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Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to a Cap on ACT Risk Management Charges

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Start Preamble June 27, 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 June 12, 2000, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), 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. Nasdaq filed the proposal pursuant to Section 19(b)(3)(A) of the Act,[3] and Rule 19b-4(f)(6) thereunder,[4] which renders the proposal effective upon filing with the Commission.[5] The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

Nasdaq filed the proposed rule change to amend NASD Rule 7010, Systems Services, to establish a cap on the Automation Confirmation Transaction Service (“ACT”) risk management charge. Nasdaq has designated this proposal as non-controversial, and requests that the Commission waive the 30-day pre-operative waiting period contained in Rule 19b-4(f)(6)(iii) under the Act,[6] to allow the proposal to be both effective and operative immediately upon filing with the Commission. The text of the proposed rule is below. Proposed new language is in italics.

* * * * *

Rule 7010. Systems Services

(g) Automated Confirmation Transaction Service

The following charges shall be paid by the participant for use of the Automated Confirmation Transaction Service (ACT):

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)

* * * * *

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 its proposal and discussed any comments it received regarding the proposal. 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 Start Printed Page 41120Board, and other over-the-counter securities. ACT handles transactions negotiated over the telephone 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 Third Market. 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.

The ACT risk management function allows firms that clear for other firms to establish acceptable levels of credit for their introducing firms. ACT risk management enables clearing firms 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.[7] Clearing firms providing clearing services to correspondent firms are assessed risk management charges of $0.035 per trade and $17.50 per month per correspondent firm. Self-clearing firms do not utilize the ACT risk management function and are not assessed risk management charges.

The ACT service for clearing firms and their executing correspondents, including the risk management function, was implemented in October 1990.[8] The ACT risk management service charge was implemented in November 1990.[9] The original ACT risk management charge was calculated to recoup the development costs for ACT programming efforts as well as costs associated with computer and other hardware purchases to meet the capacity requirements to run the risk management system and to reflect the ongoing costs of operating the risk management function of the ACT system. The per trade portion of the charge was calculated based on trading volume in 1990, which was substantially less than it is at the present. For example, in 1990, Nasdaq National Market (“NNM”) securities average 47,000 trades per day; in comparison, NNM securities average 1.26 million trades per day in 1999 (with an average of 1.67 million trades per day in the fourth quarter of 1999). Because the ACT risk management charge is based largely on the number of trades cleared, the expansion in trading volume since 1990 has required some firms to pay increasingly large risk management charges that are disproportionate to the value they receive from ACT, particularly firms that clear for correspondents that execute a large number of trades.

Nasdaq believes that it is appropriate to update the pricing model for ACT risk management charges to reflect current business practices and trading patterns and to ensure that the ACT risk management feature continues to be a valuable, cost-effective service for clearing firms. Nasdaq proposes to revise the ACT service charges and establish a cap of $10,000 on the monthly risk management charge that a clearing firm must pay on behalf of a correspondent firm. Nasdaq will implement the cap retroactive to April 1, 2000.

2. Statutory Basis

Nasdaq believes that the proposal is consistent with the provisions of Section 15A(b)(6) of the Act [10] in that it 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. Nasdaq also believes the proposed rule change is consistent with Section 15A(b)(5) of the Act [11] 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.

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

Because the foregoing proposed rule change does not:

(i) significantly affect the protection of investors or the public interest;

(ii) impose any significant burden on competition; and

(iii) 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 effective pursuant to Section 19(b)(3)(A) of the Act [12] and Rule 19b-4(f)(6) thereunder.[13] At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate 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.

Nasdaq has requested that the Commission accelerate the operative date. The Commission finds good cause to designate the proposal to become immediately operative upon filing, because such designation is consistent with the protection of investors and the public interest. Acceleration of the operative date will allow NASD members to reap the benefits of the cap on ACT risk management charges retroactive to April 1, 2000 immediately, rather than having to wait 30 days before implementing the cap. For these reasons, the Commission finds good cause to waive the 5-day pre-filing requirement, and to designate that the proposal become operative immediately.[14]

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Persons making written submission 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 Start Printed Page 41121Commission 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-00-35 and should be submitted by July 24, 2000.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[15]

Margaret H. McFarland,

Deputy Secretary

End Signature End Preamble


5.  Nasdaq provided written notice to the Commission on June 8, 2000, that is intended to file this proposal. The Commission agreed to waive the 5-day pre-filing notice requirement. See Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).

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6.  17 CFR 240.19b-4(f)(6)(iii).

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7.  See NASD Rule 6150, ACT Risk Management Functions.

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8.  See Securities Exchange Act Release No. 28583 (October 26, 1990), 55 FR 46120 (November 1, 1990)(SR-NASD-89-25). ACT was implemented for self-clearing firms in March 1990. See Securities Exchange Act Release No. 27229 (September 8, 1989), 54 FR 38484 (September 18, 1989)(SR-NASD-89-25).

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9.  See Securities Exchange Act Release No. 28595 (November 5, 1990), 55 FR 47161 (November 9, 1990)(SR-NASD-90-57).

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14.  For purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 00-16747 Filed 6-30-00; 8:45 am]