[Federal Register Volume 63, Number 21 (Monday, February 2, 1998)]
[Notices]
[Pages 5408-5410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2459]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39582; File Nos. SR-NYSE-98-01; SR-Amex-98-03; SR-BSE-
98-01; SR-CHX-98-02; SR-Phlx-98-02]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
American Stock Exchange, Inc.; Boston Stock Exchange, Inc.; Chicago 
Stock Exchange, Inc.; and Philadelphia Stock Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Changes 
Relating to an Extension and Modification of Certain Market-Wide 
Circuit Breaker Provisions

January 26, 1998.
    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 January 9, 1998, the New York Stock Exchange, Inc. (``NYSE''); on 
January 16, 1998, the American Stock Exchange, Inc. (``Amex''); on 
January 14, 1998, the Boston Stock Exchange, Inc. (``BSE''); on January 
16, 1998, the Chicago Stock Exchange, Inc. (``CHX''); and on January 
21, 1998, the Philadelphia Stock Exchange Inc. (``Phlx'') (collectively 
referred to as the ``Exchanges''), submitted to the Securities and 
Exchange Commission (``SEC'' or ``Commission''), proposed rule changes 
relating to certain market-wide circuit breaker provisions as described 
in Items I, II, and III below, which items have been prepared by the 
Exchanges. The Commission is publishing this notice to solicit comments 
on the proposed rule changes from interested persons. As discussed 
below, the Commission is also granting accelerated approval of these 
proposed rule changes.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Changes

    The Exchanges propose to amend the timing and duration of their 
respective circuit breaker procedures and to extend the circuit breaker 
pilot program until April 30, 1998.

II. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, the Exchanges included 
statements concerning the purpose of and basis for the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item V below. The self-regulatory organizations have 
prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. Purpose
    The Exchanges propose to amend their respective rules relating to 
``Trading Halts Due to Extraordinary Market Volatility--circuit 
breakers'' to extend the effectiveness of their respective rules and 
alter the timing and duration of trading halts that occur late in the 
trading day. In 1988, the Commission approved rule proposals by the 
Exchanges, along with a policy statement of the National Association of 
Securities Dealers, Inc. (``NASD''), implementing trading halts during 
significant market declines (``circuit breakers''). These rules 
provided for a one hour market-wide trading halt if the Dow Jones 
Industrial Average \3\ (``DJIA'') declined by 250 points from its 
previous day's close, and a two hour halt if, on that same day, it fell 
400 points.\4\ Amendments approved by the SEC in July 1996 reduced the 
duration of the 250 and 400 point halts to one-half hour and one hour, 
respectively.\5\ Amendments approved in January 1997 increased the 
trigger values to 350 and 550 points, respectively.\6\ These circuit 
breakers have been adopted by all U.S. securities markets, and by those 
commodities markets that trade stock index futures.
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    \3\ ``Dow Jones Industrial Average'' is a service mark of Dow 
Jones & Company, Inc.
    \4\ See Exchange Act Release Nos. 26198 (October 19, 1988), 53 
FR 41637 (NYSE, Amex, NASD, and Chicago Board Options Exchange, Inc. 
(``CBOE'')); 26218 (October 26, 1988), 53 FR 44137 (CHX); 26357 
(December 14, 1988), 53 FR 51182 (BSE); 26368 (December 16, 1988), 
53 FR 51942 (Pacific Stock Exchange, Inc. (``PSE'')); 26386 
(December 22, 1988), 53 FR 52904 (Phlx); and 26440 (January 10, 
1989), 54 FR 1830 (Cincinnati Stock Exchange, Inc. (''CSE'')).
    \5\ See Exchange Act Release Nos. 37457 (July 19, 1996), 61 FR 
39176 (NYSE); 37458 (July 19, 1996), 61 FR 39167 (Amex); and 37459 
(July 19, 1996), 61 FR 39172 (BSE, CBOE, CHX, and Phlx).
    \6\ See Exchange Act Release No. 38221 (January 31, 1997), 62 FR 
5871 (February 7, 1997) (NYSE, Amex, CBOE, CHX, BSE, and Phlx). The 
Commission approved each of the Exchanges' revised circuit breaker 
rules on a one-year pilot basis which will expire on January 31, 
1998. See id. at 5874.
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    On October 27, 1997, these circuit breakers were activated for the 
first time. The first circuit breaker (thirty minute halt) was 
activated at 2:35 p.m. After trading resumed at 3:05 p.m., the second 
circuit breaker (one hour halt) was activated at 3:30 p.m., within the 
last hour of trading, thereby closing the market for the remainder of 
the day.
    The Commission and the industry continue to discuss possible 
further refinements to the circuit breaker rules in light of the 
October 27, 1997 experience. In the interim, the Exchanges \7\ are 
proposing to amend

[[Page 5409]]

their respective trading halts rules with regard to the timing and 
duration of trading halts. Under the proposal, if the first circuit 
breaker (down 350 points) is reached prior to 3:00 p.m.,\8\ trading 
would be halted for one-half hour. If the first circuit breaker is 
reached at or after 3:00 p.m., trading on the Exchange would continue 
uninterrupted until the second circuit breaker (down 550 points) is 
reached. If the second circuit breaker is reached prior to 2:00 p.m., 
trading on the Exchange would halt for one hour. If the second circuit 
breaker is reached at or after 2:00 p.m. but before 3:00 p.m., trading 
on the Exchange would halt for 30 minutes instead of one hour. If the 
second circuit breaker is reached at or after 3:00 p.m., trading on the 
Exchange would halt for the remainder of the trading day.\9\ The 
Exchanges seek to effect these changes on a pilot basis until April 30, 
1998. The futures exchanges trading stock index futures have proposed 
analogous circuit breaker proposals with the Commodity Futures Trading 
Commission (``CFTC'') to halt trading in such contracts.\10\
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    \7\ The CBOE, CSE, Pacific Exchange, Inc. (``PCX'', formerly 
PSE), and the NASD have general rules that require them to halt 
trading during a triggering of the intermarket circuit breakers. 
Consequently, they do not need to file conforming rule changes 
because their circuit breaker halts will conform automatically to 
the halt periods adopted by the other exchanges. See letters to 
Howard L. Kramer, Senior Associate Director, Office of Market 
Supervision, Division of Market Regulation, Commission, from David 
P. Semak, Vice President of Regulation, PCX, dated January 13, 1998; 
from Adam W. Gurwitz, Vice President Legal and Corporate Secretary, 
CSE, dated January 22, 1998; from Richard Ketchum, Chief Operating 
Officer and Executive Vice President, NASD, dated January 23, 1998 
(``NASD letter''); from Arthur B. Reinstein, Assistant General 
Counsel, CBOE, dated January 23, 1998.
    The NASD's policy statement expired on December 31, 1997. The 
Commission, however, has received both oral and written 
representations from the NASD that it will continue to follow, upon 
request by the Commission, a trading halt during the triggering of 
the intermarket circuit breakers. See NASD letter, supra. The 
Commission notes that it has a standing request with the NASD to 
halt trading as quickly as practicable whenever the NYSE and other 
equity markets have suspended trading. The Exchanges' proposed rule 
changes do not affect the Commission's standing request.
    \8\ All time references are to Eastern time.
    \9\ The NYSE has requested that the Commission extend the ``safe 
harbor'' provisions of Rule 10b-18 under the Exchange Act to cover 
corporate repurchases effected at the reopening on the day of the 
halt, during the last half-hour prior to the scheduled close of 
trading on the day of the halt, and at the next day's opening if the 
market-wide halt is in effect at the scheduled close of trading, 
provided that the other restrictions in Rule 10b-18 are met in the 
execution of any repurchase order. See letter to Jonathan Katz, 
Secretary, Commission, from James E. Buck, Senior Vice President and 
Secretary, NYSE, dated January 8, 1998.
    \10\ See letters to Jean A. Webb, Secretary, CFTC, from Richard 
J. McDonald, Vice President, Research, Chicago Mercantile Exchange 
(``CME''), dated January 8, 1998; from Paul J. Draths, Vice 
President and Secretary, Chicago Board of Trade (``CBOT''), dated 
January 9, 1998; from June Furlan, Vice President and Chief 
Economist, New York Futures Exchange, Inc. (``NYFE''), dated January 
12, 1998; and from Jeff C. Borchardt, Senior Vice President, Kansas 
City Board of Trade, Inc. (``KCBT''), dated January 13, 1998.
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2. Statutory Basis
    The basis under the Act for the proposed rule changes is the 
requirement under Section 6(b)(5) \11\ that an Exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
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, to remove impediments to and 
perfect the mechanism of a free and open market and, in general, to 
protect investors and the public interest.
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    \11\ 15 U.S.C. Sec. 78f(b)(5).
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    The proposed rule changes are consistent with Section 6(b)(5) of 
the Act in that they are designed to promote just and equitable 
principles of trade. The Exchanges believe that modifying the timing 
and duration of the circuit breakers, as well as extending the circuit 
breaker pilot program is consistent with these objectives in that the 
proposed rules provide a balance between the need to halt trading 
temporarily during periods of extraordinary market volatility with the 
need to provide an open marketplace for trading securities.

B. Self-Regulatory Organizations' Statement on Burden on Competition

    The Exchanges do not believe that any burden will be placed on 
competition as a result of the proposed rule changes.

C. Self-Regulatory Organizations' Statement on Comments on the Proposed 
Rule Changes Received from Members, Participants or Others

    Comments were neither solicited nor received with respect to the 
proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Changes and Timing 
for Commission Action

    The Exchanges request that the Commission finds good cause pursuant 
to Section 19(b)(2) of the Act for approving these modifications and 
extensions to the circuit breaker rules prior to the 30th day after 
publication of the proposed rule changes in the Federal Register.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Changes

    After careful review of the Exchanges' proposed amendments to the 
circuit breaker rules and for the reasons discussed below, the 
Commission finds that the proposed rule changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular with 
the requirements of Section 6(b).\12\ Specifically, the Commission 
believes that the proposal is consistent with the Section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest.\13\
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    \12\ 15 U.S.C. 78f(b).
    \13\ In approving these rules, the Commission has considered the 
proposed rules' impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    In 1988, the Commission approved the Exchanges' circuit breaker 
proposals, along with the NASD's circuit breaker policy statement, 
because the Commission believed that the proposed circuit breaker rules 
would help promote stability in the equity and equity-related markets 
by providing for an enhanced opportunity for market participants to 
assess information during times of extreme market movements.\14\ The 
proposals, in part, were in response to the events of October 19, 1987, 
when the DJIA declined 22.6%. The Commission believed that the circuit 
breaker proposals would provide market participants with an opportunity 
during a severe market decline to reestablish an equilibrium between 
buying and selling interest in a more orderly fashion. The futures 
exchanges also adopted analogous trading halts to provide coordinated 
means to address potentially destabilizing market volatility.\15\
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    \14\ See Exchange Act Release No. 26198, supra note 4.
    \15\ See letters to Jean A. Webb, Secretary, CFTC, from Todd E. 
Petzel, Vice President, Financial Research, CME, dated September 1, 
1988; from Paul J. Draths, Vice President and Secretary, CBOT, dated 
July 29, 1988; from Milton M. Stein, Vice President, Regulation and 
Surveillance, NYFE, dated September 2, 1988; and Michael Braude, 
President, KCBT, dated August 10, 1988.
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    On October 27, 1997, the DJIA experienced a decline of 554 points, 
or 7.2%. The first circuit breaker of one-half hour was trigger at 2:35 
p.m. when the DJIA declined 350 points from the previous day's closing 
value. After the market reopened at 3:05 p.m., the DJIA continued to 
decline another 200 points, triggering the second circuit breaker at 
3:30 p.m. Because the second circuit breaker was triggered at 3:30, 
within the last hour of trading, the market was closed for the 
remainder of the day. The triggering of the circuit breakers when the 
markets were operating smoothly, the rapid decline of the market that 
followed the reopening after the first circuit breaker was activated, 
and the early close of trading that occurred as a result of the second 
circuit breaker being triggered after 3:00, have prompted the markets 
to re-evaluate the operation of circuit breakers. While the markets 
determine how to modify the trigger levels to return them to levels 
consistent with their original design, they propose to extend the 
existing breakers, at the 350 and 550 point level, for three months. In 
addition, the current proposal reflects the Exchanges' consensus as to 
a circuit breaker timing mechanism that is preferable to the

[[Page 5410]]

current procedure for circuit breakers that trigger at 350 and 550 
points late in the trading day. The Commission notes that the 
Exchanges' proposal will operate only until April 30, 1998, requiring 
the Exchanges to revise circuit breaker procedures by then to return 
them to their original design.
    The Commission believes that the extension of the current levels 
for a brief period is reasonable in order to provide sufficient time 
for the markets to amend their circuit breakers to trigger only during 
a severe market decline of historic proportions. The revisions to the 
current procedures are appropriate to prevent the markets from closing 
for the day at a decline of only 4.55%, represented by 350 points.\16\
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    \16\ This percentage is based on the DJIA close on January 23, 
1998.
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    The Commission finds good cause for approving the proposed rule 
changes prior to the thirtieth day after the date of publication to the 
notice thereof in the Federal Register because the current pilot 
program will expire on January 31, 1998, and accelerated approval will 
enable the pilot to continue on an uninterrupted basis. The Commission 
realizes that under normal circumstances the proposed modifications 
would be published for notice and comment in the Federal Register. Give 
the near expiration of the pilot, however, the Commission believes that 
accelerated approval is appropriated to keep circuit breakers in place 
until the markets have finished their re-evaluation of the broader 
circuit breaker issues. This should be done very quickly. Hence, the 
Commission is approving on a pilot basis the continuation of the 
current circuit breaker levels and the adoption of the timing and 
duration modifications only until April 30, 1998. The Commission 
believes that approving the Exchanges' continuation of circuit breaker 
rules on a pilot basis (with certain changes for late in the day halts) 
will facilitate further discussion on modifying circuit breaker levels, 
thus giving the Exchanges' adequate time to resolve this issue in the 
upcoming months. Accordingly, the Commission finds that it is 
consistent with Sections 6(b) and 19(b)(2) of the Act to approve these 
proposed rule changes on an accelerated basis.
    The Commission also believes that the circuit breaker mechanisms 
must be coordinated across the U.S. equity, futures and options markets 
to be effective in times of extreme market volatility.\17\ Therefore, 
to ensure continued market coordination, the Exchanges' proposal will 
become effective simultaneously, upon the termination of the current 
pilot program, and will take effect on February 1, 1998.
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    \17\ The Exchanges' proposals are contingent on other markets 
adopting similar proposals. In this regard, the Commission notes 
that all of the existing U.S. stock and options exchanges, as well 
as the NASD, have either submitted revised circuit breaker pilot 
programs or have agreed to comply with the provisions of such 
programs. The futures exchanges are also adopting analogous trading 
halts procedures to maintain the existing coordinated means to 
address potentially destabilizing market volatility. Thus, the 
Commission believes the contingency is satisfied.
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
changes are 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. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes between the Commission and any person, other than 
those that may 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 each 
Exchange. All submissions should refer to File No. SR-NYSE-98-01, SR-
AMEX-98-03, SR-BSE-98-01, SR-CHX-98-02, and SR-Phlx-98-02, and should 
be submitted by February 23, 1998.

VI. Conclusion

    For the foregoing reasons, the Commission believes the proposal by 
the Exchanges to revise their trading halt provisions are consistent 
with section 6(b)(5) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule changes (SR-NYSE-98-01, SR-Amex-98-03, 
SR-BSE-98-01, SR-CHX-98-02, and SR-Phlx-98-02) are approved and 
effective on February 1, 1998 until April 30, 1998.

    \18\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.3-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2459 Filed 1-30-98; 8:45 am]
BILLING CODE 8010-01-M