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July 22, 2003
Mr. Scott Zucker General Counsel TradeWeb LLC Harborside
Financial Center 2200 Plaza Five Jersey City, NJ 07311
Re: Request for No-Action Relief from Rule 10b-10 by TradeWeb LLC
Dear Mr. Zucker:
In your letter dated July 18, 2003, on behalf of TradeWeb LLC, you
request no-action relief from the staff regarding the electronic trade
confirmations generated by your TradeWeb System. Although TradeWeb is not
currently acting as a clearing agency, it may in the future register as
clearing agency or obtain an exemption from clearing agency registration.
Specifically, you seek assurance that the staff would not recommend any
enforcement action if U.S. registered broker-dealers effecting trades with
their institutional customers in debt securities rely on electronic trade
confirmations generated by and delivered through the TradeWeb System to
satisfy their obligations under Rule 10b-10 of the Securities Exchange Act
of 1934.
Response:
On the basis of the facts and representations contained in your letter,
and particularly on your representation that each electronic trade
confirmation will include all of the information required by Rule 10b-10
for transactions in debt securities, the staff of the Division of Market
Regulation will not recommend enforcement action to the Commission under
Rule 10b-10 if Dealer Subscribers (as defined in your letter) rely on the
delivery of electronic trade confirmations generated by and delivered
though the TradeWeb System to Users (as defined in your letter) as
confirmation of trades in debt securities between those Dealer Subscribers
and Users to satisfy Rule 10b-10.
Any different facts or representations may require a different
conclusion. This is a staff position regarding enforcement action under
Rule 10b-10 only, and does not express any legal conclusions regarding the
applicability of Rule 10b-10 or other statutory or regulatory provisions
of the federal securities laws.
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Sincerely,
Norman Reed Special Counsel |
Incoming Letter
TradeWeb |
Harborside Financial Center 2200 Plaza Five Jersey
City, NJ 07311-4993 Direct 201 536 5877 Fax 201 536
3160 szucker@tradeweb.com
Scott D. Zucker General
Counsel | |
Securities Exchange Act of 1934/ Section 10(b)/Rule
10b-10
July 18, 2003
Catherine McGuire, Esq. Chief Counsel Division of Market
Regulation Securities and Exchange Commission 450 Fifth Street,
N.W. Washington, D.C. 20549
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Re: |
Electronic Trade Confirmation Service through the TradeWeb
System |
Dear Ms. McGuire:
We are writing to request your advice that the staff of the
Securities and Exchange Commission (the "Commission") would not
recommend that the Commission take any enforcement action if U.S.
registered broker-dealers effecting trades with their institutional
customers in debt securities rely on electronic trade confirmations
generated by and delivered through an electronic platform (the
"TradeWeb System") operated by TradeWeb LLC ("TradeWeb")
to satisfy their obligations pursuant to Rule 10b-10 under the
Securities Exchange Act of 1934 (the "Exchange Act").
I. Description of TradeWeb and the TradeWeb System.
TradeWeb, a broker-dealer registered with the Commission, operates
the TradeWeb System through which institutional investors and investment
firms ("Users") access information, request bids and offers
directly from, and effect transactions with U.S. registered
broker-dealers participating on the TradeWeb System ("Dealer
Subscribers").1 The TradeWeb System is available only to
institutional investors and investment firms that meet certain financial
and other criteria separately determined by each Dealer Subscriber with
whom the User desires to effect transactions over the TradeWeb
System.2 The identity of the User is fully disclosed to
the Dealer Subscriber on the TradeWeb System. A User must enter into a
customer agreement with each Dealer Subscriber that has enabled the User
to effect transactions with such Dealer Subscriber over the TradeWeb
System. Each transaction effected over the TradeWeb System between a
Dealer Subscriber and a User is subject to the terms and conditions of
the customer agreement and other relevant documentation between the
parties. Currently, Dealer Subscribers and Users may effect transactions
over the TradeWeb System in U.S. government securities (including U.S.
agency securities), TBA mortgage-backed securities, commercial paper and
U.S. corporate fixed-income securities.
The TradeWeb System permits Users to submit trade inquiries to
multiple Dealer Subscribers simultaneously. All Dealer Subscribers
receiving an inquiry and willing to trade the specific security for the
transmitted quantity would message the User with a firm quotation to buy
or sell. The User reviews the quotation and determines to accept, reject
or allow the quotation to lapse. A transaction is completed only if it
is accepted by the User and Dealer Subscriber. Dealer Subscribers and
Users that effect transactions over the TradeWeb System ("TradeWeb
System Trades") are responsible for clearance and settlement using
their customary procedures separate and apart from TradeWeb and the
TradeWeb System. After a TradeWeb System Trade is effected, Users,
acting for multiple client accounts, may allocate the transaction among
those client accounts by transmitting the relevant allocation
information to the Dealer Subscriber via the TradeWeb System. The Dealer
Subscriber confirms to the User, through the TradeWeb System, the
receipt and processing of the allocation information. At no time does
TradeWeb or the TradeWeb System act as counterparty, or take title to or
otherwise handle funds or securities or participate in the settlement
process between the Dealer Subscriber and the User.
In the future, TradeWeb expects to introduce functionality that would
permit Dealer Subscribers and Users to use the TradeWeb System to
exchange information for transactions that they have entered into other
than through the TradeWeb System, such as by telephone ("Non-TradeWeb
System Trades"). Dealer Subscribers would input into the TradeWeb
System trade information regarding transactions they have entered into
with Users. This information would be transmitted to Users, who would
review and affirm or disaffirm such information. The Dealer Subscriber
would be notified via the TradeWeb System if a User disputes the terms
of a Non-TradeWeb System Trade, and the Dealer Subscriber may then
modify or resubmit the transaction details to the User. Once the User
affirms a Non-TradeWeb System Trade, notice of such affirmation would be
sent to the Dealer Subscriber. The User would have the ability to
allocate the Non-TradeWeb System Trade to sub-accounts through the
TradeWeb System in the same manner as trades entered into through the
TradeWeb System.
If in the future TradeWeb acts as an intermediary that compares
Dealer Subscriber trade data submissions with trade data submissions of
a User to determine if the two descriptions of the transaction match,
TradeWeb would obtain the appropriate registration as a clearing agency
or an exemption from such registration.
II. Summary of Proposed Confirmation Delivery Service.
As you are aware, Exchange Act Rule 10b-10 requires that a
broker-dealer provide certain written disclosures to a customer at or
before the completion of a transaction. Dealer Subscribers entering into
TradeWeb System Trades currently satisfy their obligations under Rule
10b-10 by sending confirmations to Users by means other than through the
TradeWeb System. As a result, Users may receive two "confirmations" for
the same transaction: one generated by the TradeWeb System, and one sent
separately by the Dealer Subscriber to comply with Rule 10b-10. In order
to create the Rule 10b-10 confirmation, moreover, the Dealer Subscriber
must input the trade details for a TradeWeb System Trade into another
communications system, a process which may result in unnecessary
duplication of records, increased risk of operational error, potential
delays in the delivery of a final trade confirmation to the User and
increased risk of errors and/or delays in the settlement of the
transaction.
TradeWeb proposes to offer Dealer Subscribers the ability to have
confirmations ("Confirmations") generated and transmitted to
Users through the TradeWeb System in a manner that would satisfy the
requirements of Rule 10b-10. For TradeWeb System Trades, the transaction
information contained in the Confirmation would be based on the terms of
the transaction that have been agreed to between the User and the Dealer
Subscriber over the TradeWeb System. For Non-TradeWeb System Trades, the
Confirmation would be based on transaction information that is input
into the TradeWeb System by the Dealer Subscriber and affirmed by the
applicable User. In each case, the Confirmation would reflect any
allocation among sub-accounts that has been made by the User and
accepted by the Dealer Subscriber.3
TradeWeb's proposed Confirmation delivery service would be conducted
in accordance with the following guidelines:
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Each Confirmation would include the information described in Part
III below. The Confirmation would be presented on two pages: a page
containing transaction-specific information, and a page containing
dealer-specific "terms and conditions" (i.e., the information
that would normally appear on the back of a paper confirmation,
including any additional disclosures that the Dealer Subscriber may
wish to provide that are not required by Rule 10b-10).
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The Confirmation would indicate that the User should contact the
Dealer Subscriber with whom it effected a transaction with any
questions. Any such communication following delivery of the
Confirmation would occur directly between the Dealer Subscriber and
the User (i.e., TradeWeb would not participate in such
communications, although the Dealer Subscriber and the User may elect
to use messaging facilities provided by TradeWeb and/or the TradeWeb
System).
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The TradeWeb System would display the transaction status as
"confirmed" on the trade blotters available to the Dealer Subscriber
and the User.
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Each User and Dealer Subscriber would have the ability to view,
download, and/or print their Confirmations through the TradeWeb
System, and may establish default procedures pursuant to which such
Confirmations are downloaded and/or printed automatically.
Confirmations would be stored electronically by TradeWeb.4
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Only Dealer Subscribers that request in writing (including
electronically) to participate in TradeWeb's electronic trade
confirmation service would be enabled to provide Confirmations through
the TradeWeb System.
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Each User would consent in writing (including electronically) to
the Dealer Subscriber's delivery of Confirmations electronically
through the TradeWeb System.
III. Details Regarding the Information Provided on
Confirmations.
Each Confirmation would include all of the information required by
Rule 10b-10 for transactions in debt securities, as set forth below:
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Transaction-Specific Information. The date and time of the
transaction (or the fact that the time of the transaction would be
furnished by the Dealer Subscriber upon written request), as well as
the identity, price, and principal amount of the security purchased or
sold by the User.
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Capacity of Dealer Subscriber. Whether the Dealer Subscriber
acted as principal for its own account or as agent.5
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Securities Subject to Redemption before Maturity. If the
securities are subject to redemption before maturity, that the
security may be redeemed in whole or in part before maturity, that
such a redemption could affect the yield represented, and that
additional information is available from the Dealer Subscriber upon
request.
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Trades Effected on the Basis of a Dollar Price. For trades
effected on the basis of a dollar price, the dollar price at which the
trade was effected and the yield to maturity calculated from the
dollar price.6
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Trades Effected on the Basis of Yield. For trades effected
on the basis of yield: (a) the yield at which the trade was
effected (including the percentage amount and its characterization);
(b) the dollar price calculated from the yield at which the trade
was effected; and (c) if effected on a basis other than yield to
maturity and the yield to maturity is lower than the represented
yield, the yield to maturity as well as the represented yield.7
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Trades in Asset-Backed Securities. For trades in
asset-backed securities that represent an interest in or are secured
by a pool of receivables or other financial assets that are subject
continuously to prepayment: (a) that the actual yield of those
securities may vary according to the rate at which the underlying
receivables or other financial assets are prepaid; and (b) that
information concerning the factors that affect yield (including at a
minimum estimated yield, weighted average life, and the prepayment
assumptions underlying the yield) will be furnished upon written
request by a User directed to the Dealer Subscriber.8
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Unrated Securities. If applicable, that the related debt
security (other than a government security) is unrated by a nationally
recognized statistical rating organization.9
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Membership in the Securities Investor Protection Corporation
("SIPC"). If applicable, that the Dealer Subscriber is not
a member of SIPC.
All of the information described above would be provided to TradeWeb
by the Dealer Subscriber. Trade-specific information would be provided
on a trade-by-trade basis through an electronic "data feed" from the
Dealer Subscriber.10 All other information described above,
including "dealer-specific" terms and conditions that the Dealer
Subscriber may elect to include in the Confirmation, would be provided
to TradeWeb prior to the Dealer Subscriber's first use of TradeWeb's
Confirmation delivery service and may be updated by the Dealer
Subscriber at any time thereafter.
IV. Considerations in Support of Proposed Confirmation Delivery
Service.
TradeWeb's proposal to generate and deliver Confirmations through the
TradeWeb System would be consistent with earlier no-action relief
provided by the Commission staff. In addition, the proposed Confirmation
service would provide Dealer Subscribers with a fast and reliable
alternative to delivering a confirmation outside the TradeWeb System and
reduce the operational and settlement risks to Dealer Subscribers and
Users.
As you are aware, the Commission staff has previously permitted the
electronic delivery of confirmations by third parties on behalf of
broker-dealers to satisfy the Rule 10b-10 obligations of registered
broker-dealers. For example, the staff has permitted confirmations
delivered through the DTC ID System and similar systems of other
clearing agencies to satisfy the Rule 10b-10 obligations of
broker-dealer participants.11 In addition, the staff has permitted
confirmations provided by certain unregulated operators of post-trade
confirmation networks to satisfy the requirements of Rule 10b-10.12
TradeWeb's proposed electronic trade confirmation service would
satisfy the key requirements applicable to the confirmations described
in these earlier no-action letters. Most importantly, as noted above
each Confirmation would include all the information described in Part
III above. The TradeWeb System would permit Dealer Subscribers to
include in the Confirmation any additional disclosures that they elect
to provide Users, even if such information is not required by Rule
10b-10. Dealer Subscribers and Users would, moreover, have ready access
to the Confirmation - once notified through the TradeWeb System that the
Confirmation is available, Users could view it on the TradeWeb System,
download and store it electronically into their own systems, and print
hardcopies. There would be no concerns about Users' ability or
willingness to receive Confirmations in the manner proposed, since they
would have established the necessary electronic linkages to the TradeWeb
System and consented to the delivery of Confirmations through the
TradeWeb System.
TradeWeb maintains detailed electronic records of data entry and
transaction information, which provide a continuous audit trail for
TradeWeb System Trades. In addition, as a registered broker-dealer,
TradeWeb would retain electronic records of Confirmations in accordance
with recordkeeping requirements applicable to registered broker-dealers.
Such records, as well as the TradeWeb System generally, would be
available for inspection by the Commission.
In addition, TradeWeb has in place and would continue to implement
adequate safeguards to minimize the risk that any TradeWeb System
failure would interfere with the prompt delivery of Confirmations. In
particular, the TradeWeb System would have sufficient capacity to handle
the volume of Confirmations reasonably anticipated to be generated and
delivered for TradeWeb System Trades and Non-TradeWeb System Trades.
TradeWeb currently tests the TradeWeb System regularly to ensure
adequate capacity and response times and to minimize the risk of any
TradeWeb System failures. TradeWeb also has back-up facilities and
disaster recovery protocols to ensure continuity of service if its
primary facilities become inoperable. Moreover, TradeWeb's standard
security procedures permit only authorized Dealer Subscribers, Users
and, where appropriate, certain authorized TradeWeb personnel to access
the TradeWeb System. These procedures are reasonably designed to
maintain the proper functioning of the TradeWeb System (e.g., by
protecting the TradeWeb System's operational integrity from computer
viruses or other similar threats) and the integrity of data submitted to
and maintained on the TradeWeb System.
Similar to the earlier staff no-action letters relating to electronic
trade confirmation services, TradeWeb's Confirmation service would
provide important benefits to Dealer Subscribers, Users and the
fixed-income market. For TradeWeb System Trades and Non-TradeWeb System
Trades, Dealer Subscribers would not need to input transaction
information into a separate confirmation delivery system in order to
satisfy their Rule 10b-10 obligations. Users that consent to receiving
Confirmations through the TradeWeb System would no longer need to
process multiple confirmations - one from the TradeWeb System and one
from the Dealer Subscriber - for the same transaction. The TradeWeb
System's Confirmation would also provide a standardized format for the
confirmation of transaction terms between Dealer Subscribers and Users.
The elimination of such unnecessary back-office duplication and the
ability to use standardized communications would reduce trade errors and
operational risk and would increase the speed with which the settlement
of trades can be processed. Importantly, these operational efficiencies
would benefit not only the participants involved, but also the
fixed-income markets, by facilitating the prompt and accurate
confirmation and settlement of trades. Moreover, these benefits would be
achieved with minimal incremental costs to those Dealer Subscribers and
Users that have already established the necessary linkages to the
TradeWeb System.
V. Conclusion.
Based on the foregoing, TradeWeb respectfully requests the Commission
staff's advice that it would not recommend any enforcement action to the
Commission if Dealer Subscribers rely on Confirmations generated and
delivered to Users by the TradeWeb System as described above to satisfy
their obligations under Rule 10b-10 of the Exchange Act.
* * *
If you should have any questions regarding this letter, please do not
hesitate to contact the undersigned (201-536-5877) or Robert W. Cook of
Cleary, Gottlieb, Steen & Hamilton (202-974-1538), outside counsel
to TradeWeb in this matter.
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Very truly yours,
Scott Zucker |
cc: |
Annette Nazareth, Esq. Norman Reed, Esq. Securities and
Exchange Commission |
1 |
Dealer Subscribers currently include: Credit Suisse First
Boston, Goldman Sachs, Lehman Brothers, Merrill Lynch, Salomon Smith
Barney, Morgan Stanley, Deutsche Bank, JP Morgan Securities,
Barclays Capital, Greenwich Capital, ABN AMRO, Bear Stearns, UBS
Warburg, BNP Paribas, and Banc of America Securities. For purposes
of this letter, the term "Dealer Subscriber" would include, and the
relief requested herein would be available to, any registered
broker-dealer that uses the TradeWeb System (including registered
broker-dealers that use the TradeWeb System for purposes of
delivering electronic trade confirmations but not for effecting any
securities transactions). |
2 |
Users currently include over 1,000 of the largest buy-side
institutions such as investment advisers, pension funds, mutual
funds, insurance companies, commercial banks, central banks, hedge
funds, regional dealers, and state funds. |
3 |
If in the future TradeWeb registers as a clearing agency or
obtains an exemption therefrom in order to match trade data
submitted by Dealer Subscribers and Users, the Confirmation would be
based on the matched trade data and other information provided by
the Dealer. TradeWeb anticipates that the relief requested by this
letter would be equally applicable to such Confirmations. |
4 |
TradeWeb would retain electronic records of Confirmations in
accordance with recordkeeping requirements applicable to registered
broker-dealers. |
5 |
Currently, Dealer Subscribers act only in a principal capacity
in all TradeWeb System Trades. If Dealer Subscribers act in an
agency capacity, each Confirmation would disclose: (a) the name
of the person from whom the security was purchased or to whom it was
sold (or the fact that such information would be furnished by the
Dealer Subscriber upon written customer request); (b) the
amount of any remuneration received or to be received by the Dealer
Subscriber from such customer in connection with the transaction
(unless such remuneration is paid pursuant to a written customer
agreement otherwise than on a transaction basis); and (c) the
source and amount of any other remuneration received or to be
received by the Dealer Subscriber in connection with the transaction
(or, except in the case of participation in a distribution or tender
offer, that the Dealer Subscriber has received such remuneration and
that the source and amount would be provided upon written customer
request). |
6 |
The Confirmation would not disclose the yield to maturity for
any trade in a debt security that has a maturity date that may be
extended by the issuer thereof (with a variable interest rate
payable thereon) or that is an asset-backed security that represents
an interest in or is secured by a pool of receivables or other
financial assets that are subject continuously to prepayment
(e.g., a mortgage-backed security). |
7 |
The Confirmation would not disclose yield to maturity for any
trade in a debt security that has a maturity date that may be
extended by the issuer thereof (with a variable interest rate
payable thereon) or that is an asset-backed security that represents
an interest in or is secured by a pool of receivables or other
financial assets that are subject continuously to prepayment
(e.g., a mortgage-backed security). |
8 |
Currently, mortgage-backed securities are the only category of
asset-backed securities that may be traded on the TradeWeb System,
although in the future Dealer Subscribers and Users may be able to
effect TradeWeb System Trades in other asset-backed securities.
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9 |
Currently, all securities available for trading on the TradeWeb
System are investment grade securities, although in the future
Dealer Subscribers and Users may be able to effect TradeWeb System
Trades in non-investment grade securities. |
10 |
This information would include the date and time of the
transaction, the identity, price and principal amount of the
security, that the security is subject to redemption before maturity
(if applicable), that the security represents an interest in or is
secured by a pool of receivables continuously subject to prepayment
(if applicable), dollar price and yield information, and that the
security is unrated (if applicable). |
11 |
See, e.g., MBS Clearing Corp. (pub. avail. June 27,
1997); Pacific Clearing Corp. (pub. avail. Apr. 11, 1981); The
Depository Trust Company (pub. avail. Nov. 29, 1974) (as
supplemented by letters publicly available Jan. 31, 1983 and Apr.
17, 2001). |
12 |
See Thomson Financial Services, Inc. (pub. avail. Oct. 8,
1993). |
http://www.sec.gov/divisions/marketreg/mr-noaction/tradeweb012203.htm
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