[Federal Register Volume 60, Number 239 (Wednesday, December 13, 1995)]
[Notices]
[Pages 64084-64086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30355]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36563; File No. SR-NASD-95-57]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval
of a Proposed Rule Change Relating to Policy Statement on Market
Closings
December 7, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 22, 1995, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the NASD. 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) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD proposes to amend its Policy Statement on Market Closings
(``Statement'' or ``Policy Statement''), adopted pursuant to Article
VII, Section 3 of the NASD By-Laws, to: (1) extend the expiration date
of the Statement to December 31, 1997; and (2) reflect regulatory
developments since the Statement was first adopted in 1988. The amended
Statement is as follows (additions are italicized; deletions are
bracketed):
NASD Board of Governors Policy Statement on Market Closing
September 20, 1988
Amended [insert date] 1995
In 1988, [T] the Board of Governors of the National Association of
Securities Dealers, Inc. [has] carefully considered the numerous
proposals resulting from the October 1987 market break including the
Report of the NASD Committee on the Quality of Markets and the
``circuit breaker'' proposal recommended by the President's Working
Group on Financial Markets. The Working Group proposal recommend[s]ed
that all U.S. markets for equity and equity-related products, i.e.,
stocks, individual stock options, and stock index options and futures,
halt trading for [one hour] certain specified periods if the Dow Jones
Industrial Average [(``DJIA'')] decline[s]d 250 points or 400 points
from its previous day's closing level [ and for two hours if the DJIA
declines 400 points]. The proposal also recommend[s]ed specific
reopening procedures and consistent index futures price limit
requirements. Subsequently, the major securities exchanges adopted the
recommendations of the Working Group as trading halt rules, with
uniform criteria established for the coordinated implementation of
trading halts across all equity and equity-related markets in the event
of extraordinary market movements. The exchanges have, from time-to-
time, considered amendments to such rules.
Having reviewed the [se numerous] original proposal[s] of the
Working Group, the trading halt rules adopted by the major securities
exchanges and any modifications thereto, the Board of Governors [has
adopted] reaffirms the position that is set forth below in this
Statement of Policy.
The Board notes that while progress has been made by the markets in
areas involving systems capacity, margin requirements and information
sharing, a
[[Page 64085]]
number of recommendations from the various proposals unfortunately have
not yet been either fully considered or actively pursued. The Board
believes that market closings are not the answer to the potential
danger of precipitous declines in market prices and that it is more
important to aggressively pursue other initiatives. Among these are:
1. Congress should vest regulatory authority for all equity
derivative instruments in the Securities and Exchange Commission.
2. Congress should give the Securities and Exchange Commission
authority to oversee the establishment of initial or maintenance margin
requirements by self-regulatory organizations for all equity
instruments. Relative margin levels for equities and equity derivative
instruments should be consistent across all market places.
3. The activities of clearing and settlement systems should be
coordinated across market places to reduce financial risk for all
participants. Clearing and settlement facilities for all equity
derivative instruments should be unified or linked as in the options
and securities markets.
4. An intermarket self-regulatory coordinating policy group (with
subgroups) composed of persons at the senior management level of all
self-regulatory organizations should be established to plan,
communicate and coordinate with each other in the surveillance,
financial, operational and technology areas and, acting with federal
regulators, to formulate contingency plans for market emergencies.
5. To the extent that legislation is needed to accomplish any of
these objectives, Congress should be urged by all securities industry
organizations to act promptly.
We believe implementation of these recommendations would provide a
more permanent and appropriate response to the events of October 1987
than would market closings based upon arbitrary formulae. They should
be adopted expeditiously. Because sufficient progress on all of these
matters has not yet occurred, the Board recognizes the need to consider
the Working Group's proposal on ``circuit breakers'' and the trading
halt rules adopted by the major securities exchanges as an interim
step.
The Board strongly believes that the Nation's securities markets
should remain open and operating during normal market hours whenever
possible. The Board is opposed in principle to the implementation of
``circuit breakers'' that mandate market closings on the basis of
arbitrary formulae. The Board supports the [current] practice whereby
individual market determine, after coordination with other markets and
federal regulators, whether to close based on the character of a
particular emergency situation.
The Board of Governors acknowledges that the risks imposed on any
single market remaining open while all other U.S. markets have halted
trading because of extraordinary price movements could be unacceptable.
The Board therefore has determined that, at times when other major
securities markets initiate market-wide trading halts in response to
extraordinary market conditions, the NASD will, upon request from the
Securities and Exchange Commission, act to halt domestic trading in all
securities quoted in [the NASDAQ system] The Nasdaq Stock Market and
domestic trading in equity or equity-related securities in the over-
the-counter market.
This Policy Statement on Market Closings shall be effective until
December 31, [1995] 1997 unless modified or extended prior thereto by
the Board of Governors.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD 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. The NASD 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
The Policy Statement is adopted as a stated policy of the NASD
under Article VII, Section 3 of the NASD By-Laws, which provides the
Association with the authority, acting through a designated committee
of the NASD Board of Governors, to take appropriate action in the event
of an emergency or extraordinary market conditions. Article VII,
Section 3 was adopted by the NASD as a result of the events of October
1987, and the provision was enacted to enable the NASD to respond to
future crises with a maximum degree of flexibility, providing properly
tailored responses to varying situations.\2\ As originally approved,
the Statement was to expire December 31, 1989, unless modified or
extended prior thereto by the NASD Board of Governors.\3\ The
expiration date of the Policy Statement has previously been extended a
number of times.\4\
\2\ Specifically, in its release approving Article VII, Section
3 of the NASD By-Laws, the Commission stated that ``the Commission
believes the proposal provides the NASD with the flexibility to deal
with extraordinary market conditions such as existed in October
1987.'' See Securities Exchange Act Release No. 26072 (September 12,
1988), 53 FR 36143.
\3\ Securities Exchange Release No. 26198 (October 19, 1988), 53
FR 41673.
\4\ Securities Exchange Act Release Nos. 27370 (October 23,
1989), 54 FR 43881 (approving File No. SR-NASD-89-46, extending
expiration date through December 31, 1990); 28694 (December 12,
1990), 55 FR 52119 (approving File No. SR-NASD-90-60, extending
expiration date through December 31, 1991); 30113 (December 20,
1991), 56 FR 67341 (File No. SR-NASD-91-70, extending expiration
date through January 31, 1992); 30304 (January 29, 1992), 57 FR 4658
(approving File No. SR-NASD-92-02, extending expiration date through
December 31, 1993); 33292 (December 6, 1993), 58 FR 65214 (approving
File No. SR-NASD-93-70, extending expiration date through December
31, 1994); and 35133 (December 21, 1994), 59 FR 67361 (approving
File No. SR-NASD-94-63, extending expiration date through December
31, 1995).
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Other groups, including the President's Working Group on Financial
Markets (the ``Working Group''), have proposed more specific, formulaic
responses to the events of October 1987. One such proposal is the
Working Group's proposal for ``circuit breakers.'' The Commission
requested the NASD to express its views on that proposal and the Policy
Statement was adopted in response to that request.
It should be noted that the Policy Statement expresses the views of
the NASD Board of Governors as of November 16, 1995 concerning progress
made on the numerous proposals emanating from the October 1987 crisis.
From time to time, the Board will review progress made on the
recommendations set forth in the Statement as well as other
developments as they may occur. The views of the Board may change and
the NASD may modify or amplify the Statement accordingly.
It also should be noted that the Policy Statement sets forth the
NASD's proposed response to a specific set of circumstances. The
Statement does not in any way preclude the NASD from taking any other
action that may be appropriate under other circumstances.
The NASD proposes to extend the expiration date of the Policy
Statement two years until December 31, 1997. The NASD also proposes to
make several minor modifications to the Policy Statement to reflect
regulatory developments since the Statement was
[[Page 64086]]
adopted in 1988. Given the growth of U.S. equity markets since 1988,
however, the NASD increasingly is concerned that circuit breakers may
be activated based on smaller percentage moves in the Dow Jones
Industrial Average (``DJIA'').\5\ Accordingly, it is the intention of
the NASD to reevaluate whether the 250- and 400-point thresholds
contained in the circuit breakers are appropriate. Nevertheless, the
NASD believes it is appropriate at this time to extend the
effectiveness of the Policy Statement.
\5\ Specifically, when the 250- and 400-point circuit breakers
were implemented in October 1988, a 250-point move in the DJIA was
approximately 11.7 percent of the Index and a 400-point move was
approximately 18.7 percent of the Index. However, given the
expansion and growth of U.S. equity markets since 1988, 250- and
400-point movements in the NASD now represent a much smaller
percentage move in the Index. Specifically, with the NASD at 5,000,
a 250-point move represents 5 percent of the Index and a 400-point
move represents 8 percent of the Index.
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The NASD believes the proposed rule change is consistent with
Section 15A(b)(6) of the Act. Section 15A(b)(6) requires that the rules
of a national securities association be 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 a national market system and, in general, to
protect investors and the public interest. Specifically, by extending
the effectiveness of the Policy Statement, market participants will be
afforded a reasonable opportunity to assess and rationally react to
extreme market conditions. In addition, extension of the Policy
Statement will help to ensure that circuit breakers are coordinated
across all equity and equity-related markets.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD 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, as amended.
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 NASD requests that the Commission find good cause to accelerate
the effectiveness of the proposed rule change pursuant to Section
19(b)(2) of the Act so that the effectiveness of the Policy Statement
can continue uninterrupted. The NASD notes that its other proposals to
extend the Statement have been subject to the full notice and comment
period and that the Commission has received no adverse comments on the
Statement. Accordingly, because the NASD believes that there are no
changes to the Policy Statement that would necessitate the solicitation
of public comment prior to Commission approval, because no adverse
comments have been received in response to prior extensions of the
Statement, and because the Policy will otherwise expire on December 31,
1995, the NASD requests that the Commission accelerate the
effectiveness of the proposed rule change prior to the 30th day after
its publication in the Federal Register.
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the NASD, and, in particular, the requirements
of Section 15A and the rules and regulations thereunder. Since the
Commission approved the NASD's proposal in 1988, the Dow Jones
Industrial Average has not experienced a one day market decline that
would trigger a market halt. Nevertheless, the Commission continues to
believe that circuit breaker procedures are desirable to deal with
potential strains that may develop during periods of extreme market
volatility, and accordingly, the Commission believes that the pilot
program should be extended. The Commission also believes that circuit
breakers represent a reasonable means to retard a rapid one day market
decline that could have a destabilizing effect on the nation's
financial markets and participants in these markets. Finally, the
Commission believes that the proposed changes to the Policy Statement
are minor and not of a nature to affect its operation.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register because there are no
material changes being made to the current provisions, which originally
were subject to the full notice and comment procedures, and accelerated
approval would enable Policy Statement to continue uninterrupted. The
Commission believes, therefore, that granting accelerated approval of
the proposed rule change is appropriate and consistent with Sections
15A and 19(b) of the Act.\6\
\6\ The Commission reaffirms its request that the NASD implement
its Policy Statement by implementing a trading halt as quickly as
practicable whenever the New York Stock Exchange and other equity
markets have suspended trading. See Securities Exchange Act Release
No. 27370, supra note 4.
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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 NW., Washington, DC 20549. Copies
of the submissions, 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 in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by January 3, 1996.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the proposed rule change (SR-NASD-95-57) is hereby
approved until December 31, 1997.
\7\ 17 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
\8\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30355 Filed 12-12-95; 8:45 am]
BILLING CODE 8010-01-M
