94-8441. Self-Regulatory Organizations; Midwest Clearing Corporation; Order Approving a Proposed Rule Change Relating to the Processing of Basket Trades

[Federal Register Volume 59, Number 68 (Friday, April 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8441]


[[Page Unknown]]

[Federal Register: April 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33851; File No. SR-MCC-94-01]

 

Self-Regulatory Organizations; Midwest Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to the Processing of 
Basket Trades

April 1, 1994.
    On January 7, 1994, the Midwest Clearing Corporation (``MCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-MCC-94-01) under Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'')\1\ to amend its rules 
relating to the processing of basket trades. Notice of the proposal was 
published in the Federal Register on February 15, 1994.\2\ No comment 
letters were received. This order approves the proposal.
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    \1\15 U.S.C. 78(b)(1) (1988).
    \2\Securities Exchange Act Release No. 33595 (February 8, 1994), 
59 FR 7274.
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I. Description

    The proposal amends MCC's rules relating to the processing of 
trades in the Chicago Basket (``CXM'') product which is traded on the 
Chicago Stock Exchange (``CHX'').\3\ The CXM is a basket of stocks that 
is comprised of twenty-five shares of each of the stocks included in 
the Chicago Mercantile Exchange's MMI stock index futures contract.\4\
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    \3\For a detailed description of the CXM product, refer to 
Securities Exchange Act Release No. 33053 (October 15, 1993), 58 FR 
4610 [File No. SR-CHX-93-18] (order approving proposed rule change).
    \4\The Chicago Mercantile Exchange's MMI is a stock index 
futures contract which is based on the American Stock Exchange's 
Major Market Index. The Major Market Index is a broad-based, price-
weighted index currently based on twenty stocks listed on the New 
York Stock Exchange.
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    Basket trades are defined by MCC as trades in a group of securities 
that an exchange or market place self-regulatory organization (``SRO'') 
has designated as eligible for execution in a single trade. MCC's 
current rules relating to basket trades permit MCC to accept from an 
exchange or marketplace SRO locked-in basked trade data. On T+1, MCC 
reports the locked-in basket trades to participants on a basket 
purchase and sales report. For each participant, MCC aggregates the 
trade data to arrive at an aggregate basket purchase figure and an 
aggregate basket sale figure. Aggregate buy side and aggregate sell 
side basket transactions are then ``burst'' into their component 
securities, which are eligible for MCC's continuous net settlement 
(``CNS'') system, for clearance and settlement. The CNS system nets all 
component securities of the burst basket with each participant's other 
transactions in the component securities. This results in an individual 
participant being either a net buyer or a net seller in each of a 
basket's component securities. These positions are reflected on the 
appropriate CNS purchase and sales report.
    The proposed rule provides an alternative clearing process for 
trades in the CXM. The alternative must be elected on an account-by-
account basis (as opposed to a trade-by-trade basis). Under this 
alternative, rather than aggregating all buy transactions and all sell 
transactions in one account prior to the separation of the CXM into its 
component stocks, MCC will separate each basket transaction into its 
component securities without the aggregation process. MCC will report 
this information to the electing participant instead of the 
participant's aggregate net buy and aggregate net sell basket 
information. According to MCC, the proposed alternative will make it 
easier for participants to allocate the correct number of shares with 
the proper execution prices to customers and will make it easier for 
participants to identify trades for cancellation and correction.

II. 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.\5\ The Commission 
believes that the alternative settlement process is consistent with 
MCC's obligations under this section because the alternative settlement 
process will make it easier for participants to allocate the correct 
number of shares with the proper execution prices to customers and will 
make it easier for participants to identify trades for cancellation or 
correction.
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    \5\15 U.S.C. 78q-1(b)(3)(F).
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    In addition, the Commission believes that the alternative 
settlement process is consistent with MCC's other obligation under 
section 17A(b)(3)(F) to assure the safeguarding of securities and funds 
that are in its custody or control or for which it is responsible.\6\ 
MCC participants who trade or have customers who trade baskets and 
choose the alternative settlement process will be subject to the same 
financial responsibility and reporting requirements as other MCC 
participants. Furthermore, because the baskets will be burst into their 
component securities for processing and because MCC currently processes 
trades in the underlying component securities, MCC's existing risk 
management systems will apply to the alternative processing of basket 
trades.
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    \6\Id.
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III. Conclusion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and in particular with the 
requirements of section 17A of the Act.
    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\7\ that the proposed rule change (File No. SR-MCC-94-01) be, and 
hereby is approved.

    \7\15 U.S.C. 78s(b)(2).
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    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. 94-8441 Filed 4-7-94; 8:45 am]
BILLING CODE 8010-01-M