[Federal Register Volume 70, Number 89 (Tuesday, May 10, 2005)]
[Notices]
[Pages 24666-24668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2238]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51649; File No. SR-NSCC-2005-04]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change To Establish a 
Confirmation and Matching Service for Over-The-Counter U.S. Equity 
Options Transactions

May 3, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 29, 2005, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change described in Items I, II, and III below, which items have been 
prepared primarily by NSCC. The Commission is publishing this notice to 
solicit comments from interested parties.
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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 permanent approval 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'').\2\
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    \2\ The Commission approved NSCC's Equity Options Service on a 
temporary basis through May 31, 2005, so that NSCC could evaluate 
the operations of the service and report its findings to the 
Commission. Securities Exchange Act Release No. 50652 (November 17, 
2004), 69 FR 67377.
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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.\3\
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    \3\ 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 Depository Trust & Clearing Corporation (``DTCC''), 
the corporate parent of NSCC, 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 
75 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 provides 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 provides confirmation 
and matching services (``NSCC Equity Options Service'') to Deriv/SERV 
pursuant to the NSCC/DTCC Deriv/SERV Service Agreement (``Service 
Agreement'').\4\ In connection

[[Page 24667]]

with the NSCC Equity Options Service, Deriv/SERV has become a Data 
Services Only Member of NSCC.\5\
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    \4\ DTC has represented that the continued 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 are provided by DTC pursuant to 
service agreements between NSCC and DTCC and between DTCC and DTC.
    \5\ NSCC Rules and Procedures, Rule 31.
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    The Deriv/SERV Equity Options Service is operated pursuant to the 
operating procedures of Deriv/SERV (``Deriv/SERV Operating 
Procedures''). U.S. Equity Option Transactions are also subject to 
NSCC's proposed Addendum M. Therefore, each user of the Deriv/SERV 
Equity Options Service enters 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 Agreements between 
NSCC/DTCC and Deriv/SERV, NSCC has 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 is neither responsible for the content of the messages 
transmitted through the NSCC Equity Options Service nor is it 
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 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 is a nonguaranteed service of NSCC.\6\
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    \6\ 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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    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 provides. 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 \7\ and the rules and 
regulations thereunder because the implementation of the proposal 
should 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 should 
reduce processing errors, delays, and risks that are typically 
associated with manual processes.
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    \7\ 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

    Within thirty-five 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 ninety 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 organization consents, 
the Commission will:
    (A) By order approve such 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-NSCC-2005-04 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-2005-04. 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 http://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-2005-04 and 
should be submitted on or before May 25, 2005.
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    \8\ 17 CFR 200.30-3(a)(12).


[[Page 24668]]


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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2238 Filed 5-9-05; 8:45 am]
BILLING CODE 8010-01-P