by Melissa Beck
Rule 15c3-5 is a new rule that
will effectively prohibit broker-dealers with market access from providing
customers with unfiltered access to an exchange or alternative trading system
On November 3, 2010, the
Securities and Exchange Commission (the "SEC") voted unanimously to
adopt a new rule that will effectively prohibit broker-dealers with market
access from providing customers with unfiltered access to an exchange or
alternative trading system ("ATS"). Rule 15c3-5 (the
"Rule") will require broker-dealers with direct market access to
trading securities on an exchange or ATS to establish, document, and maintain a
system of risk management controls and supervisory procedures that, among other
things, are reasonably designed to (1) systematically limit the financial
exposure of broker-dealers that could arise as a result of market access, and
(2) ensure compliance with all regulatory requirements that are applicable in
connection with market access. It encompasses trading in all securities on an
exchange or ATS, including equities, options, exchange-traded funds, and debt
securities, and is intended to strengthen the controls with respect to market
access and reduce regulatory inconsistency and the potential for regulatory
arbitrage. The Rule was adopted with only minor changes to the proposed rule
that was published for comment in January 2010, and becomes effective 60 days
from the date of publication in the Federal Register.
Broker-dealers with direct market access to an exchange or ATS use a market
participant identifier ("MPID") when effecting trades, and are
legally responsible for any trades made using their MPID. Allowing third
parties to trade using a broker-dealer's MPID could result in the broker-dealer
paying lower transaction fees based on a volume discount. A broker-dealer also
may network with another broker-dealer to gain access to an exchange where it
is not a member. For customers, such as hedge funds and institutional
investors, trading using a broker-dealer's MPID may facilitate more rapid
trading, preserve confidentiality of trading strategies, and reduce operation
and transaction costs. Broker-dealers provide customers with sponsored access
to their member exchanges or ATSs either through filtered or unfiltered access
When a broker-dealer provides filtered access to customers, the customer orders
flow through the broker-dealer's system before passing into the markets. The
system allows a broker-dealer to pre-screen a trade to ensure there are no
manual errors, regulatory violations, or other issues prior to passing it on to
the exchange or ATS. Filtered access is currently regulated by the exchanges
and self-regulatory organizations; however, the regulations are not uniform,
and in some instances, the rules serve merely as best practice guidelines.
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Melissa Beck is an associate in the Capital Markets Group of the
New York office of Morrison & Foerster. Ms. Beck's practice is focused on
the insurance industry, where she specializes in the life settlement sector.
She has advised clients on the establishment of proprietary programs, the
drafting of transaction documents, the development of policies and procedures,
and the oversight of ongoing operations, including state licensing filings, and
has performed audits on third-party providers for clients. Ms. Beck has
experience in catastrophe bonds, sidecars, and CDO and CLO transactions. She
has used her insurance regulatory knowledge to assist in M&A and litigation