|Amendments to Rule G-15(d)(ii) on Confirmation/Acknowledgment
The Board has filed proposed amendments to rule G-15 concerning automated confirmation/acknowledgment of institutional customer transactions.
Questions about the proposed amendments may be directed to Harold L. Johnson, Deputy General Counsel.
On April 1, 1998, the Municipal Securities Rulemaking Board filed with the Securities
and Exchange Commission (Commission) amendments to rule G-15(d)(ii) concerning automated
confirmation/acknowledgment of institutional customer transactions.(1)
The amendments, if approved by the Commission, would allow dealers to comply with rule
G-15(d)(ii) by using the services of "qualified vendors" for
confirmation/acknowledgment of such customer transactions. Currently, without the proposed
rule change, only clearing agencies that are registered with the Commission may be used to
obtain the confirmation/acknowledgment that is required by the rule.
The clearance of institutional customer transactions is accomplished today in large part through the use of automated confirmation/acknowledgment systems operated by clearing agencies registered with the Commission (registered clearing agencies). These systems have provided substantial efficiencies and cost savings by ensuring timely settlement and eliminating some of the time consuming and expensive manual processing associated with paper confirmations. The Board views these systems as a critical part of the national system of clearance and settlement mandated by Section 17A of the Securities Exchange Act.
Board rule G-15(d)(ii) requires that customer transactions in municipal securities which are effected on Delivery versus Payment or Receipt versus Payment (DVP/RVP) settlement basis must, if eligible for processing in an automated confirmation/acknowledgment system, be confirmed and acknowledged through such a system. The rule currently specifies that the confirmation/acknowledgment system must be one operated by a registered clearing agency. Other Self-Regulatory Organizations (SROs) in the securities market also have similar rules requiring confirmation/acknowledgment through registered clearing agencies. Based on a request from a private vendor, it appears some private vendors, who are not registered securities clearing agencies, nevertheless may wish to market confirmation/acknowledgment services to brokers, dealers and municipal securities dealers.
The Board believes that competition among confirmation/acknowledgment service providers is a desirable goal and ultimately will make the clearance and settlement process more efficient and responsive to the needs of the securities industry. At the same time, the Board believes that, if private vendors are to provide a clearance or settlement service that previously has been provided only by registered clearing agencies under supervision of the Commission, appropriate safeguards must be provided to assure that the systems offered by private vendors are reliable and are effectively integrated into the national system of clearance and settlement. The Board believes that this requires, among other things, that links exist between vendors such that the user of a confirmation/acknowledgment service can have confidence that confirmation/acknowledgment can take place regardless of which confirmation/acknowledgment service is being used by its contra-party.
SUBSTANCE OF AMENDMENTS
The amendments would allow brokers, dealers and municipal securities dealers to comply with rule G-15(d)(ii) through the use of confirmation/acknowledgment services operated by non-registered "qualified vendors." To become a "qualified vendor" of confirmation/acknowledgment services, an entity would have to:
The Board believes that these requirements for a vendor to become and remain qualified are necessary to assure that the confirmation/acknowledgment services used in the securities industry are reliable and are integrated into the national system of clearance and settlement. The amendments are responsive to the Commission staff's request (contained in a letter, dated November 25, 1997 from Mr. Richard R. Lindsey, Director, Division of Market Regulation) that SROs consider adoption of uniform rule amendments which allow vendors to provide confirmation/acknowledgment services under circumstances similar to those specified in the amendments.
April 1, 1998
TEXT OF PROPOSED AMENDMENTS(2)
Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers
(a) - (c) No change
(d) Delivery/Receipt vs. Payment Transactions.
(i) No change.
(ii) Requirement for Confirmation/Acknowledgment.
(A) Use of Registered Clearing Agency or Qualified Vendor. Except as provided in this paragraph (ii) of rule G-15(d), no broker, dealer or municipal securities dealer shall effect a customer transaction for settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) basis unless the facilities of a C
clearing A agency registered with the Securities and Exchange Commission (registered clearing agency)or Qualified Vendor are used for automated confirmation and acknowledgment of the transaction. Each broker, dealer and municipal securities dealer executing a customer transaction on a DVP/RVP basis shall: (A) ensure that the customer has the capability, either directly or through its clearing agent, to acknowledge transactions in an automated confirmation/acknowledgment system operated by a registeredC clearing A agency or Qualified Vendor; (B) submit or cause to be submitted to a registeredC clearing A agency or Qualified Vendor all information and instructions required by the registeredC clearing A agency or Qualified Vendor for the production of a confirmation that can be acknowledged by the customer or the customer's clearing agent; and (C) submit such transaction information to the automated confirmation/acknowledgment system on the date of execution of such transaction; provided that a transaction that is not eligible for automated confirmation and acknowledgment through the facilities of a registeredC clearing A agency shall not be subject to this paragraph (ii).
(B) Definitions for Rule G-15(d)(ii).
(1) "Clearing Agency" shall mean a clearing agency as defined in Section 3(a)(23) of the Act that is registered with the Commission pursuant to Section
17A(b)(2) of the Act or has obtained from the Commission an exemption from registration granted specifically to allow the clearing agency to provide confirmation/acknowledgment services.
(2) "Qualified Vendor" shall mean a vendor of electronic confirmation and acknowledgment services that:
(A) for each transaction subject to this rule: (i) delivers a trade record to a Clearing Agency in the Clearing Agency's format; (ii) obtains a control number for the trade record from the Clearing Agency; (iii) cross-references the control number to the confirmation and subsequent acknowledgment of the trade; and (iv) electronically delivers any acknowledgment received on the trade to the Clearing Agency and includes the control number when delivering the acknowledgment of the trade to the Clearing Agency;
(B) annually certifies: (i) with respect to its electronic trade confirmation/acknowledgment system, that it has a capacity requirements evaluation and monitoring process that allows the vendor to formulate current and anticipated estimated capacity requirements; (ii) that its electronic trade confirmation/acknowledgment system has sufficient capacity to process the volume of data that it reasonably anticipates to be entered into its electronic trade confirmation/acknowledgment service during the upcoming year; (iii) that its electronic trade confirmation/acknowledgment system has formal contingency procedures, that the entity has followed a formal process for reviewing the likelihood of contingency occurrences, and that the contingency protocols are reviewed, tested, and updated on a regular basis; (iv) that its electronic confirmation/acknowledgment system has a process for preventing, detecting, and controlling any potential or actual systems or computer operations failures, including any failure to interface with a Clearing Agency as described in rule G-15(d)(ii)(B)(2)(A), above, and that its procedures designed to protect against security breaches are followed; and (v) that its current assets exceed its current liabilities by at least five hundred thousand dollars;
(C) when it begins providing such services, and annually thereafter, submits an Auditor's Report to the Commission staff and obtains from the Commission staff a statement that the Commission staff does not object to the Auditor's Report. (An Auditor's Report will be deemed unacceptable if it contains any findings of material weakness.);
(D) notifies the Commission staff immediately in writing of any material change to its confirmation/affirmation systems. (For purposes of this subparagraph (D) "material change" means any changes to the vendor's systems that significantly affect or have the potential to significantly affect its electronic trade confirmation/acknowledgment systems, including changes that: (i) affect or potentially affect the capacity or security of its electronic trade confirmation/acknowledgment system; (ii) rely on new or substantially different technology; (iii) provide a new service as part of the Qualified Vendor's electronic trade confirmation/acknowledgment system; or (iv) affect or have the potential to adversely affect the vendor's confirmation/acknowledgment system's interface with a Clearing Agency.);
(E) immediately notifies the Commission staff in writing if it intends to cease providing services;
(F) provides the Board with copies of any submissions to the Commission staff made pursuant to subparagraphs (C), (D), and (E) of this rule G-15(d)(ii)(B)(2) within ten business days.
(G) promptly supplies supplemental information regarding its confirmation/acknowledgment system when requested by the Commission staff or the Board.
(3) "Auditor's Report" shall mean a written report which is prepared by competent, independent, external audit personnel in accordance with the standards of the American Institute of Certified Public Accountants and the Information Systems Audit and Control Association and which: (A) verifies the certifications described in subparagraph (d)(ii)(B)(2)(B) of this rule G-15; (B) contains a risk analysis of all aspects of the entity's information technology systems including, computer operations, telecommunications, data security, systems development, capacity planning and testing, and contingency planning and testing; and (C) contains the written response of the entity's management to the information provided pursuant to (A) and (B) of this subparagraph (d)(ii)(B)(3) of rule G-15.
(C) Disqualification of Vendor. A broker, dealer or municipal securities dealer using a Qualified Vendor that ceases to be qualified under the definition in rule G- 15(d)(ii)(B)(2) shall not be deemed in violation of this rule G-15(d)(ii) if it ceases using such vendor promptly upon receiving notice that the vendor is no longer qualified.
(iii) No change
(e) No change.
1. 1 Persons wishing to refer to the filing in any comments to the Commission should identify it is as File No. SR-MSRB-98-6.
2. Underlining indicates new language; strikethrough denotes deletions.
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