[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