Federal Register / Vol. 63, No. 72 /Wednesday, April 15, 1998 / Notices 18477

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See 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).

4See 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’’).

5Amex 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’’).

6Phlx 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.

7On October 19, 1987, the Dow Jones Industrial

Average declined 22.6%.

8See 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.

10See 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).

11See 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.

12See 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.

(6) General

There are a number of matters which

are applicable to all, or a number, of the

areas noted above. These include

EDGAR, the Commission’s electronic

disclosure system, rulemaking

procedures, training and education of

staff examiners and analysts and sharing

of information.

The Commission and NASAA request

specific public comments and

recommendations on the abovementioned topics. Commenters should

focus on the agenda but may also

discuss or comment on other proposals

which would enhance uniformity in the

existing scheme of state and federal

regulation, while helping to maintain

high standards of investor protection.

By the Commission.

Dated: April 9, 1998.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–9883 Filed 4–14–98; 8:45 am]

BILLING CODE 8010–01–P

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.

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).

II. Background

Circuit breakers are coordinated crossmarket 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.

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 marketwide 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

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
18478 Federal Register / Vol. 63, No. 72 /Wednesday, April 15, 1998 / Notices

13See 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.

14All time references are to Eastern time.

15The 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 marketwide 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.

16The 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’’).

17For 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.

18All time references are to Eastern time.

19The 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.

20See 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.

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 onehalf 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.

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

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.

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.

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.
Federal Register / Vol. 63, No. 72 /Wednesday, April 15, 1998 / Notices 18479

21See supra note 4.

22 Id.

23See infra part V.

24See 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).

25As of March 30, 1998, a 350 and 550 point

decline in the Dow represented a percentage

decline of 3.99% and 6.26%, respectively.

26When 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.

28See Exchange Act Release No. 38221 (January

31, 1997), 62 FR 5871, 5875 (February 7, 1997).

29The 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.

30See Working Group on Financial Markets,

Interim Report of the Working Group on Financial

Markets, May 16, 1988.

31See supra note 17 (describing how the trigger

levels will be calculated).

32See supra note 16 (describing the methods by

which the NYSE will disseminate information

concerning the quarterly circuit breaker trigger

point levels).

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.

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.

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

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.

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
18480 Federal Register / Vol. 63, No. 72 /Wednesday, April 15, 1998 / Notices

33See 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.’’).

34See supra part III.

35See supra note 20.

36The 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.

37See CME Letter.

38See 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.

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.

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.

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 latein-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.

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

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.
Federal Register / Vol. 63, No. 72 /Wednesday, April 15, 1998 / Notices 18481

40See 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).

41 15 U.S.C. 78s(b)(2).

42 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See letter from James E. Buck, Senior Vice

President, NYSE, to Heather Seidel, Attorney,

Market Regulation, Commission, dated January 28,

1998. Amendment No. 1 clarified that there is no

relationship between the Exchange’s definition of

‘‘broadly-based’’ and other definitions of similar

terms under federal law. Amendment No. 1 also

states why the Exchange is amending Paragraph

312.03(a) of the Manual to substitute the word

‘‘material’’ for ‘‘essential.’’ Finally, Amendment No.

1 explains why the proposal amends Paragraph

312.04(c) to replace ‘‘affiliate’’ with ‘‘subsidiary.’’

4See Securities Exchange Act Release No. 39098

4See Securities Exchange Act Release No. 39098

(September 19, 1997) 62 FR 50979 (September 29,

1997). The September 1997 amendments to the

Policy and the current proposed amendments

resulted from a broad review of the Policy

conducted by the Exchange.

5The Commission recently amended its rules in

this area. See Rule 16b–3(d) under the Act, as

amended in Securities Exchange Act Release No.

37260 (May 31, 1996) 61 FR 30376 (June 14, 1996).

6Constituents also asked for more guidance on

the definition of a ‘‘broad-based’’ Plan.

7See note 14 and accompanying text.

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.

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,41 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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.42

Jonathan G. Katz,

Secretary.

[FR Doc. 98–10027 Filed 4–14–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39839; File No. SR–NYSE–

97–37]

Self-Regulatory Organizations; New

York Stock Exchange, Inc.: Order

Granting Approval to Proposed Rule

Change by the New York Stock

Exchange, Inc., Relating to

Shareholder Approval Policy

April 8, 1998.

I. Introduction

On December 23, 1997, the New York

Stock Exchange, Inc. (‘‘NYSE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission

(‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

modify its shareholder approval policy

(the ‘‘Policy’’), contained in Paragraphs

312.03 and 312.04 of the Exchange’s

Listed Company Manual (the

‘‘Manual’’), to provide greater flexibility

for listed companies to adopt stock

option and similar plans (‘‘Plans’’)

without shareholder approval. Notice of the proposed rule change

and Amendment No. 1 to the proposed

rule change,3 together with the

substance of the proposal, was

published for comment in Securities

Exchange Act Release No. 39659

(February 12, 1998), 63 FR 9036

(February 23, 1998). No comments were

received on the proposal.

II. Description

In September 1997, the Commission

approved amendments to the Policy

regarding related-party transactions and

private sales.4 The current proposed

rule change relates to that portion of the

Policy requiring shareholder approval of

certain Plans. Currently, the Policy

requires a listed company to seek

shareholder approval of all stock option

plans that are not ‘‘broadly-based’’ with

an exception for stock or options issued

as an inducement for employment to a

person not previously employed by the

company.

However, in light of recent changes to

the legal requirements governing

shareholder approval of Plans,5 and at

the urging of listed companies, the

Exchange reviewed the Policy with its

various constituents. According to the

Exchange, the consensus favored some

relaxation in the Policy, but not a total

repeal of the shareholder approval

requirement for Plans. Specifically, the

general view was to require shareholder

approval when there is the potential for

a material dilution of shareholder’s

equity, with the threshold based on the

cumulative dilution of an issuer’s nonbroad-based Plans, and not on a single

Plan.6 As a result, the NYSE has

proposed to amend Paragraph 312.03(a)

of the Policy to exempt from

shareholder approval non-broad-based

Plans in which: (1) No single officer or

director acquires more than one percent

of the shares of the issuer’s common

stock outstanding at the time the Plan is

adopted; and (2) the cumulative dilution

of all non-broad-based Plans of the

issuer does not exceed five percent of

the issuer’s common stock outstanding

at the time the Plan is adopted.

In addition, the Exchange has

proposed to define ‘‘broadly-based

Plan’’ in Paragraph 312.04(g).7 The

proposed definition generally would

require a review of a number of factors,

including, but not limited to, the

number of persons covered by the Plan