[Federal Register Volume 60, Number 81 (Thursday, April 27, 1995)]
[Unknown Section]
[Pages 20785-20787]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10296]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35625; International Series Release No. 804; File No.
SR-NASD-94-55]
Self-Regulatory Organizations; National Association of Securities
Dealers; Order Approving a Proposed Rule Change Relating to the Access
of West Canada Clearing Corporation and Its Members to the Automated
Confirmation Transaction Service
April 19, 1995.
On October 12, 1994, the National Association of Securities
Dealers, Inc. (``NASD'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change (File No. SR-NASD-
94-55) under Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ to allow access by West Canada Clearing Corporation
(``West Canada'') and its members to the NASD's automated confirmation
transaction service (``ACT''). Notice of the proposal was published in
the Federal Register on January 27, 1995.\2\ Sixteen comment letters
were received that supported the proposal.\3\ For the reasons discussed
below, the Commission is approving the proposed rule change.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 35257 (January 20, 1995),
60 FR 5446.
\3\Letters from M. Dryhurst, Cage Manager, Levesque Beaubien
Geoffrion Inc., to Secretary, Commission (February 8, 1995); Charles
J. Dunlap, C.G.A., Chief Financial Officer, Haywood Securities Inc.,
to Secretary, Commission (February 7, 1995), Donna M. Kenny, Back
Office Manager, Global Securities, to Secretary, Commission
(February 9, 1995); D. Foreman, Manager, Clearing, Odlum Brown, to
Secretary, Commission (February 9, 1995); B.D. Harwood, Vice
Chairman, Canaccord, to Secretary, Commission (February 16, 1995);
Gerald H. Powers, Senior Vice President, Cantella & Co., Inc., to
Secretary, Commission (February 16, 1995); David R. Smith, Chief
Financial Officer, McDermid St. Lawrence Chisholm Ltd., to
Secretary, Commission (February 14, 1995); Phyllis Stevenson,
Manager, Operations, Meridian Securities International Ltd., to
Secretary, Commission (February 10, 1995); Steve McKee, Registered
Representative, Golden Capital Securities Ltd., to Secretary,
Commission (February 14, 1995); Tony Chan, Vice President, Golden
Capital Securities Ltd., to Secretary, Commission (February 14,
1995); Jeff Rutledge, Registered Representative, Golden Capital
Securities Ltd., to Secretary, Commission (February 14, 1995); Gus
Wahlroth, Registered Representative, Golden Capital Securities Ltd.,
to Secretary, Commission (February 14, 1995); Jack Finkelstein,
Registered Representative, Golden Capital Securities Ltd., to
Secretary Commission (February 14, 1995); Randy Shaw, Registered
Representative, Golden Capital Securities Ltd., to Secretary,
Commission (February 14, 1995); Rita Gatto, Registered
Representative, Golden Capital Securities Ltd., to Secretary,
Commission (February 14, 1995); Marie Martin, Vice President and
Operations Manager, Midland Walywn Capital Inc., to Secretary,
Commission (February 22, 1995). The comment letters are discussed in
Section B below.
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I. Description of the Proposal
A. Description
The NASD is amending its rule regarding ACT to allow West Canada, a
nonmember of the NASD, and members of West Canada who are not members
of the NASD to access this service. The NASD also is amending the ACT
rule to reflect that NASD members functioning as market makers in over-
the-counter equity securities are also classified as ACT participants.
The NASD created and implemented the ACT system in response to
problems experienced in the wake of the October 1987 market break and
at the urging of the Commission to consider accelerating efforts to
generate same day compared trades.\4\ ACT has three primary features:
(1) Trade match processing (i.e., the comparison of trade information
and the submission of locked-in trades for regular way settlement to
clearing agencies on a trade date or next day [``T+1''] basis);\5\ (2)
trade reporting for transactions in securities that are subject to real
time trade reporting requirements; and (3) risk management features
that provide firms with a centralized, automated environment for
assessing market exposure during and after the trading day and that
permit clearing firms to monitor and respond to the ongoing trading
activities of their correspondents.\6\
\4\For a description of ACT, refer to Securities Exchange Act
Release Nos. 27229 (September 8, 1989), 54 FR 38484 [File No. SR-
NASD-89-25] (order partially approving proposed rule change to
permit ACT to be used by self-clearing firms) and 28583 (October 26,
1990), 55 FR 46120 [File No. SR-NASD-89-25] (order approving
remainder of File SR-NASD-89-25 to permit ACT to be used by
introducing and correspondent broker-dealers).
\5\ACT uses three methods to lock-in trades: (1) Trade-by-trade
match, whereby both sides of the trade are reported to ACT and
matched; (2) trade acceptance, whereby one side of the trade is
reported to ACT and accepted by the contra-side; and (3) aggregate
volume match, whereby ACT performs a batch-type comparison at the
end of each day that aggregates previously unmatched trade reports
to effect a match. (For example, two identical trade reports for 300
and 400 shares of the same security may be matched with a 700 share
trade report.)
\6\Among others, ACT has the following risk management
capabilities. First, ACT can compute the dollar value of each trade
report entered thereby allowing member firms to assess their market
exposure during the trading day. Second, clearing firms can
establish daily gross dollar thresholds for each correspondent's
trading activity. If a correspondent reaches or exceeds the
threshold, the clearing firm is so notified. Third, ACT alerts
clearing firms when a correspondent reaches 70% or 100% of its daily
gross dollar threshold. Fourth, ACT has a single trade limit that
provides clearing firms with a 15 minute review period prior to
becoming obligated to clear a trade of $1,000,000 or more executed
by one of its correspondents. Fifth, ACT has a super cap limit set
at two times the gross dollar thresholds for purchases and sales but
in no event less than $1 million that provides clearing firms with a
15 minute review period prior to becoming obligated to clear a trade
of $200,000 or more executed by one of its correspondents once the
limit is surpassed.
[[Page 20786]]
Since its implementation, ACT has functioned as an effective and
efficient vehicle to compress the trade comparison cycle thereby
facilitating the prompt and accurate clearance and settlement of
securities transactions and enabling NASD members to know their
positions and market exposure before trading commences the next day. As
a facility of the Nasdaq Stock Market operated by the Nasdaq Stock
Market, Inc. (``NSMI'') subsidiary of the NASD, access to the ACT
system is limited to NASD members.
Providing West Canada access to ACT has been structured so that the
primary parties to the arrangement are West Canada and NSMI, the NASD
subsidiary that owns and operates ACT. Rather than negotiating separate
contracts with each individual organization, the NASD believes that it
is more efficient for NSMI to negotiate with the exchange, market, or
clearing entity to which the non-NASD member belongs, in this case West
Canada. Accordingly, under the rule change, West Canada operates as a
service bureau to input information into ACT on behalf of West Canada
members. Individual West Canada members will not be able to obtain
access to ACT unless there is first an overriding, umbrella-type
agreement reached between NSMI and West Canada. Thus, whenever NASD
members transact with West Canada members in ACT eligible securities,
they will be able to use ACT just as they do now for comparing regular-
way trades with other NASD members.
Under the rule change a nonmember clearing organization will not be
given access to ACT unless it: (1) Is a clearing agency registered
under the Act; (2) maintains membership in a registered clearing
agency; or (3) maintains an effective clearing arrangement with a
registered clearing agency. West Canada has an effective clearing
arrangement with the Midwest Clearing Corporation (``MCC'') and thus
satisfies this requirement.\7\ New section (b)(5)(B) of the ACT Rules
provides that West Canada must execute a Non-member Clearing
Organization ACT Participant Application Agreement. This agreement
requires West Canada to abide by the ACT rules and regulations and will
ensure that West Canada members' trades processed through ACT will be
accepted for clearance and settlement by West Canada. The agreement
also addresses NSMI concerns over nonpayment of service charges, the
financial exposure and liabilities of the parties, and methods of
redress should West Canada or a West Canada member fail to comply with
the relevant NASD rules and regulations. In addition, new Section
(b)(5)(B)(6) of the ACT Rules provides that West Canada will not be
able to input information into ACT on behalf of a West Canada member
unless such member also enters into a Non-Member ACT Access Participant
Application Agreement with NSMI. In the case of a clearing broker, this
agreement provides that the member will accept and will settle each
trade that ACT identifies as having been effected by such member of any
of its correspondents on the regularly scheduled settlement date. In
the case of an order entry firm, the firm must agree to accept and
settle each trade that it has effected or, if settlement is to be made
through a clearing member, guarantee the acceptance and settlement of
each ACT-identified trade by the clearing member on the regularly
scheduled settlement date.
\7\In January 1983, MCC, Midwest Securities Trust Company
(``MSTC''), the Vancouver Stock Exchange, and the Vancouver Stock
Exchange Service Corporation (``VSESC''), (now known as West Canada
Clearing Corporation [``WCCC'']) (``VSESC/WCCC'') created the
American and Canadian Connection for Efficient Securities
Settlements (``ACCESS''). Through ACCESS, over-the-counter
securities transactions between the U.S. and Canadian broker-dealers
in both U.S. and Canadian securities are compared, cleared, and
settled. Trades between U.S. and Canadian broker-dealers involving
securities listed on U.S. securities exchanges, Canadian securities
exchanges, or the National Association of Securities Dealers
Automated Quotation (``NASDAQ'') System are eligible for clearance
and settlement through ACCESS. To establish ACCESS, VSESC/WCCC
became an MCC/MSTC participant, and opened separate sponsored MCC/
MSTC accounts for Canadian broker-dealers that were participants of
VSESC. As an MCC/MSTC member, VSESC/WCCC is liable as principal
(i.e., guarantees) all trades that it submits including all trades
in its sponsored accounts. Some safeguards on ACCESS activity
include, contributions by VSESC/WCCC to MCC/MSTC's participant fund
based on VSESC/WCCC's total activity, and a cash reserve of over
250,000 Canadian dollars maintained by VSESC/WCCC to be used to
satisfy the obligations of any VSESC/WCCC participant that may
become insolvent. In addition, VSE guarantees all VSESC/WCCC
liabilities to MCC/MSTC. Letter from Jonathan Kallman, Assistant
Director, Division of Market Regulation, Commission, to Michael
Wise, Associate Counsel, MCC/MSTC (September 12, 1985).
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Separately, the proposal also amends the ACT Rules to expand the
term ``Participant'' to include NASD member firms that function as
market makers in over-the-counter (``OTC'') equity securities that are
eligible for clearing via the National Securities Clearing
Corporation's (``NSCC'') facilities.\8\ The instant modification will
clarify that ACT participant status encompasses NASD members that
function as market makers in such securities via the OTC Bulletin Board
service or another interdealer quotation system.\9\
\8\Securities Exchange Act Release No. 30415 (February 26,
1992), 57 FR 7829 [File No. SR-NASD-92-5] (order approving OTC
Equity Securities as ACT eligible securities).
\9\Under Schedule D to the NASD By-Laws, Part XII, Section 1(d)
defines ``OTC Market Maker'' to mean any NASD member that holds
itself out as being a market maker in any OTC Equity Security by
entering proprietary quotations or indications of interest in an
inter-dealer quotation system.
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B. Comments
The Commission received sixteen comment letters supporting approval
of the filing.\10\ The commenters believe that allowing West Canada and
its participants to submit trade input to ACT for comparison will
improve the timeliness of trade confirmation which is essential to
meeting the June 7, 1995 three business day settlement cycle.\11\
\10\Supra note 3.
\11\On October 6, 1993, the Commission adopted Rule 15c6-1 under
the Act, which establishes three business days after the trade date
instead of five business days as the standard settlement time frame
for most broker-dealer transactions. Securities Exchange Act Release
No. 33023 (October 6, 1993), 58 FR 52891 (release adopting Rule
15c6-1). On November 16, 1994, the Commission changed the effective
date of Rule 15c6-1 from June 1, 1995, to June 7, 1995. Securities
Exchange Act Release No. 34952 (November 9, 1994), 59 FR 59137.
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II. Discussion
The rule change stems from a request from West Canada to NASD for
access to ACT for trade comparison purposes only.\12\ Prior to this
rule change, when an NASD member effected a transaction with a West
Canada member, the transaction typically was compared, cleared, and
settled in the following manner. The NASD member entered the trade into
ACT with the West Canada member designated as the contra-party. Because
the West Canada member was not an ACT participant, ACT responded to the
NASD member ``contra-side not ready.'' ACT then reported the trade for
trade reporting purposes and transmitted the trade to NSCC as a one-
side trade for trade comparison. The West Canada member submitted the
trade information to West Canada that in turn sent the trade to MCC.
MCC then transmitted the trade report to NSCC by 2:00 a.m. on T+1 for
comparison. NSCC then compared the trade reports, and assuming there
was a match, NSCC submitted the West Canada member's side of the
transaction to MCC for clearance and settlement; the NASD
[[Page 20787]] member's side of the transaction was retained by NSCC
for clearance and settlement. If there was a discrepancy concerning the
terms of the transaction, the trade reconciliation process involved the
two clearing corporations and the two parties to the transaction and
might last until three days following the trade date. Although the NASD
believes that the facilities of NSCC and MCC have been used to compare
trades between NASD and West Canada members adequately, the NASD
believes the trade comparison procedure for these trades would be
streamlined and made more efficient through the use of ACT.
\12\The present filing solely addresses the access of West
Canada to ACT. Other proposals concerning nonmember access to ACT,
if any, will be raised in separate rule filings submitted pursuant
to Section 19 of this Act.
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The NASD does not believe that granting West Canada and West Canada
members access to ACT will jeopardize the integrity of ACT or any other
market facility operated by NSMI. In this regard, before West Canada or
any of its members are granted access to ACT, these entities must agree
to be bound by the terms of the revised ACT Participant Application
Agreements, which establish the terms and conditions under which West
Canada and its members will receive access to ACT. The revised
Agreements will provide an adequate and sufficient surrogate for NASD
membership which otherwise would provide the jurisdictional nexus to
ensure compliance with applicable NASD rules and regulations. Initial
and continuing access to ACT by nonmembers will be specifically
conditioned upon adherence to the terms and conditions of these
agreements. West Canada and West Canada members also will be required
to maintain the physical security of the equipment used to input trades
into ACT. Based on these factors, the NASD believes that granting West
Canada and West Canada members access to ACT will not compromise the
integrity or operation of Act.
The Commission believes that the proposed rule change is consistent
with Section 15A(b)(6)\13\ of the Act which requires that the rules of
a national securities association be designed to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
and processing information with respect to securities, to remove
impediments to and perfect the mechanism of a free and open market and
a nationl market system, and, in general, to protect investors and the
public interest. The Commission believes the proposal fosters
cooperation and coordination with persons engaged in clearing and
settling securities transactions by helping to eliminate the
inefficiencies inherent in the practice of submitting two-sided
transaction reports to two separate clearing corporations. The proposal
should help streamline and improve the process by which trades between
NASD and West Canada members are compared. In addition, by compressing
the time-period in which open trades are left uncompared, market
participants will be better able to access and evaluate their market
exposure thereby contributing to fair and orderly markets and the
protection of investors and the public interest. Moreover, ACT
generally achieves locked-in trades within minutes of an execution thus
resulting in faster and more efficient trade reconciliation,
confirmation and increased efficiency of back office operations which
the Commission believes is necessary for compliance with Rule 15c6-1
mandating settlement on T+3.\14\
\13\15 U.S.C. 78o-3(b)(6) (1988).
\14\Supra note 11.
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III. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the requirements of the Act and
particularly with Section 15A(b)(6) of the Act and the rules and
regulations thereunder.
It is therefore ordered, purusant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-NASD-94-55) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\15\
\15\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10296 Filed 4-26-95; 8:45 am]
BILLING CODE 8010-01-M