Mandatory Participation by Self-Clearing Firms in the Automated Confirmation Transaction (ACT) Service Set for First Quarter 1990

*These are suggested departments only. Others may be appropriate for your firm.

IMPORTANT

EXECUTIVE SUMMARY

Participation in the Securities and Exchange Commission-approved Automated Confirmation Transaction (ACT) service will become mandatory for all self-clearing firms during the first quarter of 1990. The service is designed to shorten the comparison cycle for telephone-negotiated trades in NASDAQ securities that are eligible for comparison processing through registered clearing corporations. Self-clearing members are urged to begin participating immediately in the ACT pilot program, which is currently in operation. A training disk is available from the NASD. The disk is a self-tutorial and allows a member to proceed at its own pace.

To participate in ACT, members must have NASDAQ-compatible equipment — a Harris terminal, Unisys PW² , Tandem 8NDQ, IBM-AT, IBM PS/2 models, or an NASD-approved foreign terminal interface. Any firm that does not now have NASDAQ-compatible equipment will need to take steps to get such equipment in order to comply with the mandatory participation requirements of ACT.

BACKGROUND AND EXPLANATION

The NASD has developed an on-line trade reporting and comparison system called the Automated Confirmation Transaction (ACT) service to shorten the comparison cycle for trades in NASDAQ securities. ACT locks in the post-" execution steps for telephone-negotiated, street-side trades.

These steps include transaction reporting, when applicable; comparison; and sending locked-in trades to registered clearing corporations. The clearing corporations will report ACT trades to their members on their Contract Sheets the day after the trades have been compared.

ACT has been in a pilot phase since August 30, 1989, when five members with NASDAQ-compatible terminals began using the system with test securities. On November 17, 1989, NASDAQ securities that have symbols starting with the letter "A" were made eligible for the pilot.

Within a few weeks, NASDAQ securities with symbols beginning with "B" or "C" will be added to the list of securities eligible for ACT processing. Shortly thereafter, all other NASDAQ securities will be ACT eligible.

The transactions entered into ACT will, when compared, be forwarded to the National Securities Clearing Corporation (NSCC) for trade comparison and processing. Also, for NASDAQ National Market securities, entry to ACT will satisfy NASDAQ National Market trade-reporting requirements with no other entry needed.

All self-clearing members that clear through the facilities of a registered clearing corporation must participate in ACT. Self-clearing members should complete the ACT training program as soon as possible and enter the ACT pilot phase.

To be an ACT participant, members must have NASDAQ-compatible equipment — a Harris terminal, Unisys PW², Tandem 8NDQ, IBM-AT, IBM PS/2 models 50Z, 60, 70, and 80 (for Workstation™ service terminals only), or an NASD-approved foreign terminal interface. Information on fees for communications charges as well as cost of terminals may be obtained from Anne Pittman Durand at (301) 590-6526.

TRAINING DISK

The NASD will provide members using any of the NASDAQ compatible devices with a self-tutorial training program on a floppy disk.

The disk encompasses the entire user functionality of the ACT service and is displayed in a NASDAQ Workstation™ format that allows the member to proceed at its own pace. Questions regarding the training disk should be directed to Raymond Nolting, ACT Supervisor, at (212) 858-4342 or Debby Chu, ACT Coordinator, at (212) 858-4344.

HOW ACT HELPS NASD MEMBERS

ACT provides for both one-sided input of trades with confirmation by the other side and two-sided input and matching. These features provide members with several benefits, many of which duplicate the post-execution features of the NASD's automated Small Order Execution System (SOES). They are:

• Same-day comparison and locked-in clearing for all NASDAQ trades;
• Less exposure to price movements for open items;
• On-line access to the status of each trade report;
• Faster, more efficient trade reconciliation and confirmation;
• Increased efficiency of back-office operations.

HOW ACT WORKS

Under ACT rules market makers will be required to report ACT-eligible trades into the system within 90 seconds of execution for NASDAQ National Market securities, and within 15 minutes of execution for all other securities. The contra side on any transaction, including trades in NASDAQ National Market issues, will be allowed 20 minutes from the time of execution to accept or decline the ACT report. The information submitted by the market maker must indicate whether it acted as a buyer or seller, the quantity, security symbol, price, and the identity of the contra party.

The order-entry firm, or contra party, has the option of either submitting its side of the trade, thereby generating an on-line match of the information submitted or waiting for the market maker's submission, and either accepting or rejecting it through what is called the "browse capability."

Whether the order-entry firm uses on-line match or the browse feature, the order-entry firm must accept or reject the market maker's trade entry or enter its own version of the trade within 20 minutes of execution. ACT input will not only create the clearing entry, it will also satisfy the trade-reporting requirements for transactions in NASDAQ National Market securities involving at least one round lot. At a later date, when the system is capturing trade-reporting information for all NASDAQ securities, separate end-of-day reporting for regular NASDAQ securities will no longer be required.

When a trade is compared in ACT, it will be submitted to the NSCC after the system's close, and it will appear as an ACT locked-in trade on the Contract Sheets, as SOES and Computer Assisted Execution System transactions appear today. ACT will provide trade-by-trade comparison (M-l) and, after the system's close, will attempt to match transactions that differ only as to quantity (M-2). When a trade is rejected by a participant, that trade will be dropped from ACT.

T+1 DATE PROCESSING

At the end of the trade date, transactions entered into ACT that are not rejected and which are uncompared or not responded to (one-sided) will be carried over for additional ACT processing on trade date + 1 (T+1). T+1 date processing will allow parties to transactions to compare or cancel open items and also will accept as-of submissions for T-date trades. There also will be an M-2 processing capability after the close of T+l activity. Trades that are uncompared — open or unanswered from trade date — will be locked in by the system after completion of the M-2 matching process on T+l. All locked-in transactions on T+l, compared through either member or system action, will appear as locked-in trades on the clearing NSCC's Supplemental Contract Sheets (T+2).

CORRESPONDENT FIRMS

At the present time, the NASD is working with those firms that clear for others to resolve a few remaining issues. Additional information will be forthcoming on the timing for bringing those firms into the ACT service.

Questions concerning this Notice to Members may be directed to Donald Catapano at the NASD's New York office at (212) 858-4350