[Federal Register Volume 63, Number 207 (Tuesday, October 27, 1998)]
[Notices]
[Pages 57342-57346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28640]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40578; File No. SR-NASD-98-47]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to the Integration of the Trade Acceptance and
Reconciliation Service Into the Automated Confirmation Transaction
Service
October 20, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 9, 1998, the National
Association of Securities Dealers, Inc. (``NASD'' or ``Association''),
through its wholly-owned subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), 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 Nasdaq. The
Commission is publishing this notice to solicit comments from
interested persons on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
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[[Page 57343]]
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq is proposing to amend rules of the NASD to integrate the
functionality of its Trade Acceptance and Reconciliation Service
(``TARS'') into its Automated Confirmation Transaction Service
(``ACT''), and to make certain enhancements to ACT. Below is the text
of the proposed rule change. Proposed new language is in italics;
proposed deletions are in brackets.
4632. Transaction Reporting
(a)(1) through (3) No Change.
(4) [Transacting] Transaction Reporting Outside Normal Market
Hours.
(A) No Change.
(B) Last sale reports of transactions in designated securities
executed outside the ours of 8:00 a.m. and 5:15 p.m. Eastern Time shall
be reported as follows:
(i) No change.
(ii) Last sale reports of transactions executed between 5:15 p.m.
and midnight Eastern Time shall be transmitted through ACT on the next
business day (T+1) between 8:00 a.m. and [1:30] 5:15 p.m. Eastern Time,
be designated ``as/of'' trades to denote their execution on a prior
day, and be accompanied by the time of execution.
* * * * *
(5) All members shall report [weekly] as soon as practicable to the
Market Regulation Department on Form T, last sale reports of
transactions in designated securities for which electronic submission
into ACT is not possible (e.g., the ticker symbol for the security is
no longer available or a market participant identifier is no longer
active). [that were not transmitted through ACT, for whatever reason,
either on the trade date or the next business day.] Transactions that
can be reported into ACT, whether on trade date or on a subsequent date
on an ``as of'' basis (T+N), shall not be reported on Form T. [Form T
shall be used exclusively as a back-up mode whenever electronic entry
of trade data is not feasible due to system malfunctions or other
unusual conditions.]
(6) through (8) No Change.
* * * * *
4642. Transaction Reporting
(a) (1) through (4)(B)(i) No Change.
(ii) Last sale reports of transactions executed between 5:15 p.m.
and midnight Eastern Time shall be transmitted through ACT on the next
business day (T+1) between 8:00 a.m. and [1:30] 5:15 p.m. Eastern Time,
be designated `'as/of'' trades to denote their execution on a prior
day, and be accompanied by the time of execution.
* * * * *
(5) All members shall report [weekly] as soon as practicable to the
Market Regulation Department on Form T, last sale reports of
transactions in designated securities for which electronic submission
into ACT is not possible (e.g., the ticker symbol for the security is
no longer available or a market participant identifier is no longer
active). [that were not transmitted through ACT, for whatever reason,
either on the trade date or the next business day.] Transactions that
can be reported into ACT, whether on trade date or on a subsequent date
on an ``as of'' basis (T+N), shall not be reported on Form T. [Form T
shall be used exclusively as a back-up mode whenever electronic entry
of trade data is not feasible due to system malfunctions or other
unusual conditions.]
(6) through (8) No Change.
4652. Transaction Reporting
(a) (1) through (4)(B)(i) No change.
(ii) Last sale reports of transactions executed between 5:15 p.m.
and midnight Eastern Time shall be transmitted through ACT on the next
business day (T+1) between 8:00 a.m. and [1:30] 5:15 p.m. Eastern Time,
be designated ``as/of'' trades to denote their execution on a prior
day, and be accompanied by the time of execution.
* * * * *
(5) All members shall report [weekly] as soon as practicable to the
Market Regulation Department on Form T, last sale reports of
transactions in designated securities for which electronic submission
into ACT is not possible (e.g., the ticker symbol for the security is
no longer available or a market participant identifier is no longer
active). [that were not transmitted through ACT, for whatever reason,
either on the trade date or the next business day.] Transactions that
can be reported into ACT, whether on trade date or on a subsequent date
on an ``as of'' basis (T+N), shall not be reported on Form T. [Form T
shall be used exclusively as a back-up mode whenever electronic entry
of trade data is not feasible due to system malfunctions or other
unusual conditions.]
(6) through (7) No change.
* * * * *
5109. Clearance and Settlement of International Transactions
(a) No Change.
(b) No Change.
(c) Participation in [the Trade Acceptance and Reconciliation
Service and] the Automated Confirmation Transaction Service is
mandatory for self-clearing Association members participating in the
Service directly or through an approved affiliate.
* * * * *
6120. Participation in ACT
(a) Mandatory Participation for Clearing Agency Members.
(1) Pursuant to Article VII, Section 1(a)(6) and (7) of the By-
Laws, participation in ACT is mandatory for all brokers that are
members of a clearing agency registered with the Commission pursuant to
Section 17A of the Act, and for all brokers that have a clearing
arrangement with such a broker. Such participation shall include the
reconciliation of all over the counter clearing agency eligible
transactions.
* * * * *
(b) No change.
* * * * *
6140. ACT Processing
(a) through (c) No Change.
[(d) Next Day (T+1) Trade Processing.
At the end of T+1 matching, all declined trade reports and open
``as-of'' trade reports (i.e., those trade date trades reported on T+1
and unmatched or unaccepted by the end of T+1) will be purged from the
ACT system; all other trade reports that remain open at the end of T+1
will be treated as locked-in trades by the ACT system and submitted as
such to NSCC.]
(d) T+N Trade Processing.
T+N entries may be submitted until 5:15 p.m. each business day. At
the end of daily matching, all declined trade entries will be purged
from the ACT system. ACT will not purge any open trade (i.e., unmatched
or unaccepted) at the end of its entry day, but will carry-over such
trades to the next business day for continued comparison and
reconciliation. ACT will automatically lock in and submit to NSCC as
such any carried-over T to T+21 (calendar day) trade if it remains open
as of 2:30 p.m. on the next business day. ACT will not automatically
lock in T+22 (Calendar day) or older open ``as-of'' trades that were
carried-over from the previous business day; these will be purged by
ACT at the end of the carry-over day if they remain open. Members may
re-submit these T+22 or older ``as-of'' trades into ACT on the next
business day for continued comparison and reconciliation for up to one
calendar year.
* * * * *
[[Page 57344]]
6420. Transaction Reporting
(a)(1) through (2) No Change.
(3)(A) All members shall report transactions in eligible securities
executed outside the hours of 9:30 a.m. and 5:15 p.m. Eastern Time as
follows:
(i) by transmitting the individual trade reports through ACT on the
next business day (T+1) between 8:00 a.m. and [1:30] 5:15 p.m. Eastern
Time;
(ii) No Change.
(iii) No Change.
(B) All members shall report [weekly] as soon as practicable to the
Market Regulation Department on Form T, last sale reports of
transactions in designated securities for which electronic submission
into ACT is not possible (e.g., the ticker symbol for the security is
no longer available or a market participant identifier is no longer
active). [that were not transmitted through ACT, for whatever reason,
either on the trade date or the next business day.] Transactions that
can be reported into ACT, whether no trade date or on a subsequent date
on an ``as of'' basis (T+N), shall not be reported on Form T. [Form T
shall be used exclusively as a back-up mode whenever electronic entry
of trade data is not feasible due to system malfunctions or other
unusual conditions.]
* * * * *
6620. Transaction Reporting
(a) (1) through (3)(A) No Change.
(B) Last sale reports of transactions in OTC Equity Securities
executed outside the hours of 8:00 a.m. and 5:15 p.m. Eastern Time
shall be reported as follows:
(i) No Change.
(ii) Last sale reports of transactions in ADRs, Canadian issues, or
domestic OTC Equity Securities that are executed between 5:15 p.m. and
midnight Eastern Time shall be transmitted through ACT on the next
business day (T+1) between 8:00 a.m. and [1:30] 5:15 p.m. Eastern Time,
be designated ``as/of'' trades to denote their execution on a prior
day, and be accompanied by the time of execution.
* * * * *
(4) All members shall report [weekly] as soon as practicable to the
Market Regulation Department on Form T, last sale reports of
transactions in designated securities for which electronic submission
in ACT is not possible (e.g., the ticker symbol for the security is no
longer available or a market participant identifier is no longer
active). [that were not transmitted through ACT, for whatever reason,
either on the trade date or the next business day.] Transactions that
can be reported into ACT, whether on trade date or on a subsequent date
on an ``as of'' basis (T+N), shall not be reported on Form T. [Form T
shall be used exclusively as a back-up mode whenever electronic entry
of trade data is not feasible due to system malfunctions or other
unusual conditions.]
(5) No Change.
* * * * *
7010. System Services
(a) through (d) No Change.
[(e) Trade Acceptance and Reconciliation Service.
The service charge to be paid by the subscriber for terminals
receiving Trade Acceptance and Reconciliation Service (TARS) and/or
Municipal Bond Acceptance and Reconciliation Service (MBARS) shall be
$100 per month for each TARS/MBARS dedicated terminal providing both
query and update capability, $50 per month for each shared terminal
providing query and update capability for TARS/MBARS as well as other
services and $25 per month for each terminal providing query only
capability. In addition, subscribers shall be charged $.25 for each
query/response or correction message plus equipment related charges as
detailed in Rules 7020, 7030, and 7040. Charges shall be billed to
subscribers on a monthly basis.
Subscribers averaging less than 30 trades per day during the
previous calendar quarter may access TARS through the facilities of the
Association's Service Desk. The service charge to be paid by such
subscribers shall be $50 per month.]
(f) through (h) re-lettered (e) through (g).
[(i)] (h) Automated Confirmation Transaction Service.
The following charges shall be paid by the participant for use of
the Automated Confirmation Transaction Service (ACT):
Transaction Related charges:
Comparison.............................. $0.144/side per 100 shares
(minimum 400 shares;
maximum 7,500 shares)
Late Report--T+[1]N..................... $0.288/side
Browse/query............................ $0.288/query*
Terminal fee............................ $57.00/month
(ACT only terminals)
CTCI fee................................ $575.00/month
Service desk............................ $57.00/month**
Trade reporting......................... $0.29/side (applicable only
to reportable transactions
not subject to trade
comparison through ACT) ***
Risk Management Charges:.................. $0.35/side and $17.25/month
per correspondent firm
(j) through (n) re-lettered (i) through (m).
* * * * *
[11180. Use of Trade Acceptance and Reconciliation Service
Each member that is a participant in a registered clearing agency,
for purposes of clearing over the counter securities transactions,
shall subscribe to and reconcile all eligible transactions through the
facilities of the Association's Trade Acceptance and Reconciliation
Service.]
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq 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 VI below. Nasdaq 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
General Overview
Since 1983, the NASD has offered TARS to members that are
participants in a registered clearing agency. TARS is an online trade
reconciliation facility that allows both parties to a trade, through
the Nasdaq Workstation, to reconcile breaks on contract sheets from
their clearing agency with respect to OTC and exchange-listed stocks.
TARS is currently offered as an independent service, distinct from ACT.
ACT is the Nasdaq system used by members to compare trades for
clearance and settlement and transmit trade reports for regulatory
purposes and public dissemination.\2\ Given the comparatively low
reconciliation activity in TARS, Nasdaq has been working in conjunction
with the National Securities Clearing Corporation
[[Page 57345]]
(``NSCC'') to optimize the trade comparison and reconciliation process.
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\2\ Currently, 99.8% of trades submitted by ACT to NSCC are
locked-in for clearing and settlement. The remaining 0.2% are
compared through NSCC's OTC Comparison Cycle or reconciled in TARS.
These consist primarily of supplemental or As-Of items submitted
after the current ACT cycle (i.e., after the original trade date and
T+1).
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Accordingly, the NASD is proposing to integrate TARS functionality
into ACT and make certain enhancements described below. These
enhancements include a new ``step out'' function to streamline the
clearance and settlement process and an ability to submit certain trade
reporting entries electronically without using a paper Form T report,
which should improve the NASD's trade reporting and surveillance
programs. Furthermore, the elimination of TARS as an independent
service will help member firms, NSCC, and Nasdaq eliminate Y2K
incompatible systems, as the current TARS software uses an incompatible
six digit date format. In conjunction with the migration of TARS into
ACT, the Municipal Bond Acceptance and Reconciliation Service
(``MBARS'') also will be discontinued.\3\ MBARS subscribers have been
notified that they will have to make their municipal bond, corporate
bond, and unit investment trust submissions directly to NSCC.\4\
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\3\ MBARS allows subscribers to enter original trade input and
reconcile outstanding transactions for comparison, clearance and
settlement through the Fixed Income Transaction Service operated by
NSCC.
\4\ This may be accomplished either through a direct feed to
NSCC or via NSCC's current PC Platform. In addition, NSCC is in the
process of replacing its PC Platform with a new service, PC Web
Direct, which will allow direct access into NSCC using a standard
internet browser.
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ACT/TARS Migration
TARS will be discontinued as an independent service, and the
functionality of TARS will be incorporated into ACT with the following
changes. First, participants will be able to enter As-Of Trades and As-
Of Trade Reversals that reference a trade date up to one year prior to
the date of submission. Currently, ACT will only accept As-Of trade
entries that reference the prior trade date (i.e., they must be entered
on trade date plus one (T+1)). Second, NSCC will be the sole source of
compared contract sheet information. This is a rarely used element of
TARS and this functionality will not be available in ACT.
In addition, the following enhancements to ACT also will be
implemented:
Expansion of ACT Window for As-Of Trade Entry
The As-Of trade entry function will be expanded to allow a
subscriber to submit entries that reference a trade date for a period
of up to one calendar year prior to the date of the As-Of entry. As-Of
trades that are entered for clearing are subject to matching/comparison
with the counterparty. These trades will be eligible for daily M2
matching \5\ via the ACT batch cycle. In addition, As-Of entries, which
currently must be entered by 1:30 p.m., will now be accepted up until
5:15 p.m. ACT will no longer perform an on-line M2 match in the
afternoon of the second day. Instead, the M2 match will be performed at
the end of the entry day. As-Of trades that are entered from T+1
through T+21 (calendar days) that remain open on the afternoon (as of
2:30 p.m.) of the business day following the date of entry will be
automatically locked-in by ACT. This responds to firms' continuing need
for an ``auto-lock'' feature previously available through TARS and
NSCC's ``demand advisory'' processing. As-Of trades submitted from T+22
through T+one year will require a submission by both sides for
comparison. As-Of trades that are submitted against non-ACT
participants will be submitted to NSCC as one-sided entries at the end
of the entry day. As-Of trades will be included in ACT's risk
management calculations and will be subject to Blockbuster and Sizable
Trade processing.
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\5\ M2 matching is the ACT process that compares and matches
previously uncompared trades submitted to ACT.
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New System Feature: ACT As-Of Trade Reversals
The revised ACT will introduce a new reversal function (``Trade
Reversal'') to allow participants to cancel the effects of a prior
submission to NSCC. This function will replace the current TARS
``withhold'' and ``demand withhold'' functions. The As-Of Trade
Reversal will be subject to the same rules as the previously described
As-Of trade-entry function. The participant will need to reverse the
side of the trade when submitting an As-Of Trade Reversal into ACT. For
example, if a subscriber wishes to cancel a previously submitted sell
trade, the subscriber must submit an As-Of reversal trade as a buy. A
subscriber will also have the ability to enter an As-Of Trade Reversal
on a net position basis. For example, if a subscriber entered a sell
trade for 1,000 shares, but the trade should have been for 800 shares,
the subscriber may enter an As-Of Trade Reversal for 200 shares as a
buy to net the position to the correct amount. Subscribers may find
this easier than entering an As-Of Trade Reversal buy for 1,000 shares
and an As-Of trade sell for 800 shares.
Form T Trade Reporting
Both the As-Of trade-entry and Trade Reversal functions described
above can be used to more efficiently capture trades that currently are
submitted on paper Form T for reporting purposes. Paper Form T is
currently used by members as a back-up means to report trades that are
not submitted into ACT electronically within the current system
limitation of T+1 for reporting As-Of trades.\6\ Subscribers that have
failed to report a trade into ACT by the end of the T+1 window will now
be able to electronically submit these trades using the expanded As-Of
trade-entry function (T+2 to T+N), effectively eliminating the paper
form in most instances.\7\ In addition, the As-Of Trade Reversal
function can be used to cancel and/or correct trades on an As-Of basis.
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\6\ See, e.g., NASD Rule 4632(a)(5).
\7\ While this should significantly reduce the need for paper
Form T in most situations, it will remain permissible to use the
paper form solely as a means to allow firms to comply with NASD
trade reporting rules in certain limited circumstances.
Specifically, Form T could be used when ACT cannot accept a trade
report or reversal for a transaction in which the ticker symbol is
no longer available or recognized by NSCC, or when a market
participant identifier is no longer valid. The relevant rule
provisions referencing use of Form T are being amended accordingly.
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ACT Step-Outs
The revised ACT service will also provide a new Step-Out
transaction indicator to allow members to uniquely identify Step-Out
``clearing-only'' entries submitted to ACT for comparison, clearance,
and settlement through NASCC. A Step-Out allows the executing broker
(Broker A) to ``step-out,'' or allocate, all or part of the trade(s) to
another broker(s) (Broker B). Broker A will submit an ACT market-maker
entry that is flagged as a Step-Out against Broker B. Broker B will be
required to acknowledge the entry by either accepting it or submitting
a matching order-entry firm entry that is also flagged as a Step-Out.
Since the Step-Out flag will be part of the matching criteria, an
omission of the flag by either side will cause the entries not to
match. Once matched, it will be submitted to NSCC for clearance and
settlement and will include the Step-Out flag for identification
purposes.
ACT will provide a separate Step-Out selection option on the ACT
Trade Scan Window that will allow firms to view all their Step-Out
entries at one time. These entries will not be reported to the tape or
disseminated to the media.
ACT Give-Up Automatic Lock-In
The ACT Give-Up Automatic Lock-in function allows an introducing
broker to enter and lock-in a trade when it is responsible for both
sides of the trade. This occurs when two of its ``Give-Ups''
[[Page 57346]]
trade with each other or the introducing broker trades with one of its
own Give-Up firms. In the current ACT system, the introducing broker
may submit a market-maker entry for one side and either accept the
trade or submit an order-entry firm entry to match the trade. In the
new system, by specifying the new Give-Up Automatic Lock-In feature,
the introducing broker will avoid the need to accept the trade or
submit the order-entry side. In other words, this new lock-in feature
will allow the introducing broker to submit just one entry and not two.
ACT will submit this trade to NSCC as an M1 matched locked-in trade.
No/Was Trades
Whereas in the current ACT system a trade that is entered
incorrectly or for some other reason is declined by the counterparty
must be deleted and re-entered by the market-maker side, the enhanced
ACT will allow the market-maker side to modify, or ``No/Was,'' a trade
that was declined by the counterparty.
``.S'' Trade Modifier
Currently the ``.S'' trade modifier cannot be used to indicate a
two-day settlement period; the system only recognizes the modifier as
indicating four or more days. However, in the new ACT, the allowable
entries for the ``.S'' modifier will be either two days, or anywhere
from four through 60 days.
Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act \8\ in that the proposed
rule change should enhance the process through which members engage in
the comparison and clearing of securities transactions. Specifically,
Section 15A(b)(6) requires that the rules of a registered national
securities association are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principals of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
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; and are not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. The proposed rule change provides material enhancements to the
process of comparing, and ultimately clearing and settling, securities
transactions, and thus is wholly consistent in the furtherance of the
purposes of the Act.
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\8\ 15 U.S.C. 78o-3(b)(6).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The proposed rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \9\ and Rule 19b-4(e)(5) thereunder.\10\ The
proposal effects a change in an existing order-entry or trading system
of a self-regulatory organization that: (i) does not significantly
affect the protection of investors or the public interest; (ii) does
not impose any significant burden on competition; and (iii) does not
have the effect of limiting the access to or availability of the
system.
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(e)(5).
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At any time within sixty days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-98-47 and should be
submitted by November 17, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28640 Filed 10-26-98; 8:45 am]
BILLING CODE 8010-01-M