[Federal Register Volume 69, Number 249 (Wednesday, December 29, 2004)]
[Notices]
[Pages 78082-78084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3865]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50898; File No. SR-NSX-2004-07]


Self-Regulatory Organizations; National Stock Exchange; Notice of 
Filing of a Proposed Rule Change and Amendment No. 1 Thereto Relating 
to Non-Member Give-Ups

December 21, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 31, 2004, the National Stock ExchangeSM 
(``NSX'' or ``Exchange'') 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 by the 
Exchange. On December 3, 2004, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ The Commission is publishing this notice 
to solicit comment on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The NSX submitted Amendment No. 1 in order to provide 
additional information in describing the manner in which the 
proposed rule change will operate. Amendment No. 1 replaces the 
original rule filing in its entirety. The Exchange notes that 
Amendment No. 1 does not alter the text of the proposed rule change 
as it appeared in the original rule filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the clearing requirements contained 
in Article II, Section 5.1 of the NSX By-Laws to permit members to 
give-up a non-member's clearing number if certain conditions are 
satisfied. The text of the proposed rule change appears below. New 
language is in italics.
* * * * *

CODE OF REGULATIONS (BY-LAWS) OF NATIONAL STOCK EXCHANGE

* * * * *

ARTICLE II Exchange Membership

* * * * *
    Section 5. Restrictions on Admittance to or Continuance in 
Membership and Association
    5.1. General Restrictions
* * * * *
Interpretations and Policies
* * * * *
    .03 An Exchange member may only give-up its own or another Exchange 
member's clearing number when executing a transaction on the Exchange; 
provided, however, that a member may give-up a non-member's clearing 
number when executing a transaction on the Exchange if (i) the non-
member (a) is a registered broker-dealer and is a self-clearing member 
of the National Securities Clearing Corporation (``NSCC'') and (b) 
consents to the disciplinary jurisdiction of the Exchange and agrees to 
adhere to all applicable Exchange By-Laws and Rules; and (ii) the 
executing member's guaranteeing clearing firm, who must be an Exchange 
member, agrees to accept financial responsibility for all transactions 
given-up to the non-member, including but not limited to, 
responsibility to clear and settle the non-member's trades in the event 
that the non-member or the NSCC does not accept any such trades.
* * * * *

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 NSX 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 NSX 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
    Currently, to enter transactions on the NSX, an Exchange member 
must either be self-clearing or must have a clearing member agree to 
accept financial responsibility for all of its transactions. In turn, 
any Exchange member that wishes to self-clear or clear third party 
transactions on the Exchange must also be a member of the National 
Securities Clearing Corporation (``NSCC'').
    In addition, the Exchange By-Laws currently provide that, when a 
member executes a transaction on the Exchange, it may only give-up its 
own clearing number or the number of another Exchange member.\4\ The 
Exchange notes

[[Page 78083]]

that the provision limiting give-ups to Exchange members' clearing 
firms was originally put in place to ensure the Exchange's ability to 
exercise jurisdiction over all parties involved in the execution and 
settlement of trades that occur on the Exchange. The Exchange proposes 
to expand the list of clearing firms eligible to be ``given-up'' to 
include non-member clearing firms,\5\ if certain conditions are 
satisfied.
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    \5\ The Exchange notes that use of the term ``non-member'' 
refers to the fact that a ``non-member'' firm does not have certain 
voting and ownership rights that other NSX members have. However, as 
described in the proposed rule text, a ``non-member'' firm that has 
entered into a give-up arrangement under Interpretation .03 to 
Article II, Section 5.1 of the Exchange By-Laws is subject to the 
Exchange's jurisdiction and the requirement to adhere to all 
applicable Exchange By-Laws and Rules, just as any other member of 
the Exchange.
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    The conditions that would enable an NSX member to give-up a non-
member's clearing number are that (i) the non-member (a) be a 
registered broker-dealer and a self-clearing member of the NSCC and (b) 
consent to the disciplinary jurisdiction of the Exchange and agree to 
adhere to all applicable Exchange By-Laws and Rules; and (ii) the 
executing member's clearing firm, who must be an Exchange member, 
agrees to accept financial responsibility for all transactions given-up 
to the non-member, including but not limited to, responsibility to 
clear and settle the non-member's trades in the event that the non-
member or the NSCC does not accept any such trades. The Exchange 
believes that this additional give-up alternative offers members more 
flexibility \6\ and is consistent with the above-described intent of 
Interpretation .03 to Article II, Section 5.1 of the Exchange By-Laws 
in that it permits the Exchange to retain jurisdiction over the parties 
involved in executions and those responsible for guaranteeing 
transaction clearance and settlement.
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    \6\ For example, undeer the NSX's current requirements, an NSX 
member can execute a transaction on behalf of a non-member. However, 
for purposes of reporting by NSX to the NSCC for clearing and 
settlement, the NSX member cannot give-up the non-member's clearing 
ccount to NSX. Instead, the clearing and settlement information must 
be processed directly with the NSCC. Under the proposed rule change, 
an NSX member would have the option of giving up the non-member's 
clearing number to the NSX for reporting by NSX to the NSCC. This 
gives the NSX member the flexibility to process a non-member's order 
in the same manner in which it is permitted to process other NSX 
members' orders.
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    In order to evidence the satisfaction of the above-referenced 
requirements, and thus for a member to be eligible to give-up a non-
member's clearing number, an access authorization agreement in a form 
prescribed by the Exchange must be completed and signed by the member, 
its NSX member clearing firm, and the non-member clearing firm.7 The 
agreement will specify that the conditions of Interpretation .03 have 
been satisfied, including that the non-member consents to the 
disciplinary jurisdiction of the Exchange and agrees to adhere to all 
applicable Exchange By-Laws and Rules. The agreement will also specify 
that the executing member's clearing firm agrees to accept financial 
responsibility for all transactions given-up to the non-member.
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    \7\ The access authorization agreement is attached to Form 19b-4 
as Exhibit 3.
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    The Exchange believes the proposal provides adequate controls 
regarding non-member give-ups. For operational purposes, the Exchange 
requires the non-member be a self-clearing member of NSCC, thus 
requiring NSCC clearing membership for Exchange transactions given-up 
to non-members, as is currently required for Exchange transactions 
given-up to NSX members.\8\ For disciplinary jurisdiction and 
compliance purposes, the requirements that the non-member consent to 
the disciplinary jurisdiction of the Exchange and agree to adhere to 
all applicable Exchange By-Laws and Rules, provide an adequate level of 
Exchange control over the non-member give-up transaction. The Exchange 
believes that these controls provide a jurisdictional basis for 
disciplinary action against the non-member, allowing the Exchange to 
enforce its rules with respect to the non-member to the same degree as 
if the non-member were itself a member. Additionally, the NSX requires 
that the member clearing firm accept financial responsibility for all 
transactions given-up to the non-member. The Exchange believes that 
this guarantees the financial obligations incurred with respect to non-
member give-up transactions. As is currently the case for give-ups to 
member clearing firms, the Exchange will assess the executing member 
with the relevant fees on all transactions given-up to non-members.
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    \8\ Telephone conversation between Jennifer M. Lamie, Assistant 
General Counsel and Secretary, NSX and Marisol Rubecindo, Attorney, 
Division of Market Regulation, Commission.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 6(b) of the Act,\9\ in 
general, and Section 6(b)(5) of the Act,\10\ in particular, which 
requires, among other things, that the rules of the Exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, to foster cooperation and coordination with 
persons engaged in clearing and settling transactions, and, in general, 
to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were solicited or received in connection with 
the proposed rule change, as amended.

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

    Within 35 days of the 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 longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organizations 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. 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-NSX-2004-07 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, D.C. 20549-0609.
    All submissions should refer to File No. SR-NSX-2004-07. This file 
number should be included in the subject line if e-mail is used. To 
help the

[[Page 78084]]

Commission process and review 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 Room. Copies of such filings will also be 
available for inspection and copying at the principal office of the 
Exchange. 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-NSX-
2004-07 and should be submitted on before January 19, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to the 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. E4-3865 Filed 12-28-04; 8:45 am]
BILLING CODE 8010-01-P