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Self-Regulatory Organizations; American Stock Exchange LLC; Order Granting Approval of a Proposed Rule Change To Establish Resolution Times for Uncompared Transactions

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Information about this document as published in the Federal Register.

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Start Preamble February 27, 2003.

I. Introduction

On April 22, 2002, American Stock Exchange LLC (“Amex”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change File No. SR-AMEX-2002-36 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).[1] Notice of the proposal was published in the Federal Register on December 4, 2002.[2] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

II. Description

The resolution of uncompared trades (sometimes referred to as “DKs”) has gone through substantial revision as the nature of trade comparison has changed. In 1966, standardized forms were adopted for the timely and efficient resolution of DKs. The primary responsibility for DK resolution at that time was entrusted to floor members.[3] In 1978, the time limit for replying to a DK notice was set at 3:45 p.m. on trade date plus three business days (“T+3”) or prior to 10 a.m. on trade date plus five business days (“T+5”) if a specialist or independent member was involved. Upon a change in the opening to 9:30 a.m. in 1985, members were then required to reply to a DK notice involving a specialist or independent member prior to 9:30 a.m. on T+5.

A result of, among other things, the Commission's 1987 Market Break Report [4] was a major initiative to shorten the comparison process. One development was the implementation in 1990 of Amex's Intra-Day Comparison system (“IDC”).[5] In 1990, Amex also implemented Rule 719, Comparison of Exchange Transactions, which required that any transactions effected on Amex be compared or otherwise closed out by Amex's close of business on the business day following the day of the contract.[6] Amex adopted further rule changes in 1991 to formalize the operational procedures for full implementation of Amex's electronic equity trade comparison facility.[7] Among the new rules adopted in 1991 was Rule 731, Resolution of Uncompared Transactions, that expressly required that member organizations resolve uncompared trades no later than 3 p.m. on T+1 or 3:30 p.m. on T+1 if an agent was involved.

Because of the inherent risks to the settlement process from uncompared trades, Amex believes it should have the flexibility to change the time periods for the resolution of DKs. For example, market conditions and systemic changes may require Amex to implement different cut-off time periods for the resolution of DKs depending on the particular product, such as stocks, bonds, exchange-traded funds (“ETFs”), or trust-issued receipts (“TIRs”). Accordingly Amex proposes to amend Rule 731 to allow Amex to establish DK resolution time periods for equities, bond, ETFs, and TIRs as appropriate.

Specifically, the proposed rule change will amend Rule 731 by providing Amex flexibility in determining (1) cut-off times and dates for member organizations to make any necessary additions, deletions, or changes to their DK data and (2) cut-off times for resolution and acceptance of DKs remaining uncompared in the system. Start Printed Page 11165The proposed rule change also will adopt Commentary .08 to Rule 731 that extends the applicability of the rule to portfolio depositary receipts, index fund shares, and TIRs orders to buy or sell a security where the price is derivatively based upon another security or index of securities.[8] The proposed Commentary also provides that Amex may establish separate times to review and resolve DKs in these products.

III. Discussion

Section 6(b)(5) of the Act requires that the rules of an exchange are designed, among other things, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities.[9] The proposed rule change permits Amex flexibility in establishing time periods for resolution of DKs and extends the application of the rule to additional types of securities that previously had not been covered by the rule. This flexibility should enable Amex to address issues in its comparison process that may arise from market conditions or from various products trading on Amex. In so doing, Amex should be able to improve its ability to resolve uncompared trades, which in turn will improve the clearance and settlement of securities trading on Amex. For the reasons set forth above, the Commission believes that the AMEX's rule change is consistent with the exchange's obligations under the Act.

IV. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular with the requirements of section 6(b)(5) of the Act and the rules and regulations thereunder.

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-AMEX-2002-36) be and hereby is approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[10]

Start Signature

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  Securities Exchange Act Release No. 46916, (November 26, 2002), 67 FR 72241 (December 4, 2002).

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3.  A separate rule for uncompared options trades, Rule 970, was adopted when options commenced trading at the Amex in 1975. Rule 970 sets forth the procedures for settling uncompared options trades through the Rejected Option Transaction Notice.

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4.  Commission, Division of Market Regulation, The October 1987 Market Break (February 1988).

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5.  Exchange Act Release No. 28069 (May 29, 1990), 55 FR 23324 (June 7, 1990), [SR-Amex-90-01] (order approving IDC for post-trade processing of transactions in equity securities).

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6.  Exchange Act Release No. 27851 (March 27, 1990), 55 FR 12759 (April 5, 1990), [SR-Amex-89-05] (order permanently approving rule requiring regular way trades be compared or closed out by close of business on T+1). In 1994, the Commission approved Amex's proposed rule change which required trade date submission of comparison data. Exchange Act Release No. 34298 (July 1, 1994), 59 FR 35397 (July 11, 1994), [SR-Amex-94-13]. Today Rule 719(a) requires members and member organizations to submit comparison data to their clearing firm for any transaction executed on Amex within two hours of the trade.

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7.  Exchange Act Release No. 29157 (May 2, 1991), 56 FR 21510 (May 9, 1991), [SR-Amex-90-16] (order approving rule detailing mechanics of resolving uncompared equity trades through IDC).

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8.  Orders to buy or sell an option will continue to be covered by Rule 950(f) and the applicable Commentary to Rule 950.

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[FR Doc. 03-5422 Filed 3-6-03; 8:45 am]