[Federal Register Volume 64, Number 4 (Thursday, January 7, 1999)]
[Notices]
[Pages 1044-1046]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-305]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40838; File No. SR-CBOE-98-40]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 Thereto by Chicago Board Options Exchange, Incorporated, Relating to
Mandatory Year 2000 Testing
December 28, 1998.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 22, 1998, as amended on December 24, 1998,\3\ the Chicago
Board Options Exchange, Incorporated (``CBOE'' or the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the CBOE. The Commission is publishing this
notice and order to solicit comments on the proposed rule change from
interested persons and to approve the proposal and Amendment No. 1
thereto on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Timothy Thompson, Director-Regulatory
Affairs, Legal Department, CBOE, to Michael Walinskas, Deputy
Associate Director, Division of Market Regulation, Commission, dated
December 22, 1998 (``Amendment No. 1''). The original filing was not
noticed in the Federal Register.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
CBOE proposes to adopt new Rule 15.11, Mandatory Year 2000 Testing,
that would require member firms to participate in computer system
testing designed to prepare for the Year 2000 and to file reports with
CBOE regarding Year 2000 testing.
The test of the proposed rule change is below. Proposed new
language is italicized.
* * * * *
Chapter XV
* * * * *
Records, Reports and Audits
* * * * *
Mandatory Year 2000 Testing
Rule 15.11
[This rule will expire automatically on January 1, 2001.]
(a) Point-to-Point Testing. Each member that has an electronic
interface with the Exchange shall participate in point-to-point testing
with the Exchange of its computer systems designed to ascertain Year
2000 compatibility of those computer systems, in a manner and frequency
as prescribed by the Exchange. A member that has its electronic
interface through a service provider need not participate in point-to-
point testing if, by a time designated by the Exchange, (i) the service
provider conducts successful tests with the Exchange on behalf of the
firms it serves, (ii) the member conducts successful point-to-point
testing with the service provider and (iii) the Exchange agrees that
further testing is not necessary.
(b) Industry Wide Testing. The Exchange may require certain of its
members to participate in industry wide testing of computer systems for
Year 2000 compatibility. The Exchange may require any member who will
participate in industry wide testing to also participate in any tests
necessary to ensure preparedness to participate in industry wide
testing.
(c) Reports. Members participating in point-to-point testing
(whether between the firm and the Exchange, between the firm and its
service provider, or between the firm's service provider and the
Exchange) or industry wide testing shall file reports with the Exchange
concerning the required tests in the manner and frequency required by
the Exchange. The Exchange may require reports before the testing is
begun to ensure that the member or its service provider is prepared to
participate in the tests.
II. Self-Regulatory Organization's Statement of the Purpose of and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CBOE included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The CBOE has prepared summaries, set forth in sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(1) Purpose
On January 1, 2000, the internal date in computers throughout the
world will
[[Page 1045]]
change from ``12/31/99'' to ``01/01/00.'' Absent the necessary changes
to those computers' codes, then those computers could make errors in
even the most routine processing, because the computers may read the
two digit ``00'' year code as 1900 instead of as 2000. This ``Year
2000'' problem could have disastrous consequences for a number of
businesses, including the securities industry, if businesses do not
make the necessary changes and perform the necessary testing prior to
the Year 2000. The constituents of the securities industry will need to
coordinate extensive testing to ensure there are no widespread
problems.
The CBOE, in cooperation with the SEC and with other self
regulatory organizations (``SROs''), has been working to raise
awareness of the Year 2000 problem in the industry. The proposed CBOE
Rule 15.11(a) would require each CBOE member that has an electronic
interface with CBOE to participate in point-to-point testing with the
Exchange of computer systems, in a manner and frequency prescribed by
the Exchange.\4\ Generally, point-to-point testing means testing
between two entities. In this case, the requirement refers to testing
between the member with the electronic interface and the Exchange.
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\4\ It should be noted that the Exchange believes that it
currently has the authority wihtout the approval of this Rule to
require testing and reporting with respect to Year 2000 under its
broad authority to enforce the provisions of the Exchange Act and to
ensure the safety of its marketplace. More specifically, Rule 4.2
prohibits members from engaging in conduct that violates the
Exchange Act; Rule 4.3 permits the Exchange to approve the
maintenance of wire connections with other members or with non-
members; and Rule 4.10 gives the President or the Chairman of the
Exchange the right to impose such conditions and restrictions on a
member as either may consider reasonably necessary for the
protection of the Exchange and the customers of such member. Because
a Year 2000 problem with a member's computers could have such
serious impact on the Exchange or the conduct of customer business,
the Exchange believes it could rely on these rules to require all
the testing and reporting required by proposed Rule 15.11 or to
prohibit any wire connections involving computers for non-compliance
of the Exchange's requests. The Exchange believes, however, that its
membership is better served by having the specifics of its intention
with respect to Year 2000 testing and reporting defined in a
separate rule.
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A member can be exempted from this requirement if the member has
its electronic interface through a service provider is, by a time
designated by the Exchange, the service provider conducts successful
tests with the Exchange on behalf of the firms its serves, if the
member conducts successful point-to-point testing with the service
provider by a time designated by the Exchange, and if the Exchange
agrees that no further testing is necessary.
CBOE understands that other SROs, including NASD Regulation, the
New York Stock Exchange, and the American Stock Exchange are also
proposing rules to require mandatory Year 2000 testing by their
members.
To ensure that the securities industry is adequately prepared to
meet the ``Year 2000'' problem, the Securities Industry Association
(``SIA'') has undertaken to coordinate industry-wide testing.
Participants will include, among others the stock exchanges, Nasdaq,
registered clearing corporations, data processors and broker-dealers.
The first industry-wide test is scheduled for March 6, 1999. The
proposed CBOE Rule 15.11(b) specifically authorizes CBOE to require
certain CBOE members to participate in those industry-wide tests.\5\
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\5\ The Exchange will encourage its members to participate in
industry wide testing to the extent those firms can be accommodated
into the testing schedule. The Exchange also makes clear in the Rule
that it may require its members to participate in the industry wide
testing. The Exchange would exercise this authority in the event it
was deemed important for those members to participate and to the
extent those firms chose not to participate voluntarily.
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Proposed CBOE Rule 15.11(c) would also require members
participating in point-to-point and/or industry testing to file reports
with CBOE concerning the required tests in the manner and frequency
required by the Exchange. The Exchange may require reports of its
members participating in either the point-to-point testing (whether
between the firm and the Exchange, between the firm and its service
provider, or between the firm's service provider and the Exchange) or
the industry wide testing. Moreover, the Exchange may require reports
before the testing is begun to ensure that the member or its service
provider is prepared to participate in the tests.
A member that is subject to the rules and fails to participate in
the tests or fails to file any required reports, may be subject to
disciplinary action pursuant to Chapter XVII of the Exchange's rules.
(2) Basis
The Exchange believes that, by helping to ensure the participation
of Exchange members in important testing to prepare for Year 2000, the
proposed rule change is consistent with section 6(b) of the Act \6\ in
general, and in particular will further the objectives of section
6(b)(5),\7\ which requires that the rules of an exchange be designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments and to perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
After careful consideration, the Commission has concluded, for the
reasons set forth below, that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder. Mandating Year 2000 testing and reporting is consistent
with section 6(b)(5) of the Act, which, among other aspects, requires
that the rules of an exchange promote just and equitable principles of
trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, and remove impediments to
and perfect the mechanism of a free and open market and a national
market system. The Commission believes that the proposed rule change
will facilitate CBOE's and member firms' efforts to ensure the
securities markets' continued smooth operation during the period
leading up to and beyond January 1, 2000.
The Exchange has requested that the Commission approve the proposed
rule change prior to the 30th day after the date of publication of
notice of the filing in the Federal Register because, in light of the
industry wide tests that will soon begin and the tests that the
Exchange is conducting, the Exchange wants to ensure that it can
promptly deal with any problems that arise. The Commission finds good
cause for approving the proposed rule change prior to the 30th day
after the date of publication of notice of the filing in the Federal
Register. It is vital that SROs
[[Page 1046]]
such as CBOE have the authority to mandate that their member firms
participate in Year 2000 testing and that they report test results (and
other Year 2000 information) to the SROs. The proposed rule change will
help CBOE participate in coordinating Year 2000 testing, including
industry-wide testing, and in remediating any potential Year 2000
problems. This, in turn, will help ensure that the industry-wide tests
and CBOE's Year 2000 efforts are successful. The proposed rule change
will also help CBOE work with its member firms, the SIA, and other SROs
to minimize any possible disruptions the Year 2000 may cause.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, Washington, DC 20549. Copies of
the submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission, and all written communications relating to the
proposed rule change between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of CBOE. All submissions
should refer to File No. SR-CBOE-98-40 and should be submitted by
January 28, 1999.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the Act
\8\ that the proposed rule change (SR-CBOE-98-40) and Amendment No. 1
thereto is thereby approved On an accelerated basis.\9\
\8\ 15 U.S.C. 78s(b)(2).
\9\ In approving the proposal, the Commission has considered the
rule's impact on efficiency, competition and capital formation. 15
U.S.C. 78c(f).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-305 Filed 1-6-99; 8:45 am]
BILLING CODE 8010-01-M
