[Federal Register Volume 85, Number 58 (Wednesday, March 25, 2020)]
[Notices]
[Pages 16971-16974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06189]
[[Page 16971]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88425; File No. SR-FINRA-2020-009]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend FINRA Rule 6121.02 (Market-Wide Circuit
Breakers in NMS Stocks)
March 19, 2020.
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 March 18, 2020, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. FINRA has designated
the proposed rule change as constituting a ``non-controversial'' rule
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which
renders the proposal effective upon receipt of this filing by the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 6121.02 (Market-wide Circuit
Breakers in NMS Stocks) concerning the resumption of trading following
a Level 3 market-wide circuit breaker halt.
The text of the proposed rule change is available on FINRA's
website at http://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA 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. FINRA 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
1. Purpose
FINRA proposes to amend Rule 6121.02 concerning the resumption of
trading following a Level 3 market-wide circuit breaker halt. FINRA is
proposing this rule change in conjunction with other self-regulatory
organizations (``SROs'').
Rule 6121.02 addresses the circumstances under which FINRA shall
halt, and subsequently resume, over-the-counter trading in all NMS
stocks due to extraordinary market volatility (i.e., market-wide
circuit breakers). The market-wide circuit breaker (``MWCB'') mechanism
under Rule 6121.02 was approved by the Commission to operate on a pilot
basis, the term of which was to coincide with the pilot period for the
Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of
Regulation NMS (the ``LULD Plan''),\4\ including any extensions to the
pilot period for the LULD Plan.\5\ Last year, the Commission approved
an amendment to the LULD Plan for it to operate on a permanent, rather
than pilot, basis.\6\ In light of the proposal to make the LULD Plan
permanent, FINRA amended Rule 6121.02 to untie the pilot's
effectiveness from that of the LULD Plan and to extend the pilot's
effectiveness to the close of business on October 18, 2019.\7\ FINRA
then filed a proposed rule change to extend the pilot for an additional
year to the close of business on October 18, 2020.\8\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down
Release''). The LULD Plan provides a mechanism to address
extraordinary market volatility in individual securities.
\5\ See Securities Exchange Act Release Nos. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (Order Approving File No. SR-
FINRA-2011-054); and 68778 (January 31, 2013), 78 FR 8668 (February
6, 2013) (Notice of Filing and Immediate Effectiveness of File No.
SR-FINRA-2013-011) (Proposed Rule Change to Delay the Operative Date
of FINRA Rule 6121.02).
\6\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving the Eighteenth
Amendment to the National Market System Plan To Address
Extraordinary Market Volatility).
\7\ See Securities Exchange Act Release No. 85547 (April 8,
2019), 84 FR 14981 (April 12, 2019) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2019-010).
\8\ See Securities Exchange Act Release No. 87078 (September 24,
2019), 84 FR 51669 (September 30, 2019) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA- 2019-023).
---------------------------------------------------------------------------
The market-wide circuit breaker under Rule 6121.02 provides an
important, automatic mechanism that is invoked to promote stability and
investor confidence during a period of significant stress when
securities markets experience extreme broad-based declines. FINRA and
the U.S. equity exchanges adopted uniform rules on a pilot basis
relating to market-wide circuit breakers in 2012 (``MWCB Rules''),
which are designed to slow the effects of extreme price movement
through coordinated trading halts across securities markets when severe
price declines reach levels that may exhaust market liquidity.\9\
Market-wide circuit breakers provide for trading halts in all equities
and options markets during a severe market decline as measured by a
single-day decline in the S&P 500 Index.
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129) (Notice of
Filing of Amendments No. 1 and Order Granting Accelerated Approval
of Proposed Rule Changes as Modified by Amendments No. 1, Relating
to Trading Halts Due to Extraordinary Market Volatility).
---------------------------------------------------------------------------
Pursuant to Rule 6121.02, a market-wide trading halt will be
triggered if the S&P 500 Index declines in price by specified
percentages from the prior day's closing price of that index.
Currently, the triggers are set at three circuit breaker thresholds: 7%
(Level 1), 13% (Level 2), and 20% (Level 3). A market decline that
triggers a Level 1 or Level 2 halt after 9:30 a.m. ET and before 3:25
p.m. ET would halt market-wide trading for 15 minutes, while a similar
market decline at or after 3:25 p.m. ET would not halt market-wide
trading. A market decline that triggers a Level 3 halt, at any time
during the trading day, would halt market-wide trading until the
primary listing market opens the next trading day.
Today, in the event that a Level 3 market decline occurs, trading
in exchange-listed stocks would be halted until the primary listing
market opens the next trading day. Upon feedback from industry
participants, FINRA has been working with other SROs to establish a
standardized approach for resuming trading in all NMS stocks following
a Level 3 halt. The proposed approach would allow for the opening of
all NMS stocks the next trading day after a Level 3 halt as a regular
trading day, and is designed to ensure that Level 3 MWCB events are
handled in a more consistent manner that is transparent for market
participants.\10\
---------------------------------------------------------------------------
\10\ Of note, the U.S. futures markets, which have similar rules
for coordinated MWCB halts, normally begin their ``next day''
trading session at 6:00 p.m. ET (for CFE and CME) or at 8:00 p.m. ET
(for ICE). If the U.S. futures markets amend their MWCB rules, as
needed, to allow for normal course trading following a Level 3 halt,
the futures markets would resume trading in their normal course at
6:00 p.m. ET (CFE and CME) or 8:00 p.m. ET (ICE) the same day as the
Level 3 halt.
Furthermore, there may be cross-market differences in how each
exchange currently opens the next day after a Level 3 MWCB halt. For
example, while some exchanges currently resume trading in listed
securities no differently from a regular trading day, other
exchanges may, for instance, conduct a halt auction process instead
of opening in the normal course under their respective rules. As
discussed later in this filing, the proposed changes will allow each
SRO to resume trading in all NMS stocks the next trading day
following a Level 3 halt no differently from a regular trading day.
---------------------------------------------------------------------------
[[Page 16972]]
As proposed, a Level 3 halt would end at the end of the trading day
on which it is declared. This proposed change would allow over-the-
counter trading in all NMS stocks to resume the next day no differently
from any other trading day. In other words, a member could resume
trading otherwise than on an exchange in any NMS stock on the day
following the Level 3 market wide circuit breaker, and would not need
to wait for the primary listing market to re-open trading in a security
before it could start trading such security, so long as the halt has
been lifted by the applicable securities information processor
(``SIP'').\11\
---------------------------------------------------------------------------
\11\ The SEC has approved a proposed rule change by NASDAQ to
permit NASDAQ to resume trading the day following a Level 3 market
decline as it would on any other trading day. See Securities
Exchange Act Release No. 88360 (March 11, 2020) (Order Approving
File No. SR-NASDAQ- 2020-003) (``Nasdaq Approval Order''). FINRA
anticipates that the other SROs also will file similar proposals to
amend their MWCB rules on the resumption of trading following Level
3 halts, and amend their rules, where required, to have their Level
3 next-day openings happen normally.
---------------------------------------------------------------------------
To effect this change, FINRA is amending Rule 6121.02 to delete the
language requiring that members wait until the primary listing exchange
opens the next trading day following a Level 3 market decline, and
specify that FINRA will halt trading otherwise than on an exchange in
all NMS stocks for the remainder of the trading day. The proposed rule
change would therefore allow each SRO to resume trading in all NMS
stocks the next trading day following a Level 3 halt as they normally
would. Members should ensure that they have policies and procedures in
place that address their resumption of over-the-counter trading in NMS
stocks following a Level 3 MWCB.
FINRA expects that the primary listing exchanges will facilitate
this change by sending resume messages to the applicable SIP to lift
the Level 3 trading halt message in all NMS stocks. The resumption
messages will be disseminated after the SIP has started on the next
trading day and before the start of the earliest pre-market trading
session of all exchanges. If a security is separately subject to a
regulatory halt that has not ended, FINRA expects that the primary
listing exchanges would replace the Level 3 halt message with the
applicable regulatory halt message.
Having a consistent approach for all NMS stocks will make the
opening process the day after a Level 3 halt more uniform and reduce
complexity, which FINRA believes is important after a significant
market event. Based on industry feedback, FINRA believes that opening
in the normal course for all NMS stocks will be more beneficial to the
marketplace. By allowing trading to resume after a Level 3 halt in all
NMS stocks no differently from any normal trading day under the
respective rules of each SRO, the proposed rule change would provide
greater certainty to the marketplace by ensuring a familiar experience
for all market participants that trade NMS stocks and balances out
potential concerns around volatility. While FINRA recognizes that the
impact of this proposal is to permit all NMS stocks to be traded during
time periods that do not have certain price protections for volatility
such as LULD Bands or MWCB protections, FINRA nonetheless believes that
this outcome is outweighed by the benefits provided by opening in a
manner that is more familiar to the marketplace. Moreover, allowing the
resumption of trading to occur as it would on any other trading day
will allow for price formation to occur earlier in the trading day,
which in turn allows market participants to react to news that has
developed. As such, trading at the beginning of regular hours may be
more orderly.
FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the SEC waive the requirement that
the proposed rule change not become operative for 30 days after the
date of the filing.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\12\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, 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. The market-wide
circuit breaker mechanism under Rule 6121.02 is an important, automatic
mechanism that is invoked to promote stability and investor confidence
during a period of significant stress when securities markets
experience extreme broad-based declines. FINRA believes that the
proposed rule change promotes just and equitable principles of trade in
that it promotes transparency and uniformity across markets concerning
when and how to halt trading in all stocks as a result of extraordinary
market volatility, and how the markets will resume trading following a
Level 3 market decline.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
As described above, FINRA together with other SROs, is seeking to
adopt a standardized approach related to resuming trading in NMS stocks
after a Level 3 MWCB halt. In this regard, FINRA believes that the
proposal to resume trading in all NMS stocks following a Level 3 halt
in the same manner that these securities would open trading on a
regular trading day will benefit investors, the national market system,
and FINRA members by promoting a fair and orderly market and reducing
confusion during a significant cross-market event. By allowing trading
to resume after a Level 3 halt in all NMS stocks no differently from
any normal trading day under the respective rules of each exchange, the
proposed rule change would provide greater certainty to the marketplace
by ensuring a familiar experience for all market participants that
trade NMS stocks.
Based on the foregoing, FINRA believes that the benefits to market
participants under the proposed revisions to Rule 6121.02 with the
proposed standardized process for resuming trading in all NMS stocks
following a Level 3 halt will promote fair and orderly markets, and
protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act because the proposed Level 3
rule change described above would standardize the opening process for
all NMS stocks, which would make the opening process the day after a
Level 3 halt more uniform and reduce complexity. Further, The Nasdaq
Stock Market LLC (``Nasdaq'') already amended its rules to adopt
amendments concerning the resumption of trading following a Level 3
MWCB to allow for the opening of all securities the next trading day
after a Level 3 halt
[[Page 16973]]
as a regular trading day.\13\ FINRA understands that the other SROs
will file similar proposals to adopt the proposed changes related to
resumptions following a Level 3 MWCB.
---------------------------------------------------------------------------
\13\ See Nasdaq Approval Order.
---------------------------------------------------------------------------
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the potential economic impacts, including anticipated
costs, benefits, and distributional and competitive effects, relative
to the current baseline, and the alternatives FINRA considered in
assessing how to best meet its regulatory objectives.\14\
---------------------------------------------------------------------------
\14\ FINRA believes an abbreviated economic impact assessment is
appropriate to facilitate the expedient adoption of consistent rules
regarding the resumption of trading in all NMS stocks following a
Level 3 market-wide circuit breaker.
---------------------------------------------------------------------------
Regulatory Objective
FINRA proposes to amend Rule 6121.02 concerning the resumption of
trading following a Level 3 market-wide circuit breaker halt. The
proposed rule change would allow each SRO to resume trading in all NMS
stocks the next trading day following a Level 3 halt as they normally
would, without requiring the primary listing market to first re-open
trading in a security.
Economic Baseline
The market-wide circuit breaker under Rule 6121.02 provides an
automatic mechanism that is invoked to promote stability and investor
confidence during a period of stress when securities markets experience
extreme broad-based declines. Market-wide circuit breakers provide for
trading halts in all equities and options markets during a severe
market decline as measured by a single-day decline in the S&P 500
Index.
Pursuant to Rule 6121.02, a market-wide trading halt will be
triggered if the S&P 500 Index declines in price by specified
percentages from the prior day's closing price of that index. A market
decline that triggers a Level 3 halt, defined as a 20% decline in price
from the prior day's closing price of the S&P 500 Index, currently
would halt market-wide trading until the primary listing market opens
the next trading day.
Over-the-counter trading in an NMS stock currently may start the
next trading day when its primary listing market opens the security.
Consequently, the opening process for NMS stocks after a Level 3 halt
is different from any other trading day that was not preceded by a
Level 3 MWCB. This adds to complexity the day after a Level 3 MWCB
halt.
Economic Impact
Having a consistent approach for all NMS stocks will make the
opening process the day after a Level 3 halt more uniform and reduce
complexity. FINRA recognizes that the proposed rule change would permit
all NMS stocks to be traded during time periods when certain price
protections for volatility such as LULD Bands or MWCB protections are
not in force. The absence of these protections may be mitigated because
the resumption of trading would occur as it would on any other trading
day, which permits price formation to occur earlier in the trading day,
and should allow market participants to more quickly react to news
events. As a result, trading at the beginning of regular hours may be
less volatile.
Alternatives
No further alternatives are under consideration.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\17\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b)(3)(A)(iii).
\16\ 17 CFR 240.19b-4(f)(6).
\17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Commission has waived the pre-filing requirement.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \18\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\19\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Commission notes that
it approved a substantively similarly proposed rule change submitted by
The Nasdaq Stock Market LLC.\20\ Waiver of the operative delay will
ensure consistency across the market centers and the timely
implementation of the proposed rule change. Accordingly, the Commission
waives the 30-day operative delay and designates the proposed rule
change operative upon filing.\21\
---------------------------------------------------------------------------
\18\ 17 CFR 240.19b-4(f)(6).
\19\ 17 CFR 240.19b-4(f)(6)(iii).
\20\ See Securities Exchange Act Release No. 88360 (March 11,
2020) (SR-NASDAQ-2020-03).
\21\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \22\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2020-009 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2020-009. This
file
[[Page 16974]]
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2020-009 and should be submitted on or before April 15, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06189 Filed 3-24-20; 8:45 am]
BILLING CODE 8011-01-P