Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and rule 19b-4 thereunder, 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. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.
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:
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 Start Printed Page 52955use 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
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. 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.
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.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5), 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.
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. Start Printed Page 52956Persons 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.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
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.Back to Citation
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”).Back to Citation
5. This date is consistent with the schedule set forth in the SEC Order for completion of PCX obligations with respect to this undertaking.Back to Citation
[FR Doc. 01-26199 Filed 10-17-01; 8:45 am]
BILLING CODE 8010-01-M