[Federal Register Volume 64, Number 113 (Monday, June 14, 1999)]
[Notices]
[Pages 31886-31889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14990]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41488; File No. SR-AMEX-98-42]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Regarding the Confirmation and Affirmation of Securities
Transactions
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 27, 1998, the
American Stock Exchange, Inc. (``AMEX'') filed with the Securities and
Exchange Commission (``Commission'') and on may 21, 1999, amended the
proposed rule change as described in Items I and II below, which items
have been prepared primarily by AMEX.\2\ The Commission is publishing
this notice and order to solicit comments from interested persons and
to grant accelerated approval of the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Since the filing of the proposed rule change, AMEX has
merged with the National Association of Securities Dealers and as a
result has changed its full name from American Stock Exchange, Inc.
to American Stock Exchange LLC.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Under the rule change, AMEX will amend Rule 423 to permit
electronic confirmation/affirmation of depository eligible COD
transactions \3\ by a qualified vendor or by an entity that has
obtained an exemption from registration as a clearing agency.\4\
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\3\ COD transaction are those in which a member firm extends
receipt versus payment or delivery versus payment privileges to a
customer.
\4\ 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, AMEX 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. AMEX has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such statements.
[[Page 31887]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
AMEX Rule 423 (``COC Orders'') currently requires that the
facilities of a Commission registered clearing agency be used by AMEX
member organizations for the confirmation, affirmation, and book-entry
settlement of COD transactions in depository eligible securities.
Certain vendors of electronic trade confirmation (``ETC'') services
have requested that they be allowed to provide confirmation/affirmation
services for institutional trades (i.e., COD transaction) even though
they are not registered clearing agencies. Under the proposed rule
change, AMEX will amend Rule 423 to allow its broker-dealer members to
use a qualified vendor for the confirmation and affirmation of
institutional trades. In addition, Rule 423 is being amended to allow
AMEX's broker-dealer members to use the confirmation/affirmation
services of any entity that has obtained an exemption from registration
as a clearing agency specifically so that it can provide confirmation/
affirmation services for institutional trades.
In order to become a qualified vendor under the rule change, and
ETC vendor will be required to certify to its customers that:
(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 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;
(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 AMEX 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.\5\
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\5\ 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 AMEX'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 AMEX 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 AMEX or
by the Commission staff. If a qualified vendor intends to cease
providing confirmation/affirmation services as requested by AMEX or by
the Commission staff. If a qualified vendor intends to cease providing
confirmation/affirmation services, it must notify AMEX and the
Commission staff in writing.
The Municipal Securities Rulemaking Board (``MSRB''), the National
Association of Securities Dealers (``NASD''), and the New York Stock
Exchange (``NYSE'') have made amendments to their rules similar to
those being proposed here by AMEX.\6\ The proposed Rule 423 amendments
are responsive to the Commission staff's request that the self-
regulatory organizations have uniform rules with respect to qualified
vendors providing confirmation/affirmation services.
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\6\ 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
(order approving proposed rule changes).
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(2) Statutory Basis
AMEX believes that the proposed rule change is consistent with
Section 6(b) of the Act \7\ in general and furthers the objectives of
Section 6(b)(5) in particular 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.
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\7\ 15 U.S.C. 78f.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
AMEX believes that the proposed rule change will impose no burden
on competition.
(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. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Section 6(b)(5) of the Act \8\ requires, among other things, that
AMEX'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 \9\ requires that
AMEX's rules not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. The Commission
believes that AMEX'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 AMEX's
members, registered clearing agencies, and entities that become
qualified vendors under the rule change.
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\8\ 15 U.S.C. 78f(b)(5).
\9\ 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
[[Page 31888]]
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 AMEX'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 AMEX to immediately conform its Rule 423 to the
recently amended confirmation/affirmation rules of the MSRB, NASD, and
NYSE.\10\
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\10\ Supra note 4.
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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 AMEX. All
submissions should refer to File No. SR-AMEX-98-42 and should be
submitted by July 6, 1999.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (File No. SR-AMEX-98-42) be and
hereby is approved.
\11\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
Exhibit A
Proposed Amendments to Rule 423
Additions Italicized
Deletions [bracketed]
COD Orders
Rule 423. No member or member organization shall accept an order
from a customer pursuant to an arrangement whereby payment for
securities purchased is to be made to the member or member
organization upon delivery of the securities to an agent of the
customer, or whereby payment for securities sold is to be made by
the member or member organization to an agent of the customer upon
receipt of the securities from such agent, 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, acknowledgment 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 transactions.
The facilities of either a Clearing Agency or a Qualified Vendor
shall be utilized for the electronic conformation and affirmation of
all depository eligible transactions.
Commentary
.01 through .03 No change.
[.04 The following transactions shall be exempt from the
provisions of paragraph (5) of this Rule:
(1) Transactions that are to be settled outside of the United
States.
(2) Transactions wherein both a member organization and its agent
are not participants in a securities depository.
(3) Transactions wherein both a customer and its agent are not
participants in a securities depository.]
.04 Transactions that are to be settled outside of the United
States shall be exempt from the provisions of paragraph (5) of this
rule.
.05 No Change.
.06 For the purposes 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
(``Commision'') pursuant to Section 17A(b)(2) of the Act or has
obtained from the Commission and exemption from registration granted
specifically to allow the Clearing Agency to provide confirmation
and affirmation services.
07. 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 Commentary .06 of this
rule.
[.08 Rule 423(5) and Commentary .04, .05, .06, and .07 shall
become effective January 1, 1983.]
.08 ``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) certifies to its customers: (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 is 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 its current assets exceed its
current liabilities by the lease five hundred thousand dollars;
(C) has submitted, and shall continue to submit on an annual
basis, an Auditor's Report 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;
(D) notifies 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: (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 notified the Commission staff in writing if it
intends to cease providing services;
(F) provides the Exchange with copies of any submissions to the
Commission staff made pursuant to .08 (B), (C), (D) and (E) of this
rule within ten business days; and
(G) supplies supplemental information regarding their electronic
trade confirmation/
[[Page 31889]]
affirmation services as requested by the Exchange or the Commission
staff.
.09 ``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
.08(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. 99-14990 Filed 6-11-99; 8:45 am]
BILLING CODE 8010-01-M