[Federal Register Volume 63, Number 70 (Monday, April 13, 1998)]
[Notices]
[Pages 18055-18057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9593]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39833; File No. SR-MSRB-98-06]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change Relating to Rule G-
15(d)(ii) Concerning Automated Confirmation/Acknowledgment of Customer
Transactions
April 6, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 3, 1998, the
Municipal Securities Rulemaking Board (``Board'' or ``MSRB'') 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 primarily by the Board. The Commission is
publishing this notice to solicit comments from interested persons on
the proposed rule change.
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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
The Board is filing amendments to Board rule G-15(d)(ii),
concerning automated confirmation/acknowledgment of customer
transactions (hereafter referred to as ``the proposed rule change'').
The text of the proposed rule change is as follows: \2\
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\2\ Italicizing indicates new language; [brackets] indicate
deletions.
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G-15 Confirmation, Clearance and Settlement of Transactions With
Customers
(a)-(c) No change.
(d) Delivery/Receipt vs. Payment Transactions.
(i) No change.
(ii) Requirement for Confirmation/Acknowledgment.
(A) Use of Registered Clearing Agency or Qualified Vendor. Except
as provided in this paragraph (ii) of rule G-15(d), no broker, dealer
or municipal securities dealer shall effect a customer transaction for
settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP)
basis unless the facilities of a C[c]learing A[a]gency [registered with
the Securities and Exchange Commission (registered clearing agency)] or
Qualified Vendor are used for automated confirmation and acknowledgment
of the transaction. Each broker, dealer and municipal securities dealer
executing a customer transaction on a DVP/RVP basis shall: (A) ensure
that the customer has the capability, either directly or through its
clearing agent, to acknowledge transactions in an automated
confirmation/acknowledgment system operated by a [registered]
C[c]learing A[a]gency or Qualified Vendor; (B) submit or cause to be
submitted to a [registered] C[c]learing A[a]gency or Qualified Vendor
all information and instructions required by the [registered]
C[c]learing A[a]gency or Qualified Vendor for the production of a
confirmation that can be acknowledged by the customer or the customer's
clearing agent; and (C) submit such transaction information to the
automated confirmation/acknowledgment system on the date of execution
of such transaction; provided that a transaction that is not eligible
for automated confirmation and acknowledgment through the facilities of
a [registered] C[c]learing A[a]gency shall not be subject to this
paragraph (ii).
(B) Definitions for Rule G-15(d)(ii).
(1) ``Clearing Agency'' shall mean a clearing agency as defined in
Section 3(a)(23) of the Act that is registered with the Commission
pursuant to Section 17A(b)(2) of the Act or has obtained from the
Commission an exemption from registration granted specifically to allow
the clearing agency to provide confirmation/acknowledgment services.
(2) ``Qualified Vendor'' shall mean a vendor of electronic
confirmation and acknowledgment services that:
(A) for each transaction subject to this rule: (i) delivers a trade
record to a Clearing Agency in the Clearing Agency's format; (ii)
obtains a control number for the trade record from the Clearing Agency;
(iii) cross-references the control number to the confirmation and
subsequent acknowledgment of the trade; and (iv) electronically
delivers any acknowledgment received on the trade to the Clearing
Agency and includes the control number when delivering the
acknowledgment of the trade to the Clearing Agency;
(B) annually certifies: (i) with respect to its electronic trade
confirmation/acknowledgment system, that it has a capacity requirements
evaluation and monitoring process that allows the vendor to formulate
current and anticipated estimated capacity requirements; (ii) that its
electronic trade confirmation/acknowledgment
[[Page 18056]]
system has sufficient capacity to process the volume of data that it
reasonably anticipates to be entered into its electronic trade
confirmation/acknowledgment service during the upcoming year; (iii)
that its electronic trade confirmation/acknowledgment system has formal
contingency procedures, that the entity has followed a formal process
for reviewing the likelihood of contingency occurrences, and that the
contingency protocols are reviewed, tested, and updated on a regular
basis; (iv) that its electronic confirmation/acknowledgment system has
a process for preventing, detecting, and controlling any potential or
actual systems or computer operations failures, including any failure
to interface with a Clearing Agency as described in rule G-
15(d)(ii)(B)(2)(A), above, and that its procedures designed to protect
against security breaches are followed; and (v) that its current assets
exceed its current liabilities by at least five hundred thousand
dollars;
(C) when it begins providing such services, and annually
thereafter, submits an Auditor's Report to the Commission staff and
obtains from the Commission staff a statement that the Commission staff
does not object to the Auditor's Report. (An Auditor's Report will be
deemed unacceptable if it contains any findings of material weakness.);
3
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\3\ At this time, the Commission staff intends to indicate that
a vendor's initial Auditor's Report is not unacceptable and that the
vendor therefore is a qualified vendor for purposes of Rule G-15 by
issuing a letter to the vendor stating that it will not recommend
enforcement action against any of the Board's member organizations
that elect to use the confirmation/affirmation services of the
vendor.
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(D) notifies the Commission staff immediately in writing of any
material change to its confirmation/acknowledgment systems. (For
purposes of this subparagraph (D) ``material change'' means any changes
to the vendor's systems that significantly affect or have the potential
to significantly affect its electronic trade confirmation/
acknowledgment systems, including changes that: (i) affect or
potentially affect the capacity or security of its electronic trade
confirmation/acknowledgment system; (ii) rely on new or substantially
different technology; (iii) provide a new service as part of the
Qualified Vendor's electronic trade confirmation/acknowledgment system;
or (iv) affect or have the potential to adversely affect the vendor's
confirmation/acknowledgment system's interface with a Clearing
Agency.);
(E) immediately notifies the Commission staff in writing if it
intends to cease providing services;
(F) provides the Board with copies of any submissions to the
Commission staff made pursuant to subparagraphs (C), (D), and (E) of
this rule G-15(d)(ii)(B)(2) within ten business days.
(G) promptly supplies supplemental information regarding its
confirmation/acknowledgment system when requested by the Commission
staff or the Board.
(3) ``Auditor's Report'' shall mean a written report which is
prepared by competent, independent, external audit personnel in
accordance with the standards of the American Institute of Certified
Public Accountants and the Information Systems Audit and Control
Association and which: (A) verifies the certifications described in
subparagraph (d) (ii) (B) (2) (B) of this rule G-15; (B) contains a
risk analysis of all aspects of the entity's information technology
systems including, computer operations, telecommunications, data
security, systems development, capacity planning and testing, and
contingency planning and testing; and (C) contains the written response
of the entity's management to the information provided pursuant to (A)
and (B) of this subparagraph (d) (ii) (B) (3) of rule G-15.
(C) Disqualification of Vendor. A broker, dealer or municipal
securities dealer using a Qualified Vendor that ceases to be qualified
under the definition in rule G-15(d)(ii)(B)(2) shall not be deemed in
violation of this rule G-15(d)(ii) if it ceases using such vendor
promptly upon receiving notice that the vendor is no longer qualified.
(iii) No change.
(e) No change.
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 Board 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 Board 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
(a) The clearance of institutional customer transactions is
accomplished today in large part through the use of automated
confirmation/acknowledgment systems operated by clearing agencies
registered with the Commission (``registered clearing agencies'').
These systems have provided substantial efficiencies and cost savings
by ensuring timely settlement and eliminating some of the time
consuming and expensive manual processing associated with paper
confirmations. The Board views these systems as a critical part of the
national system of clearance and settlement mandated by Section 17A of
the Act.\4\
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\4\ 15 U.S.C. 78q-1.
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Board rule G-15(d)(ii) requires that customer transactions in
municipal securities which are effected on delivery versus payment or
receipt versus payment (``DVP/RVP'') settlement basis must, if eligible
for processing in an automated confirmation/acknowledgment system, be
confirmed and acknowledged through such a system. The rule currently
specifies that the confirmation/acknowledgment system must be one
operated by a registered securities clearing agency. Other self-
regulatory organizations (``SROs'') in the securities market also have
similar rules requiring confirmation/acknowledgment through registered
clearing agencies. Based on a request from a private vendor, it appears
some private vendors, who are not registered securities clearing
agencies, nevertheless may wish to market confirmation/acknowledgment
services to brokers, dealers and municipal securities dealers.
The Board believes that competition among confirmation/
acknowledgment service providers is a desirable goal and ultimately
will make the clearance and settlement process more efficient and
responsive to the needs of the securities industry. At the same time,
the Board believes that, if private vendors are to provide a clearance
or settlement service that previously has been provided only by
registered clearing agencies under supervision of the Commission,
appropriate safeguards must be provided to assure that the systems
offered by private vendors are reliable and are effectively integrated
into the national system of clearance and settlement.
The proposed rule change would allow brokers, dealers and municipal
securities dealers to comply with rule G-15(d)(ii) through the use of
confirmation/acknowledgment systems operated by non-registered
``qualified vendors.'' to become a ``qualified vendor'' of
confirmation/acknowledgment services, an entity would have to:
For each transaction that it processes in its
confirmation/acknowledgment system, deliver a trade
[[Page 18057]]
record to a registered clearing agency, obtain a control number, cross
reference the control number to the confirmation/acknowledgment,
electronically deliver any acknowledgment received from a customer or a
customer's agent to the registered clearing agency and include such
control number when delivering acknowledgments to the clearing agency.
Certify to the integrity and capacity of the electronic
confirmation/acknowledgment system and that it will maintain monitoring
and contingency procedures.
On an annual basis, submit an independent auditor's report
to the Commission staff which the Commission staff does not object to.
Notify the Commission staff in writing of any material
changes in the systems by which it offers electronic confirmation/
acknowledgment services.
Submit to the Board copies of any of the above filings
with the Commission staff within ten business days.
Supply supplemental information regarding its
confirmation/acknowledgment services, as requested by the Board or the
Commission staff.
The Board believes that these requirements for a vendor to become
and remain qualified are necessary to assure that the confirmation/
acknowledgment services used in the securities industry are reliable
and are integrated into the national system of clearance and
settlement. The proposed rule change is responsive to the Commission
staff's request (contained in a letter, dated November 25, 1997 from
Mr. Richard R. Lindsey, Director, Division of Market Regulation) that
SROs consider adoption of uniform rule amendments which allow vendors
to provide confirmation/acknowledgment services under circumstances
similar to those specified in the proposed rule change.\5\
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\5\ The Commission notes that the proposed rule change addresses
the concerns raised by the Petition for Rulemaking filed by Thomson
Financial Services (``Thomson'') with the Commission in December
1996. Thus, the Commission will respond to Thomson's petition after
the final disposition of the proposed rule change.
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(b) As set forth in Section 15B(b)(2)(C) of the Act,\6\ the Board
has the authority to adopt rules to ``foster cooperation and
coordination with persons engaged in . . . clearing, settling,
processing information with respect to, and facilitating transactions
in municipal securities.''
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\6\ 15 U.S.C. 78o-4(b)(2)(C).
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The Board's role in this area is given additional direction by
Section 17A of the Act,\7\ which mandates the creation of a national
system of automated clearance and settlement of securities
transactions. Section 17A expressly includes municipal securities
within the stated objectives.
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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
The Board does not believe that the proposed rule change will have
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act because it applies equally to
all brokers, dealers and municipal securities dealers involved in DVP/
RVP customer transactions.
(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.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the Board. All
submissions should refer to File No. SR-MSRB-98-06 and should be
submitted by May 4, 1998.
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. 98-9593 Filed 4-10-98; 8:45 am]
BILLING CODE 8010-01-M
