[Federal Register: December 16, 2002 (Volume 67, Number 241)]
[Notices]
[Page 77117-77119]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16de02-89]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46948; File No. SR-NASD 2002-157]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc.
Regarding ACT Risk Management
December 4, 2002.
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 October 31, 2002, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its subsidiary The Nasdaq
Stock Market, Inc. (``Nasdaq'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by Nasdaq. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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 Rule 6150 regarding
the risk management function provided by Nasdaq's Automated
Confirmation Transaction Service (``ACT''). Upon approval of the
proposed rule change, Nasdaq will permit members to voluntarily utilize
the ACT risk management function, provided that they utilize another
risk management tool of equal quality and that they and the
correspondent firms for whom they clear trades continue to report
clearing-eligible trades to ACT in compliance with applicable ACT
rules. The text of the proposed rule change is available at Nasdaq and
at the Commission.
[[Page 77118]]
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 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 Commission, 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.\3\ 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 with charges limited
to a maximum of $10,000 per month per correspondent.\4\ Given their
lack of credit exposure, self-clearing brokers without correspondents
have no reason to utilize the ACT risk management function and are not
assessed risk management charges.
---------------------------------------------------------------------------
\3\ See NASD Rule 6150.
\4\ See Securities Exchange Act Release No. 34-42984 (June 27,
2000), 65 FR 41119 (July 3, 2000) (File No. SR-NASD-00-35).
---------------------------------------------------------------------------
The ACT service was implemented for self-clearing firms in March
1990.\5\ The ACT service for clearing brokers and their executing
correspondents, including the risk management function, was implemented
in October 1990;\6\ the ACT risk management service charge was
implemented in November 1990.\7\ The NASD's impetus for creating ACT
risk management was the market break of 1987. After studying the market
break, the Commission urged the NASD to create an automated system to
facilitate rapid, reliable trade comparison and clearing. At that time,
clearing brokers and clearing Agencies urged the NASD to include a
real-time risk management tool within its new automated system.\8\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 34-27229 (September
8, 1989), 54 FR 38484 (September 18, 1989) (File No. SR-NASD-89-25).
\6\ See Securities Exchange Act Release No. 34-28583 (October
26, 1990), 55 FR 46120 (November 1, 1990) (File No. SR-NASD-89-25).
\7\ See Securities Exchange Act Release No. 34-28595 (November
5, 1990), 55 FR 47161 (November 9, 1990) (File No. SR-NASD-90-57).
\8\ See SR-NASD-89-25 (May 31, 1989), and Amendments thereto.
---------------------------------------------------------------------------
Nasdaq considers risk management to be a mandatory service for all
clearing brokers because effective, real-time, risk management by each
and every clearing broker is critical to the protection of investors
and other market participants. Recently, however, Nasdaq has learned
that clearing brokers have developed their own risk management
procedures and controls comparable to the service provided by ACT.
While ACT risk management is integral to the surveillance procedures of
many clearing firms, Nasdaq recognizes that a one-size-fits-all
approach may no longer be appropriate to meet the surveillance needs of
all clearing brokers, particularly in light of the constantly evolving
ownership structures of many clearing firms and broker-dealers.
As such, Nasdaq would like to make ACT risk management an optional
service for all clearing brokers that clear for correspondents
reporting trades into ACT. In order to ensure that all clearing brokers
continue to effectively manage their risk, Nasdaq will require that a
clearing broker meet several conditions prior to opting out of the ACT
risk management service. First, a clearing broker must submit a letter
that specifies the correspondent or correspondents for which it no
longer requires the risk management service. Additionally, it must
state in its letter that it uses an internal risk management capability
to monitor the trading activities and risk exposures of its
correspondents for which it is opting out of the service. Finally,
clearing brokers that discontinue the use of ACT risk management, as
well as the correspondents for whom they clear, must continue to comply
with all applicable rules governing the reporting of trades to ACT.
Once Nasdaq receives a satisfactory letter from a clearing broker
requesting relief from ACT risk management, Nasdaq will discontinue the
assessment of risk management charges for the specified
correspondent(s) on the first day of the month following the date the
firm requested relief from ACT risk management charges.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A of the Act,\9\ in general and with
section 15A(b)(6) of the Act,\10\ in particular, 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.
By requiring clearing brokers to utilize a risk management tool
comparable to its own, Nasdaq hopes to ensure that there is no
degradation in risk management practices. If, in the future, Nasdaq
determines that a degradation of this sort has occurred, Nasdaq will
reassess this rule.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78o-3.
\10\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will impose
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
Nasdaq has neither solicited nor received written comments on the
proposed rule change.
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
[[Page 77119]]
longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
A. By order approve the 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 NW., 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 No. SR-NASD-2002-157 and
should be submitted by January 6, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
---------------------------------------------------------------------------
\11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31551 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P