[Federal Register Volume 66, Number 202 (Thursday, October 18, 2001)]
[Notices]
[Pages 52954-52956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26199]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44922; File No. SR-PCX-2001-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Pacific Exchange, Inc. Relating to 
Synchronization of Member Organization Business Clocks

October 11, 2001.
    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 June 18, 2001, the Pacific Exchange, Inc. (``PCX'' 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 Exchange. On 
October 9, 2001, the Exchange amended its proposal.\3\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Hassan Abedi, Attorney, PCX, to Nancy J. 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated October 5, 2001 (``Amendment No. 1''). Amendment 
No. 1 expanded the proposed rule language to further define the 
three-second tolerance.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX is proposing to adopt a new rule requiring all PCX member 
organizations to synchronize their business clocks. The text of the 
proposed rule change is as follows:

Time Synchronization

    Rule 6.20(a)  Each Member Organization must synchronize, within a 
time frame established by the Exchange, the business clocks that it 
uses for the purpose of recording the date and time of any event that 
must be recorded pursuant to the Rules of the Exchange. Member 
Organizations may

[[Page 52955]]

use any time provider source. Each Member Organizations must, however, 
ensure that the business clocks it uses on the Exchange are accurate to 
within a three-second[s] tolerance of the National Institute of 
Standards and Technology Atomic Clock in Boulder Colorado (``NIST 
Clock'') or the United States Naval Observatory Master Clock in 
Washington D.C. (``USNO Master Clock''). This tolerance includes all of 
the following:
    (1) The difference between the NIST/USNO standard and a time 
provider's clock;
    (2) transmission delay from the source; and
    (3) the amount of drift of the Member Organization's business 
clock. For purposes of this Rule, ``business clocks'' mean Member 
Organization proprietary system clocks. Member Organizations must set 
forth in their written supervisory procedures, required by PCX Rule 
4.25, the manner in which synchronization of business clocks will be 
conducted, documented and maintain.

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 purpose of the proposed rule change is to ensure that all 
member organization business clocks, used for purposes of recording 
order or trade data to the Exchange, are synchronized to a single time 
designated by the PCX, and that member organizations adopt such 
procedures as may be necessary to maintain such synchronization during 
each trading day. The adoption of the proposed rule would also assist 
the PCX in fulfilling one of the undertakings contained in the order 
issued by the SEC relating to the PCX's regulatory responsibilities.\4\ 
Pursuant to the SEC Order, the PCX agreed to undertake to design and 
implement an audit trail sufficient to enable the Exchange to 
reconstruct markets promptly, conduct efficient surveillance and 
enforce its rules. As part of this undertaking, the PCX must work to 
provide for market-wide synchronization of clocks utilized in 
connection with the audit trail.
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    \4\ See In the Matter of Certain Activities of Options 
Exchanges, Securities Exchange Act Release No. 37538 (September 11, 
2000); Administrative Proceeding File No. 3-10282 (``SEC Order'').
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    The PCX believes that the reliability and usefulness of any audit 
trail depends on the ability of the Exchange to require that the 
business clocks of member organizations be appropriately synchronized. 
The determination of whether members have complied with various rules 
and standards to which they are subject, including, among others, best 
execution obligations, compliance with the obligation to honor firms 
quotes, and prohibitions on frontrunning customer orders, depends 
critically on establishing with reasonable confidence the time at which 
order information is received. Time synchronization, therefore, becomes 
a necessary and integral part of the PCX audit trail system.
    Proposed Rule 6.20 provides that each member organization must 
synchronize, within a time frame to be established by the Exchange, the 
business clocks that it uses for the purpose of recording the date and 
time of any event that must be recorded pursuant to the Rules of the 
Exchange. Although member organizations may use any time provider 
source, each member organization must ensure that the business clocks 
it uses on the Exchange are accurate to within three seconds of the 
National Institute of Standards and Technology Atomic Clock in Boulder 
Colorado or the United States Naval Observatory Master Clock in 
Washington, DC.
    It is important to note that the obligation to maintain the 
synchronization of business clocks will be ongoing. Therefore, pursuant 
to PCX Rule 4.25, member organizations must set forth in their written 
supervisory procedures the manner in which synchronization of business 
clocks will be conducted, documented and maintained. The PCX will 
carefully review member organizations' compliance with these 
requirements given the importance of accurate time recordation to the 
audit trail system.
    The PCX proposes to implement the requirements of this rule in two 
phases. In the first phase, the proposed schedule contemplates that the 
requirements of the rule would apply to all orders that are received 
electronically, or captured in electronic form promptly after receipt, 
as of January 2, 2002. In the second phase, the proposed implementation 
schedule would apply the requirements of the proposed rule to all other 
types of orders as of September 11, 2002.\5\
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    \5\ This date is consistent with the schedule set forth in the 
SEC Order for completion of PCX obligations with respect to this 
undertaking.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\6\ in general, and furthers the objectives of 
Section 6(b)(5),\7\ 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 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

    The Exchange 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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 its finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve the 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 proposal, as 
amended, is consistent with the Act.

[[Page 52956]]

Persons making written submission should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, 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 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 Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the PCX. All 
submissions should refer to File No. SR-PCX-2001-24 and should be 
submitted by November 8, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-26199 Filed 10-17-01; 8:45 am]
BILLING CODE 8010-01-M