```
[Federal Register Volume 63, Number 72 (Wednesday, April 15, 1998)]
[Notices]
[Pages 18477-18481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10027]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39846; File Nos. SR-NYSE-98-06; SR-Amex-98-09; BSE-98-
06; SR-CHX-98-08; SR-NASD-98-27; and SR-Phlx-98-15]

Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the New York Stock Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 Thereto by the 
American Stock Exchange, Inc.; Notice of Filing and Order Granting 
Accelerated Approval of Proposed Rule Changes by the Boston Stock 
Exchange, Inc., Chicago Stock Exchange, Inc., and National Association 
of Securities Dealers, Inc.; Notice of Filing and Order Granting 
Accelerated Approval of Proposed Rule Change and Amendment No. 1 
Thereto by the Philadelphia Stock Exchange, Inc.; Relating to 
Modifications to the Market-Wide Circuit Breaker Provisions (``Trading 
Halts Due to Extraordinary Market Volatility'')

April 9, 1998.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ the New 
York Exchange, Inc. (``NYSE''), the American Stock Exchange, Inc. 
(``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago 
Stock Exchange, Inc. (``CHX''), the Philadelphia Stock Exchange, Inc. 
(``Phlx'') (individually, ``Exchange'' and collectively, 
``Exchanges''), and the National Association of Securities Dealers, 
Inc. (``NASD''), submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), proposed rule changes relating to certain 
market-wide circuit breaker provisions.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notices of the NYSE's and Amex's proposed rule changes were 
published for comment in the Federal Register on February 23, 1998 and 
February 27, 1998, respectively.\3\ Four comment letters were received 
on the proposals.\4\ On April 1, 1998, Amex filed an amendment to the 
proposed rule change.\5\ On April 6, 1998, Phlx also filed an amendment 
to the proposed rule change.\6\ This order approves the proposed rule 
changes of the NYSE and the Amex. This order also approves, on an 
accelerated basis, Amex's amendment to the proposed rule change. As 
discussed below, the Commission is also granting accelerated approval 
of the proposed rule changes of the BSE, CHX, NASD, and Phlx (as 
amended).
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    \3\ See Exchange Act Release Nos. 39666 (February 13, 1998), 63 
FR 9034 (February 23, 1998) (NYSE); 39689 (February 20, 1998), 63 FR 
10054 (February 27, 1998) (Amex).
    \4\ See letter to Kaye Williams, Congressional and Legislative 
Affairs Commission, from Mark I. Klein (forwarded by Senator Diane 
Feinstein), dated February 11, 1998 (``Klein Letter''). See letters 
to Margaret H. McFarland, Deputy Secretary, Commission, from Options 
Clearing Corporation, dated March 23, 1998 (``OCC Letter'') from 
Chicago Board Options Exchange, Inc. (``CBOE''), dated March 23, 
1998 (``CBOE Letter''). See letter to Kathryn Fulton, Congressional 
and Legislative Affairs, Commission, from Charles Wayne Emerson 
(forwarded by Senator Richard Shelby), dated February 18, 1998 
(``Emerson Letter'').
    \5\ Amex Amendment No. 1 corrects a spelling error in the text 
of the proposed rule change. See Letter to Christine Richardson, 
Division of Market Regulation, Commission, from Michael Cavalier, 
Amex, dated April 1, 1998 (``Amex Amendment No. 1'').
    \6\ Phlx Amendment No. 1 replaces the term ``below'' with the 
term ``before'' in paragraph (a)(i) of the text of the proposed 
rule. See Letter to Michael Walinskas, Division of Market 
Regulation, Commission, from Carla J. Behnfeldt, Phlx, dated April 
6, 1998.
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II. Background

    Circuit breakers are coordinated cross-market trading halts that 
are intended to help avoid systemic breakdown when a severe one-day 
market drop of historic proportions prevents the financial markets from 
operating in an orderly manner. A decade ago, the securities and 
futures markets, in response to the most destabilizing U.S. market drop 
in over half a century,\7\ introduced circuit breakers in order to 
offer investors and the markets an opportunity to assess information 
and positions when the markets experienced a severe, rapid decline.
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    \7\ On October 19, 1987, the Dow Jones Industrial Average 
declined 22.6%.
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    In 1988, the Commission approved the Exchanges' circuit breaker 
proposals, along with the NASD's circuit breaker policy statement.\8\ 
These rules provided for a one hour market-wide trading halt if the Dow 
Jones Industrial Average (``Dow'') \9\ declined by 250 points from its 
previous day's close, and a two hour halt if, on that same day, it fell 
400 points. Amendments approved by the SEC in July 1996 reduced the 
duration of the 250 and 400 points halts to one-half hour and one hour, 
respectively.\10\ Amendments approved in January 1997 increased the 
trigger values to 350 and 550 points.\11\ The Commission believed that 
the circuit breaker proposals would provide market participants with an 
opportunity during a severe market decline to reestablish an 
equilibrium between buying and selling interest in a more orderly 
fashion. The futures exchanges also adopted analogous trading halts to 
provide coordinated means to address potentially destabilizing market 
volatility.\12\
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    \8\ See Exchange Act Release No. 26198 (October 19, 1988), 53 
FR41637 (NYSE, Amex, NASD, and CBOE).
    \9\ ``Dow Jones Industrial Average'' is a service mark of Dow 
Jones & Company, Inc.
    \10\ See Exchange Act Release Nos. 37457 (July 19, 1996), 61 FR 
39176 (NYSE); 37458 (July 19, 1996), 61 FR 39167 (Amex); and 37459 
(July 19, 1996), 61 FR 39172 (BSE, CBOE, CHX, and Phlx).
    \11\ See Exchange Act Release No. 38221 (January 31, 1997), 62 
FR 5871 (February 7, 1997) (NYSE, Amex, CBOE, CHX, BSE, and Phlx). 
The Commission approved each of the Exchanges' revised circuit 
breaker rules on a one-year pilot basis which expired on January 31, 
1998. See id. at 5874.
    \12\ See letters to Jean A. Webb, Secretary, Commodity Futures 
Trading Commission (``CFTC''), from Todd E. Petzel, Vice President, 
Financial Research, Chicago Mercantile Exchange (``CME''), dated 
September 1, 1988; from Paul J. Draths, Vice President and 
Secretary, Chicago Board of Trade (``CBOT''), dated July 29, 1988; 
from Milton M. Stein, Vice President, Regulation and Surveillance, 
New York Future Exchange (``NYFE''), dated September 2, 1988; and 
Michael Braude, President, Kansas City Board of Trade (``KCBT''), 
dated August 10, 1988.
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    On October 27, 1997, the Dow (and U.S. markets generally) 
experienced a decline of 554 points, or 7.2%, to close at 7161.15. This 
marked the first time circuit breakers were triggered since their 
adoption. The first circuit breaker of one-half hour was triggered at 
2:36

[[Page 18478]]

p.m. when the Dow declined 350 points from the previous day's closing 
value. After the market reopened at 3:06 p.m., the Dow continued to 
decline another 200 points, triggering the second circuit breaker at 
3:30 p.m. Because the second circuit breaker was triggered at 3:30 
p.m., within the last hour of trading, the market was closed for the 
remainder of the day. It has been suggested that the triggering of the 
circuit breakers on October 27, 1997, was needless at best, and 
inappropriately halted trading. In addition, the circuit breakers' low 
point value level, close proximity to each other, and the fact that the 
second circuit breaker would close the market for the remainder of the 
day, may have contributed to selling pressure after the first halt was 
lifted. This triggering of the circuit breakers when the markets were 
operating smoothly prompted the markets to re-evaluate the operation 
and function of circuit breakers.
    In January 1998, as a result of the events of October 27, 1997, the 
Exchanges adopted interim changes to the circuit breaker rules.\13\ 
These changes provide, in part, that if the Dow falls 350 or more 
points below its previous trading day's closing value, trading in all 
stocks and equity-based options on the Exchanges will halt for one 
half-hour, except that if the 350 or more point decline is reached at 
or after 3:00 p.m.,\14\ there will be no halt in trading. Furthermore, 
if, on the same day, the Dow drops 550 or more points from its previous 
trading day's close, trading in all stocks and equity-based options on 
the Exchanges will halt for one hour, except that if the 550 point 
decline occurs after 2:00 p.m., but before 3:00 p.m., the halt will be 
one-half hour instead of one hour. If, however, the 550 point drop 
occurs at or after 3:00 p.m., the Exchanges and Nasdaq will close for 
the remainder of the day. These interim changes were adopted only until 
the markets could agree on modifications to raise significantly the 
circuit breaker trigger levels. Subsequently, the markets agreed to the 
proposal being approved today, which is described below.
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    \13\ See Exchange Act Release No. 39582 (January 26, 1998), 63 
FR 5408 (February 2, 1998) (order granting accelerated approval of 
proposed rule changes by the NYSE, Amex, BSE, CHX, and Phlx). The 
proposed rule changes became effective on February 2, 1998 and were 
approved on a pilot basis until April 30, 1998. Although the NASD's 
general policy statement concerning circuit breakers expired on 
December 31, 1997, the NASD submitted a letter to the Commission 
stating that it would continue to follow, upon request from the 
Commission, a market-wide trading halt during the triggering of the 
intermarket circuit breakers. See Letter to Howard L. Kramer, Senior 
Associate Director, Office of Market Supervision, Division of Market 
Regulation, Commission, from Richard Kecthum, Chief Operating 
Officer and Executive Vice President, NASD, dated January 23, 1998.
    \14\ All time references are to Eastern time.
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III. Description of the Proposal

    Because the current circuit breaker provisions have been approved 
only until April 30, 1998, and because there is a general consensus 
among those in the securities industry that the current circuit breaker 
trigger levels are too low and too close together, the Exchanges have 
proposed to revise the levels to address these concerns.
    The Exchanges \15\ propose to establish new circuit breaker trigger 
levels for a one-day decline of 10%, 20% and 30% of the Dow, to be 
calculated at the beginning of each calendar quarter, using the average 
closing value of the Dow for the previous month to establish specific 
point values for the quarter.\16\ Each trigger will be rounded to the 
nearest 50 points.\17\
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    \15\ The CBOE, Cincinnati Stock Exchange, Inc. (``CSE''), and 
the Pacific Exchange, Inc. (``PCX'', formerly PSE) have general 
rules that require them to halt trading during a triggering of the 
intermarket circuit breakers. Consequently, they do not need to file 
conforming rule changes because their circuit breaker halts will 
conform automatically to the halt periods adopted by the other 
exchanges. See Letters to Howard L. Kramer, Senior Associate 
Director, Office of Market Supervision, Division of Market 
Regulation, Commission, from Adam W. Gurwitz, Vice President Legal 
and Corporate Secretary, CSE, dated March 9, 1998; from David P. 
Semak, Vice President, Regulation, PCX, dated April 1, 1998; and 
CBOE Letter supra note 4.
    Because the NASD's policy statement has expired, it is filing a 
proposed rule change to codify, in Interpretive material, on a two-
year pilot basis, the NASD's agreement to halt, upon SEC request, 
all domestic trading in both securities listed on Nasdaq and all 
equity and equity-related securities trading over-the-counter 
market, should other major securities markets declare a market-wide 
trading halt upon the triggering of the circuit breakers. See File 
No. SR-NASD-98-27. The Commission notes that it has a standing 
request with the NASD that the NASD halt trading as quickly as 
practicable whenever the NYSE and other equity markets have 
suspended trading. The Exchanges' and the NASD's proposed rule 
filings do not affect the Commission's standing request.
    \16\ The NYSE has stated that its Data and Statistics Department 
will calculate the point values for the circuit breaker trigger 
levels after the close of trading on the last day of the quarter. 
The NYSE will disseminate the levels to the media that evening. 
Before the opening on the next trading day, the NYSE's Floor 
Operations Division will disseminate the new trigger levels via its 
``hoot and holler system'' to all other U.S. market centers which 
trade stocks, stock options, stock index options, stock index 
futures and options on such futures, as well as to the SEC and CFTC. 
The circuit breaker trigger levels also will be disseminated as a 
message on the ticker tape and as a CMS broadcast to SuperDOT 
subscribers. The NYSE's Market Surveillance Division also will issue 
an Information Memorandum. See Letter to Michael Walinskas, Senior 
Special Counsel, Division of Market Regulation, Commission, from 
Agnes Gautier, Vice President, Market Surveillance, NYSE, dated 
March 5, 1998 (``NYSE Letter'').
    \17\ For example, if the average of the Dow closing values for 
the previous month is 7700, 10% of such average would be 770; this 
would be rounded to the nearest 50 points to create a circuit 
breaker trigger level of 750. In addition, if a trigger level is 
midway between two points, it will be rounded down, e.g., 825 would 
be rounded to 800, and 875 would be rounded to 850. See id.
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    Before 2:00 p.m.,\18\ the halt for a 10% decline will be one hour. 
At or after 2:00 p.m. but before 2:30 p.m., the halt will be for one-
half hour. If the 10% trigger value is reached at or after 2:30 p.m., 
the market will not halt at the 10% level and will continue trading.
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    \18\ All time references are to Eastern time.
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    The halt for a 20% decline will be two hours if triggered before 
1:00 p.m. At or after 1:00 p.m. but before 2:00 p.m., the halt will be 
for one hour. If the 20% trigger value is reached at or after 2:00 
p.m., trading will halt for the remainder of the day.\19\ If the market 
declines by 30%, at any time, trading will be halted for the remainder 
of the day.
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    \19\ The NYSE has requested that the Commission extend the 
``safe harbor'' provisions of rule 10b-18 under the Exchange Act to 
cover corporate repurchases effected at the reopening on the day of 
the halt, during the last half-hour prior to the scheduled close of 
trading on the day of the halt, and at the next day's opening if the 
market-wide halt is in effect at the scheduled close of trading, 
provided that the other restrictions in Rule 10b-18 are met in the 
execution of any repurchase order. See Letter to Jonathan Katz, 
Secretary, Commission, from James E. Buck, Senior Vice President and 
Secretary, NYSE, dated January 8, 1998. The Commission currently is 
evaluating this request.
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    The futures exchanges trading stock index futures have proposed 
substantively identical circuit breaker proposals with the CFTC to halt 
trading in such contracts.\20\ As discussed further below, the CME's 
proposal also would raise its daily price limit for the S&P 500 index 
futures from 90 points to a maximum daily downward price limit of 20%. 
Under the Exchanges' proposals, prior to 2:00 p.m., the securities 
markets will be permitted to trade in the range of 20% to 30% down; 
however, the CME's proposal will not permit the S&P 500 stock index 
futures market to trade below 20% down. Furthermore, the CME's proposal 
states that variation margin settlement values will be based on the 
limit price, rather than on a price derived from the closing index 
value. In other words, CME settlement values would be based on the 20% 
limit price, regardless of the prices at which the underlying stocks 
were trading at the close.
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    \20\ See Letters to Jean A. Webb, Secretary, CFTC, from Richard 
J. McDonald, Vice President, Research, CME, dated March 9, 1998 
(``CME Letter''); from Paul J. Draths, Vice President and Secretary, 
CBOT, dated March 13, 1998; from Jean Butler Furlan, Chief 
Economist, NYFE, dated February 12, 1998; and from Jeff C. 
Borchardt, Senior Vice President, KCBT, dated March 10, 1998 (``KCBT 
Letter''). See infra part V.

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[[Page 18479]]

IV. Summary of Comments

    The Commission received four comments on the Exchanges' 
proposals.\21\ The Klein and Emerson Letters both opposed the 
Exchanges' proposals to increase the circuit breaker trigger levels to 
10%, 20% and 30%.\22\ The OCC Letter generally supported the Exchanges' 
circuit breaker proposals except insofar as they would allow the market 
to reopen following a 20% decline prior to 2:00 p.m. EST. The CBOE 
Letter generally supported the proposals. Both the OCC and CBOE 
Letters, however, expressed concern over the CME's rule change 
proposal,\23\ noting features of the proposal that would result in less 
than complete coordination among the stock, options and futures 
markets.
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    \21\ See supra note 4.
    \22\ Id.
    \23\ See infra part V.
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V. Commission Findings and Conclusions

    After careful review of the Exchanges' proposed amendments to the 
circuit breaker rules and for the reasons discussed below, the 
Commission finds that the proposed rule changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to both a national securities exchange and a national 
securities association, and, in particular with the requirements of 
Sections 6(b)(5), 11A(a)(1) and 15A(b)(6).\24\ The proposals are 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, to foster competition and coordination with 
persons engaged in regulating securities, and to protect investors and 
the public interest.
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    \24\ See 15 U.S.C. 78f(b), 78k-1 and 78o-3. In approving this 
rule change, the Commission notes that it has considered the 
proposals' impact on efficiency, competition, and capital formation, 
consistent with Section 3 of the Act. Id. at 78c(f).
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    In general, the Commission believes that markets function best when 
they are open and unencumbered by artificial constraints like circuit 
breakers. For this reason, the Commission believes that mechanisms like 
circuit breakers, which impede the natural functioning of markets, 
should only be imposed in the most extreme circumstances. For circuit 
breakers to be of any value, they should only be used on those rare 
occasions when the market decline is of historic proportions and, as a 
result, the markets and supporting technology face broad disorder.
    Circuit breakers were meant from their inception to be triggered 
only in truly extraordinary circumstances--i.e., a severe market 
decline when the prices have dropped so dramatically that liquidity and 
credit dry up, and when prices threaten to free fall. When the circuit 
breakers initially were adopted in 1988, they were triggered by 250 and 
400 point declines in the Dow, which at that time represented declines 
of approximately 12% and 19%, respectively. As a result of the dramatic 
increase in the Dow over the past decade, the present circuit breaker 
levels of 350 and 550 points represent declines of only 4% and 6%.\25\ 
The likelihood has increased significantly that these existing circuit 
breakers will trigger during less than extraordinary market declines. 
In fact, the drop that occurred on October 27, 1997, did not represent 
the type of extraordinary decline that circuit breakers were meant to 
halt.\26\ When the circuit breakers were activated, the markets were 
operating efficiently, and there was no threat of imminent market 
breakdown. The Commission believes that the current circuit breakers 
trigger levels of 350 and 550 are too low and too close together, and 
have the potential to cause premature or unnecessary trading halts.\27\ 
Indeed, when the Commission approved the raising of circuit breakers 
last year from 250/400 points to 350/550 points, it noted that such a 
raise, while an improvement over existing levels, was insufficient and 
that the markets would need to devise substantially higher trigger 
levels.\28\
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    \25\ As of March 30, 1998, a 350 and 550 point decline in the 
Dow represented a percentage decline of 3.99% and 6.26%, 
respectively.
    \26\ When the 350-point trigger was reached on October 27, the 
stock market was down only 4.54%, a level that had been reached on 
11 previous days since 1945.
    \27\ It has been suggested that, when the 350 point circuit 
breaker was triggered on October 27, 1997, and the markets closed 
for thirty minutes, upon the reopening, ``the existence of a second 
trigger only 200 points lower produced a destabilizing 
`gravitational pull,' motivating market participants to sell before 
the second trigger was reached to avoid being locked into their 
positions overnight.'' See OCC Letter, supra note 4; see also CBOE 
Letter, supra note 4.
    \28\ See Exchange Act Release No. 38221 (January 31, 1997), 62 
FR 5871, 5875 (February 7, 1997).
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    In considering the Exchanges' proposals to modify the circuit 
breaker trigger levels, the Commission also has taken into account the 
guidelines expressed by the Working Group on Financial Markets 
(``Working Group'') when it originally recommended the adoption of 
circuit breaker procedures in 1988.\29\ At that time, the Working 
Group's Interim Report on Financial Markets stressed that the circuit 
breaker trigger levels should be ``broad enough to be tripped only on 
rare occasions, but * * * sufficient to support the ability of the 
payments and credit systems to keep pace with extraordinarily large 
market declines.'' \30\ The Working Group's report also cautioned that 
the circuit breaker trigger levels should be reviewed by market 
regulators periodically to reflect market levels and to adjust the 
point-decline triggers to ensure that market-wide halts be imposed only 
after extraordinary market declines.
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    \29\ The Working Group on Financial Markets was established by 
the President in March 1988 in response to the 1987 market break. It 
consists of the Secretary of the Department of the Treasury and the 
Chairmen of the Commission, the CFTC, and the Board of Governors of 
the Federal Reserve System. Its mandate is to determine the extent 
to which coordinated regulatory action is necessary to strengthen 
the nation's financial markets.
    \30\ See Working Group on Financial Markets, Interim Report of 
the Working Group on Financial Markets, May 16, 1988.
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    The Commission believes that the Exchanges' current proposals of 
10%, 20% and 30% circuit breaker trigger levels reflect the type of 
severe one-day market decline that circuit breakers are intended to 
address. Over the past decade, the Dow has increased to the point where 
the current circuit breaker trigger levels of 350 and 550 points no 
longer represent a significant market decline. Thus, the Commission 
believes that an increase in the circuit breaker trigger levels is 
necessary and appropriate in order to prevent the markets from closing 
as a result of a non-destabilizing decline. The Commission also 
believes that not only will the Exchanges' proposals return circuit 
breakers to levels consistent with their intended design and function, 
but that the proposed levels of 10%, 20% and 30% should not cause 
premature or unnecessary trading halts.
    The Commission also believes that translating the 10%, 20% and 30% 
circuit breaker trigger levels into point valuations, as well as 
rounding each of the trigger point values to the nearest 50 points will 
provide clarity to and a better comprehension of the quarterly circuit 
breaker trigger levels to all market participants.\31\ The Commission 
also finds satisfactory the methods by which the NYSE will disseminate 
information concerning the quarterly circuit breaker trigger levels to 
market participants and investors.\32\ The Commission believes that 
these information dissemination procedures will ensure that all U.S. 
market centers which trade stocks, stock options, stock

[[Page 18480]]

index options, stock index futures and options on such futures, the 
SEC, the CFTC, and public investors are given notice of the new 
quarterly circuit breaker trigger levels before the opening of trading 
on the next trading day following the close of trading on the last day 
of the quarter.
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    \31\ See supra note 17 (describing how the trigger levels will 
be calculated).
    \32\ See supra note 16 (describing the methods by which the NYSE 
will disseminate information concerning the quarterly circuit 
breaker trigger point levels).
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    As stated above, the Commission, in general, does not favor market 
closings. The Commission believes that as long as the markets are 
functioning efficiently, they should remain open. The Commission 
realizes, however, that on those rare occasions of severe market 
decline and systemic overload, it may be necessary to provide a short 
pause for participants to reassess market conditions. The Commission 
notes that providing a brief pause in trading was the original purpose 
of circuit breakers. In order to achieve an orderly daily close and 
permit completion of market activities in a fair way, the Commission 
firmly believes that every attempt should be made to reopen the markets 
after the triggering of a circuit breaker if it is triggered early in 
the day.
    The Commission notes that investors have come to rely on the 
markets being open until 4:00 p.m., and make their investment decisions 
on that basis. When an early close prevents investors from making their 
trades, resulting investment decisions become colored by uncertainty. 
Another concern is the uncertainty created for mutual funds in the 
event of an early close due to a triggered circuit breaker. Investors 
in mutual funds who place orders to redeem shares before 4:00 p.m. 
generally will receive that day's net asset value for the fund shares. 
When a circuit breaker closes trading for the day prematurely, 
investors who place orders to redeem shares may not receive that day's 
net asset value.\33\ In addition, an early close could be disruptive to 
the unwinding of derivative-related index arbitrage positions.
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    \33\ See also Letter to Arthur J. Levitt, Jr., Chairman, 
Commission, from Matthew P. Fink, President, Investment Company 
Institute, dated January 27, 1998 (``[C]losing the markets early 
could be harmful to the over 60 million mutual fund shareholders who 
have come to expect that the markets will close at 4:00 p.m., and 
that orders placed up until that time will get that day's net asset 
value.'').
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    The Commission believes that the Exchanges' proposals sufficiently 
address the need for the markets to remain open or to reopen during the 
trading day so that an orderly market close can occur. More 
specifically, the Exchanges' proposals strike a reasonable balance 
between the need to halt trading temporarily during periods of 
extraordinary market volatility with the need to provide for an open 
market place for trading securities and an orderly market close. The 
Commission notes that the current proposals also reflect a consensus 
among the Exchanges and the NASD as to the late-in-the-day timing 
mechanisms for the triggering of the circuit breakers. Overall, the 
Commission believes that the proposed changes to the circuit breaker 
procedures are appropriate to prevent the markets from closing for the 
day absent significant and extraordinary declines.
    The Exchanges' proposals are contingent on other markets adopting 
substantively identical proposals. In this regard, the Commission notes 
that all of the existing U.S. stock and options exchanges, as well as 
the NASD, have either submitted revised circuit breaker pilot programs 
to reflect the NYSE proposal or have agreed to comply with the 
provisions of such programs.\34\ The futures exchange are also adopting 
complementary trading halts to maintain the existing coordinated means 
to address potentially destabilizing market volatility.\35\ The 
Commission notes, however, that the CME's proposal does diverge from 
the proposals of the securities markets and the other futures markets 
in one manner.\36\ The CME's proposal calls for a 20% price limit to 
remain in effect even after the equity markets have reopened following 
a trading halt due to a 20% decline in the Dow.\37\ In other words, the 
CME will not permit the futures prices to fall below 20%, whereas the 
securities markets could drop to a maximum of 30% after reopening from 
the 20% circuit breaker.
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    \34\ See supra part III.
    \35\ See supra note 20.
    \36\ The KCBT's proposal is nearly identical to the CME's and, 
therefore, also diverges from the proposals of the securities 
markets and other futures markets. See KCBT Letter.
    \37\ See CME Letter.
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    The Commission believes that a similar difference currently exists 
between the CME's rules and the securities markets and other futures 
markets in that the CME will not permit S&P 500 futures to trade below 
a total daily price limit of 90 S&P 500 points from the settlement 
price of the preceding regular trading session. In other words, under 
the CME's present rule, the securities markets potentially could reopen 
and fall further after a 550 point drop that occurs prior to 3:00 p.m., 
while the S&P 500 futures could not fall further because the total 
daily 90 point price limit in the S&P 500 futures still would remain in 
effect. Despite this current difference, the Commission previously has 
determined that the CME's current rule is substantively identical to 
those of the securities markets and the other futures markets.\38\ 
Thus, the Commission believes that the CME's proposed rule change is 
substantively identical to those of the securities market and other 
futures markets for purposes of the effectiveness of other circuit 
breaker rules.\39\
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    \38\ See Exchange Act Release No. 39582 (January 26, 1998), 63 
FR 5408 (February 2, 1998).
    \39\ In making this determination, the Commission does not want 
to imply that it supports the CME's price limit of 20%. Clearly, a 
price limit of 30% would better align the CME's stock index futures 
contracts with the stock and option markets.
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    The CBOE and OCC Letters raise a valid issue of concern regarding 
the CME's proposal to amend its margining procedures so that a stock 
index future's daily variation margin payment is capped at 20%, 
regardless of whether the underlying stock market has declined beyond 
20%. This raises the possibility of a mismatch between the margin and 
capital treatment of a stock index option position and its futures 
hedge. The Commission urges the CME either to reconsider its proposal 
to cap variation margin at 20% or to work out an alternative margining 
procedure with the options exchanges. Nevertheless, because this issue 
concerns margin payments rather than the decision to halt trading, as 
well as the fact that the CME will permit its stock index futures to 
decline to a virtually historic amount (20%), the Commission does not 
believe that the CME's alternative proposal undermines the conclusion 
that the CME's circuit breaker trading halt is substantively identical 
to the securities markets' circuit breaker proposals.
    The Commission finds good cause for approving Amex Amendment No. 1 
to the proposed rule change prior to the thirtieth day after the date 
of publication of notice of filing thereof in the Federal Register. 
Amex Amendment No. 1 corrects a spelling error contained in the text of 
the proposed rule and does not substantively modify the proposal. 
Accordingly, the Commission believes that it is consistent with 
Sections 6, 11A and 19(b) of the Act to approve Amex Amendment No. 1 on 
an accelerated basis.
    The Commission finds good cause for approving the proposed rule 
changes by the BSE, CHX, NASD, and Phlx, as amended, prior to the 
thirtieth day after the date of publication of notice of filing thereof 
in the Federal Register. Specifically, the Commission notes that the 
BSE's, CHX's, NASD's and Phlx's proposed rule changes are substantively 
identical to those proposed by the NYSE and Amex. The BSE's, CHX's, 
NASD's and Phlx's proposals raise no issues that are not raised by the 
NYSE and Amex.

[[Page 18481]]

Additionally, the Commission notes that the NYSE and Amex proposal were 
each published for a full notice and comment period in the Federal 
Register.\40\ The Commission notes that Phlx Amendment No. 1 corrects a 
typographical error in the text of the proposed rule and does not 
substantively modify Phlx's proposal. The Commission believes that it 
is important that the Exchanges' circuit breaker procedures be approved 
simultaneously to preserve the existence of uniform market-wide circuit 
breaker provisions. Accordingly, the Commission believes that it is 
consistent with Sections 6, 11A, 15A and 91(b) of the Act to approve 
the BSE's, CHX's, NASD's and Phlx's, as amended, proposed rule changes 
on an accelerated basis.
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    \40\ See Exchange Act Release Nos. 39666 (February 13, 1998), 63 
FR 9034 (February 23, 1998) (SR-NYSE-98-06); 39689 (February 20, 
1998), 63 FR 10054 (February 27, 1998) (SR-Amex-98-09).
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    As part of the Commission's belief that the circuit breaker 
mechanisms must be coordinated across the U.S. equity, futures and 
options markets to be effective in times of extreme market volatility, 
and to ensure continued market coordination, the Exchanges' proposals 
will become effective simultaneously beginning on April 15, 1998.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the BSE, CHX, NASD and Phlx proposals; Amex 
Amendment No. 1; and Phlx Amendment No. 1, including whether the 
proposed rule changes are consistent with the Act. Persons making 
written submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
Nos. SR-Amex-98-15; SR-BSE-98-03; SR-CHX-98-08; SR-NASD-98-27; and SR-
Phlx-98-15 and should be submitted by May 6, 1998.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\4\\1\ that the proposed rule changes (SR-NYSE-98-06; SR-Amex-98-
09; SR-BSE-98-03; SR-CHX-98-08; SR-NASD-98-27; and SR-Phlx-98-15) are 
approved.
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    \41\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-10027 Filed 4-14-98; 8:45 am]
BILLING CODE 8010-01-M
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