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87-79 Request for Comments on Proposed New NASD By-Law Authorizing Mandatory Reporting of Trade Comparison Information

TO: All NASD Members and Other Interested Persons

LAST DATE FOR COMMENT: DECEMBER 24, 1987.

EXECUTIVE SUMMARY

The NASD requests comments on a proposed new By-Law that would permit the NASD to require trade comparison reporting by members conducting' an inter-dealer OTC securities business, as intended when the Trade Acceptance and Reconciliation Service (TARS) began development in 1981.

The text of the proposed new By-Law is attached.

BACKGROUND

Since 1983, the NASD has offered the Trade Acceptance and Reconciliation Service (TARS) to members that are participants in a registered clearing corporation. TARS is an on-line trade reconciliation facility that allows both parties of an unresolved trade to view on their NASDAQ terminals uncompared and advisory OTC trades that are cleared through the facilities of a registered clearing agency and to enter corrections at once. Corrections entered by one side are immediately displayed to the other side and this information is automatically transmitted each day to the clearing corporation, eliminating the need to separately prepare and submit trade correction tickets to the clearing corporation.

Since 1981, when TARS was in its developmental stage, the NASD has contemplated that mandatory trade comparison reporting would be required of all NASD members conducting an interdealer OTC securities business. Currently, 105 TARS subscribers account for 86 percent of all cleared OTC transactions. Since its introduction, TARS has substantially reduced the percentage of uncompared OTC transactions by bringing those transactions into an automated comparison environment.

PROPOSED NEW BY-LAW

The proposed new NASD By-Law would authorize the NASD Board of Governors to require members to report all original and supplemental OTC trade comparison data as the Board deems appropriate. Reporting would be administered either by the NASD or through the facilities of a registered clearing corporation.

The NASD Board approved, in concept, the development of rules that would require (1) mandatory participation in TARS by all NASD members that are participants in a registered clearing agency for purposes of clearing OTC transactions, and (2) all NASD members conducting an interdealer business in OTC securities to submit trade data to a comparison facility. The NASD is currently studying the most cost-effective methods for allowing members that are not clearing corporation participants to input such trade comparison information.

In a related matter, the SEC Division of Market Regulation has urged the NASD to enhance its surveillance capabilities for non-NASDAQ, OTC securities. For the NASD to effectively surveil this segment of the market, the NASD must obtain, in a timely manner, information similar to that now available for NASDAQ securities. In response to the SEC's request, the NASD is currently developing reporting and other requirements to enable it to carry out this task.

Therefore, the proposed new By-Law may be enhanced to permit the NASD Board to require the reporting of trade data, including aggregate volume information. To facilitate reporting of non-NASDAQ, OTC transaction information, the NASD intends to integrate the reporting of this information, to the greatest degree possible, with any trade comparison reporting requirement.

REQUEST FOR COMMENTS

The NASD encourages all members and other interested persons to comment on the proposed new By-Law and to include comments relating to expansion of the By-Law provisions to permit reporting requirements for surveillance of the non-NASDAQ, OTC securities market. Comments should be directed to:

Mr. Lynn Nellius
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506

Comments must be received by December 24, 1987. Comments received by this date will be considered by the NASD Uniform Practice Committee and the NASD Board of Governors. If approved by the Board, the proposal will be submitted to the membership for a vote. If approved by the membership, the proposal must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this notice should be directed to Donald C. Catapano, Director, NASD Uniform Practice/TARS, at (212) 839-6255.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Attachment

PROPOSED NEW NASD BY-LAW

ARTICLE XXI

The Board of Governors is hereby authorized to require the prompt reporting by members of such original and supplementary trade comparison data as the Board deems appropriate. Such reporting requirement may be administered by the Corporation, a division or subsidiary thereof, or a clearing agency registered under the Securities Exchange Act of 1934.


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