[Federal Register Volume 63, Number 72 (Wednesday, April 15, 1998)]
[Notices]
[Pages 18477-18481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10027]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39846; File Nos. SR-NYSE-98-06; SR-Amex-98-09; BSE-98-
06; SR-CHX-98-08; SR-NASD-98-27; and SR-Phlx-98-15]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change by the New York Stock Exchange, Inc.; Order
Granting Approval of Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval of Amendment No. 1 Thereto by the
American Stock Exchange, Inc.; Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Changes by the Boston Stock
Exchange, Inc., Chicago Stock Exchange, Inc., and National Association
of Securities Dealers, Inc.; Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Change and Amendment No. 1
Thereto by the Philadelphia Stock Exchange, Inc.; Relating to
Modifications to the Market-Wide Circuit Breaker Provisions (``Trading
Halts Due to Extraordinary Market Volatility'')
April 9, 1998.
I. Introduction
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ the New
York Exchange, Inc. (``NYSE''), the American Stock Exchange, Inc.
(``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago
Stock Exchange, Inc. (``CHX''), the Philadelphia Stock Exchange, Inc.
(``Phlx'') (individually, ``Exchange'' and collectively,
``Exchanges''), and the National Association of Securities Dealers,
Inc. (``NASD''), submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), proposed rule changes relating to certain
market-wide circuit breaker provisions.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notices of the NYSE's and Amex's proposed rule changes were
published for comment in the Federal Register on February 23, 1998 and
February 27, 1998, respectively.\3\ Four comment letters were received
on the proposals.\4\ On April 1, 1998, Amex filed an amendment to the
proposed rule change.\5\ On April 6, 1998, Phlx also filed an amendment
to the proposed rule change.\6\ This order approves the proposed rule
changes of the NYSE and the Amex. This order also approves, on an
accelerated basis, Amex's amendment to the proposed rule change. As
discussed below, the Commission is also granting accelerated approval
of the proposed rule changes of the BSE, CHX, NASD, and Phlx (as
amended).
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\3\ See Exchange Act Release Nos. 39666 (February 13, 1998), 63
FR 9034 (February 23, 1998) (NYSE); 39689 (February 20, 1998), 63 FR
10054 (February 27, 1998) (Amex).
\4\ See letter to Kaye Williams, Congressional and Legislative
Affairs Commission, from Mark I. Klein (forwarded by Senator Diane
Feinstein), dated February 11, 1998 (``Klein Letter''). See letters
to Margaret H. McFarland, Deputy Secretary, Commission, from Options
Clearing Corporation, dated March 23, 1998 (``OCC Letter'') from
Chicago Board Options Exchange, Inc. (``CBOE''), dated March 23,
1998 (``CBOE Letter''). See letter to Kathryn Fulton, Congressional
and Legislative Affairs, Commission, from Charles Wayne Emerson
(forwarded by Senator Richard Shelby), dated February 18, 1998
(``Emerson Letter'').
\5\ Amex Amendment No. 1 corrects a spelling error in the text
of the proposed rule change. See Letter to Christine Richardson,
Division of Market Regulation, Commission, from Michael Cavalier,
Amex, dated April 1, 1998 (``Amex Amendment No. 1'').
\6\ Phlx Amendment No. 1 replaces the term ``below'' with the
term ``before'' in paragraph (a)(i) of the text of the proposed
rule. See Letter to Michael Walinskas, Division of Market
Regulation, Commission, from Carla J. Behnfeldt, Phlx, dated April
6, 1998.
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II. Background
Circuit breakers are coordinated cross-market trading halts that
are intended to help avoid systemic breakdown when a severe one-day
market drop of historic proportions prevents the financial markets from
operating in an orderly manner. A decade ago, the securities and
futures markets, in response to the most destabilizing U.S. market drop
in over half a century,\7\ introduced circuit breakers in order to
offer investors and the markets an opportunity to assess information
and positions when the markets experienced a severe, rapid decline.
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\7\ On October 19, 1987, the Dow Jones Industrial Average
declined 22.6%.
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In 1988, the Commission approved the Exchanges' circuit breaker
proposals, along with the NASD's circuit breaker policy statement.\8\
These rules provided for a one hour market-wide trading halt if the Dow
Jones Industrial Average (``Dow'') \9\ declined by 250 points from its
previous day's close, and a two hour halt if, on that same day, it fell
400 points. Amendments approved by the SEC in July 1996 reduced the
duration of the 250 and 400 points halts to one-half hour and one hour,
respectively.\10\ Amendments approved in January 1997 increased the
trigger values to 350 and 550 points.\11\ 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.\12\
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\8\ See Exchange Act Release No. 26198 (October 19, 1988), 53
FR41637 (NYSE, Amex, NASD, and CBOE).
\9\ ``Dow Jones Industrial Average'' is a service mark of Dow
Jones & Company, Inc.
\10\ 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).
\11\ 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 expired on January 31,
1998. See id. at 5874.
\12\ See letters to Jean A. Webb, Secretary, Commodity Futures
Trading Commission (``CFTC''), from Todd E. Petzel, Vice President,
Financial Research, Chicago Mercantile Exchange (``CME''), dated
September 1, 1988; from Paul J. Draths, Vice President and
Secretary, Chicago Board of Trade (``CBOT''), dated July 29, 1988;
from Milton M. Stein, Vice President, Regulation and Surveillance,
New York Future Exchange (``NYFE''), dated September 2, 1988; and
Michael Braude, President, Kansas City Board of Trade (``KCBT''),
dated August 10, 1988.
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On October 27, 1997, the Dow (and U.S. markets generally)
experienced a decline of 554 points, or 7.2%, to close at 7161.15. This
marked the first time circuit breakers were triggered since their
adoption. The first circuit breaker of one-half hour was triggered at
2:36
[[Page 18478]]
p.m. when the Dow declined 350 points from the previous day's closing
value. After the market reopened at 3:06 p.m., the Dow 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
p.m., within the last hour of trading, the market was closed for the
remainder of the day. It has been suggested that the triggering of the
circuit breakers on October 27, 1997, was needless at best, and
inappropriately halted trading. In addition, the circuit breakers' low
point value level, close proximity to each other, and the fact that the
second circuit breaker would close the market for the remainder of the
day, may have contributed to selling pressure after the first halt was
lifted. This triggering of the circuit breakers when the markets were
operating smoothly prompted the markets to re-evaluate the operation
and function of circuit breakers.
In January 1998, as a result of the events of October 27, 1997, the
Exchanges adopted interim changes to the circuit breaker rules.\13\
These changes provide, in part, that if the Dow falls 350 or more
points below its previous trading day's closing value, trading in all
stocks and equity-based options on the Exchanges will halt for one
half-hour, except that if the 350 or more point decline is reached at
or after 3:00 p.m.,\14\ there will be no halt in trading. Furthermore,
if, on the same day, the Dow drops 550 or more points from its previous
trading day's close, trading in all stocks and equity-based options on
the Exchanges will halt for one hour, except that if the 550 point
decline occurs after 2:00 p.m., but before 3:00 p.m., the halt will be
one-half hour instead of one hour. If, however, the 550 point drop
occurs at or after 3:00 p.m., the Exchanges and Nasdaq will close for
the remainder of the day. These interim changes were adopted only until
the markets could agree on modifications to raise significantly the
circuit breaker trigger levels. Subsequently, the markets agreed to the
proposal being approved today, which is described below.
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\13\ See Exchange Act Release No. 39582 (January 26, 1998), 63
FR 5408 (February 2, 1998) (order granting accelerated approval of
proposed rule changes by the NYSE, Amex, BSE, CHX, and Phlx). The
proposed rule changes became effective on February 2, 1998 and were
approved on a pilot basis until April 30, 1998. Although the NASD's
general policy statement concerning circuit breakers expired on
December 31, 1997, the NASD submitted a letter to the Commission
stating that it would continue to follow, upon request from the
Commission, a market-wide trading halt during the triggering of the
intermarket circuit breakers. See Letter to Howard L. Kramer, Senior
Associate Director, Office of Market Supervision, Division of Market
Regulation, Commission, from Richard Kecthum, Chief Operating
Officer and Executive Vice President, NASD, dated January 23, 1998.
\14\ All time references are to Eastern time.
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III. Description of the Proposal
Because the current circuit breaker provisions have been approved
only until April 30, 1998, and because there is a general consensus
among those in the securities industry that the current circuit breaker
trigger levels are too low and too close together, the Exchanges have
proposed to revise the levels to address these concerns.
The Exchanges \15\ propose to establish new circuit breaker trigger
levels for a one-day decline of 10%, 20% and 30% of the Dow, to be
calculated at the beginning of each calendar quarter, using the average
closing value of the Dow for the previous month to establish specific
point values for the quarter.\16\ Each trigger will be rounded to the
nearest 50 points.\17\
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\15\ The CBOE, Cincinnati Stock Exchange, Inc. (``CSE''), and
the Pacific Exchange, Inc. (``PCX'', formerly PSE) 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 Adam W. Gurwitz, Vice President Legal
and Corporate Secretary, CSE, dated March 9, 1998; from David P.
Semak, Vice President, Regulation, PCX, dated April 1, 1998; and
CBOE Letter supra note 4.
Because the NASD's policy statement has expired, it is filing a
proposed rule change to codify, in Interpretive material, on a two-
year pilot basis, the NASD's agreement to halt, upon SEC request,
all domestic trading in both securities listed on Nasdaq and all
equity and equity-related securities trading over-the-counter
market, should other major securities markets declare a market-wide
trading halt upon the triggering of the circuit breakers. See File
No. SR-NASD-98-27. The Commission notes that it has a standing
request with the NASD that the NASD halt trading as quickly as
practicable whenever the NYSE and other equity markets have
suspended trading. The Exchanges' and the NASD's proposed rule
filings do not affect the Commission's standing request.
\16\ The NYSE has stated that its Data and Statistics Department
will calculate the point values for the circuit breaker trigger
levels after the close of trading on the last day of the quarter.
The NYSE will disseminate the levels to the media that evening.
Before the opening on the next trading day, the NYSE's Floor
Operations Division will disseminate the new trigger levels via its
``hoot and holler system'' to all other U.S. market centers which
trade stocks, stock options, stock index options, stock index
futures and options on such futures, as well as to the SEC and CFTC.
The circuit breaker trigger levels also will be disseminated as a
message on the ticker tape and as a CMS broadcast to SuperDOT
subscribers. The NYSE's Market Surveillance Division also will issue
an Information Memorandum. See Letter to Michael Walinskas, Senior
Special Counsel, Division of Market Regulation, Commission, from
Agnes Gautier, Vice President, Market Surveillance, NYSE, dated
March 5, 1998 (``NYSE Letter'').
\17\ For example, if the average of the Dow closing values for
the previous month is 7700, 10% of such average would be 770; this
would be rounded to the nearest 50 points to create a circuit
breaker trigger level of 750. In addition, if a trigger level is
midway between two points, it will be rounded down, e.g., 825 would
be rounded to 800, and 875 would be rounded to 850. See id.
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Before 2:00 p.m.,\18\ the halt for a 10% decline will be one hour.
At or after 2:00 p.m. but before 2:30 p.m., the halt will be for one-
half hour. If the 10% trigger value is reached at or after 2:30 p.m.,
the market will not halt at the 10% level and will continue trading.
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\18\ All time references are to Eastern time.
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The halt for a 20% decline will be two hours if triggered before
1:00 p.m. At or after 1:00 p.m. but before 2:00 p.m., the halt will be
for one hour. If the 20% trigger value is reached at or after 2:00
p.m., trading will halt for the remainder of the day.\19\ If the market
declines by 30%, at any time, trading will be halted for the remainder
of the day.
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\19\ 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. The Commission currently is
evaluating this request.
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The futures exchanges trading stock index futures have proposed
substantively identical circuit breaker proposals with the CFTC to halt
trading in such contracts.\20\ As discussed further below, the CME's
proposal also would raise its daily price limit for the S&P 500 index
futures from 90 points to a maximum daily downward price limit of 20%.
Under the Exchanges' proposals, prior to 2:00 p.m., the securities
markets will be permitted to trade in the range of 20% to 30% down;
however, the CME's proposal will not permit the S&P 500 stock index
futures market to trade below 20% down. Furthermore, the CME's proposal
states that variation margin settlement values will be based on the
limit price, rather than on a price derived from the closing index
value. In other words, CME settlement values would be based on the 20%
limit price, regardless of the prices at which the underlying stocks
were trading at the close.
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\20\ See Letters to Jean A. Webb, Secretary, CFTC, from Richard
J. McDonald, Vice President, Research, CME, dated March 9, 1998
(``CME Letter''); from Paul J. Draths, Vice President and Secretary,
CBOT, dated March 13, 1998; from Jean Butler Furlan, Chief
Economist, NYFE, dated February 12, 1998; and from Jeff C.
Borchardt, Senior Vice President, KCBT, dated March 10, 1998 (``KCBT
Letter''). See infra part V.
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[[Page 18479]]
IV. Summary of Comments
The Commission received four comments on the Exchanges'
proposals.\21\ The Klein and Emerson Letters both opposed the
Exchanges' proposals to increase the circuit breaker trigger levels to
10%, 20% and 30%.\22\ The OCC Letter generally supported the Exchanges'
circuit breaker proposals except insofar as they would allow the market
to reopen following a 20% decline prior to 2:00 p.m. EST. The CBOE
Letter generally supported the proposals. Both the OCC and CBOE
Letters, however, expressed concern over the CME's rule change
proposal,\23\ noting features of the proposal that would result in less
than complete coordination among the stock, options and futures
markets.
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\21\ See supra note 4.
\22\ Id.
\23\ See infra part V.
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V. Commission Findings and Conclusions
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 both a national securities exchange and a national
securities association, and, in particular with the requirements of
Sections 6(b)(5), 11A(a)(1) and 15A(b)(6).\24\ The proposals are
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, to foster competition and coordination with
persons engaged in regulating securities, and to protect investors and
the public interest.
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\24\ See 15 U.S.C. 78f(b), 78k-1 and 78o-3. In approving this
rule change, the Commission notes that it has considered the
proposals' impact on efficiency, competition, and capital formation,
consistent with Section 3 of the Act. Id. at 78c(f).
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In general, the Commission believes that markets function best when
they are open and unencumbered by artificial constraints like circuit
breakers. For this reason, the Commission believes that mechanisms like
circuit breakers, which impede the natural functioning of markets,
should only be imposed in the most extreme circumstances. For circuit
breakers to be of any value, they should only be used on those rare
occasions when the market decline is of historic proportions and, as a
result, the markets and supporting technology face broad disorder.
Circuit breakers were meant from their inception to be triggered
only in truly extraordinary circumstances--i.e., a severe market
decline when the prices have dropped so dramatically that liquidity and
credit dry up, and when prices threaten to free fall. When the circuit
breakers initially were adopted in 1988, they were triggered by 250 and
400 point declines in the Dow, which at that time represented declines
of approximately 12% and 19%, respectively. As a result of the dramatic
increase in the Dow over the past decade, the present circuit breaker
levels of 350 and 550 points represent declines of only 4% and 6%.\25\
The likelihood has increased significantly that these existing circuit
breakers will trigger during less than extraordinary market declines.
In fact, the drop that occurred on October 27, 1997, did not represent
the type of extraordinary decline that circuit breakers were meant to
halt.\26\ When the circuit breakers were activated, the markets were
operating efficiently, and there was no threat of imminent market
breakdown. The Commission believes that the current circuit breakers
trigger levels of 350 and 550 are too low and too close together, and
have the potential to cause premature or unnecessary trading halts.\27\
Indeed, when the Commission approved the raising of circuit breakers
last year from 250/400 points to 350/550 points, it noted that such a
raise, while an improvement over existing levels, was insufficient and
that the markets would need to devise substantially higher trigger
levels.\28\
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\25\ As of March 30, 1998, a 350 and 550 point decline in the
Dow represented a percentage decline of 3.99% and 6.26%,
respectively.
\26\ When the 350-point trigger was reached on October 27, the
stock market was down only 4.54%, a level that had been reached on
11 previous days since 1945.
\27\ It has been suggested that, when the 350 point circuit
breaker was triggered on October 27, 1997, and the markets closed
for thirty minutes, upon the reopening, ``the existence of a second
trigger only 200 points lower produced a destabilizing
`gravitational pull,' motivating market participants to sell before
the second trigger was reached to avoid being locked into their
positions overnight.'' See OCC Letter, supra note 4; see also CBOE
Letter, supra note 4.
\28\ See Exchange Act Release No. 38221 (January 31, 1997), 62
FR 5871, 5875 (February 7, 1997).
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In considering the Exchanges' proposals to modify the circuit
breaker trigger levels, the Commission also has taken into account the
guidelines expressed by the Working Group on Financial Markets
(``Working Group'') when it originally recommended the adoption of
circuit breaker procedures in 1988.\29\ At that time, the Working
Group's Interim Report on Financial Markets stressed that the circuit
breaker trigger levels should be ``broad enough to be tripped only on
rare occasions, but * * * sufficient to support the ability of the
payments and credit systems to keep pace with extraordinarily large
market declines.'' \30\ The Working Group's report also cautioned that
the circuit breaker trigger levels should be reviewed by market
regulators periodically to reflect market levels and to adjust the
point-decline triggers to ensure that market-wide halts be imposed only
after extraordinary market declines.
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\29\ The Working Group on Financial Markets was established by
the President in March 1988 in response to the 1987 market break. It
consists of the Secretary of the Department of the Treasury and the
Chairmen of the Commission, the CFTC, and the Board of Governors of
the Federal Reserve System. Its mandate is to determine the extent
to which coordinated regulatory action is necessary to strengthen
the nation's financial markets.
\30\ See Working Group on Financial Markets, Interim Report of
the Working Group on Financial Markets, May 16, 1988.
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The Commission believes that the Exchanges' current proposals of
10%, 20% and 30% circuit breaker trigger levels reflect the type of
severe one-day market decline that circuit breakers are intended to
address. Over the past decade, the Dow has increased to the point where
the current circuit breaker trigger levels of 350 and 550 points no
longer represent a significant market decline. Thus, the Commission
believes that an increase in the circuit breaker trigger levels is
necessary and appropriate in order to prevent the markets from closing
as a result of a non-destabilizing decline. The Commission also
believes that not only will the Exchanges' proposals return circuit
breakers to levels consistent with their intended design and function,
but that the proposed levels of 10%, 20% and 30% should not cause
premature or unnecessary trading halts.
The Commission also believes that translating the 10%, 20% and 30%
circuit breaker trigger levels into point valuations, as well as
rounding each of the trigger point values to the nearest 50 points will
provide clarity to and a better comprehension of the quarterly circuit
breaker trigger levels to all market participants.\31\ The Commission
also finds satisfactory the methods by which the NYSE will disseminate
information concerning the quarterly circuit breaker trigger levels to
market participants and investors.\32\ The Commission believes that
these information dissemination procedures will ensure that all U.S.
market centers which trade stocks, stock options, stock
[[Page 18480]]
index options, stock index futures and options on such futures, the
SEC, the CFTC, and public investors are given notice of the new
quarterly circuit breaker trigger levels before the opening of trading
on the next trading day following the close of trading on the last day
of the quarter.
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\31\ See supra note 17 (describing how the trigger levels will
be calculated).
\32\ See supra note 16 (describing the methods by which the NYSE
will disseminate information concerning the quarterly circuit
breaker trigger point levels).
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As stated above, the Commission, in general, does not favor market
closings. The Commission believes that as long as the markets are
functioning efficiently, they should remain open. The Commission
realizes, however, that on those rare occasions of severe market
decline and systemic overload, it may be necessary to provide a short
pause for participants to reassess market conditions. The Commission
notes that providing a brief pause in trading was the original purpose
of circuit breakers. In order to achieve an orderly daily close and
permit completion of market activities in a fair way, the Commission
firmly believes that every attempt should be made to reopen the markets
after the triggering of a circuit breaker if it is triggered early in
the day.
The Commission notes that investors have come to rely on the
markets being open until 4:00 p.m., and make their investment decisions
on that basis. When an early close prevents investors from making their
trades, resulting investment decisions become colored by uncertainty.
Another concern is the uncertainty created for mutual funds in the
event of an early close due to a triggered circuit breaker. Investors
in mutual funds who place orders to redeem shares before 4:00 p.m.
generally will receive that day's net asset value for the fund shares.
When a circuit breaker closes trading for the day prematurely,
investors who place orders to redeem shares may not receive that day's
net asset value.\33\ In addition, an early close could be disruptive to
the unwinding of derivative-related index arbitrage positions.
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\33\ See also Letter to Arthur J. Levitt, Jr., Chairman,
Commission, from Matthew P. Fink, President, Investment Company
Institute, dated January 27, 1998 (``[C]losing the markets early
could be harmful to the over 60 million mutual fund shareholders who
have come to expect that the markets will close at 4:00 p.m., and
that orders placed up until that time will get that day's net asset
value.'').
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The Commission believes that the Exchanges' proposals sufficiently
address the need for the markets to remain open or to reopen during the
trading day so that an orderly market close can occur. More
specifically, the Exchanges' proposals strike a reasonable balance
between the need to halt trading temporarily during periods of
extraordinary market volatility with the need to provide for an open
market place for trading securities and an orderly market close. The
Commission notes that the current proposals also reflect a consensus
among the Exchanges and the NASD as to the late-in-the-day timing
mechanisms for the triggering of the circuit breakers. Overall, the
Commission believes that the proposed changes to the circuit breaker
procedures are appropriate to prevent the markets from closing for the
day absent significant and extraordinary declines.
The Exchanges' proposals are contingent on other markets adopting
substantively identical 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
to reflect the NYSE proposal or have agreed to comply with the
provisions of such programs.\34\ The futures exchange are also adopting
complementary trading halts to maintain the existing coordinated means
to address potentially destabilizing market volatility.\35\ The
Commission notes, however, that the CME's proposal does diverge from
the proposals of the securities markets and the other futures markets
in one manner.\36\ The CME's proposal calls for a 20% price limit to
remain in effect even after the equity markets have reopened following
a trading halt due to a 20% decline in the Dow.\37\ In other words, the
CME will not permit the futures prices to fall below 20%, whereas the
securities markets could drop to a maximum of 30% after reopening from
the 20% circuit breaker.
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\34\ See supra part III.
\35\ See supra note 20.
\36\ The KCBT's proposal is nearly identical to the CME's and,
therefore, also diverges from the proposals of the securities
markets and other futures markets. See KCBT Letter.
\37\ See CME Letter.
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The Commission believes that a similar difference currently exists
between the CME's rules and the securities markets and other futures
markets in that the CME will not permit S&P 500 futures to trade below
a total daily price limit of 90 S&P 500 points from the settlement
price of the preceding regular trading session. In other words, under
the CME's present rule, the securities markets potentially could reopen
and fall further after a 550 point drop that occurs prior to 3:00 p.m.,
while the S&P 500 futures could not fall further because the total
daily 90 point price limit in the S&P 500 futures still would remain in
effect. Despite this current difference, the Commission previously has
determined that the CME's current rule is substantively identical to
those of the securities markets and the other futures markets.\38\
Thus, the Commission believes that the CME's proposed rule change is
substantively identical to those of the securities market and other
futures markets for purposes of the effectiveness of other circuit
breaker rules.\39\
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\38\ See Exchange Act Release No. 39582 (January 26, 1998), 63
FR 5408 (February 2, 1998).
\39\ In making this determination, the Commission does not want
to imply that it supports the CME's price limit of 20%. Clearly, a
price limit of 30% would better align the CME's stock index futures
contracts with the stock and option markets.
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The CBOE and OCC Letters raise a valid issue of concern regarding
the CME's proposal to amend its margining procedures so that a stock
index future's daily variation margin payment is capped at 20%,
regardless of whether the underlying stock market has declined beyond
20%. This raises the possibility of a mismatch between the margin and
capital treatment of a stock index option position and its futures
hedge. The Commission urges the CME either to reconsider its proposal
to cap variation margin at 20% or to work out an alternative margining
procedure with the options exchanges. Nevertheless, because this issue
concerns margin payments rather than the decision to halt trading, as
well as the fact that the CME will permit its stock index futures to
decline to a virtually historic amount (20%), the Commission does not
believe that the CME's alternative proposal undermines the conclusion
that the CME's circuit breaker trading halt is substantively identical
to the securities markets' circuit breaker proposals.
The Commission finds good cause for approving Amex Amendment No. 1
to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register.
Amex Amendment No. 1 corrects a spelling error contained in the text of
the proposed rule and does not substantively modify the proposal.
Accordingly, the Commission believes that it is consistent with
Sections 6, 11A and 19(b) of the Act to approve Amex Amendment No. 1 on
an accelerated basis.
The Commission finds good cause for approving the proposed rule
changes by the BSE, CHX, NASD, and Phlx, as amended, prior to the
thirtieth day after the date of publication of notice of filing thereof
in the Federal Register. Specifically, the Commission notes that the
BSE's, CHX's, NASD's and Phlx's proposed rule changes are substantively
identical to those proposed by the NYSE and Amex. The BSE's, CHX's,
NASD's and Phlx's proposals raise no issues that are not raised by the
NYSE and Amex.
[[Page 18481]]
Additionally, the Commission notes that the NYSE and Amex proposal were
each published for a full notice and comment period in the Federal
Register.\40\ The Commission notes that Phlx Amendment No. 1 corrects a
typographical error in the text of the proposed rule and does not
substantively modify Phlx's proposal. The Commission believes that it
is important that the Exchanges' circuit breaker procedures be approved
simultaneously to preserve the existence of uniform market-wide circuit
breaker provisions. Accordingly, the Commission believes that it is
consistent with Sections 6, 11A, 15A and 91(b) of the Act to approve
the BSE's, CHX's, NASD's and Phlx's, as amended, proposed rule changes
on an accelerated basis.
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\40\ See Exchange Act Release Nos. 39666 (February 13, 1998), 63
FR 9034 (February 23, 1998) (SR-NYSE-98-06); 39689 (February 20,
1998), 63 FR 10054 (February 27, 1998) (SR-Amex-98-09).
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As part of the Commission's belief 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,
and to ensure continued market coordination, the Exchanges' proposals
will become effective simultaneously beginning on April 15, 1998.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the BSE, CHX, NASD and Phlx proposals; Amex
Amendment No. 1; and Phlx Amendment No. 1, 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 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 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 Exchange. All submissions should refer to File
Nos. SR-Amex-98-15; SR-BSE-98-03; SR-CHX-98-08; SR-NASD-98-27; and SR-
Phlx-98-15 and should be submitted by May 6, 1998.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\4\\1\ that the proposed rule changes (SR-NYSE-98-06; SR-Amex-98-
09; SR-BSE-98-03; SR-CHX-98-08; SR-NASD-98-27; and SR-Phlx-98-15) are
approved.
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\41\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-10027 Filed 4-14-98; 8:45 am]
BILLING CODE 8010-01-M