[Federal Register Volume 64, Number 4 (Thursday, January 7, 1999)]
[Notices]
[Pages 1046-1048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-306]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40839; File No. SR-CHX-92-32]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Stock 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 December 21, 1998, the Chicago Stock Exchange, Incorporated (``CHX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to approve the
proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.194b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to add a new rule, Article XI, Rule 11, to
require certain CHX members to conduct or participate in computer tests
designed to address the Year 2000 problem and to file reports with the
CHX.
The text of the proposed rule change is below. Proposed new
language is italicized.
* * * * *
ARTICLE XI
Rule 11. Mandatory Year 2000 Testing
[Note: This rule will expire automatically on January 1, 2001]
(a) Each member and member organization shall conduct or
participate in testing of computer systems designed to prepare for Year
2000, in a manner and frequency prescribed by the Exchange, and shall
provide to the Exchange reports related to such testing as requested by
the Exchange.
(b) The Exchange may exempt a member or member organization from
this requirement if that member or member organization cannot be
accommodated in the schedule by the organization conducting the test or
if the member does not employ computers in its business or for other
reasons acceptable to the Exchange.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange 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 IV below. The Exchange 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
The CHX is proposing to adopt a rule that would establish the CHX's
specific authority to require certain members to participate in Year
2000 tests and to require reporting on the tests.\3\ The CHX is
proposing that the rule will expire in the year 2001 so that the CHX
will have specific authority to mandate testing and reporting, as
necessary, to correct problems that are not resolved prior to January
1, 2000, or to correct problems that arise after January 1, 2000.
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\3\ The proposed rule is not intended to limit the CHX's
existing authority by rule, contract, or otherwise, to mandate
testing or require reports from members.
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On January 1, 2000, the internal date in computers should roll-over
from ``12/31/99'' to ``01/01/00.'' At that moment, if corrective
measures have not been taken, the program logic in the vast majority of
these computer systems will begin to produce erroneous results because
the systems will read the date as beginning in the year 1900 rather
than 2000. This problem, known as the ``Year 2000 Problem,'' could
cause significant disruption in the securities industry. There are
several stages involved in correcting the Year 2000 Problem, including:
assessing the problem; implementing corrective measures; conducting
internal, point-to-point, and integrated or industry-wide testing; and
establishing contingency plans.
The testing stage of correcting the Year 2000 Problem will be
critical to
[[Page 1047]]
ensuring that the markets will operate with minimal disruption after
January 1, 2000. To facilitate testing on an integrated, industry-wide
basis, the Securities Industry Association (``SIA'') has undertaken the
task of coordinating such a test. Test participants will include, among
others, Nasdaq, the exchanges, registered clearing corporations and
depositories, data processors, and broker-dealers. The first day of the
integrated, industry-wide test is scheduled for March 6, 1999.\4\
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\4\ The exact number of firms that will be able to participate
in the SIA test has not been conclusively determined.
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The CHX believes it is essential that the firms that could cause
the most disruption in the market (if these firms have not corrected
the Year 2000 Problem) conduct tests of all of their critical computer
systems that relate to their different types of businesses (e.g.,
equities, options, government securities, mortgage-backed securities).
Consequently, the CHX is proposing to require certain firms to conduct
tests to address the Year 2000 Problem in a manner and frequency
prescribed by the Exchange.
The proposed rule would provide specific authority to require
participation in organized, industry-sponsored tests, and require
``point-to-point'' testing between member firms and the CHX or other
systems, or internal tests of members systems. These other tests may be
particularly significant for smaller forms that may not be able to
participate in the industry-sponsored tests.
Some members may be able to satisfy their testing obligation
without actually conducting tests themselves. For example, it is likely
that specialists that are not clearing firms and that only use CHX
issued specialist terminals for their specialist activity will not be
required to participate in mandatory testing because the CHX has
completed testing of this system. Also, members that use computer
systems provided by service bureaus are not likely to have to perform
any additional tests of the systems provided by the service bureaus so
long as (i) the service bureaus participate in the SIA coordinated
test, (ii) the members have on cured point-to-point testing with their
service bureaus, (iii) the service bureaus have conducted point-to-
point testing with the CHX, and (iv) the tests do not indicate any
problems.
The CHX also believes that test results should be reported to the
CHX. These reports will enable the CHX to identify those members that
have not adequately prepared for the Year 2000 so that appropriate
action can be taken to address these members' deficiencies, including,
for example, providing assistance to or easing the transition of
business to other firms. Accordingly, the proposal would require
members to file reports with the CHX about the tests. To avoid
duplicative and burdensome reporting, the CHX will coordinate its
reporting requirements with other SROs as much as possible. For
example, the CHX may exclude from its reporting requirement those firms
for which the CHX is not the designated examining authority.
The CHX will issue Notices to Members specifying members' reporting
and testing obligations sufficiently in advance of specific events,
such as SIA-coordinated industry-wide tests, that members will
reasonably be able to comply. Regardless of when such Notices are
issued, nothing in this rule relieves member firms of their obligations
to take all necessary steps so that they may function properly--both
their internal systems and their ability to communicate and transact
business with other firms--on and after January 1, 2000.
Further, although the CHX is not proposing to require all members
of the CHX to conduct external testing, testing is a key element of
year 2000 compliance for all firms.\5\ Specifically, the CHX still
encourages all member firms to test their computer systems and take
whatever remedial measures are necessary to deal with Year 2000 issues.
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\5\ Member firms that choose or are required to participate in
external testing should recognize that internal testing is a
prerequisite for external testing and participation in SIA-
coordinated tests and should act accordingly.
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2. Statutory Basis
The exchange believes that the proposed rule change is consistent
with section 6(b)(5) of the Act,\6\ 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, in general, to protect investors and the public
interest. The CHX rule requiring certain members to conduct or
participate in Year 2000 tests, and to file reports about the tests,
will enable CHX, those participating in the tests, and others to
evaluate the readiness of securities industry for the Year 2000. The
firms that would be required to conduct testing perform critical
functions in the markets and these firms' inability to perform these
functions beyond January 1, 2000 could cause disruptions in the markets
and cause harm to investors.
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\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange goes not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
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 the CHX'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 rule
change prior to the thirtieth day after publication of the proposal in
the Federal Register, to help ensure that CHX member firms are properly
prepared for the SIA industry-wide testing that is scheduled to begin
on March 6, 1999. The Commission finds good cause for approving the
proposed rule prior to the 30th day after the date of publication of
notice of the filing in the Federal Register. It is vital that SROs
such as CHX have the authority to mandate that their member firms
participate in Year 2000 testing and that they report test results (and
other Year
[[Page 1048]]
2000 information) to their SROs. The proposed rule change will help the
CHX 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 the
CHX's Year 2000 efforts are successful. The proposed rule change will
also help the CHX 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, NW, Washington, DC 20549. Copies
of the submissions, 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 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 at the
Commission's Public Reference Section, 450 Fifth Street, NW,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the CHX. All
submissions should refer to File No. SR-CHX-98-32 and should be
submitted by January 28, 1999.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the Act
\7\ that the proposed rule change is hereby approved on an accelerated
basis.\8\
\7\ 15 U.S.C. 78s(b)(2).
\8\ In approving the proposal, the Commission has considered the
rule's impact on efficiency, competition and capital formationl. 15
U.S.C. 78c(f).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-306 Filed 1-6-99; 8:45 am]
BILLING CODE 8010-01-M
