NASD's Portal Targets Unregistered Securities

With the recent flurry of proposals and products to automate the trading of foreign exchange, futures and options, it's easy to forget that markets still exist where quotations are not displayed on any screen.

One of these is the market for U.S. and foreign equity and debt issues that have not been registered with the Securities and Exchange Commission. The SEC's Rule 144A allows these securities to be sold to qualified financial institutions and wealthy individuals.

The National Association of Securities Dealers wants to put this market on the screen with its system for Private Offerings, Resales and Trading through Automated Linkages, known as PORTAL. The NASD recently filed its proposal for PORTAL with the SEC.

Like the NASD's automated quotation system for trading over-the- counter securities, PORTAL would use competing market makers instead of a single specialist favored by many stock exchanges. PORTAL would differ from NASDAQ in that prices shown on the screen would be indications, not firm quotes. Marketmakers will be permitted to enter one-sided quotations and will not be required to display size.

Unlike many new electronic markets, PORTAL is not being built from scratch. Most of the system's functions will be provided by facilities that are currently in place, under development or already proposed.

These include:

NASDAQ and the Automated Confirmation Transaction system the NASD plans to introduce this fall. Broker/dealers will enter trade details into ACT within 30 minutes after a transaction occurs, producing a locked-in trade.

The International Securities Clearing Corp.'s linkages with Cedel, Euro-clear and other foreign clearing organizations through its Global Compass project.

The Depository Trust Co.'s plan to include foreign issues in its Institutional Delivery system, which allows book-entry settlement between a broker/dealer and an institutional investor's custodian bank. If PORTAL begins operating before the international ID is ready, a vendor system such as FITEL's Equinet or I.P. Sharp's Instant Link will be used to transmit confirmations to institutional investors and custodian banks.

The NASD recently purchased two Stratus XA2000 Model 110 OLTP systems to support PORTAL's operations. One system has been installed at NASDAQ's central processing facility in Trumbull, Conn. The other Model 110, which will be used as a backup, is scheduled for installation in the fourth quarter at NASDAQ's disaster recovery center in Rockville, Md.

This is the first time the NASD has purchased Stratus equipment. All of NASDAQ's other hardware was supplied by Unisys and Tandem Computers Inc. Stratus estimates the value of the NASDAQ contract at $300,000.

PORTAL will use NASDAQ's existing terminals and network to support both primary market placements and secondary trading in non- registered securities. However, all NASDAQ marketmakers will not automatically receive access to PORTAL. NASD members must register in order to participate in the system and must have excess net capital of at least $5 million.

PORTAL will permit broker/dealers to communicate with select investors and will accommodate multicurrency quotation, confirmation and settlement. The system's hours will extend beyond NASDAQ's 9:30 a.m. to 4 p.m. trading day.

All securities traded through PORTAL will be immobilized in participating depositories such as Brussels-based Euro-clear and Luxembourg-based Cedel, allowing book-entry clearing and settlement. Euro-clear and Cedel are the clearing houses for the Eurobond market, where issuers offer securities outside their home country.

A typical primary placement would take place through PORTAL as follows: After the primary placement manager concludes the deal with the issuer -- either a corporation or a foreign government -- the manager pays the issuer and the issuer delivers the securities to the manager's account at Cedel or Euro-clear. The manager disseminates information on the issue to selected institutions via PORTAL screens.

After a trade is made, the primary placement manager enters transaction details into ACT. These are transmitted to the ISCC, which sends settlement instructions to Cedel or Euro-clear. ISCC also uses information entered into ACT to allow DTC to send a confirmation to the institutional investor and its custodian bank. The custodian affirms the trade through the DTC and ISCC transmits contra-side settlement instructions to Cedel or Euro-clear.

Secondary transactions would work in much the same way except the seller's securities would already have been deposited with Cedel or Euro-clear.