[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