[Federal Register Volume 63, Number 70 (Monday, April 13, 1998)]
[Notices]
[Pages 18060-18062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9592]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39830; File No. SR-NYSE-98-07]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc., Consisting of Amendments
to Its Rule Regarding COD Orders
April 6, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 18, 1998, the New
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``SEC'' or ``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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change consists of amendments to Exchange Rule
387 to permit electronic confirmation/affirmation of depository
eligible COD Orders by ``Qualified Vendors.'' \2\
---------------------------------------------------------------------------
\2\ The text of the amendments is attached as Exhibit A to this
notice.
---------------------------------------------------------------------------
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. 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.
[[Page 18061]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(1) Purpose
Exchange Rule 387 currently requires that the facilities of a
Commission registered securities depository/clearing agency be utilized
by Exchange member organizations for the confirmation, affirmation and
book entry settlement of COD transactions in depository eligible
securities. Certain private vendors have requested that they be allowed
to provide member organizations with electronic confirmation/
affirmation services on COD institutional trades even though such
vendors are not Commission registered clearing agencies.
The Exchange, working in conjunction with other SROs and a
committee of representatives from the Securities Industry Association,
developed the proposed amendments in order to allow the above request
made by certain private vendors. To provide such services, an entity
would have to become a ``qualified vendor'' by complying with the new
provisions as set forth in the amended rule. These provisions require
such vendors to do the following:
For each transaction, deliver a trade record to the
Clearing Agency, obtain a control number, cross reference the control
number to the confirmation/affirmation and include such control number
when delivering affirmations to the clearing agency.
Certify to the Commission \3\ the integrity and capacity
of the electronic confirmation/affirmation system and that the vendor
will maintain monitoring and contingency procedures.
---------------------------------------------------------------------------
\3\ With respect to the determination of whether a vendor is a
``qualified vendor,'' the Commission interprets the Exchange's use
of the word ``Commission'' in the proposed rule change to mean
Commission staff.
---------------------------------------------------------------------------
Submit an Auditor's Report to the Commission on an annual
basis, which is not deemed unacceptable by the Commission.\4\
---------------------------------------------------------------------------
\4\ At this time, the Commission staff intends to indicate that
a vendor's initial Auditor's Report is not unacceptable and that the
vendor therefore is a qualified vendor for purposes of Rule 387 by
issuing a letter to the vendor stating that it will not recommend
enforcement action against any of the Exchange's member
organizations that elect to use the confirmation/affirmation
services of the vendor.
---------------------------------------------------------------------------
Notify the Commission in writing of any significant
electronic confirmation/affirmation system changes.
Notify the Commission in writing if the qualified vendor
intends to cease providing confirmation/affirmation services.
Submit to the Exchange copies of any of the above filings
with the Commission within ten business days.
Supply supplemental information regarding the vendor's
electronic trade confirmation/affirmation services as requested by the
Exchange or the Commission.
The proposed Rule 387 amendments are responsive to the SEC's
request (contained in a letter, dated November 25, 1997 from Mr.
Richard R. Lindsey, Director, Division of Market Regulation) that self-
regulatory organizations adopt uniform rule amendments which allow
``qualified vendors'' to provide confirmation/affirmation services,
provided the conditions set forth in the amended rule are met.\5\
---------------------------------------------------------------------------
\5\ The Commission notes that the proposed rule change addresses
the concerns raised by the Petition for Rulemaking filed by Thomson
Financial Services (``Thomson'') with the Commission in December
1996. Thus, the Commission will respond to Thomson's petition after
the final disposition of the proposed rule change.
---------------------------------------------------------------------------
(2) Statutory Basis
The proposed rule change is consistent with the requirements of
Section 6(b)(5) of the Act \6\ in that it is designed to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities. Under the proposal, additional
electronic confirmation and affirmation services will be available to
COD customers because such electronic services will now be permitted to
be performed by ``qualified vendors'' that meet specific standards.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will not 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 either solicited or received.
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 reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such 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, 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, N.W., Washington, D.C. 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. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
above-mentioned self-regulatory organization. All submissions should
refer to the file number in the caption above and should be submitted
by May 4, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
Exhibit A-- Proposed Amendments to Rule 387
Additions italicized
Deletions [bracketed]
COD Orders
Rule 387. (a) No member organization shall accept an order from a
customer pursuant to an arrangement whereby payment for securities
purchased or delivery of securities sold is to be made to or by an
agent of the customer unless all of the following procedures are
followed:
(1) through (4) No change.
[(5) The customer or its agent shall utilize the facilities of a
securities depository for the confirmation, acknowledgement and book
entry settlement of all depository eligible transactions.]
(5) The facilities of a Clearing Agency shall be utilized for the
book-entry settlement of all depository eligible
[[Page 18062]]
transactions. The facilities of either a Clearing Agency or a Qualified
Vendor shall be utilized for the electronic confirmation and
affirmation of all depository eligible transactions.
Supplementary Material:
.10 No change.
.30 For the purpose of this rule, a [``securities depository'']
``Clearing Agency'' shall mean a Clearing Agency as defined in Section
3(a)(23) of the Securities Exchange Act of 1934, that is registered
with the Securities and Exchange Commission (``Commission'') pursuant
to Section 17A(b)(2) of the Act or has obtained from the Commission an
exemption from registration granted specifically to allow the Clearing
Agency to provide confirmation and affirmation services.
.40 For the purposes of this rule, ``depository eligible
transactions'' shall mean transactions in those securities for which
confirmation, [acknowledgment] affirmation, and book entry settlement
can be performed through the facilities of a [securities depository]
Clearing Agency as defined in Rule 387.30.
.50 ``Qualified Vendor'' shall mean a vendor of electronic
confirmation and affirmation services that:
(A) Shall, for each transaction subject to this rule: (i) deliver a
trade record to a Clearing Agency in the Clearing Agency's format; (ii)
obtain a control number for the trade record from the Clearing Agency;
(iii) cross-reference the control number to the confirmation and
subsequent affirmation of the trade; and (iv) include the control
number when delivering the affirmation of the trade to the Clearing
Agency;
(B) Has submitted a certification to the Commission which is not
deemed unacceptable by the Commission: (i) With respect to its
electronic trade confirmation/affirmation system, that it has a
capacity requirements, evaluation, and monitoring process that allows
the vendor to formulate current and anticipated estimated capacity
requirements; (ii) that its electronic trade confirmation/affirmation
system has sufficient capacity to process the specified volume of data
that it reasonably anticipates to be entered into its electronic trade
confirmation/affirmation service during the upcoming year; (iii) that
its electronic trade confirmation/affirmation system has formal
contingency procedures, that the entity has followed a formal process
of reviewing the likelihood of contingency occurrences, and that the
contingency protocols are reviewed and updated on a regular basis; (iv)
that its electronic trade confirmation/affirmation system has a process
for preventing, detecting, and controlling any potential or actual
systems integrity failures, and its procedures designed to protect
against security breaches are followed; and (v) that it has cash
reserves of not less than five hundred thousand dollars;
(C) Has submitted and shall continue to submit on an annual basis,
an Auditor's Report to the Commission which is not deemed unacceptable
by the Commission. An Auditor's Report will be deemed unacceptable if
it contains any findings of material weakness;
(D) Notifies the Commission in writing of any changes to its
systems that significantly affect or have the potential to
significantly affect its electronic trade confirmation/affirmation
system including, without limitation, changes that: (i) Affect or
potentially affect the capacity or security of its electronic trade
confirmation/affirmation system; (ii) rely on new or substantially
different technology; or (iii) provide a new service to the Qualified
Vendor's electronic trade confirmation/affirmation system;
(E) Immediately notifies the Commission in writing if it intends to
cease providing services;
(F) Provides the Exchange with copies of any submissions to the
Commission made pursuant to .50 (B), (C), (D) and (E) of this rule
within ten business days; and
(G) Supplies supplemental information regarding their electronic
trade confirmation/affirmation services as requested by the Exchange or
the Commission.
.60 ``Auditor's Report'' shall mean a written report which is
prepared by competent, independent, external audit personnel in
accordance with the standards of the American Institute of Certified
Public Accountants and the Information Systems Audit and Control
Association and which (i) Verifies the certifications contained in
.50(B) above; (ii) contains a risk analysis of all aspects of the
entity's information technology systems including, without limitation,
computer operations, telecommunications, data security, systems
development, capacity planning and testing, and contingency planning
and testing; and (iii) contains the written response of the entity's
management to the information provided pursuant to (i) and (ii) above.
[FR Doc. 98-9592 Filed 4-10-98; 8:45 am]
BILLING CODE 8010-01-M
