Market infrastructure - U.S.A.
Trading
Stock Exchanges
There are currently eleven securities exchanges registered with the Securities and Exchange Commission (SEC) under Section 6(a) of the Exchange Act as National Securities Exchanges:
BATS Exchange, Inc. Equities, options
C2 Options Exchange, Incorporated
Chicago Board Options Exchange, Incorporated Options on equities, indices and ETFs
Chicago Stock Exchange, Inc. Equities
International Securities Exchange, LLC Options on equities, ETFs, FX, indices
NASDAQ OMX PHLX, Inc. (formerly Philadelphia Stock Ex.) Equities, ETFs, Options
The NASDAQ Stock Market LLC Equities, ETFs, options
National Stock Exchange, Inc Equities
New York Stock Exchange LLC Bonds, equities, futures and options
NYSE Amex LLC (formerly the American Stock Exchange) Bonds, equities, futures and options
NYSE Arca, Inc. Bonds, equities, ETFs, futures and options
Over the Counter (OTC) Market
There are a number of OTC trading places including dark pools and alternative trading systems (ECNs) such as National Association of Securities Dealers Automated Quotation (NASDAQ) system and Direct Edge. A large portion of the OTC market is also achieved through broker-dealer internal trading.
Clearing and settlement
Central Securities Depositories - The Depository Trust and Clearing Corporation (DTCC)
DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks.
DTCC operates through seven subsidiaries - each one serves a specific segment and risk profile within the securities industry:
- The Depository Trust Company (DTC) was created in 1973 to reduce costs and provide clearing and settlement efficiencies by immobilising securities and making “book-entry” changes to ownership of the securities. DTC provides securities movements for NSCC's net settlements, and settlement for institutional trades (which typically involve money and securities transfers between custodian banks and broker/dealers), as well as money market instruments. DTC supports both the omnibus and the segregated account structures.
- National Securities Clearing Corporation (NSCC) is a wholly owned subsidiary of the DTCC, established in 1976. It acts as a central counterparty that provides centralised clearance, settlement and information services for broker-to-broker equity, corporate bond and municipal bond, exchange-traded funds and unit investment trust trades in the U.S. NSCC also provides netting of trades and payments among its members, reducing the value of securities and payments that must be exchanged.
- Fixed Income Clearing Corporation (FICC) was created in 2003 to reduce costs and give DTCC customers a common approach to fixed income transaction processing by integrating the Government Securities Clearing Corporation and the Mortgage-Backed Securities Clearing Corporation. Its Government Securities Division provides real-time trade matching, clearing, risk management and netting for trades in US government debt issues, including repurchase agreements. FICC's Mortgage-Backed Securities Division provides real-time trade matching, trade confirmation, risk management, netting and electronic pool notification to the MBS market.
- DTCC Deriv/SERV LLC provides automated repository and asset servicing for over-the counter (OTC) derivatives trades, including credit, equity and interest rate derivatives. It also provides related matching of payment flows and bilateral netting services.
- DTCC Loan/SERV LLC provides a range of messaging and reconciliation services to the global syndicated loan market.
- DTCC Solutions LLC delivers information-based and business processing solutions to financial intermediaries.
- EuroCCP Ltd. (EuroCCP) is the European subsidiary of DTCC, providing clearing services for Turquoise and other alternative trading systems.
The Fedwire Securities Services is a book-entry securities issuance and transfer system, provided to U.S. depository institutions and U.S. branches of foreign banks by the Federal Reserve Banks. The Fedwire Securities Service provides issuance, principal and interest payment processing, custody, transfer and settlement services for securities issued by the U.S. Treasury, Federal Agencies, Government-Sponsored Enterprises and some international organisations (e.g. World Bank). Transfers are processed on an individual or gross basis in real-time, and settlement is final and irrevocable when made. The Fedwire Securities Services supports the omnibus account structure.
The Options Clearing Corporation (OCC)
OCC is an equity derivatives clearing organisation. OCC operates under the jurisdiction of both the SEC and the Commodities Futures Trading Commission (CFTC). Under its SEC jurisdiction, OCC clears transactions for put and call options on common stocks and other equity issues, stock indexes, foreign currencies, interest rate composites and single-stock futures. As a registered Derivatives Clearing Organisation (DCO) under CFTC jurisdiction, OCC offers clearing and settlement services for transactions in futures and options on futures. Additionally, OCC provides central counterparty clearing and settlement services for securities lending transactions.
Cash transfer systems
The Fedwire Funds Service and CHIPS are the two most important systems for large-value domestic and international U.S. Dollar (USD) payments.
- Fedwire Funds Service
Fedwire Funds Service is a Real Time Gross Settlement Funds Transfer system owned and operated by the Federal Reserve Banks enabling financial institutions to electronically transfer funds between its participants. Funds transfers are immediate, final, and irrevocable when processed. Participants that maintain a reserve or clearing account with a Federal Reserve Bank may use Fedwire to send payments to, or receive payments from, other account holders directly. DTC and NSCC use Fedwire Funds for settlement purposes. - Clearing House Interbank Payments System (CHIPS)
CHIPS is a real-time, final USD payment system that uses bilateral and multilateral netting.
CHIPS participants include commercial banks, Edge Act corporations or investment companies. CHIPS is operated by The Clearing House, a leading private sector provider of settlement and clearing services to financial institutions worldwide, owned by 20 of the largest U.S. banks.
Security numbering
The Committee on Uniform Security Identification Procedure (CUSIP) was created in 1964 to develop a standard method of identifying securities. This resulted in the establishment of the CUSIP system and, in 1968, the creation of the CUSIP Service Bureau to administer the system. As coverage expanded, CUSIP Global Services emerged as the entity managing CUSIP offerings.
The CUSIP consists of nine alphanumeric characters: 6 digits for the issuer number, 2 digits for the issue number, 1 check digit.
Most U.S. securities are today identified by a CUSIP number, delivered by CUSIP Global Services which is managed on behalf of the American Bankers Association (ABA) by Standard & Poor's. Some of these securities are also assigned a CGS ISIN, but CUSIP remains the primary securities identifier used in the U.S.
Regulatory structure
Regulations
The main laws that govern the securities industry are:
- Securities Act of 1933;
- Securities Exchange Act of 1934;
- Trust Indenture Act of 1939;
- Investment Company Act of 1940;
- Investment Advisers Act of 1940;
- Sarbanes-Oxley Act of 2002.
Regulators
Securities and Exchange Commission (SEC)
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
The key responsibilities of the SEC are to:
- Interpret federal securities laws;
- Issue new rules and amend existing rules;
- Oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies;
- Oversee private Self-Regulatory Organisation (SRO) in the securities, accounting, and auditing fields; and
- Coordinate U.S. securities regulation with federal, state, and foreign authorities.
The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.
The Federal Reserve's duties fall into four general areas:
- Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates;
- Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers;
- Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets;
- Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.
Financial Industry Regulatory Authority (FINRA)
FINRA is a Self-Regulatory Organisation created in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the member regulation, enforcement and arbitration functions of the New York Stock Exchange.
FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. In common with other SROs, FINRA sets rules and standards for its members, the securities firms, and hosts most of the arbitrations between investors and brokers. It requires its members to regularly file financial, operational and sales-practice reports for regulatory purposes.
Commodity Futures Trading Commission (CFTC)
Created in 1974 by the Congress, the CFTC is as an independent agency with the mandate to regulate commodity futures and option markets in the U.S.A. The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.
The Municipal Securities Rulemaking Boards (MSRB)
The MSRB is an SRO established by the US Congress in 1975, regulating dealers who underwrite, trade and sell municipal bonds, municipal notes, and other municipal securities.
Trade associations
As well as the regulatory bodies, a number of associations contribute to setting market practice. The list below is not exhaustive.
American Bankers Association (ABA)
ABA's mission is to serve its members by enhancing the role of financial services institutions as the preeminent providers of financial services. This mission is accomplished through federal legislative and regulatory activities, consumer education, research, and products and services that promote, educate, inform and support members.
The Association of Global Custodians (AGC)
The AGC is an informal group of nine global custodian banks that are major providers of securities custody and trade settlement services to institutional investors worldwide. The Association primarily seeks to address regulatory and market structure issues that are of common interest to global custody banks.
The International Securities Association for Institutional Trade Communication (ISITC)
ISITC is comprised of broker/dealers, custodians, investment managers, and vendors/utilities. ISITC's mission is to develop standards and market practices designed to enhance efficiency across the transaction lifecycle. These standards range from transaction initiation/confirmation through settlement and subsequent downstream processes for corporate actions, reconciliation and securities lending. In addition, the organisation focuses on a variety of products and transaction types including OTC derivatives, repos, factor-based securities and transfers.
The Securities Industry and Financial Markets Association (SIFMA)
SIFMA's mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA is the U.S. regional member of the Global Financial Markets Association (GFMA).
The Institute of International Bankers (IIB)
Founded in 1966, the IIB represents and advances the interests of the international banking community in the U.S.A. Its mission is to ensure that federal and state banking laws and regulations provide international banks operations in the U.S.A. with the same competitive opportunities as domestic banking organisations.