[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