[Federal Register Volume 59, Number 122 (Monday, June 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15491]
[[Page Unknown]]
[Federal Register: June 27, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34238; File No. SR-NASD-94-28]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
the National Association of Securities Dealers, Inc. Relating to
Clearance and Settlement Requirements for NASD Member Firms That Are
Market Makers in the Nasdaq Stock Market or the OTC Bulletin
Board Service
June 20, 1994.
Pursusant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on May
23, 1994, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the NASD. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to Section 19(b)(1) of the Act, the NASD hereby files a
proposed rule change that deals with clearance and settlement
requirements applicable to NASD member firms functioning as market
makers in The Nasdaq Stock Market (``Nasdaq'') or the OTC Bulletin
Board Service (``OTCBB''). Below is the text of the proposed
rule change. (Additions are italicized and deletions are bracketed.)
Scheduled D--Part V: Requirements Applicable to NASDAQ Market
Makers
Sec. 7 Clearance and Settlement
(a) A market maker shall clear and settle transaction in Nasdaq
securities [other than securities in SOES] through the facilities of a
registered clearing agency [where clearing facilities are located
within 25 miles of the market maker.] that uses a continuous net
settlement system. This requirement may be satisfied by direct
participation, use of direct clearing services, or by entry into a
correspondent clearing arrangement with another member that clears
trades through such an agency.
(b) [Notwithstanding its proximity to a particular clearing
facility, a market maker may also clear and settle its transactions in
a security that is not a SOES security through any registered clearing
facility using a continuous net settlement system; enter into a
correspondent clearing arrangement with a member that clears through a
continuous net settlement clearing facility; settle transactions ``ex-
clearing'' provided both parties to the transaction agree; or use
direct clearing services.] Notwithstanding paragraph (a), transactions
in Nasdaq securities may be settled ``ex-clearing'' provided that both
parties to the transaction agree.
(c) No change.
OTC Bulletin Board Service Rules
Section 4. Requirements Applicable to Market Makers
(d) Clearance and Settlement
(1) A market maker shall clear and settle transactions in OTCBB-
quoted securities through the facilities of a registered clearing
agency that uses a continuous net settlement system. This requirement
applies only to transactions in OTCBB securities that are clearing
eligible.
(2) The foregoing requirement may be satisfied by direct
participation, use of direct clearing services, or by entry into a
correspondent clearing arrangement with another member that clears
trades through such an agency.
(3) Notwithstanding paragraph (d)(1), transactions in OTCBB-quoted
securities may be settled ``ex-clearing'' provided that both parties to
the transaction agree.
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 NASD 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 NASD 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
The purpose of this rule change is to mandate market maker
utilization of the facilities of a registered clearing agency to ensure
efficient clearance and settlement of securities transactions. For
securities listed on Nasdaq, this will be accomplished by eliminating
the ``25 mile exception''' from Section 7(a) in Part V of Schedule D to
the NASD By-Laws. (Part V articulates the basic requirements applicable
to Nasdaq market makers.) Even today, this exception is quite limited
in that it is only available to market makers who are located more than
25 miles from a clearing facility, limit their Nasdaq market making
activity to Nasdaq SmallCapSM securities, and do not participate
in the Small Order Execution System (``SOES'').\1\ With respect to
equity securities quoted in the OTCBB, a new requirement is being
proposed to mandate market maker participation in a registered clearing
agency for clearance and settlement of transactions in OTCBB securities
that are clearing eligible.\2\ As a result, parallel requirements will
exist for the two largest equity market segments in which NASD members
function as market makers and utilize the Automated Confirmation
Transaction Service (``ACT'') for trade reporting and comparison
purposes.\3\
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\1\Although registered market makers in Nasdaq National Market
securities must be SOES participants, SOES participation is
voluntary with respect to market makers in SmallCap issues.
\2\As of April 30, 1994, approximately 87% of all securities
quoted in the OTCBB were clearing eligible. Clearing eligible status
is noted in the OTCBB symbol directory and in the electronic
directory accessible via Nasdaq Workstation PCs.
\3\The NASD estimates that fewer than 10 member firms that
function as market makers would be required to establish clearing
arrangements as a result of this rule proposal.
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ACT is the primary facility for collecting, processing, and
disseminating transaction reports on Nasdaq securities as well as
equity issues quoted in the OTCBB. ACT also facilitates the clearance
and settlement of inter-member transactions by locking-in trade details
for transmission to the National Securities Clearing Corporation
(``NSCC''). The generation of locked-in trades by ACT enhances the
overall efficiency of the clearance and settlement process and
virtually eliminates a members risk exposure respecting uncompared
trades. These benefits cannot be realized, however, unless the broker-
dealers on both sides of the trade have some form of participation in a
registered clearing agency.
This rule proposal is believed to be consistent with the provisions
of Sections 11A(a)(1), 15A(b)(6), and 17A(a)(1) of the Act. Section
11A(a)(1) contains the Congressional findings that have guided
development of the National Market System. These findings include a
directive to apply state-of-the-art data processing and communications
techniques to achieve more efficient and effective market operations
and to ensure the economical execution of securities orders. Similarly,
Section 15A(b)(6) requires, among other things, that the rules of a
national securities association be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, and processing
information with respect to and facilitating transactions in
securities. Finally, Section 17A(a)(1) reflects the statutory goals of
a national system for clearance and settlement of securities
transactions. These goals include the application of new data
processing and communications techniques to create the opportunity for
more efficient, effective, and safe procedures for clearance and
settlement. The NASD believes that this proposed rule change is fully
consistent with these statutory requirements. In sum, the primary
objectives of this rule change are to minimize risk exposure from
uncompared trades and foster optimal usage of ACT to lock-in the
details of individual trades prior to their submission to a registered
clearing agency.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the rule change will not result in any
burden on competition that is 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
The NASD did not solicit or receive written comments on this rule
proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 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 90 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 NASD 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to file number SR-NASD-94-28 and
should be submitted by July 18, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15491 Filed 6-24-94; 8:45 am]
BILLING CODE 8010-01-M
