SEC Division of Trading and Markets no-action letter: Trade Web

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July 22, 2003

Mr. Scott Zucker General Counsel TradeWeb LLC Harborside Financial Center 2200 Plaza Five Jersey City, NJ 07311

Re: Request for No-Action Relief from Rule 10b-10 by TradeWeb LLC

Dear Mr. Zucker:

In your letter dated July 18, 2003, on behalf of TradeWeb LLC, you request no-action relief from the staff regarding the electronic trade confirmations generated by your TradeWeb System. Although TradeWeb is not currently acting as a clearing agency, it may in the future register as clearing agency or obtain an exemption from clearing agency registration. Specifically, you seek assurance that the staff would not recommend any enforcement action if U.S. registered broker-dealers effecting trades with their institutional customers in debt securities rely on electronic trade confirmations generated by and delivered through the TradeWeb System to satisfy their obligations under Rule 10b-10 of the Securities Exchange Act of 1934.

Response:

On the basis of the facts and representations contained in your letter, and particularly on your representation that each electronic trade confirmation will include all of the information required by Rule 10b-10 for transactions in debt securities, the staff of the Division of Market Regulation will not recommend enforcement action to the Commission under Rule 10b-10 if Dealer Subscribers (as defined in your letter) rely on the delivery of electronic trade confirmations generated by and delivered though the TradeWeb System to Users (as defined in your letter) as confirmation of trades in debt securities between those Dealer Subscribers and Users to satisfy Rule 10b-10.

Any different facts or representations may require a different conclusion. This is a staff position regarding enforcement action under Rule 10b-10 only, and does not express any legal conclusions regarding the applicability of Rule 10b-10 or other statutory or regulatory provisions of the federal securities laws.

Sincerely,

Norman Reed Special Counsel

Incoming Letter

Harborside Financial Center 2200 Plaza Five Jersey City, NJ 07311-4993 Direct 201 536 5877 Fax 201 536 3160 szucker@tradeweb.com

Scott D. Zucker General Counsel

Securities Exchange Act of 1934/ Section 10(b)/Rule 10b-10

July 18, 2003

Catherine McGuire, Esq. Chief Counsel Division of Market Regulation Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549

Re:

Electronic Trade Confirmation Service through the TradeWeb System

Dear Ms. McGuire: We are writing to request your advice that the staff of the Securities and Exchange Commission (the " Commission ") would not recommend that the Commission take any enforcement action if U.S. registered broker-dealers effecting trades with their institutional customers in debt securities rely on electronic trade confirmations generated by and delivered through an electronic platform (the " TradeWeb System ") operated by TradeWeb LLC (" TradeWeb ") to satisfy their obligations pursuant to Rule 10b-10 under the Securities Exchange Act of 1934 (the " Exchange Act "). I. Description of TradeWeb and the TradeWeb System. TradeWeb, a broker-dealer registered with the Commission, operates the TradeWeb System through which institutional investors and investment firms (" Users ") access information, request bids and offers directly from, and effect transactions with U.S. registered broker-dealers participating on the TradeWeb System (" Dealer Subscribers "). 1 The TradeWeb System is available only to institutional investors and investment firms that meet certain financial and other criteria separately determined by each Dealer Subscriber with whom the User desires to effect transactions over the TradeWeb System. 2 The identity of the User is fully disclosed to the Dealer Subscriber on the TradeWeb System. A User must enter into a customer agreement with each Dealer Subscriber that has enabled the User to effect transactions with such Dealer Subscriber over the TradeWeb System. Each transaction effected over the TradeWeb System between a Dealer Subscriber and a User is subject to the terms and conditions of the customer agreement and other relevant documentation between the parties. Currently, Dealer Subscribers and Users may effect transactions over the TradeWeb System in U.S. government securities (including U.S. agency securities), TBA mortgage-backed securities, commercial paper and U.S. corporate fixed-income securities. The TradeWeb System permits Users to submit trade inquiries to multiple Dealer Subscribers simultaneously. All Dealer Subscribers receiving an inquiry and willing to trade the specific security for the transmitted quantity would message the User with a firm quotation to buy or sell. The User reviews the quotation and determines to accept, reject or allow the quotation to lapse. A transaction is completed only if it is accepted by the User and Dealer Subscriber. Dealer Subscribers and Users that effect transactions over the TradeWeb System (" TradeWeb System Trades ") are responsible for clearance and settlement using their customary procedures separate and apart from TradeWeb and the TradeWeb System. After a TradeWeb System Trade is effected, Users, acting for multiple client accounts, may allocate the transaction among those client accounts by transmitting the relevant allocation information to the Dealer Subscriber via the TradeWeb System. The Dealer Subscriber confirms to the User, through the TradeWeb System, the
receipt and processing of the allocation information. At no time does TradeWeb or the TradeWeb System act as counterparty, or take title to or otherwise handle funds or securities or participate in the settlement process between the Dealer Subscriber and the User. In the future, TradeWeb expects to introduce functionality that would permit Dealer Subscribers and Users to use the TradeWeb System to exchange information for transactions that they have entered into other than through the TradeWeb System, such as by telephone (" Non-TradeWeb System Trades "). Dealer Subscribers would input into the TradeWeb System trade information regarding transactions they have entered into with Users. This information would be transmitted to Users, who would review and affirm or disaffirm such information. The Dealer Subscriber would be notified via the TradeWeb System if a User disputes the terms of a Non-TradeWeb System Trade, and the Dealer Subscriber may then modify or resubmit the transaction details to the User. Once the User affirms a Non-TradeWeb System Trade, notice of such affirmation would be sent to the Dealer Subscriber. The User would have the ability to allocate the Non-TradeWeb System Trade to sub-accounts through the TradeWeb System in the same manner as trades entered into through the TradeWeb System. If in the future TradeWeb acts as an intermediary that compares Dealer Subscriber trade data submissions with trade data submissions of a User to determine if the two descriptions of the transaction match, TradeWeb would obtain the appropriate registration as a clearing agency or an exemption from such registration. II. Summary of Proposed Confirmation Delivery Service. As you are aware, Exchange Act Rule 10b-10 requires that a broker-dealer provide certain written disclosures to a customer at or before the completion of a transaction. Dealer Subscribers entering into TradeWeb System Trades currently satisfy their obligations under Rule 10b-10 by sending confirmations to Users by means other than through the TradeWeb System. As a result, Users may receive two "confirmations" for the same transaction: one generated by the TradeWeb System, and one sent separately by the Dealer Subscriber to comply with Rule 10b-10. In order to create the Rule 10b-10 confirmation, moreover, the Dealer Subscriber must input the trade details for a TradeWeb System Trade into another communications system, a process which may result in unnecessary duplication of records, increased risk of operational error, potential delays in the delivery of a final trade confirmation to the User and increased risk of errors and/or delays in the settlement of the transaction. TradeWeb proposes to offer Dealer Subscribers the ability to have confirmations (" Confirmations ") generated and transmitted to Users through the TradeWeb System in a manner that would satisfy the requirements of Rule 10b-10. For TradeWeb System Trades, the transaction information contained in the Confirmation
would be based on the terms of the transaction that have been agreed to between the User and the Dealer Subscriber over the TradeWeb System. For Non-TradeWeb System Trades, the Confirmation would be based on transaction information that is input into the TradeWeb System by the Dealer Subscriber and affirmed by the applicable User. In each case, the Confirmation would reflect any allocation among sub-accounts that has been made by the User and accepted by the Dealer Subscriber. 3

TradeWeb's proposed Confirmation delivery service would be conducted in accordance with the following guidelines:

Each Confirmation would include the information described in Part III below. The Confirmation would be presented on two pages: a page containing transaction-specific information, and a page containing dealer-specific "terms and conditions" ( i.e. , the information that would normally appear on the back of a paper confirmation, including any additional disclosures that the Dealer Subscriber may wish to provide that are not required by Rule 10b-10).

The Confirmation would indicate that the User should contact the Dealer Subscriber with whom it effected a transaction with any questions. Any such communication following delivery of the Confirmation would occur directly between the Dealer Subscriber and the User ( i.e. , TradeWeb would not participate in such communications, although the Dealer Subscriber and the User may elect to use messaging facilities provided by TradeWeb and/or the TradeWeb System).

The TradeWeb System would display the transaction status as "confirmed" on the trade blotters available to the Dealer Subscriber and the User.

Each User and Dealer Subscriber would have the ability to view, download, and/or print their Confirmations through the TradeWeb System, and may establish default procedures pursuant to which such Confirmations are downloaded and/or printed automatically. Confirmations would be stored electronically by TradeWeb. 4

Only Dealer Subscribers that request in writing (including electronically) to participate in TradeWeb's electronic trade confirmation service would be enabled to provide Confirmations through the TradeWeb System.

Each User would consent in writing (including electronically) to the Dealer Subscriber's delivery of Confirmations electronically through the TradeWeb System. III. Details Regarding the Information Provided on Confirmations. Each Confirmation would include all of the information required by Rule 10b-10 for transactions in debt securities, as set forth below:

Transaction-Specific Information. The date and time of the transaction (or the fact that the time of the transaction would be furnished by the Dealer Subscriber upon written request), as well as the identity, price, and principal amount of the security purchased or sold by the User.

Capacity of Dealer Subscriber. Whether the Dealer Subscriber acted as principal for its own account or as agent. 5

Securities Subject to Redemption before Maturity. If the securities are subject to redemption before maturity, that the security may be redeemed in whole or in part before maturity, that such a redemption could affect the yield represented, and that additional information is available from the Dealer Subscriber upon request.

Trades Effected on the Basis of a Dollar Price. For trades effected on the basis of a dollar price, the dollar price at which the trade was effected and the yield to maturity calculated from the dollar price. 6

Trades Effected on the Basis of Yield. For trades effected on the basis of yield: (a) the yield at which the trade was effected (including the percentage amount and its characterization); (b) the dollar price calculated from the yield at which the trade was effected; and (c) if effected on a basis other than yield to maturity and the yield to maturity is lower than the represented yield, the yield to maturity as well as the represented yield. 7

Trades in Asset-Backed Securities. For trades in asset-backed securities that represent an interest in or are secured by a pool of receivables or other financial assets that are subject continuously to prepayment: (a) that the actual yield of those securities may vary according to the rate at which the underlying receivables or other financial assets are prepaid; and (b) that information concerning the factors that affect yield (including at a minimum estimated yield, weighted average life, and the prepayment assumptions underlying the yield) will be furnished upon written request by a User directed to the Dealer Subscriber. 8

Unrated Securities. If applicable, that the related debt security (other than a government security) is unrated by a nationally recognized statistical rating organization. 9

Membership in the Securities Investor Protection Corporation (" SIPC "). If applicable, that the Dealer Subscriber is not a member of SIPC. All of the information described above would be provided to TradeWeb by the Dealer Subscriber. Trade-specific information would be provided on a trade-by-trade basis through an electronic "data feed" from the Dealer Subscriber. 10 All other information described above, including "dealer-specific" terms and conditions that the Dealer Subscriber may elect to include in the Confirmation, would be provided to TradeWeb prior to the Dealer Subscriber's first use of TradeWeb's Confirmation delivery service and may be updated by the Dealer Subscriber at any time thereafter. IV. Considerations in Support of Proposed Confirmation Delivery Service. TradeWeb's proposal to generate and deliver Confirmations through the TradeWeb System would be consistent with earlier no-action relief provided by the Commission staff. In addition, the proposed Confirmation service would provide Dealer Subscribers with a fast and reliable alternative to delivering a confirmation outside the TradeWeb System and reduce the operational and settlement risks to Dealer Subscribers and Users. As you are aware, the Commission staff has previously permitted the electronic delivery of confirmations by third parties on behalf of broker-dealers to satisfy the Rule 10b-10 obligations of registered broker-dealers. For example, the staff has permitted confirmations delivered through the DTC ID System and similar systems of other clearing agencies to satisfy the Rule 10b-10 obligations of broker-dealer participants. 11 In addition, the staff has permitted confirmations provided by certain unregulated operators of post-trade confirmation networks to satisfy the requirements of Rule 10b-10. 12

TradeWeb's proposed electronic trade confirmation service would satisfy the key requirements applicable to the confirmations described in these earlier no-action letters. Most importantly, as noted above each Confirmation would include all the information described in Part III above. The TradeWeb System would permit Dealer Subscribers to include in the Confirmation any additional disclosures that they elect to provide Users, even if such information is not required by Rule 10b-10. Dealer Subscribers and Users would, moreover, have ready access to the Confirmation - once notified through the TradeWeb System that the Confirmation is available, Users could view it on the TradeWeb System, download and store it electronically into their own systems, and print hardcopies. There would be no concerns about Users' ability or willingness to receive Confirmations in the manner proposed, since they would have established the necessary electronic linkages to the TradeWeb System and consented to the delivery of Confirmations through the TradeWeb System. TradeWeb maintains detailed electronic records of data entry and transaction information, which provide a continuous audit trail for TradeWeb System Trades. In addition, as a registered broker-dealer, TradeWeb would retain electronic records of Confirmations in accordance with recordkeeping requirements applicable to registered broker-dealers. Such records, as well as the TradeWeb System generally, would be available for inspection by the Commission. In addition, TradeWeb has in place and would continue to implement adequate safeguards to minimize the risk that any TradeWeb System failure would interfere with the prompt delivery of Confirmations. In particular, the TradeWeb System would have sufficient capacity to handle the volume of Confirmations reasonably anticipated to be generated and delivered for TradeWeb System Trades and Non-TradeWeb System Trades. TradeWeb currently tests the TradeWeb System regularly to ensure adequate capacity and response times and to minimize the risk of any TradeWeb System failures. TradeWeb also has back-up facilities and disaster recovery protocols to ensure continuity of service if its primary facilities become inoperable. Moreover, TradeWeb's standard security procedures permit only authorized Dealer Subscribers, Users and, where appropriate, certain authorized TradeWeb personnel to access the TradeWeb System. These procedures are reasonably designed to maintain the proper functioning of the TradeWeb System ( e.g. , by protecting the TradeWeb System's operational integrity from computer viruses or other similar threats) and the integrity of data submitted to and maintained on the TradeWeb System. Similar to the earlier staff no-action letters relating to electronic trade confirmation services, TradeWeb's Confirmation service would provide important benefits to Dealer Subscribers, Users and the fixed-income market. For TradeWeb System Trades and Non-TradeWeb System Trades,
Dealer Subscribers would not need to input transaction information into a separate confirmation delivery system in order to satisfy their Rule 10b-10 obligations. Users that consent to receiving Confirmations through the TradeWeb System would no longer need to process multiple confirmations - one from the TradeWeb System and one from the Dealer Subscriber - for the same transaction. The TradeWeb System's Confirmation would also provide a standardized format for the confirmation of transaction terms between Dealer Subscribers and Users. The elimination of such unnecessary back-office duplication and the ability to use standardized communications would reduce trade errors and operational risk and would increase the speed with which the settlement of trades can be processed. Importantly, these operational efficiencies would benefit not only the participants involved, but also the fixed-income markets, by facilitating the prompt and accurate confirmation and settlement of trades. Moreover, these benefits would be achieved with minimal incremental costs to those Dealer Subscribers and Users that have already established the necessary linkages to the TradeWeb System. V. Conclusion. Based on the foregoing, TradeWeb respectfully requests the Commission staff's advice that it would not recommend any enforcement action to the Commission if Dealer Subscribers rely on Confirmations generated and delivered to Users by the TradeWeb System as described above to satisfy their obligations under Rule 10b-10 of the Exchange Act. * * * If you should have any questions regarding this letter, please do not hesitate to contact the undersigned (201-536-5877) or Robert W. Cook of Cleary, Gottlieb, Steen & Hamilton (202-974-1538), outside counsel to TradeWeb in this matter.

Very truly yours,

Scott Zucker

cc:

Annette Nazareth, Esq. Norman Reed, Esq. Securities and Exchange Commission

Dealer Subscribers currently include: Credit Suisse First Boston, Goldman Sachs, Lehman Brothers, Merrill Lynch, Salomon Smith Barney, Morgan Stanley, Deutsche Bank, JP Morgan Securities, Barclays Capital, Greenwich Capital, ABN AMRO, Bear Stearns, UBS Warburg, BNP Paribas, and Banc of America Securities. For purposes of this letter, the term "Dealer Subscriber" would include, and the relief requested herein would be available to, any registered broker-dealer that uses the TradeWeb System (including registered broker-dealers that use the TradeWeb System for purposes of delivering electronic trade confirmations but not for effecting any securities transactions).

Users currently include over 1,000 of the largest buy-side institutions such as investment advisers, pension funds, mutual funds, insurance companies, commercial banks, central banks, hedge funds, regional dealers, and state funds.

If in the future TradeWeb registers as a clearing agency or obtains an exemption therefrom in order to match trade data submitted by Dealer Subscribers and Users, the Confirmation would be based on the matched trade data and other information provided by the Dealer. TradeWeb anticipates that the relief requested by this letter would be equally applicable to such Confirmations.

TradeWeb would retain electronic records of Confirmations in accordance with recordkeeping requirements applicable to registered broker-dealers.

Currently, Dealer Subscribers act only in a principal capacity in all TradeWeb System Trades. If Dealer Subscribers act in an agency capacity, each Confirmation would disclose: (a) the name of the person from whom the security was purchased or to whom it was sold (or the fact that such information would be furnished by the Dealer Subscriber upon written customer request); (b) the amount of any remuneration received or to be received by the Dealer Subscriber from such customer in connection with the transaction (unless such remuneration is paid pursuant to a written customer agreement otherwise than on a transaction basis); and (c) the source and amount of any other remuneration received or to be received by the Dealer Subscriber in connection with the transaction (or, except in the case of participation in a distribution or tender offer, that the Dealer Subscriber has received such remuneration and that the source and amount would be provided upon written customer request).

The Confirmation would not disclose the yield to maturity for any trade in a debt security that has a maturity date that may be extended by the issuer thereof (with a variable interest rate payable thereon) or that is an asset-backed security that represents an interest in or is secured by a pool of receivables or other financial assets that are subject continuously to prepayment ( e.g. , a mortgage-backed security).

The Confirmation would not disclose yield to maturity for any trade in a debt security that has a maturity date that may be extended by the issuer thereof (with a variable interest rate payable thereon) or that is an asset-backed security that represents an interest in or is secured by a pool of receivables or other financial assets that are subject continuously to prepayment ( e.g. , a mortgage-backed security).

Currently, mortgage-backed securities are the only category of asset-backed securities that may be traded on the TradeWeb System, although in the future Dealer Subscribers and Users may be able to effect TradeWeb System Trades in other asset-backed securities.

Currently, all securities available for trading on the TradeWeb System are investment grade securities, although in the future Dealer Subscribers and Users may be able to effect TradeWeb System Trades in non-investment grade securities.

This information would include the date and time of the transaction, the identity, price and principal amount of the security, that the security is subject to redemption before maturity (if applicable), that the security represents an interest in or is secured by a pool of receivables continuously subject to prepayment (if applicable), dollar price and yield information, and that the security is unrated (if applicable).

See, e.g. , MBS Clearing Corp. (pub. avail. June 27, 1997); Pacific Clearing Corp. (pub. avail. Apr. 11, 1981); The Depository Trust Company (pub. avail. Nov. 29, 1974) (as supplemented by letters publicly available Jan. 31, 1983 and Apr. 17, 2001).

See Thomson Financial Services, Inc. (pub. avail. Oct. 8, 1993).

http://www.sec.gov/divisions/marketreg/mr-noaction/tradeweb012203.htm

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Modified: 02/09/2005