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SEC Modernizes Regulations for
Alternative Trading Systems

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FOR IMMEDIATE RELEASE98-127
Agency Streamlines Process of Introducing Products and
Operating Pilot Trading Systems

Washington, D.C., December 2, 1998 – The Commission voted today to publish two releases that modernize the Commission's regulatory framework in light of the important role of technology, and the increasing competition, in today's securities markets. The releases adopt the following changes:

Chairman Arthur Levitt said, "The rules adopted today take an important step toward accomplishing the goal of ensuring the continued strength of America's securities markets in an era of global commerce and intensified competition. They represent common-sense regulation that still ensures investor protection."

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Summary of Releases Adopting Changes to the Regulation of Alternative Trading Systems and Relief From the SRO Rule-Filing Requirements

The Commission will vote today on whether to publish two releases. The first release adopts rules establishing a new regulatory framework for alternative trading systems. This new framework will allow alternative trading systems to choose to register as exchanges or to register as broker- dealers and comply with additional requirements specifically designed to address their unique role in the market. This release also adopts a new rule, which permits exchanges and the NASD to develop and operate pilot trading systems for up to 2 years before seeking Commission approval. Further, this release makes clear that the Commission will work to accommodate new, or existing, exchanges who wish to operate as for-profit organizations.

The Commission will also vote on whether to publish a second release adopting amendments to Rule 19b-4, which will permit registered securities exchanges and the NASD to list and trade new derivative securities products without Commission approval.

Reason for the Adopting Releases

The releases modernize the Commission's regulatory framework in light of the important role of technology, and the increasing competition, in today's securities markets. The following developments prompted the Commission's actions.

How the Commission Is Responding

The two releases being considered by the Commission today would address these concerns by:

(1)Adopting a new regulatory framework for alternative trading systems that better integrates these systems into the national market system and improves investor protection. This new regulatory framework continues to provide alternative trading systems with the flexibility they need to innovate by allowing them to choose between registering as an exchange and registering as a broker-dealer.
(2)Allowing the registered exchanges and the NASD to: (i) defer seeking Commission approval of low volume pilot trading systems for two years; and (ii) trade new derivative securities products without Commission approval when there are previously approved listing standards.
(3)Allowing registered exchanges to operate as for-profit businesses.

New Regulatory Framework for Alternative Trading Systems

In the Commission's proposing release on the regulation of markets, published in April 1998, the Commission requested comment on a framework that would allow alternative trading systems to choose to be a market participant and register as a broker-dealer, or to be a separate market and register as an exchange. This approach would allow a trading system to choose the role it wishes to play as a business. After reviewing the comment letters, the Commission is adopting the proposed framework with minor modifications.

Choosing to Register as a Broker-Dealer

Most alternative trading systems that are currently operating are relatively small. If these smaller systems choose to register as broker-dealers, their regulatory requirements will be substantially similar to what they currently undertake. As registered broker- dealers, these alternative trading systems will continue to be covered by the oversight of one of the self-regulatory organizations. Provided an alternative trading system has limited volume, it will only have to file a notice with the Commission describing the way it operates, maintain an audit trail, and file quarterly reports.

Under the rules the Commission is adopting today, alternative trading systems with substantial trading volume – and therefore a potentially significant impact on the market – will need to comply with the following additional requirements.

Relief for the Registered Exchanges and the NASD

Unlike alternative trading systems, registered exchanges and the NASD are required to submit all of their rule changes for Commission review. This requirement can impede their ability to compete effectively by slowing the development of innovative trading systems and the introduction of new products. Today, the Commission is adopting two rules that respond to this concern.

First, the Commission is adopting a rule that temporarily exempts registered exchanges and the NASD from the rule filing requirements so that they may operate – for up to two years --pilot trading systems. During this trial two year period, the pilot trading system will be subject to strict volume limitations. The operator of the pilot trading system will also have to ensure that the trading activity on that system is being adequately surveilled. This rule will enhance the registered exchanges' and the NASD's ability to compete with alternative trading systems registered as broker-dealers and to bring innovative trading systems to market.

Second, the Commission is adopting a rule that creates a streamlined procedure for the registered securities exchanges and the NASD to quickly begin trading new derivative securities products. Under the new rule, if a registered exchange or the NASD has existing trading rules, surveillance procedures, and listing standards that apply to the broad product class covering a new derivative securities product, the new product can be listed or traded without Commission approval.

For-Profit Exchanges

A number of exchanges throughout the world have demutualized and now operate as for-profit enterprises. The releases the Commission is considering today make clear that the Commission will work to accommodate, within the existing requirements for exchange registration, exchanges wishing to operate under a proprietary structure. This would allow alternative trading systems that are proprietary to register as exchanges and for currently registered exchanges to convert to a for-profit structure. For example, the International Securities Exchange – a proprietary, electronic options exchange – recently announced its intent to register as an exchange. Like all currently registered exchanges, registered exchanges operating with a for-profit business structure will have self-regulatory obligations, including enforcing participants' compliance with the securities laws.



-[1]-   Securities Exchange Act Release No. 39884 (April 17, 1998). This release is available at the Commission's web site (http://www.sec.gov/rules/propridx.htm).




http://www.sec.gov/news/regats.htm
Last update: 10/28/98

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