Document ID: SEC-2020-1690-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-10-21T04:00Z

[Federal Register Volume 85, Number 204 (Wednesday, October 21, 2020)]
[Notices]
[Pages 67072-67074]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23244]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90160; File No. SR-FINRA-2020-033]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Extend the Pilot Period Related to FINRA Rule 
6121.02 (Market-Wide Circuit Breakers in NMS Stocks)

October 13, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 8, 2020, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to extend the pilot period related to FINRA Rule 
6121.02 (Market-wide Circuit Breakers in NMS Stocks) until October 18, 
2021.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Rule 6121.02 addresses the circumstances under which FINRA shall 
halt trading in all NMS Stocks due to extraordinary market volatility 
(i.e., market-wide circuit breakers). The market-wide circuit breaker 
(``MWCB'') mechanism under Rule 6121.02 was approved by the Commission 
to operate on a pilot basis, the term of which was to coincide with the 
pilot period for the Plan to Address Extraordinary Market Volatility 
Pursuant to Rule 608 of Regulation NMS (the ``LULD Plan''),\4\ 
including any extensions to the pilot period for the LULD Plan.\5\ In 
April 2019, the Commission approved an amendment to the LULD Plan for 
it to operate on a permanent, rather than pilot, basis.\6\ In light of 
the proposal to make the LULD Plan permanent, FINRA amended Rule 
6121.02 to untie the pilot's effectiveness from that of the LULD Plan 
and to extend the pilot's effectiveness to the close of business on 
October 18, 2019.\7\ FINRA then further extended the pilot through 
October 18, 2020.\8\ FINRA now proposes to amend Rule 6121.02 to extend 
the pilot to the close of business on October 18, 2021. This filing 
does not propose any substantive or additional changes to Rule 6121.02.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down 
Release''). The LULD Plan provides a mechanism to address 
extraordinary market volatility in individual securities.
    \5\ See Securities Exchange Act Release Nos. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (Order Approving File No. SR-
FINRA-2011-054); and 68778 (January 31, 2013), 78 FR 8668 (February 
6, 2013) (Notice of Filing and Immediate Effectiveness of File No. 
SR-FINRA-2013-011) (Proposed Rule Change to Delay the Operative Date 
of FINRA Rule 6121.02).
    \6\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (Order Approving the Eighteenth 
Amendment to the National Market System Plan To Address 
Extraordinary Market Volatility).
    \7\ See Securities Exchange Act Release No. 85547 (April 8, 
2019), 84 FR 14981 (April 12, 2019) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2019-010).
    \8\ See Securities Exchange Act Release No. 87078 (September 24, 
2019), 84 FR 51669 (September 30, 2019) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2019-023).
---------------------------------------------------------------------------

    The market-wide circuit breaker under Rule 6121.02 provides an 
important, automatic mechanism that is invoked to promote stability and 
investor confidence during a period of significant stress when 
securities markets experience extreme broad-based declines. All U.S. 
equity exchanges and

[[Page 67073]]

FINRA adopted uniform rules on a pilot basis relating to market-wide 
circuit breakers in 2012 (``MWCB Rules''), which are designed to slow 
the effects of extreme price movement through coordinated trading halts 
across securities markets when severe price declines reach levels that 
may exhaust market liquidity.\9\ Market-wide circuit breakers provide 
for trading halts in all equities and options markets during a severe 
market decline as measured by a single-day decline in the S&P 500 
Index.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129) (Notice of 
Filing of Amendments No. 1 and Order Granting Accelerated Approval 
of Proposed Rule Changes as Modified by Amendments No. 1, Relating 
to Trading Halts Due to Extraordinary Market Volatility).
---------------------------------------------------------------------------

    Pursuant to Rule 6121.02, a market-wide trading halt will be 
triggered if the S&P 500 Index declines in price by specified 
percentages from the prior day's closing price of that index. 
Currently, the triggers are set at three circuit breaker thresholds: 7% 
(Level 1), 13% (Level 2), and 20% (Level 3). A market decline that 
triggers a Level 1 or Level 2 halt after 9:30 a.m. ET and before 3:25 
p.m. ET would halt market-wide trading for 15 minutes, while a similar 
market decline at or after 3:25 p.m. ET would not halt market-wide 
trading. If a Level 3 Market Decline occurs at any time during the 
trading day, FINRA shall halt trading otherwise than on an exchange in 
all NMS stocks for the remainder of the trading day.
    Since the MWCB pilot was last extended in October 2019, the MWCB 
mechanism has proven itself to be an effective tool for protecting 
markets through turbulent times. In the Spring of 2020, at the outset 
of the worldwide COVID-19 pandemic, U.S. equities markets experienced 
four MWCB Level 1 halts, on March 9, 12, 16, and 18, 2020. In each 
instance, the markets halted as intended upon a 7% drop in the S&P 500 
Index, and resumed as intended 15 minutes later.
    In response to these events, the previously-convened MWCB Taskforce 
(``Taskforce'') reviewed the March 2020 halts and considered whether 
any immediate changes to the MWCB mechanism should be made. The 
Taskforce, consisting of representatives from equities exchanges, 
futures exchanges, FINRA, broker-dealers, and other market 
participants, had been assembled in early 2020 to consider more 
generally potential changes to the MWCB mechanism. The Taskforce held 
ten meetings in the Spring and Summer of 2020 that were attended by 
Commission staff to consider, among other things: (1) Whether to retain 
the S&P 500 Index as the standard for measuring market declines; (2) 
whether halts that occur shortly after the 9:30 a.m. market open cause 
more harm than good; and (3) what additional testing of the MWCB 
mechanism should be done.
    After considering data and anecdotal reports of market 
participants' experiences during the March 2020 MWCB events, the 
Taskforce did not recommend immediate changes be made to the use of the 
S&P 500 Index as the reference price against which market declines are 
measured, or to the current MWCB mechanism which permits halts even 
shortly after the 9:30 a.m. market open. The Taskforce recommended 
creating a process for a backup reference price in the event that the 
S&P 500 Index becomes unavailable, and enhancing functional MWCB 
testing. The Taskforce also asked CME to consider modifying its rules 
to enter into a limit-down state in the futures pre-market after a 7% 
decline instead of 5%.
    On September 17, 2020, the Director of the Division of Trading and 
Markets requested that the equities exchanges and FINRA prepare a more 
complete study of the design and operation of the MWCB mechanism and 
the LULD Plan during the period of volatility in the Spring of 2020. 
Based on the results of that study, FINRA expects to work with the 
Commission, the other self-regulatory organizations (``SROs''), and 
market participants to determine if any additional changes to the MWCB 
mechanism should be made, including consideration of rules and 
procedures for the periodic testing of the MWCB mechanism with industry 
participants.
    In addition to the work of the Taskforce, FINRA and the other SROs 
moved forward in 2019 and 2020 with a plan to normalize their Day 2 
opening procedures after a Level 3 MWCB halt, such that trading would 
reopen on Day 2 as it would on any other trading day. FINRA filed a 
rule change to that effect in March 2020.\10\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 88425 (March 19, 
2020), 85 FR 16971 (March 25, 2020) (Notice of Filing and Immediate 
Effectiveness of SR-FINRA-2020-009).
---------------------------------------------------------------------------

    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days from the date 
of filing, so that FINRA can implement the proposed rule change 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The market-wide 
circuit breaker mechanism under Rule 6121.02 is an important, automatic 
mechanism that is invoked to promote stability and investor confidence 
during a period of significant stress when securities markets 
experience extreme broad-based declines. Extending the market-wide 
circuit breaker pilot under Rule 6121.02 for an additional year would 
ensure the continued, uninterrupted operation of a consistent mechanism 
to halt trading across the U.S. markets while FINRA and the other SROs 
study the design and operation of the MWCB mechanism and the LULD Plan 
during the period of volatility in the Spring of 2020. Based on the 
results of that study, FINRA expects to work with the Commission, the 
other SROs, and market participants to determine if any additional 
changes to the MWCB mechanism should be made, including consideration 
of rules and procedures for the periodic testing of the MWCB mechanism 
with industry participants.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA also believes that the proposed rule change promotes just and 
equitable principles of trade in that it promotes transparency and 
uniformity across markets concerning when and how to halt trading in 
all NMS stocks as a result of extraordinary market volatility. Based on 
the foregoing, FINRA believes the benefits to market participants from 
the MWCB under Rule 6121.02 should continue on a pilot basis because 
the MWCB will promote fair and orderly markets, and protect investors 
and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the proposal would 
ensure the continued, uninterrupted operation of a consistent mechanism 
to halt trading across the

[[Page 67074]]

U.S. markets while FINRA and the other SROs study the design and 
operation of the MWCB mechanism and the LULD Plan during the period of 
volatility in the Spring of 2020.
    Further, FINRA understands that other SROs will file proposals to 
extend their rules regarding the market-wide circuit breaker pilot. 
Thus, the proposed rule change will help to ensure consistency across 
market centers without implicating any competitive issues.

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

    FINRA has designated this rule filing as non-controversial under 
Section 19(b)(3)(A) \12\ of the Act and Rule 19b-4(f)(6) \13\ 
thereunder. Because the proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.\14\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ In addition, Rule 19b-4(f)(6)(iii) requires FINRA to give 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission has waived this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. FINRA has asked the 
Commission to waive the 30-day operative delay so that the proposal may 
become operative upon filing. Extending the pilot for an additional 
year will allow the uninterrupted operation of the existing pilot while 
FINRA, and the other SROs conduct a study of the MWCB mechanism in 
consultation with market participants and determine if any additional 
changes to the MWCB mechanism should be made, including consideration 
of rules and procedures for the periodic testing of the MWCB mechanism 
with industry participants. Therefore, the Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest. The Commission hereby designates the 
proposed rule change to be operative upon filing.\17\
---------------------------------------------------------------------------

    \15\ Id.
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2020-033 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2020-033. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2020-033 and should be submitted on or before November 12, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23244 Filed 10-20-20; 8:45 am]
BILLING CODE 8011-01-P