[Federal Register Volume 70, Number 109 (Wednesday, June 8, 2005)]
[Notices]
[Pages 33570-33571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2932]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51745; File No. SR-NSCC-2005-04]


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

May 26, 2005.

I. Introduction

    On April 29, 2005, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change File No. SR-NSCC-2005-04 pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on May 10, 2005.\2\ The comment period ended on May 25, 2005. 
No comment letters were received. For the reasons discussed below, the 
Commission is granting accelerated approval of the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 51649 (May 3, 2005), 70 
FR 24666.
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II. Description

    NSCC is permanently adding Addendum M to its Rules and Procedures 
to establish a confirmation and matching service for over-the-counter 
(``OTC'') U.S. equity options transactions. The service is called the 
Equity Options Service.\3\
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    \3\ 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. NSCC staff has communicated its findings to 
Commission staff during various meetings and conversations.
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    Currently, confirmation of trade details among dealers and the 
dealers' buy-side customers in the OTC equity options market is 
supported largely by faxes and telephone communications. It is widely 
acknowledged by the industry that this current operational 
infrastructure, which depends upon nonstandardized, 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 and standardizing 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 the 
associated cash flows. This service is now used by approximately 75 
entities, which includes all of the largest OTC credit default swaps 
dealers.
    Deriv/SERV has developed a confirmation and matching service for 
OTC equity options transactions and the 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 OTC equity 
option is a U.S. person and the OTC equity option is issued by a U.S. 
issuer (``U.S. Equity Option Transaction''), NSCC provides confirmation 
and matching services through its Equity Options Service to Deriv/SERV 
pursuant to a service agreement between NSCC and Deriv/SERV (``Service 
Agreement'').\4\ In connection 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 
Addendum M of NSCC's Rules and Procedures. 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 Agreement, 
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

[[Page 33571]]

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 responsible neither for the content of the messages 
transmitted through the NSCC Equity Options Service nor 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. The NSCC 
Equity Options Service does not involve netting or money settlement 
through the facilities of NSCC, and it is a nonguaranteed service of 
NSCC.\6\
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    \6\ 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 (i.e., the ``comparison of data respecting 
the terms of settlement of securities transactions'') constitutes a 
clearing agency function 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.

III. Discussion

    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 the proposed rule change to be consistent with Section 
17A(b)(3)(F) of the Act because the NSCC Equity Options Service should 
provide for the prompt and accurate clearance and settlement of U.S. 
OTC equity option transactions by facilitating the transmission of 
automated, standardized information on a centralized communications 
platform. This should reduce processing errors, delays, and risks that 
are typically associated with manual processes.
    NSCC has requested that the Commission approve the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of the filing. The Commission finds good cause for approving the 
proposed rule change prior to the thirtieth day after the date of 
publication of the notice of the filing because the Commission's 
current approval of NSCC's Equity Options Service expires May 31, 2005.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-2005-04) be and hereby 
is approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2932 Filed 6-7-05; 8:45 am]
BILLING CODE 8010-01-P