[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 56983-56985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28385]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37890; File Nos. SR-Amex-96-37, SR-NYSE-96-30, and SR-
Phlx-96-43]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the American
Stock Exchange, Inc., New York Exchange, Inc., and Philadelphia Stock
Exchange, Inc., Relating to an Extension of Certain Market-Wide Circuit
Breaker Provisions
October 29, 1996.
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 October 3, 1996, the American Stock Exchange, Inc.
(``Amex''); on October 15, 1996, the New York Stock Exchange, Inc.
(``NYSE''); and on October 22, 1996, the Philadelphia Stock Exchange,
Inc. (``Phlx'') respectively (each individually referred to herein as
an ``Exchange'' and to two or more collectively referred to as
``Exchanges'', filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule changes relating to the
extension of certain market-wide circuit breaker provisions as
described in Items I, II, and III below, which Items have been prepared
by the Exchanges. The Phlx submitted to the Commission Amendment No. 1
to its proposal on October 28, 1996. \3\ 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. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Phlx requested an extension of its
pilot program for a six month period ending on April 30, 1997,
rather than the one year period originally requested. See Letter
from Murray L. Ross, Secretary, Phlx, to Alton Harvey, Office Chief,
Office of Market Watch (``OMW''), Division of Market Regulation
(``Market Regulation''), Commission, dated October 28, 1996.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance
of the Proposed Rule Changes
The Exchanges propose to extend for six month (i.e., until April
30, 1997) their existing circuit breaker pilot programs which expire on
October 31, 1996.
II. Self-Regulatory Organizations' Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In their filing 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
In 1988, the Commission approved circuit breaker rule proposals by
the Exchanges;\4\ and in July, 1996, the Commission approved the first
major set of changes to the circuit breaker rules.\5\ To summarize, the
original circuit breaker rules provided that trading would halt for one
hour if the Dow Jones Industrial Average (``DJIA'') \6\ was to decline
250 points from its previous day's closing level and, thereafter,
trading would halt for an additional two hours if the DJIA declined 400
points from its previous day's close. Further, the original rules also
provided for the Exchanges to conduct an abbreviated reopening session
if the circuit breaker trigger levels were reached during the last
hour, but before the last half-hour of trading, or during the last two
hours, but before the last hour of trading. The original circuit
breaker proposals were approved on a pilot basis, and have
[[Page 56984]]
been extended annually on that basis since.\7\
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\4\ See Securities Exchange Act Release Nos. 26198 (October 19,
1988), 53 FR 41637 (Amex, Chicago Board Options Exchange,
Incorporated (``CBOE''), National Association of Securities Dealers
(``NASD'') and NYSE); 26218 (October 26, 1988), 53 FR 44137 (Chicago
Stock Exchange (``CHX'')); 26357 (December 14, 1988), 53 FR 51182
(Boston Stock Exchange (``BSE'')); 26368 (December 16, 1988), 53 FR
51942 Pacific Stock Exchange (``PSE'')); 26386 (December 22, 1988),
53 FR 52904 (Phlx); and 26440 (January 17, 1989), (Cincinnati Stock
Exchange (``CSE'')).
\5\ See Securities 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\ ``Dow Jones Industrial Average'' is a service mark of Dow
Jones & Company, Inc.
\7\ See supra note 4. The most recent extensions expire on
October 31, 1996 for the Amex, NYSE and Phlx, and on October 31,
1997 for the BSE and CHX. See Securities Exchange Act Release No.
36414 (Oct. 25, 1995) 60 FR 55630. The National Association of
Securities Dealers' (``NASD'') policy statement expires on December
31, 1997. See Securities Exchange Act Release No. 36563 (December 7,
1995), 60 FR 64084. The Commission approved on a permanent basis the
proposals by the CBOE, CSE, and PSE). See Securities Exchange Act
Release Nos. 26198 (October 19, 1988), 53 FR 41637 (CBOE); 26440
(January 10, 1989) 54 FR 1830 (CSE); and 26368 (December 16, 1988),
53 FR 51942 (PSE).
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In July of 1996, the Commission approved proposals by the Exchanges
to amend their circuit breaker rules to modify the time periods for
halting trading on the Exchanges when the DJIA has declined by 250 or
400 points.\8\ Now, if the DJIA declines by 250 points, trading will
halt for one-half hour, and if the DJIA declines further by 400 points,
trading will halt for one hour. Also, the Commission approved the
Exchanges eliminating references in their rules to using abbreviated
reopening procedures either to permit trading to reopen before the
scheduled closing, or to establish new last sales prices if trigger
values are reached during the last hour, but before the last half-hour
of trading, or during the last two hours, but before the last hour of
trading.\9\
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\8\ See supra note 5.
\9\ Id.
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The Exchanges believe that it is appropriate to extend their
respective circuit breaker pilot programs for at least another six
months. Although the Exchanges have not had to implement the circuit
breaker provisions subsequent to the revisions approved in July, 1996,
the Exchanges continue to believe that these revised time periods will
be sufficient to provide a meaningful ``time out'' for participants to
evaluate changing market conditions, without unduly constraining
trading activity. Accordingly, the Exchanges propose that an initial
extension of at least six months be granted to provide them with
additional time to continue appraising the effectiveness of the reduced
time periods for halting trading.
The Exchanges also represent that they will use the six-month
extension to review the adequacy of the current circuit breaker trigger
levels, which have remained the same 250/400 point level ever since the
pilot programs were first adopted in 1988.\10\ The Commission believes
that increases in the circuit breaker trigger levels to reflect current
market levels should be developed by the Exchanges as soon as possible.
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\10\ See supra note 4.
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2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) 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 protect 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 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 extending their circuit
breaker rules is consistent with these objectives in that the
additional time will provide market participants with a reasonable
opportunity to continue assessing the viability of the reduced time
periods in the event of a circuit breaker trading halt, and also, to
address the adequacy of the current circuit breaker trigger levels.
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 change.
C. Self-Regulatory Organizations' Statement on Comments on the Proposed
Rule Change 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 extensions to
circuit breaker rules prior to the 30th day after publication of the
proposed rule change in the Federal Register.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review of the Exchanges' proposed amendments to their
circuit breaker rules and for the reasons discussed below, the
Commission believes 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).\11\ Specifically, the Commission
believes the proposals are 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,
to prevent fraudulent and manipulative acts, and, in general, to
protect investors and the public interest.
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\11\ 15 U.S.C. 78f(b).
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In 1988, the Commission approved circuit breaker proposals by the
SROs as a coordinated mechanism to deal with potential strains that may
develop during periods of extreme market volatility.12 These
market-wide circuit breakers were intended to provide market
participants with an opportunity to reestablish an equilibrium between
buying and selling interest by providing a reasonable opportunity to
become aware of and respond to a sudden, potentially destabilizing
market decline. In approving these proposals, the Commission also noted
that an Interim Report of the Working Group on Financial Markets
(``Working Group'') 13 had recommended that in periods of rapid
market decline that threaten to create panic conditions, trading halts
and reopening procedures should be coordinated within the financial
market place.\14\ Specifically, the Working Group recommended that all
U.S. markets for equity and equity-related products--stocks, individual
stock options, stock index options, and stock index futures--halt
trading during such periods of market volatility.\15\ These
recommendations, in part, were in response to the events of October 19,
1987, when the DJIA declined over 22.6%. The futures exchanges also
adopted analogous trading halts to providecoordinated means to address
potentially destabilizing market volatility.\16\
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\12\ See supra note 4.
\13\ The Working Group on Financial Markets was established by
the President in March 1988 in response to the 1987 market break. It
consisted of the Under Secretary for Finance of the Department of
the Treasury and the Chairmen of the Commission, the Commodity
Futures Trading Commission, and the Board of Governors of the
Federal Reserve System. Its mandate was to determine the extent to
which coordinated regulatory action was necessary to strengthen the
nation's financial markets.
\14\ Id.
\15\ Id.
\16\ See Letter from Todd E. Petzel, Vice President, Financial
Research, Chicago Mercantile Exchange (``CME''), to Jean A. Webb,
Secretary, Commodity Futures Trading Commission (``CFTC''), dated
September 1, 1988. See also letters to Jean A. Webb, Secretary,
CFTC, from Paul J. Draths, Vice President and Secretary, Chicago
Board of Trade (``CBT''), dated July 29, 1988; Michael Braude,
President, Kansas City Board of Trade (``KCBT''), dated August 10,
1988; and Milton M. Stein, Vice President, Regulation and
Surveillance, New York Futures Exchange (``NYFE''), dated September
2, 1988.
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[[Page 56985]]
The Commission continues to believe that the market-wide trading
halt proposals are consistent with Section 6 of the Act \17\ in that
they are designed to remove impediments to, and perfect the mechanism
of, a free and open market, and to protect investors and the public
interest. In particular, the Commission believes that the circuit
breaker rules reflect an appropriate coordinated effort by the equities
and futures markets to halt trading for a brief period in all stocks,
stock options, stock index options, stock index futures, and options on
stock index futures when the equity market experiences a potentially
destabilizing intra-day decline. The Commission also believes that the
proposed extension of the circuit breaker rules by the Exchanges will
serve to maintain the coordinated approach that now exists for trading
halts that are applicable during large, rapid market declines.
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\17\ 15 U.S.C. 78f(b).
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While the Commission is approving the NYSE, Amex, and Phlx's
proposals today in order to maintain coordinated trading halt
procedures across all equity markets, the Commission continues to have
significant concerns that the levels for triggering the trading halts
need to be increased to reflect the market rise since the breakers'
inception. As the Commission noted when the rule changes shortening the
circuit breaker halts were adopted in July 1996,\18\ the 154% increase
in market levels since 1988 necessitates increases in the circuit
breaker trigger levels so as to prevent unnecessary application of the
breakers. The continued rise in the DJIA since July further reinforces
the Commission's concerns in this area. Specifically, when the circuit
breaker rules were adopted in 1988, the 250-point and 400-point
triggers represented one-day declines of 12% and 19%, respectively, in
the DJIA. At current market levels, these triggers represent declines
of only 4.1% and 6.6%, respectively.\19\ Thus, the maintenance of the
trigger levels at 250 and 400 points for eight years while the market
has risen substantially has acted to effectuate a significant de facto
diminution of the price movement that would cause a market-wide trading
halt.
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\18\ See supra note 5.
\19\ These figures are based on the DJIA close of 6094.23 on
October 18, 1996.
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The Commission has serious doubts whether a 4.1% decline warrants a
market-wide halt. In this regard, the Commission notes that the 1988
threshold of a 12% decline in the DJIA for the first trading halt has
been reached only once since 1945, during the 508-point (22.63%)
decline on October 19, 1987; whereas the current 4.1% threshold for the
first trading halt has been reached on 13 separate occasions since
1945.
The original intent of circuit breakers was to provide a brief
``timeout'' only during an extraordinary market decline. The Working
Group envisioned that the circuit breaker levels would be reevaluated
periodically and adjusted to reflect market levels.\20\ The Commission
strongly urges the markets to reach a consensus as soon as possible on
the size of increases in the current trigger levels required to ensure
that cross-market trading halts are imposed only during market declines
of historic proportions. Accordingly, the Commission is approving the
extensions of circuit breakers for only a six-month period, rather than
for a year as in the past. During the next six months, the Commission
expects that the markets will promptly reevaluate and adjust circuit
breaker trigger levels in order to prevent imposing cross-market
trading halts that are not justified by the overall magnitude of a
market decline. Moreover, the Commission expects the markets to provide
the Commission with their proposals for new trigger levels by February
3, 1997.
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\20\ See supra note 13.
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Nevertheless, in order to maintain the coordination of circuit
breaker procedures across the nation's stock, options, and futures
exchanges, the Commission has determined that it is appropriate to
approve the Exchanges' proposals to extend their current circuit
breaker rules for an additional six months. The Commission believes
that this extension will provide more than sufficient time for the
Exchanges to agree on the proper trigger levels and procedures under
prevailing market levels, as well as to submit proposals to the
Commission and for the Commission to act on the markets' proposals.
Accordingly, the Commission finds good cause for approving the
Exchanges' proposed rule changes prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal Register
because there are no changes being made to the current provisions which
were approved in July, 1996. Accelerated approval will enable the
circuit breaker pilots to continue on an uninterrupted basis, and
ensure continued coordination among the Exchanges. Due to the
importance of these circuit breakers for market confidence, soundness,
and integrity, it is necessary and appropriate that these procedures
continue uninterrupted. Therefore, the Commission believes that
granting accelerated approval of the proposed rule changes is
appropriate and consistent with Sections 6 and 19(b)(2) of the Act.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. 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-96-37, SR-NYSE-96-30, and
SR-Phlx-96-43 and should be submitted by November 26, 1996.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule changes (SR-Amex-96-37, SR-NYSE-96-30,
and SR-Phlx-96-43) are hereby approved until April 30, 1997.
\21\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 96-28385 Filed 11-4-96; 8:45 am]
BILLING CODE 8010-01-M
