[Federal Register Volume 67, Number 241 (Monday, December 16, 2002)]
[Notices]
[Pages 77117-77119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31551]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46948; File No. SR-NASD 2002-157]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. 
Regarding ACT Risk Management

December 4, 2002.
    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 October 31, 2002, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its subsidiary The Nasdaq 
Stock Market, Inc. (``Nasdaq'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing a proposed rule change to NASD Rule 6150 regarding 
the risk management function provided by Nasdaq's Automated 
Confirmation Transaction Service (``ACT''). Upon approval of the 
proposed rule change, Nasdaq will permit members to voluntarily utilize 
the ACT risk management function, provided that they utilize another 
risk management tool of equal quality and that they and the 
correspondent firms for whom they clear trades continue to report 
clearing-eligible trades to ACT in compliance with applicable ACT 
rules. The text of the proposed rule change is available at Nasdaq and 
at the Commission.

[[Page 77118]]

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 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 Board, and other over-the-counter securities. ACT handles 
transactions negotiated over the phone 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 Nasdaq InterMarket. Participation in ACT is 
mandatory for NASD members that are members of a clearing agency 
registered with the Commission, that have a clearing arrangement with 
such a member, or that participate in any of Nasdaq's trading services.
    An integral part of ACT is the risk management function. The ACT 
risk management function provides firms that clear for other firms with 
the capability to establish acceptable levels of credit for their 
introducing firms. ACT risk management also enables clearing brokers 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.\3\ Clearing brokers providing clearing services to 
correspondent firms are assessed risk management charges of $0.035 per 
trade and $17.25 per month per correspondent firm with charges limited 
to a maximum of $10,000 per month per correspondent.\4\ Given their 
lack of credit exposure, self-clearing brokers without correspondents 
have no reason to utilize the ACT risk management function and are not 
assessed risk management charges.
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    \3\ See NASD Rule 6150.
    \4\ See Securities Exchange Act Release No. 34-42984 (June 27, 
2000), 65 FR 41119 (July 3, 2000) (File No. SR-NASD-00-35).
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    The ACT service was implemented for self-clearing firms in March 
1990.\5\ The ACT service for clearing brokers and their executing 
correspondents, including the risk management function, was implemented 
in October 1990;\6\ the ACT risk management service charge was 
implemented in November 1990.\7\ The NASD's impetus for creating ACT 
risk management was the market break of 1987. After studying the market 
break, the Commission urged the NASD to create an automated system to 
facilitate rapid, reliable trade comparison and clearing. At that time, 
clearing brokers and clearing Agencies urged the NASD to include a 
real-time risk management tool within its new automated system.\8\
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    \5\ See Securities Exchange Act Release No. 34-27229 (September 
8, 1989), 54 FR 38484 (September 18, 1989) (File No. SR-NASD-89-25).
    \6\ See Securities Exchange Act Release No. 34-28583 (October 
26, 1990), 55 FR 46120 (November 1, 1990) (File No. SR-NASD-89-25).
    \7\ See Securities Exchange Act Release No. 34-28595 (November 
5, 1990), 55 FR 47161 (November 9, 1990) (File No. SR-NASD-90-57).
    \8\ See SR-NASD-89-25 (May 31, 1989), and Amendments thereto.
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    Nasdaq considers risk management to be a mandatory service for all 
clearing brokers because effective, real-time, risk management by each 
and every clearing broker is critical to the protection of investors 
and other market participants. Recently, however, Nasdaq has learned 
that clearing brokers have developed their own risk management 
procedures and controls comparable to the service provided by ACT. 
While ACT risk management is integral to the surveillance procedures of 
many clearing firms, Nasdaq recognizes that a one-size-fits-all 
approach may no longer be appropriate to meet the surveillance needs of 
all clearing brokers, particularly in light of the constantly evolving 
ownership structures of many clearing firms and broker-dealers.
    As such, Nasdaq would like to make ACT risk management an optional 
service for all clearing brokers that clear for correspondents 
reporting trades into ACT. In order to ensure that all clearing brokers 
continue to effectively manage their risk, Nasdaq will require that a 
clearing broker meet several conditions prior to opting out of the ACT 
risk management service. First, a clearing broker must submit a letter 
that specifies the correspondent or correspondents for which it no 
longer requires the risk management service. Additionally, it must 
state in its letter that it uses an internal risk management capability 
to monitor the trading activities and risk exposures of its 
correspondents for which it is opting out of the service. Finally, 
clearing brokers that discontinue the use of ACT risk management, as 
well as the correspondents for whom they clear, must continue to comply 
with all applicable rules governing the reporting of trades to ACT.
    Once Nasdaq receives a satisfactory letter from a clearing broker 
requesting relief from ACT risk management, Nasdaq will discontinue the 
assessment of risk management charges for the specified 
correspondent(s) on the first day of the month following the date the 
firm requested relief from ACT risk management charges.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\9\ in general and with 
section 15A(b)(6) of the Act,\10\ in particular, in that the proposal 
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. 
By requiring clearing brokers to utilize a risk management tool 
comparable to its own, Nasdaq hopes to ensure that there is no 
degradation in risk management practices. If, in the future, Nasdaq 
determines that a degradation of this sort has occurred, Nasdaq will 
reassess this rule.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 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 impose 
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

    Nasdaq has neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 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 90 days of such date if it finds such

[[Page 77119]]

longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    A. By order approve the 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, 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 20549-0609. 
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 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 No. SR-NASD-2002-157 and 
should be submitted by January 6, 2003.

    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. 02-31551 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P