[Federal Register Volume 64, Number 113 (Monday, June 14, 1999)]
[Notices]
[Pages 31890-31892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14989]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41487; File No. SR-PCX-98-35)


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of a Proposed Rule 
Change Regarding the Confirmation and Affirmation of Securities 
Transactions

June 7, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 30, 1998, the Pacific 
Exchange, Inc. (``PCX'') filed with the Securities and Exchange 
Commission (``Commission'') and on November 16, 1998, and May 28, 1999, 
amended the proposed rule change as described in Items I and II below, 
which items have been prepared primarily by PCX. The Commission is 
publishing this notice and order to solicit comments from interested 
persons and to grant accelerated approval of the proposed rule change.
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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 will permit PCX members to use the 
facilities of a qualified vendor or an entity that has obtained an 
exemption from registration as a clearing agency for the electronic 
confirmation and affirmation of depository eligible transactions.\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, PCX 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. PCX 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

    The PCX is proposing to amend Rule 9.12 to allow qualified vendors 
of electronic trade confirmation (``FTC'') services that are not 
registered clearing agencies to provide electronic trade confirmation/
affirmation services for institutional trades. The rule is also being 
amended to allow entities that have obtained exemptions from clearing 
agency registration specifically so that they can offer confirmation/
affirmation services to provide such services for institutional trade.
    Rule 9.12 was originally adopted to protect broker-dealers form 
problems relating to financial exposure associated with inaccurate and 
filed institutional transactions. Financial exposure results from 
institutional customers that settle their trades on a receipt versus 
payment (``RVP'') or delivery versus payment (``DVP'') basis. This 
permits them to delay payment for securities until the securities are 
delivered to their custodian and to delay delivery of securities until 
payment is received. Additional financial exposure results when the 
broker-dealer sells or purchases securities on behalf of an 
institutional customer from another broker-dealer. In such a situation 
the broker-dealer is subject to financial exposure until the 
institution's custodian delivers securities or makes payment that the 
borker-dealer will use to cover its trade with the other broker-dealer. 
If ther is a delay in settlement with the institution or the 
institution refuses to recognize and settle the trade, the broker-
dealer is still obligated to settle its trade with the other broker-
dealer.
    Certain vendors of ETC services have requested that they be allowed 
to provide confirmation/affirmation services for institutional trades 
even though they are not registered clearing agencies. PCX is proposing 
to amend Rule 9.12 so that either a clearing agency \3\ or a qualified 
vendor may provide electronic conformation and affirmation of all 
depository eligible transactions to be settled on an RVP/DVP basis. In 
order to become a qualified vendor under the rule change, an ETC vendor 
will be required to certify to its customers that:

    \3\ For purposes of Rule 9.12, clearing agency means a clearing 
agency as defined in Section 3(a)(23) of the Act that is registered 
with the Commission or that has obtained from the Commission an 
exemption from registration granted specifically to allow the 
clearing agency to provide confirmation/affirmation services.
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    (1) With respect to its electronic trade confirmation/
affirmation system, it has a capacity requirements, evaluation, and 
monitoring process that allows it to formulate current and 
anticipated estimated capacity requirements;
    (2) Its electronic trade conformation/affirmation system has 
sufficient capacity to process the specified volume of data that it 
reasonably anticipates to be entered into its

[[Page 31891]]

electronic trade confirmation/affirmation service during the 
upcoming year;
    (3) Its electronic trade confirmation/affirmation system has 
formal contingency procedures, the entity has followed a formal 
process of reviewing the likelihood of contingency occurrences, and 
the contingency protocols are reviewed and updated on a regular 
basis:
    (4) 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
    (5) Its current assets exceed its current liabilities by at 
least $500,000.

    In addition, a qualified vendor will be required initially and 
annually to submit to PCX and to the Commission staff a report prepared 
by independent audit personnel (referred to in the rule change as 
``Auditor's Report''). Each Auditor's Report must: (1) verify the 
certifications described above; (2) contain a risk analysis of all of 
the entity's information technology systems; and (3) contain the 
written response of the entity's management to the Auditor's Report's 
verifications and risk analysis. The Auditor's Report must be deemed 
not unacceptable by Commission staff.\4\
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    \4\ At this time, the Commission staff intends to indicate that 
an entity's initial Auditor's Report is not unacceptable by issuing 
a letter to the entity stating that it will not recommend 
enforcement action against any of PCX's member organizations that 
elect to use the confirmation/affirmation systems of the entity. 
Subsequent Auditor's Reports submitted to the Commission staff by 
the qualified vendor will be considered acceptable unless the 
Commission staff otherwise informs the qualified vendor.
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    Qualified vendors will be subject to ongoing requirements under the 
rule change. For each transaction in which it provides confirmation/
affirmation services, a qualified vendor will be required to: (1) 
deliver a trade record to a registered clearing agency in the clearing 
agency's format; (2) obtain a control number for the trade record from 
the clearing agency; (3) cross reference the control number to the 
confirmation and subsequent affirmation of the trade; and (4) include 
the control number when delivering the affirmation of the trade to the 
clearing agency. A qualified vendor will be required to notify the PCX 
and the Commission staff in writing of any changes to its systems that 
significantly affect or have the potential to significantly affect its 
electronic trade confirmation/affirmation system. In addition, a 
qualified vendor will be required to supply supplemental information 
regarding its confirmation/affirmation system as requested by PCX or by 
the Commission staff. If a qualified vendor intends to cease providing 
confirmation/affirmation services, it must notify PCX and the 
Commission staff in writing.
    PCX believes that the proposal is consistent with Section 6(b) of 
the Act \5\ in general and with Section 6(b)(5) of the Act \6\ in 
particular in that it is 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, and to protest investors and the public interest.
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The PCX 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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 6(b)(5) of the Act \7\ requires, among other things, that 
PCX's rules be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities. In addition, Section 6(b)(8) of the Act \8\ requires that 
PCX's rules not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The Commission 
believes that PCX's proposed rule change is consistent with its 
obligations under the Act because it will require unregulated entities 
that wish to provide confirmation/affirmation services to establish 
links and interfaces with a registered clearing agency. This 
requirement should increase cooperation and coordination among PCX's 
members, registered clearing agencies, and entities that become 
qualified vendors under the rule change.
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78f(b)(8).
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    In addition, in reviewing the proposed rule change the Commission 
has considered whether the proposed rule change would impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act. The Commission believes that the rule change 
has been carefully designed to allow unregistered ETC vendors to 
provide confirmation/affirmation services for institutional trades in a 
manner which is not unduly burdensome for ETC vendors and which 
preserves the safety and soundness of the national system for the 
clearance and settlement of securities transactions. Therefore, the 
Commission believes that PCX's proposed rule change should not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the publication of notice of 
the filing. Approving prior to the thirtieth day after publication of 
notice will allow PCX to immediately conform its Rule 9.12 to the 
recently amended confirmation/affirmation rules of the Municipal 
Securities Rulemaking Board (``MSRB''), National Association of 
Securities Dealers (``NASD''), and New York Stock Exchange 
(``NYSE'').\9\
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    \9\ Securities Exchange Act Release No. 41378 (May 7, 1999), 64 
FR 25940 [File Nos. SR-MSRB-98-06, SR-NASD-98-20, SR-NYSE-98-07.
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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-
0609. 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 Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of PCX. All 
submissions should refer to File No. SR-PCX-98-35 and should be 
submitted by July 6, 1999.

[[Page 31892]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-PCX-98-35) be and 
hereby is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A

Additions italicized
Deletions [bracketed]

Text of the Proposed Rule Change: COD Orders--Partial Delivery

    Rule 9.12(a)(1)-(3) No change.
    (4) No change.
    (A)-(B)(i)-(ii) 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.] The 
facilities of a Clearing Agency must be utilized for the book-entry 
settlement of all Depository Eligible Transactions except for 
transactions that are to be settled outside the United States. The 
facilities of either a Clearing Agency or a Qualified Vendor must be 
utilized for the electronic confirmation and affirmation of all 
Depository Eligible Transaction.
    (A) For the purpose of this rule, ``securities depository'' 
[shall] means 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 pursuant to Section 17A(b)(2) of 
the Act.
    (B) For the purpose of this rule ``depository eligible 
transactions'' [shall] means transactions in those securities for 
which confirmation, affirmation [acknowledgment] and book entry 
settlement can be performed through the facilities of a securities 
depository as defined in Rule 9.12(a)(5)(A).
    (C) For the purpose of this rule ``Clearing Agency'' means 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 pursuant to Section 17A(b)(2) of the Act or that 
has obtained from the Commission an exemption from registration 
granted specifically to allow the clearing agency to provide 
confirmation/affirmation services.
    (D) ``Qualified Vendor'' means a vendor of electronic 
confirmation and affirmation services that:
    (i) will, for each transaction subject to this rule: (a) deliver 
a trade record to a Clearing Agency in the Clearing Agency's format; 
(b) obtain a control number for the trade record from the Clearing 
Agency; (c) cross-reference the control number to the confirmation 
and subsequent affirmation of the trade; and (d) include the control 
number when delivering the affirmation of the trade to the Clearing 
Agency;
    (ii) certifies to its customers: (a) with respect to its 
electronic trade confirmation/affirmation system, that it has a 
capacity requirements, evaluation, and monitoring processes that 
allow the vendor to formulate current and anticipated estimated 
capacity requirements; (b) 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; (c) 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; (d) 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 (e) that its current assets exceed its 
current liabilities by at least five hundred thousand dollars;
    (iii) has submitted and will continue to submit on an annual 
basis an Auditor's Report to the Exchange and to the Commission 
Staff which is not deemed unacceptable by the Commission Staff. An 
Auditor's Report will be deemed unacceptable if it contains any 
findings of material weakness;
    (iv) notifies the Exchange and the Commission Staff immediately 
in writing of any changes to its systems that significantly affect 
or have the potential to significantly affect its electronic trade 
confirmation/affirmation systems including, without limitation, 
changes that: (a) affect or potentially affect the capacity or 
security of its electronic trade confirmation/affirmation system; 
(b) rely on new or substantially different technology; or (c) 
provide a new service to the Qualified Vendors' electronic trade 
confirmation/affirmation system;
    (v) immediately notifies the Exchange and Commission Staff, in 
writing, if it intends to cease providing services;
    (vi) provides the Exchange with copies of any submission to the 
Commission Staff made pursuant to Sections (a)(5)(D)(ii), (iii), 
(iv), or (v) of the Rule within ten business days; and
    (vii) supplies supplemental information regarding their 
electronic trade confirmation/affirmation services as requested by 
the Exchange or the Commission.
    (E) ``Auditor's Report'' means a written report that 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 that (i) verifies the certifications contained in 
subsection (a)(5)(D)(ii) 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.

Rule 9.12(b), No Change.
[FR Doc. 99-14989 Filed 6-11-99; 8:45 am]
BILLING CODE 8010-01-M