[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]


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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.
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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 proposed rule change consists of amendments to Exchange Rule 
387 to permit electronic confirmation/affirmation of depository 
eligible COD Orders by ``Qualified Vendors.'' \2\
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    \2\ The text of the amendments is attached as Exhibit A to this 
notice.
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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.
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    \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.
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     Submit an Auditor's Report to the Commission on an annual 
basis, which is not deemed unacceptable by the Commission.\4\
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    \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.
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     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\
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    \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.
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(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.
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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 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