[Federal Register Volume 65, Number 128 (Monday, July 3, 2000)]
[Notices]
[Pages 41119-41121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16747]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42984; File No. SR-NASD-00-35]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to a Cap on ACT Risk Management 
Charges

June 27, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 12, 2000, 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'' or ``SEC'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by Nasdaq. Nasdaq filed the proposal pursuant to Section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ Nasdaq provided written notice to the Commission on June 8, 
2000, that is intended to file this proposal. The Commission agreed 
to waive the 5-day pre-filing notice requirement. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq filed the proposed rule change to amend NASD Rule 7010, 
Systems Services, to establish a cap on the Automation Confirmation 
Transaction Service (``ACT'') risk management charge. Nasdaq has 
designated this proposal as non-controversial, and requests that the 
Commission waive the 30-day pre-operative waiting period contained in 
Rule 19b-4(f)(6)(iii) under the Act,\6\ to allow the proposal to be 
both effective and operative immediately upon filing with the 
Commission. The text of the proposed rule is below. Proposed new 
language is in italics.
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    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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* * * * *
Rule 7010. Systems Services
    (g) 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:
    No change.

Risk Management Charges: $0.035/side and $17.25/month per correspondent 
firm (maximum $10,000/month per correspondent firm)
* * * * *

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 its proposal and discussed any 
comments it received regarding the proposal. The text of these 
statements may be examined at the places specified in Item IV 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

1. Purpose
    ACT is an automated trade reporting and reconciliation service that 
speeds the post-execution steps of price and volume reporting, 
comparison, and clearing of pre-negotiated trades completed in Nasdaq, 
OTC Bulletin

[[Page 41120]]

Board, and other over-the-counter securities. ACT handles transactions 
negotiated over the telephone or executed through any of Nasdaq's 
automated trading services. It also manages post-execution procedures 
for transactions in exchange-listed securities that are traded off-
board in the Third Market. Participation in ACT is mandatory for NASD 
members that are members of a clearing agency registered with the SEC, 
that have a clearing arrangement with such a member, or that 
participate in any of Nasdaq's trading services.
    The ACT risk management function allows firms that clear for other 
firms to establish acceptable levels of credit for their introducing 
firms. ACT risk management enables clearing firms to monitor buy/sell 
trading activity of their introducing firms, establish trading 
thresholds, allow/inhibit large trades, add/delete clearing 
relationships, and access a real-time database of correspondent trading 
activity.\7\ Clearing firms providing clearing services to 
correspondent firms are assessed risk management charges of $0.035 per 
trade and $17.50 per month per correspondent firm. Self-clearing firms 
do not utilize the ACT risk management function and are not assessed 
risk management charges.
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    \7\ See NASD Rule 6150, ACT Risk Management Functions.
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    The ACT service for clearing firms and their executing 
correspondents, including the risk management function, was implemented 
in October 1990.\8\ The ACT risk management service charge was 
implemented in November 1990.\9\ The original ACT risk management 
charge was calculated to recoup the development costs for ACT 
programming efforts as well as costs associated with computer and other 
hardware purchases to meet the capacity requirements to run the risk 
management system and to reflect the ongoing costs of operating the 
risk management function of the ACT system. The per trade portion of 
the charge was calculated based on trading volume in 1990, which was 
substantially less than it is at the present. For example, in 1990, 
Nasdaq National Market (``NNM'') securities average 47,000 trades per 
day; in comparison, NNM securities average 1.26 million trades per day 
in 1999 (with an average of 1.67 million trades per day in the fourth 
quarter of 1999). Because the ACT risk management charge is based 
largely on the number of trades cleared, the expansion in trading 
volume since 1990 has required some firms to pay increasingly large 
risk management charges that are disproportionate to the value they 
receive from ACT, particularly firms that clear for correspondents that 
execute a large number of trades.
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    \8\ See Securities Exchange Act Release No. 28583 (October 26, 
1990), 55 FR 46120 (November 1, 1990)(SR-NASD-89-25). ACT was 
implemented for self-clearing firms in March 1990. See Securities 
Exchange Act Release No. 27229 (September 8, 1989), 54 FR 38484 
(September 18, 1989)(SR-NASD-89-25).
    \9\ See Securities Exchange Act Release No. 28595 (November 5, 
1990), 55 FR 47161 (November 9, 1990)(SR-NASD-90-57).
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    Nasdaq believes that it is appropriate to update the pricing model 
for ACT risk management charges to reflect current business practices 
and trading patterns and to ensure that the ACT risk management feature 
continues to be a valuable, cost-effective service for clearing firms. 
Nasdaq proposes to revise the ACT service charges and establish a cap 
of $10,000 on the monthly risk management charge that a clearing firm 
must pay on behalf of a correspondent firm. Nasdaq will implement the 
cap retroactive to April 1, 2000.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with the provisions 
of Section 15A(b)(6) of the Act \10\ in that it is designed to promote 
just and equitable principles of trade and to remove impediments to and 
perfect the mechanism of a national market system, and, in general, to 
protect investors and the public interest. Nasdaq also believes the 
proposed rule change is consistent with Section 15A(b)(5) of the Act 
\11\ in that it provides for the equitable allocation of reasonable 
dues, fees and other charges among members and issuers and other 
persons using any facility or system which the Association operates or 
controls.
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    \10\ 15 U.S.C. 78o-3(b)(6).
    \11\ 15 U.S.C. 78o-3(b)(5).
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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.

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

    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \12\ and 
Rule 19b-4(f)(6) thereunder.\13\ At any time within 60 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.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission accelerate the operative 
date. The Commission finds good cause to designate the proposal to 
become immediately operative upon filing, because such designation is 
consistent with the protection of investors and the public interest. 
Acceleration of the operative date will allow NASD members to reap the 
benefits of the cap on ACT risk management charges retroactive to April 
1, 2000 immediately, rather than having to wait 30 days before 
implementing the cap. For these reasons, the Commission finds good 
cause to waive the 5-day pre-filing requirement, and to designate that 
the proposal become operative immediately.\14\
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    \14\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submission should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 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

[[Page 41121]]

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 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 number SR-NASD-00-35 and should be 
submitted by July 24, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
Margaret H. McFarland,
Deputy Secretary
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    \15\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 00-16747 Filed 6-30-00; 8:45 am]
BILLING CODE 8010-01-M