Document ID: SEC-2012-0221-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-02-08T05:00Z

[Federal Register Volume 77, Number 26 (Wednesday, February 8, 2012)]
[Notices]
[Pages 6610-6613]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2832]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66310; File No. SR-NASDAQ-2012-015]

 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 4618

February 2, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 19, 2012, the 
NASDAQ Stock Market LLC (``NASDAQ'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change described 
in Items I and II

[[Page 6611]]

below, which Items have been prepared primarily by NASDAQ. NASDAQ filed 
the proposal pursuant to Section 19(b)(3)(A) (iii) of the Act \2\ and 
Rule 19b-4(f)(6) \3\ thereunder so that the proposal was effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the rule change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ is filing this proposed rule change to amend Rule 4618. The 
text of the proposed rule change is shown below. Proposed new language 
is italicized, and proposed deletions are in brackets.
4618. Clearance and Settlement
    (a) All transactions through the facilities of the Nasdaq Market 
Center shall be cleared and settled through a registered clearing 
agency using 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 a[n]clearing agency[.], or by 
use of the services of CDS Clearing and Depository Services, Inc. in 
its capacity as a member of such a clearing agency.
    (b) Notwithstanding paragraph (a), transactions 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, NASDAQ 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. NASDAQ has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of these 
statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by NASDAQ.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ proposes to modify Rule 4618 to clarify that the use of a 
long-standing arrangement between National Securities Clearing 
Corporation (``NSCC'') and CDS Clearing and Depository Services, Inc. 
(``CDS'') \5\ for clearing transactions in U.S. securities provides an 
acceptable method for clearing transactions executed on NASDAQ. Among 
other things, CDS operates Canada's national clearance and settlement 
operations for cash equities trading, performing a role analogous to 
NSCC in the U.S. CDS is regulated by the Ontario and Quebec securities 
commissions and the Bank of Canada and has working and reporting 
relationships with the Canadian Securities Administrators, other 
Canadian provincial securities commissions, and the Canadian Office of 
the Superintendent of Financial Institutions. CDS is also a full 
service member of NSCC and a participant in The Depository Trust 
Company (``DTC'').
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    \5\ CDS was formerly known as The Canadian Depository for 
Securities Limited.
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    Currently, a Canadian broker-dealer seeking to buy or sell U.S. 
securities may do so through a U.S. registered broker-dealer with which 
it establishes a relationship for that purpose. In such a relationship, 
the US broker-dealer manages the clearance and settlement of the 
resulting trades, either through direct membership at NSCC or 
indirectly through a clearing broker with which it has established a 
relationship. Under the proposed change, a Canadian broker-dealer that 
is a member of CDS may make use of CDS, and its direct membership in 
NSCC, to clear and settle the resulting trades. Specifically, the 
clearing report for the trade will ``lock in'' CDS, making reference to 
the CDS membership of the Canadian broker-dealer, as a party to the 
trade.\6\ NSCC will then look to CDS for the satisfaction of the 
clearance and settlement obligations of the Canadian broker-dealer. 
NSCC requires CDS to commit collateral to the NSCC clearing fund like 
any other NSCC member, the amount of which is based on a risk-based 
margining methodology. In a similar manner, CDS requires its 
participants to commit collateral to CDS. The sole risk incurred by 
NASDAQ and then by NSCC in the arrangement is the highly remote risk 
that CDS itself might default on its obligations to clear and settle on 
behalf of the Canadian broker-dealer. This risk is conceptually 
indistinguishable from the risk of a clearing broker default, but 
because the value of the trades of the Canadian broker-dealers cleared 
through the mechanism is likely to be small in comparison to the values 
cleared through many large U.S. clearing brokers, the magnitude of this 
risk is correspondingly smaller.
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    \6\ As an NSCC member, CDS is responsible for the clearing and 
settling of its participants' trades conducted with U.S. broker-
dealers. For purposes of ``locking-in'' parties, certain CDS 
participants have discrete NSCC participant codes that identify the 
Canadian broker-dealer and its participation in the NSCC/CDS 
clearing arrangement. On midnight of T+1, NSCC takes on the buyer's 
credit risk and the seller's delivery risk.
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    The relationship between NSCC and CDS was established more than two 
decades ago, and various aspects of the relationship have been 
recognized through several prior filings \7\ and no-action letters.\8\ 
A recent description of the parameters of the relationship may be found 
in NSCC's Assessment of Compliance with the CPSS/IOSCO Recommendations 
for Central Counterparties.\9\ The most prominent use of the 
relationship arises under FINRA Rule 7220A, which allows over-the-
counter trades executed on behalf of CDS members to be reported through 
the FINRA/NASDAQ Trade Reporting Facility and cleared through the CDS/
NSCC relationship. NASDAQ also understands that the EDGA Exchange and 
the EDGX Exchange permit clearance of trades executed on behalf of 
Canadian broker-dealers through this mechanism.
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    \7\ See, e.g., Securities Exchange Act Release No. 34-36918 
(March 4, 1996), 61 FR 9739 (March 11, 1996) (SR-NASD-95-49) 
(approving access to Automated Confirmation Transaction Service for 
CDS members); Securities Exchange Act Release No. 34-40523 (October 
6, 1998), 63 FR 54739 (October 13, 1998) (approving establishment of 
a CDS omnibus account at DTC to facilitate cross-border clearing).
    \8\ See, e.g., Letter from Dan W. Schneider, Deputy Associate 
Director, Commission, to Karen L. Saperstein, Assistant General 
Counsel, NSCC (November 26, 1984) (available at 1984 WL 47355) 
(taking no-action position with respect to use of CDS and NSCC with 
respect to clearing of trades executed on behalf of Canadian broker-
dealers on the Boston Stock Exchange); Letter from Dan W. Schneider, 
Deputy Associate Director, Commission, to Karen L. Saperstein, 
Assistant General Counsel, NSCC (October 24, 1984) (available at 
1984 WL 47356) (taking no-action position with respect to CDS 
becoming a member of NSCC).
    \9\ ``Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties,'' NSCC (November 14, 
2011) (available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf).
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    In order to clearly establish that use of the CDS/NSCC relationship 
is a permissible method of clearing transactions executed on NASDAQ, 
NASDAQ is proposing to amend Rule

[[Page 6612]]

4618. Currently, the rule provides that trades must be cleared through 
a registered clearing agency using a continuous net settlement 
(``CNS'') system and that 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. NSCC is currently the only registered 
clearing agency using a CNS system for trades executed on NASDAQ. While 
it is possible that the term ``direct clearing services'' could be 
construed to cover CDS's participation in NSCC on behalf of its members 
because CDS is a direct member of NSCC for the purpose of providing 
clearing services to its members the term has not previously been 
construed by NASDAQ in that manner. Accordingly, NASDAQ believes that 
the clarity of the rule would be enhanced by directly recognizing the 
CDS/NSCC relationship in the rule text. NASDAQ proposes amending the 
rule to provide that the rule may be satisfied through ``use of the 
services of CDS Clearing and Depository Services, Inc. in its capacity 
as a member of such a clearing agency.'' Whenever a clearing 
arrangement making use of CDS's membership in NSCC is established, the 
NASDAQ member, the Canadian broker on whose behalf it is acting, CDS, 
and NASDAQ will sign a short agreement addressed to NSCC in which the 
parties acknowledge their use of the CDS/NSCC arrangement.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act \10\ in general and with Section 
6(b)(5) of the Act \11\ in particular in that the proposal is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable practices of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and in general to 
protect investors and the public interest. Specifically, by allowing 
Canadian broker-dealers whose trades are executed on NASDAQ to make use 
of the long-standing arrangement between NSCC and CDS for clearing 
transactions, NASDAQ believes that the proposed rule change will 
directly foster cooperation and coordination with the two primary North 
American cash equities clearinghouses and their respective members and 
will thereby promote a free and open market. Because the arrangement 
between NSCC and CDS, which has been in place in varying forms for over 
two decades, includes mechanisms to provide for the collateralization 
of the obligations arising thereunder, NASDAQ believes that the 
proposed change is fully consistent with the protection of investors 
and the public interest.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(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. The proposed change will ensure 
that Canadian broker-dealers whose trades are executed on NASDAQ are 
able to make use of an additional option for clearing such 
transactions, thereby promoting competition with respect to the 
availability of clearing services. The change will enhance NASDAQ's 
ability to compete in the over-the-counter market with other exchanges 
that offer the ability to clear through the CDS/NSCC relationship.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. NASDAQ will notify the Commission of any written 
comments received by NASDAQ.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
immediately effective pursuant to Section 19(b)(3)(A) of the Act \12\ 
and Rule 19b-4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied the five-day prefiling requirement.
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    NASDAQ has requested that the Commission waive the 30-day operative 
waiting period contained in Exchange Act Rule 19b-4(f)(6)(iii). The 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest because the 
arrangement between NSCC and CDS countenanced by the proposed rule 
change has been in place and has been used for over two decades, 
includes mechanisms to provide for the collateralization of the 
obligations arising thereunder, and has long been recognized under 
FINRA and NASD rules for use in clearing over-the-counter transactions. 
The technology changes at NASDAQ necessary to allow implementation of 
the proposed rule change have already been made. Accordingly, the 
Commission believes that the change does not significantly affect the 
protection of investors or the public interest and does promote 
competition. Conversely, because delay of implementation would only 
serve to delay the availability of a well-established clearing 
mechanism for clearing certain trades executed on NASDAQ and would 
thereby inhibit customer choice and flexibility without advancing any 
regulatory goal, it would be consistent with the protection of 
investors and the public interest to waive the waiting period. 
Therefore, the Commission designates the proposed rule change as 
operative upon filing.\14\
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    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or

[[Page 6613]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2012-015. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filings also will be available for 
inspection and copying at the principal office of NASDAQ.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NASDAQ-2012-
015 and should be submitted on or before February 29, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-2832 Filed 2-7-12; 8:45 am]
BILLING CODE 8011-01-P