the OTC
Bulletin Board service or another interdealer quotation system.\8\ This
element of the rule proposal is a technical change that has no bearing
on the provision regarding ACT access to West Canada.
\7\Securities Exchange Act Release No. 30415 (February 26,
1992), 57 FR 7829 [File No. SR-NASD-92-5] (order approving OTC
Equity Securities as ACT eligible securities).
\8\Under Schedule D to the NASD By-Laws, Part XII, Section 1(d)
defines ``OTC Market Maker'' to mean any NASD member that holds
itself out as being a market maker in any OTC Equity Security by
entering proprietary quotations or indications of interest in an
inter-dealer quotation system.
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The NASD believes that the proposed rule change is consistent with
Sections 15A(b)(6)\9\ and 17A(a)\10\ of the Act. Section 15A(b)(6)
requires that the rules of a national securities association be
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing information with respect to
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. Section 17A(a) provides that
the prompt and accurate clearance and settlement of securities
transactions is necessary for the protection of investors and that
inefficient procedures for clearance and settlement impose unnecessary
costs on investors.
\9\15 U.S.C. Sec. 78o-3(b)(6) (1988).
\10\15 U.S.C. Sec. 78q-1(a) (1988).
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By streamlining and improving the process by which trades between
NASD and West Canada members are compared, the NASD believes the prompt
and accurate clearance and settlement of securities will be facilitated
and promoted. In addition, by compressing the time-period in which open
trades are left uncompared, market participants will be better able to
access and evaluate their market exposure thereby contributing to fair
and orderly markets and the protection of investors and the public
interest. Moreover, the NASD believes the proposed rule change is
consistent with Rule 15c6-1, which mandates settlement on the third
business day following the trade date (``T+3'') by June 7, 1995.\11\
Because ACT generally achieves locked-in trades within minutes of an
execution, the NASD believes the ability to comply with the shorter
time constraints necessitated by T+3 settlement will be enhanced.
Accordingly, the NASD proposes to amend its rules governing ACT to
accommodate the access of West Canada to ACT.\12\
\11\On October 6, 1993, the Commission adopted Rule 15c6-1 under
the Act, which establishes three business days after the trade date
instead of five business days as the standard settlement timeframe
for most broker-dealer transactions. Securities Exchange Act Release
No. 33023 (October 6, 1993), 58 FR 52891 (release adopting Rule
15c6-1). On November 16, 1994, the Commission changed the effective
date of Rule 15c6-1 from June 1, 1995, to June 7, 1995. Securities
Exchange Act Release No. 34952 (November 9, 1994), 59 FR 59137.
\12\Access to the ACT Service desk, however, will continue to be
limited to NASD member firms. The ACT Service desk allows input into
ACT by those firms that do not have direct access to ACT, or by
direct participant's of ACT that are having trouble with their own
system.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed 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
Comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five 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 ninety 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, N.W., Washington, D.C. 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 [[Page 5449]] public in accordance with
the provisions of 5 U.S.C. Sec. 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 No.
SR-NASD-94-55 and should be submitted by February 17, 1995.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
\13\17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-2073 Filed 1-26-95; 8:45 am]
BILLING CODE 8010-01-M