Self-Regulatory Organizations; Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Clearance and Settlement Requirements for NASD Member Firms That Are Market Makers in the Nasdaq Stock Market or the OTC Bulletin BoardRegister Service

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34238; File No. SR-NASD-94-28]

Self-Regulatory Organizations; Filing of Proposed Rule Change by

the National Association of Securities Dealers, Inc. Relating to

Clearance and Settlement Requirements for NASD Member Firms That Are

Market Makers in the Nasdaq Stock Market or the OTC Bulletin

Board Service

June 20, 1994.

Pursusant to Section 19(b)(1) of the Securities Exchange Act of

1934 (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on May

23, 1994, the National Association of Securities Dealers, Inc.

(``NASD'' or ``Association'') 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 the NASD. 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

Pursuant to Section 19(b)(1) of the Act, the NASD hereby files a

proposed rule change that deals with clearance and settlement

requirements applicable to NASD member firms functioning as market

makers in The Nasdaq Stock Market (``Nasdaq'') or the OTC Bulletin

Board Service (``OTCBB''). Below is the text of the proposed

rule change. (Additions are italicized and deletions are bracketed.)

Scheduled D--Part V: Requirements Applicable to NASDAQ Market

Makers

Sec. 7 Clearance and Settlement

(a) A market maker shall clear and settle transaction in Nasdaq

securities [other than securities in SOES] through the facilities of a

registered clearing agency [where clearing facilities are located

within 25 miles of the market maker.] that uses 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 an agency.

(b) [Notwithstanding its proximity to a particular clearing

facility, a market maker may also clear and settle its transactions in

a security that is not a SOES security through any registered clearing

facility using a continuous net settlement system; enter into a

correspondent clearing arrangement with a member that clears through a

continuous net settlement clearing facility; settle transactions ``ex-

clearing'' provided both parties to the transaction agree; or use

direct clearing services.] Notwithstanding paragraph (a), transactions

in Nasdaq securities may be settled ``ex-clearing'' provided that both

parties to the transaction agree.

(c) No change.

OTC Bulletin Board Service Rules

Section 4. Requirements Applicable to Market Makers

(d) Clearance and Settlement

(1) A market maker shall clear and settle transactions in OTCBB-

quoted securities through the facilities of a registered clearing

agency that uses a continuous net settlement system. This requirement

applies only to transactions in OTCBB securities that are clearing

eligible.

(2) The foregoing 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.

(3) Notwithstanding paragraph (d)(1), transactions in OTCBB-quoted

securities 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, the NASD 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. The NASD 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

The purpose of this rule change is to mandate market maker

utilization of the facilities of a registered clearing agency to ensure

efficient clearance and settlement of securities transactions. For

securities listed on Nasdaq, this will be accomplished by eliminating

the ``25 mile exception''' from Section 7(a) in Part V of Schedule D to

the NASD By-Laws. (Part V articulates the basic requirements applicable

to Nasdaq market makers.) Even today, this exception is quite limited

in that it is only available to market makers who are located more than

25 miles from a clearing facility, limit their Nasdaq market making

activity to Nasdaq SmallCapSM securities, and do not participate

in the Small Order Execution System (``SOES'').\1\ With respect to

equity securities quoted in the OTCBB, a new requirement is being

proposed to mandate market maker participation in a registered clearing

agency for clearance and settlement of transactions in OTCBB securities

that are clearing eligible.\2\ As a result, parallel requirements will

exist for the two largest equity market segments in which NASD members

function as market makers and utilize the Automated Confirmation

Transaction Service (``ACT'') for trade reporting and comparison

purposes.\3\

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\1\Although registered market makers in Nasdaq National Market

securities must be SOES participants, SOES participation is

voluntary with respect to market makers in SmallCap issues.

\2\As of April 30, 1994, approximately 87% of all securities

quoted in the OTCBB were clearing eligible. Clearing eligible status

is noted in the OTCBB symbol directory and in the electronic

directory accessible via Nasdaq Workstation PCs.

\3\The NASD estimates that fewer than 10 member firms that

function as market makers would be required to establish clearing

arrangements as a result of this rule proposal.

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ACT is the primary facility for collecting, processing, and

disseminating transaction reports on Nasdaq securities as well as

equity issues quoted in the OTCBB. ACT also facilitates the clearance

and settlement of inter-member transactions by locking-in trade details

for transmission to the National Securities Clearing Corporation

(``NSCC''). The generation of locked-in trades by ACT enhances the

overall efficiency of the clearance and settlement process and

virtually eliminates a members risk exposure respecting uncompared

trades. These benefits cannot be realized, however, unless the broker-

dealers on both sides of the trade have some form of participation in a

registered clearing agency.

This rule proposal is believed to be consistent with the provisions

of Sections 11A(a)(1), 15A(b)(6), and 17A(a)(1) of the Act. Section

11A(a)(1) contains the Congressional findings that have guided

development of the National Market System. These findings include a

directive to apply state-of-the-art data processing and communications

techniques to achieve more efficient and effective market operations

and to ensure the economical execution of securities orders. Similarly,

Section 15A(b)(6) requires, among other things, that the rules of a

national securities association be designed to prevent fraudulent and

manipulative acts and practices, to promote just and equitable

principles of trade, and to foster cooperation and coordination with

persons engaged in regulating, clearing, settling, and processing

information with respect to and facilitating transactions in

securities. Finally, Section 17A(a)(1) reflects the statutory goals of

a national system for clearance and settlement of securities

transactions. These goals include the application of new data

processing and communications techniques to create the opportunity for

more efficient, effective, and safe procedures for clearance and

settlement. The NASD believes that this proposed rule change is fully

consistent with these statutory requirements. In sum, the primary

objectives of this rule change are to minimize risk exposure from

uncompared trades and foster optimal usage of ACT to lock-in the

details of individual trades prior to their submission to a registered

clearing agency.

B. Self-Regulatory Organization's Statement on Burden on Competition

The NASD believes that the rule change will not 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

The NASD did not solicit or receive written comments on this rule

proposal.

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 longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the NASD consents, the Commission will:

A. By order approve such 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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

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 number SR-NASD-94-28 and

should be submitted by July 18, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-15491 Filed 6-24-94; 8:45 am]

BILLING CODE 8010-01-M