[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