[Federal Register Volume 69, Number 221 (Wednesday, November 17, 2004)]
[Notices]
[Pages 67377-67378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3195]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50652; File No. SR-NSCC-2004-04]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
on a Temporary Basis of a Proposed Rule Change To Establish a 
Confirmation and Matching Service for Over-the-Counter U.S. Equity 
Options Transactions

November 10, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 13, 2004, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on September 
15, 2004, and on October 28, 2004, amended the proposed rule change 
described in Items I and II below, which items have been prepared 
primarily by NSCC. The Commission is publishing this notice and order 
to solicit comments from interested persons and to grant accelerated 
approval of the proposed rule change through May 31, 2005.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NSCC is seeking to add Addendum M to its Rules and Procedures to 
establish a confirmation and matching service for over-the-counter 
(``OTC'') U.S. equity options transactions (``NSCC Equity Options 
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, NSCC 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. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Currently, confirmation of trade details among dealers and the 
dealers' buy-side customers in the OTC equity options industry is 
supported largely by faxes and telephone communication. It is widely 
acknowledged by the industry that this current operational 
infrastructure, which depends upon nonstandard and manual processing, 
results in excessive processing costs, delays, and errors. The industry 
is seeking to reduce the attendant operational risks associated with 
OTC equity options processing by automating the trade confirmation 
process for OTC equity options.
    In response to similar conditions prevailing in the credit default 
swaps industry, the corporate parent of NSCC, The Depository Trust & 
Clearing Corporation (``DTCC'') created a subsidiary, DTCC Deriv/SERV 
LLC (``Deriv/SERV''), in 2003. Deriv/SERV currently offers a 
confirmation and matching service for OTC credit default swaps 
transactions and their associated cash flows. This service is now used 
by approximately 30 entities including all of the largest OTC credit 
default swaps dealers.
    Deriv/SERV has developed a confirmation and matching service for 
OTC equity options transactions and their associated cash flows 
(``Deriv/SERV Equity Options Service''). The Deriv/SERV Equity Options 
Service will provide for confirmation and matching either between two 
OTC equity options dealers or between an OTC equity options dealer and 
its buy-side customer. Where either the buyer or the seller of an 
equity option is a U.S. person and the equity option is issued by a 
U.S. issuer (``U.S. Equity Option Transaction''), NSCC will provide 
confirmation and matching services (``NSCC Equity Options Service'') to 
Deriv/SERV pursuant to the NSCC/DTCC Deriv/SERV Service Agreement 
(``Service Agreement'').\3\ In connection with the NSCC Equity Options 
Service, Deriv/SERV will become a Data Services Only Member of NSCC.\4\
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    \3\ DTC has represented that the processing of Deriv/SERV's 
transactions will not be a strain on the capacity of DTC's systems. 
The host computer and other automated facilities associated with the 
NSCC Equity Options Service will be provided by DTC pursuant to 
service agreements between NSCC and DTCC and between DTCC and DTC.
    \4\ NSCC Rules and Procedures, Rule 31.
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    The Deriv/SERV Equity Options Service will be operated pursuant to 
the operating procedures of Deriv/SERV (``Deriv/SERV Operating 
Procedures''). U.S. Equity Option Transactions will also be subject to 
NSCC's proposed Addendum M. Therefore, each user of the Deriv/SERV 
Equity Options Service will enter into an agreement with Deriv/SERV 
obligating the user to abide by the terms of the Deriv/SERV Operating 
Procedures and obligating them to abide by Addendum M for any U.S. 
Equity Option Transactions. Pursuant to the Service Agreement between 
NSCC/DTCC and Deriv/SERV, NSCC will have the right to require Deriv/
SERV to cause Deriv/SERV's users to abide by the terms of Addendum M. 
In addition, pursuant to the Service Agreement, NSCC and Deriv/SERV 
have agreed that should the Commission request that NSCC provide to the 
Commission any information relating to the NSCC Equity Options Service, 
Deriv/SERV will provide any such information in its possession to NSCC 
so that NSCC may provide such information to the Commission.
    NSCC will neither be responsible for the content of the messages 
transmitted through the NSCC Equity Options Service nor be responsible 
for any errors, omissions, or delays that may occur relating to the 
NSCC Equity Options Service in the absence of gross negligence on 
NSCC's part. Both the Service Agreement and the Deriv/SERV Operating 
Procedures will provide that NSCC has no liability in connection with 
the NSCC Equity Options Service in the absence of gross negligence on 
NSCC's part. Because the NSCC Equity Options Service does not involve 
money settlement, securities clearance, or netting through the 
facilities of NSCC, it will be a nonguaranteed service of NSCC.\5\
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    \5\ NSCC offers certain ``guaranteed'' services through its CNS 
system in which NSCC acts as a central counterparty and provides 
settlement-related guarantees regarding certain trades cleared and 
netted at NSCC. NSCC also offers ``nonguaranteed'' services, such as 
NSCC's Mutual Fund and Insurance Processing Services, in which 
members do not receive the protections of the NSCC guarantee. Some 
of NSCC's nonguaranteed services entail settlement of funds through 
NSCC on a nonguaranteed basis (i.e., NSCC's FundSERV[reg] service). 
Other nonguaranteed services involve the communication of 
information only without settlement of transactions or funds through 
the facilities of NSCC (i.e., NSCC's Profile service). The NSCC 
Equity Options Service is a nonguaranteed service limited to the 
matching and communication of information and does not involve 
settlement of securities transactions or funds through the 
facilities of NSCC. In its Matching Release, the Commission 
concluded that matching constitutes a clearing agency function, 
specifically the ``comparison of data respecting the terms of 
settlement of securities transactions,'' within the meaning of 
Section 3(a)(23)(A) of the Exchange Act. Securities Exchange Act 
Release No. 39829 (April 6, 1998), 63 FR 17943 [File No. S7-10-98].

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[[Page 67378]]

    Deriv/SERV will charge its users fees in connection with the Deriv/
SERV Equity Options Service and pursuant to the Service Agreement will 
make payments to NSCC for the services that NSCC is providing. NSCC 
will file proposed rule changes under Section 19(b) of the Act for fees 
that NSCC charges to Deriv/SERV for the NSCC Equity Options Service and 
for any changes made by NSCC to the Equity Options Service.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder because the implementation of the proposal will 
provide for the prompt and accurate clearance and settlement of U.S. 
OTC equity option transactions processed through the NSCC Equity 
Options Service by facilitating the transmission of standardized 
information on a centralized communications platform. This will reduce 
processing errors, delays, and risks that are typically associated with 
manual processes.
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    \6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will impose a 
burden on competition 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

    NSCC has not solicited or received any written comments on this 
proposal. NSCC will notify the Commission of any written comments it 
receives.

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

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\7\ The Commission 
finds that NSCC's proposed rule change is consistent with this 
obligation under the Act because the NSCC Equity Options Service should 
reduce manual processing errors, delays, and risks that are typically 
associated with U.S. OTC equity option transactions by facilitating the 
transmission of standardized information on a centralized 
communications platform for all U.S. OTC equity options processed 
through it.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    NSCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of the notice of filing. The Commission finds good cause 
for approving prior to the thirtieth day after publication because by 
so approving NSCC will be able to implement and firms to begin using 
the NSCC Equity Options Service before the approaching end of year 
freeze on systems changes.
    The Commission is approving the NSCC Equity Options Service on a 
temporary basis through May 31, 2005, so that NSCC will have time to 
evaluate the operations of the service and to report its findings to 
the Commission before the Commission decides on permanent approval.

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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to [email protected]. Please include 
File Number SR-NSCC-2004-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NSCC-2004-04. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 NSCC 
and on NSCC's Web site at www.nscc.com/legal. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.
    All submissions should refer to File Number SR-NSCC-2004-04 and 
should be submitted on or before December 8, 2004.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
\8\ that the proposed rule change (File No. SR-NSCC-2004-04) be and 
hereby is approved on an accelerated basis through May 31, 2005.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3195 Filed 11-16-04; 8:45 am]
BILLING CODE 8010-01-P