[Federal Register Volume 61, Number 198 (Thursday, October 10, 1996)]
[Notices]
[Pages 53254-53256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26065]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37782; File No. SR-Phlx-96-36]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to Index Value
Calculations by the Index Calculation Engine (``ICE'') System
October 3, 1996
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 5, 1996, the
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with
the Securities and Exchage Commission (``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to utilize
the Exchange's own internal system's calculation of index values as:
(1) A ``back-up'' to the values currently calculated by an outside
securities information vendor, as well as (2) the official index value
for Phlx index options.\2\ Currently, the Exchange utilizes a
securities information vendor to calculate the index value for all of
its listed index options. Thus, this vendor is the ``reporting
authority'' pursuant to Rule 1000A(b)(9), meaning the institution or
reporting service designated by the Exchange as the official source for
calculating and determining the current value or the closing index
value of the index.
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\2\ The Commission notes that the Phlx seeks to utilize the ICE
system value as the official index value in three instances. First,
the ICE system value would act as the official index value in the
event the reporting authority designated by the Phlx is experiencing
difficulties in disseminating an accurate value (e.g., computer
failure). Under these circumstances, the ICE system value would be
used as the official index value only for the time period that is
necessary for the designated agent to correct its problem. This
would allow trading to continue in the affected security without
interruption.
Second, if the Phlx believes that the problem is chronic, the
Exchange may want to designate a different reporting authority or
become the reporting authority itself. Therefore, the Phlx seeks the
authority to continue to disseminate the ICE system index value
during the time it takes the Exchange to make this decision. As soon
as this decision is made, however, the Phlx would submit a rule
filing pursuant to Section 19 of the Act to switch the reporting
authority.
Finally, due to economic and efficiency considerations, the Phlx
may want to act as the reporting authority for certain Phlx index
options on a permanent basis. Telephone call between Edith Hallahan,
Special Counsel, Regulatory Services, Phlx, and Anthony P. Pecora,
Attorney, Division of Market Regulation, SEC (Sept. 3, 1996).
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Recently, the Exchange implemented its own index value calculation
system, known as the Index Calculation Engine (``ICE''). ICE is a
system administered by Regulatory Services, which currently serves as a
back-up to the official reporting authority by separately calculating
index values. Specifically,
[[Page 53255]]
the ICE system receives market price information from another
securities information vendor respecting the securities underlying each
Phlx index and, employing the particular methodology (i.e.,
capitalization-weighted), calculates an index value every 15 seconds.
Daily, Exchange staff monitors the ICE terminal to ensure that its
value coincides with that of the reporting authority, including the
last sale prices, outstanding shares, component issues and divisor. The
ICE system contains both the Bridge values and the Exchange-calculated
values. The system is directed to disseminate the reporting authority's
value as opposed to the ICE value at the start of each day. Alarms are
established so that if a particular index value calculated by the
reporting authority varies by more than a set amount from ICE's value,
the alarm will ring to alert staff. If it is determined that the price
disruption is due to incorrect information or a technical difficulty
with the reporting authority, Exchange staff is able to immediately
switch over to the ICE system to disseminate that value. Thus, ICE
provides the Exchange with an independent, internal index value as a
back-up.
Accordingly, the Exchange proposes to temporarily utilize the ICE
system as its reporting authority when ICE indicates that the reporting
authority's value is incorrect or the data feed is subject to technical
difficulties. The Exchange also proposes to cease using the designated
outside vendor as the reporting authority in specific instances,
implementing the ICE system as the reporting authority.
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 self-regulatory organization
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 self-regulatory organization
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
Currently, three market (broad-based) index options, seven industry
(narrow-based or sector) index options and the Super Cap Index option
trade on the Exchange. The reporting authority for each index option is
currently Bridge Data. For each index option listed on the Exchange,
the specifications and descriptions filed with the Commission detail
how the index value is calculated and that the calculation is conducted
by Bridge.
In the course of reviewing inconsistencies in index value
calculations as well as the disaster recovery implications of using a
single, outside reporting authority, the Exchange determined to create
and build its own internal system for the calculation and dissemination
of index values. Recently, the ICE system was completed, tested, and
implemented as a surveillance tool for Phlx Regulatory Services and
Market Surveillance staff monitoring Exchange index options trading.
In an effort to make use of the capabilities of the ICE system, the
Exchange proposes its implementation where its official reporting
authority is not able to accurately calculate an index value. This may
occur for many reasons, including a system malfunction due to a power
surge, cut cable, or line problem. The reporting authority's value may
also be based on incorrect price information received from that
vendor's source of such data, which the Exchange is able to verify and
adjust using another vendor's values. Prior to the implementation of
the ICE system, Exchange staff became aware of faulty index values by
way of customer complaint, specialist or market maker notification (who
generally calculate index values independently), and staff discovery
due to routine monitoring of index values and news releases. None of
these methods is instantaneous nor independently reliable.
With the ICE system in place, Exchange staff can immediately detect
an inconsistency in the value between the two systems and investigate
further to identify where the discrepancy lies. Because the system
automatically alerts staff to such inconsistencies, monitoring index
values becomes less reliant on staff efforts. The staff role then
becomes focused on researching and resolving the inconsistencies
identified by the ICE system.
The Exchange also believes that the development of the ICE system
facilitates its ability to serve as the reporting authority for its own
index values. Thus, the system will serve not only as a back-up, but
also as the official reporting authority, replacing the outside
securities information vendor. The Exchange is proposing to designate
the ICE system as the reporting authority temporarily when the other
value is not reliable, as described above. In addition, the Exchange
proposes that the ICE system be implemented as the reporting authority
for index values temporarily (replacing the official reporting
authority instantaneously) unit another official reporting authority
can be designated, whether it is ultimately ICE or another securities
information vendor.
Lastly, the Exchange proposes to utilize the ICE system to
calculate index values for customized options that may be traded in the
future on the Exchange. Because customization will allow for various
methods of determining the index value, the Exchange must provide a
method for calculating and disseminating such values. For instance, a
P.M.-settled option such as the National Over-the-Counter Index option
could be customized for A.M. settlement, requiring the calculation of a
morning value for that option. The Exchange believes it will be more
efficient and economical to rely on ICE for these functions, rather
than contract with an outside vendor.
The Exchange believes that its ICE system supports the integrity of
index values on the Exchange in two ways. First, it serves as an
automatic trigger that the official value may be incorrect, with
independent verification of data. Second, the ICE system provides an
automatic replacement value.
The Exchange notes that pursuant to Rule 1102A, neither the
Exchange nor its Reporting Authority shall have any liability stemming
from the calculation or dissemination of the current or closing index
value.\3\ The Exchange also notes that other exchanges' rules contain
substantially similar definitions of reporting authority and liability
provisions, and utilize a wide variety of reporting authorities,
including calculating certain index values internally, thereby serving
as their own reporting authority.\4\
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\3\ See also Phlx By-Law Article XII, Section 12-11, Use of
Facilities of Corporation (limiting the Exchanges' liability
concerning damages sustained by a member or member organization
utilizing the Exchange's facilities).
The Commission notes, however, that blanket disclaimers may not
apply in all instances. See letter from Murray L. Ross, Vice
President and Secretary, Phlx, to Anthony P. Pecora, Attorney,
Division of Market Regulation, SEC, dated August 21, 1996, in File
No. SR-Phlx-96-11 (stating that the Phlx will not rely upon the
limitation of liability clause concerning 3-D options in cases of
intentional misconduct or any violation of the federal securities
laws); 15 U.S.C. 78cc (limiting the ability to waive the protection
of the federal securities laws).
\4\ See, e.g., Chicago Board Options Exchange Rule 24.1,
Interpretations and Policies .01.
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Thus, the Exchange believes that the proposed rule change is
consistent with
[[Page 53256]]
Section 6 of the Act \5\ in general, and in particular, with Section
6(b)(5),\6\ in that it is designed to promote just and equitable
principles of trade, prevent fraudulent and manipulative acts and
practices, to foster cooperation and coordination with persons engaged
in regulating, clearing, settling, processing information with respect
to, and facilitating transactions in securities, as well as to protect
investors and the public interest, by creating a back-up and
alternative determination of index values on the Exchange. This, in
turn, promotes the integrity of the index settlement process by
improving both the responsiveness to erroneous values as well as
providing a replacement value to ensure the accuracy of disseminated
index values.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Phlx does not believe that the proposed rule change will impose
any inappropriate burden on competition.
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.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 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 any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Also, copies of such filing will be available
for inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-96-36 and should be
submitted by October 31, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-26065 Filed 10-9-96; 8:45 am]
BILLING CODE 8010-01-M
