SEC Approves Amendment To UPC To Add New Section 72

Executive Summary

On May 25, 1995, the Securities and Exchange Commission (SEC) approved an amendment to the Uniform Practice Code (UPC) adding new Section 72 requiring a member or its agent who is a participant in a registered clearing agency to use the facilities of such registered clearing agency for the clearance of eligible transactions in corporate debt securities. The new section is intended to reduce or eliminate the risks and inefficiencies associated with broker-to-broker clearing of transactions in corporate debt securities. The new section takes effect on June 30, 1995.

Background

On May 25, 1995, the SEC approved an amendment to the UPC adding new Section 72 requiring a member or its agent who is a participant in a registered clearing agency to use the facilities of such registered clearing agency for the clearance of eligible transactions in corporate debt securities. The new section takes effect on June 30, 1995. The text of the new section follows this Notice.

Recently, the NASD^® has observed that a significant percentage of all transactions in corporate bonds is being compared, cleared, and settled broker-to-broker, or ex-clearing; that is, without using the facilities of a registered clearing agency. Clearing such transactions broker-to-broker is labor intensive, requires more time to complete, and results in more fails than transactions processed through a clearing agency. The labor-intensive, manual nature of broker-to-broker processing is error prone; such as, keystroke errors, manual document handling errors, delivery errors, and payment errors, among others. In addition, because such broker-to-broker clearance is labor intensive, it also generally requires more time to complete. All of these factors increase the systemic clearance risk by increasing the number of trade fails and the potential financial exposure to members.

The NASD is concerned that the problems associated with broker-to-broker clearance of corporate bond trades is creating avoidable risks and inefficiencies, as described above, in the clearance and settlement process. In addition, the implementation of T+3 settlement of securities transactions on June 7, 1995, will likely exacerbate the risks and inefficiencies inherent in clearing corporate bond transactions broker-to-broker. Accordingly, the NASD is amending the UPC to add a new Section 72 requiring a member to submit its interdealer transactions in corporate debt securities to a registered clearing agency if the member or its agent is a participant in a registered clearing agency. By doing so, members will be able to view their compared corporate bond trades on T+1 and more readily comply with the accelerated settlement cycle.

The amendment also provides that the NASD may exempt any transaction or class of transactions in corporate debt securities from the provisions of the rule as may be necessary to accommodate special circumstances related to the clearance of such transactions or class of transactions. The NASD anticipates that this provision will be used only if the special pricing and processing problems related to particular corporate debt securities made using the facilities of a registered clearing agency difficult or impossible and outweighed the benefits of using the facilities of a registered clearing agency.

Questions regarding this Notice may be directed to the NASD Uniform Practice Department at (203) 3759609.

Text Of Amendment To Uniform Practice Code

(Note: New text is underlined.)

UNIFORM PRACTICE CODE

Clearance of Corporate Debt Securities

Sec. 72

Each member or its agent that is a participant in a registered clearing agency, for purposes of clearing over the counter securities transactions, shall use the facilities of a registered clearing agency for the clearance of eligible transactions between members in corporate debt securities. The Association may exempt any transaction or class of transactions in corporate debt securities from the provisions of this rule as may be necessary to accommodate special circumstances related to the clearance of such transactions or class of transactions.