[Federal Register Volume 65, Number 216 (Tuesday, November 7, 2000)]
[Notices]
[Pages 66789-66791]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28507]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43501; File No. SR-NASD-00-45]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to an Interpretation Regarding ACT Risk Management Charges, and to 
Clarify the ACt Risk Management Function

October 31, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 31, 2000, the National Association of Securities Dealers 
(``NASD''), through its wholly owned subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''), 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 Nasdaq.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On August 17, 2000, Nasdaq minor, technical changes to the 
proposed rule change, none of which were substantive in nature, and 
none which required the filing of a formal amendment. Telephone 
conversation among Mary N. Revell, Associate General Counsel, Office 
of General Counsel, Nasdaq, and Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), SEC and 
Joseph P. Morra, Special Counsel, Division, SEC.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is filing a proposed rule change to NASD Rules 7010 and 
6150. The purpose of the proposal is to issue an interpretation 
regarding Automated Confirmation Transaction Service (``ACT'') risk 
management charges and a clarification regarding the ACT risk 
management function. Below is the text of the proposed rule change. 
Proposed new language is in italics.

Rule 7010. System Services

    (a)-(f) No change.
    (g) Automated Confirmation Transaction Service
    The following charges shall be paid by the participant for use 
of the Automated Confirmation Transaction Service (ACT):

[[Page 66790]]

    Transaction Related Charges:
    No change.
    Risk Management Charges: $0.035/side and $17.25/month per 
correspondent firm (maximum $10,000/month per correspondent firm)
    IM-7010-1; Risk Management Charges
    All clearing brokers are provided access to the ACT risk 
management function for which they are assessed the charges detailed 
above, unless exempted under the provision detailed below.
    Self-clearing brokers are not required to pay risk management 
charges.
    Clearing brokers that are effectively self-clearing with respect 
to certain correspondents may seek relief from the requirement to 
pay ACT risk management charges for trades cleared on behalf of 
these correspondents. A firm is ``effectively self-clearing'' if it 
clears for affiliated correspondents that are wholly or majority 
owned by a common corporate parent, which will be solely liable for 
any credit problems encountered by the affiliates. Such a firm may 
choose not to utilize the ACT risk management function for trades 
cleared on behalf of affiliated correspondents and may seek relief 
from ACT risk management charges by submitting a letter to Nasdaq 
containing the following:
    (1) a detailed description of the firm's corporate structure 
showing that all affiliates are wholly or majority owned by a common 
corporate parent;
    (2) a statement that the firm will use an internal risk 
management capability to monitor the trading activities and risk 
exposure of its affiliated correspondents and meet its financial and 
operational obligations under the federal securities laws and NASD 
rules that provides risk management functions comparable to those 
provided by ACT as described in Rule 6150;
    (3) an acknowledgment that the firm will no longer utilize the 
ACT risk management function for trades cleared for these affiliated 
correspondents; and
    (4) a request for relief from ACT risk management charges. After 
reviewing the letter to ensure that it addresses all the above 
elements, Nasdaq will:
    (1) instruct the NASD Finance Department to cease assessing ACT 
risk management charges on trades cleared by the firm on behalf of 
its affiliated correspondents;
    (2) notify ACT that the firm will no longer utilize the ACT risk 
management function for the affiliated correspondents' trades; and
    (3) inform NASD Regulation of this new arrangement.
* * * * *

Rule 6150. ACT Risk Management Functions

    Self-clearing brokers, corresponding clearing brokers, and 
executing brokers, whether they utilize the ACT risk management 
function or not, are required to report all clearing-eligible 
transactions to ACT for ACT risk management functions. The ACT 
system will provide the following risk management capabilities to 
clearing brokers that have executed an ACT Participants Risk 
Management Agreement:
    (a)-(g) 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, Nasdaq including 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. Nasdaq 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.

1. Purpose
    ACT is an automated trade reporting and reconciliation service that 
speeds the post-execution steps of price and volume reporting, 
comparison, and clearing of pre-negotiated trades completed in Nasdaq, 
OTC Bulletin Board, and other over-the-counter securities. ACT handles 
transactions negotiated over the phone or executed through any of 
Nasdaq's automated trading services. It also manages post-execution 
procedures for transactions in exchange-listed securities that are 
traded off-board in the Nasdaq InterMarket. Participation in ACT is 
mandatory for NASD members that are members of a clearing agency 
registered with the SEC, that have a clearing arrangement with such a 
member, or that participate in any of Nasdaq's trading services. An 
integral part of ACT is the risk management function.
    The ACT risk management function provides firms that clear for 
other firms with the capability to establish acceptable levels of 
credit for their introducing firms. ACT risk management also enables 
clearing brokers to monitor buy/sell trading activity of their 
introducing firms, establish trading thresholds, allow/inhibit large 
trades, add/delete clearing relationships, and access a real-time 
database of correspondent trading activity.\4\ Clearing brokers 
providing clearing services to correspondent firms are assessed risk 
management charges of $0.035 per trade and $17.25 per month per 
correspondent firm. Nasdaq recently adopted a new rule, limiting this 
charge to a maximum of $10,000 per month per correspondent.\5\ Self-
clearing brokers without correspondents have no reason to utilize the 
ACT risk management function, given their lack of exposure, and are not 
assessed risk management charges.
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    \4\ See NASD Rule 6150.
    \5\ See Securities Exchange Act Release No. 42984 (June 27, 
2000), 65 FR 41119 (July 3, 2000) (SR-NASD-00-35).
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    The ACT service was implemented for self-clearing firms in March 
1990.\6\ The ACT service for clearing firms and their executing 
correspondents, including the risk management function, was implemented 
in October 1990;\7\ the ACT risk management service charge was 
implemented in November 1990.\8\
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    \6\ See Securities Exchange Act Release No. 27229 (Sept. 8, 
1989), 54 FR 38484 (Sept. 18, 1989) (SR-NASD-89-25).
    \7\ See Securities Exchange Act Release No. 28583 (Oct. 26, 
1990), 55 FR 46120 (Nov. 1, 1990) (SR-NASD-89-25).
    \8\ See Securities Exchange Act Release No. 28595 (Nov. 5, 
1990), 55 FR 47161 (Nov. 9, 1990) (SR-NASD-90-57).
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    Recently, Nasdaq received two inquiries from clearing brokers 
seeking relief from the ACT risk management charges for trades cleared 
for affiliated correspondents. These clearing firms have entered into 
new relationships with previously unaffiliated broker-dealer firms. As 
a result, all of the affiliated firms, including the clearing firm and 
the correspondent firm(s), are wholly or majority owned by a common 
corporate parent, which will be solely liable for any credit problems 
encountered by the affiliated firms. The clearing firm in such an 
arrangement has an internal risk management system that allows it to 
monitor the capital exposure of the consolidated entities. These 
clearing firms have represented to Nasdaq that they believe they are 
effectively self-clearing firms, and should be treated as such for 
purposes of application of the requirement to pay ACT risk management 
charges.
    Nasdaq believes there is merit to this position, and proposes to 
issue a responsive interpretation regarding ACT risk management 
charges. The proposed interpretation would reiterate Nasdaq's long-
standing position that clearing brokers are required to pay ACT risk 
management charges and that self-clearing brokers are not required to 
pay these charges. The interpretation would further state that firms 
that are effectively self-clearing are not required to pay ACT risk 
management charges, subject to the provisions set forth in the 
interpretation. Nasdaq supports the view that a firm that clears for 
affiliated correspondents that are wholly or majority owned by a common 
corporate parent, which will be solely liable for any credit problems 
encountered by the affiliates, should be effectively considered self-
clearing. Nasdaq believes that such a firm should be able

[[Page 66791]]

to choose whether or not to participate in the ACT risk management 
function with respect to trades cleared on behalf of the affiliates, as 
long as it has an effective internal risk management system.
    Under the interpretation, a firm that chooses not to participate in 
the ACT risk management function will be able to seek an exemption from 
the ACT risk management charge for trades cleared on behalf of 
affiliated correspondents by submitting a letter to Nasdaq. The letter 
must describe in detail the clearing firm's ownership structure, state 
that the firm will use an internal risk management capability to 
monitor the trading activities and risk exposure of its affiliated 
correspondents and meet its financial and operational obligations under 
the federal securities laws and NASD rules that provides risk 
management functions comparable to those provided by ACT, acknowledge 
that it will no longer utilize the ACT risk management function for 
trades cleared for its affiliates, and request an exemption from the 
ACT risk management charge. After reviewing the letter to ensure that 
it addresses all of the above, Nasdaq will instruct the NASD Finance 
Department that it should no longer assess ACT risk management charges 
on trades cleared by the firm on behalf of its affiliates, notify ACT 
that the firm will no longer utilize the ACT risk management function 
for the affiliated correspondents' trades, and inform NASD Regulation 
of this new arrangement.
    Nasdaq proposes to make the interpretation effective immediately 
after SEC approval. Firms that submit a satisfactory letter to Nasdaq 
requesting relief from ACT risk management charges within 90 days of 
the effective date of the interpretation will no longer be assessed 
future ACT risk management charges and will receive a credit for any 
such fees paid for ACT risk management services after April 1, 2000. 
Firms that request relief from ACT risk management charges 90 days or 
more after the effective date of the interpretation will not be 
assessed ACT risk management charges beginning on the first day of the 
first month after a satisfactory letter is received by Nasdaq.
    Nasdaq also proposes to revise NASD Rule 6150, ACT Risk Management 
Functions, to explicitly state that clearing brokers and executing 
brokers must report all clearing-eligible transactions to ACT for risk 
management functions. This transaction information is included in 
Nasdaq's real-time database of correspondent trading activity. 
Submission of complete clearing information to ACT is essential in 
order for Nasdaq to be able to generate accurate ACT risk management 
function reports and alerts.
    Nasdaq is proposing this revision to respond to arguments that have 
been made by member firms that participation in ACT risk management is 
optional. Nasdaq believes those member firms have based their position 
on an erroneous interpretation of a sentence in a Notice to Members 
(``NTM'') issued in 1990 announcing SEC approval of the ACT risk 
management functions. In pertinent part, NTM 90-80 states:

    Using ACT Risk Management, clearing firms can choose to monitor 
purchase and sale activity, establish dollar thresholds for the 
trading day, examine large trades, establish and delete clearing 
relationships, and develop an internal database through a real-time 
data feed of correspondent activity. (Emphasis added.)

This sentence establishes that clearing firms can choose to use any of 
the available ACT risk management functions to monitor correspondent 
activity; it does not mean that participation in ACT risk management is 
optional. Nasdaq's long-standing position is that clearing firm 
participation in ACT risk management is mandatory. However, to resolve 
any ambiguities, Nasdaq is proposing to revise NASD Rule 6150, ACT Risk 
Management Functions, to make this requirement explicit.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act \9\ in that the proposal 
is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a national market 
system and, in general, to protect investors and the public interest. 
The proposed rule change also is consistent with Section 15A(b)(5) of 
the Act \10\ in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system which the Association 
operates or controls.
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    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will 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

    Written comments were neither solicited nor received.

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 (9) 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, 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, DC 20549-0609. 
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-00-45 and 
should be submitted by November 28, 2000.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland
Deputy Secretary.
[FR Doc. 00-28507 Filed 11-6-00; 8:45 am]
BILLING CODE 8010-01-M