[Federal Register: August 30, 2001 (Volume 66, Number 169)]
[Proposed Rules]
[Page 45903-45919]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30au01-27]
[[Page 45903]]
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Part II
Commodity Futures Trading Commission
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17 CFR Part 41
Securities and Exchange Commission
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17 CFR Part 240
Cash Settlement and Regulatory Halt Requirements for Security Futures
Products; Proposed Rule
[[Page 45904]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 41
RIN 3038-AB86
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-44743; File No. S7-15-01]
RIN 3235-AI24
Cash Settlement and Regulatory Halt Requirements for Security
Futures Products
AGENCIES: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint Proposed Rule.
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SUMMARY: The Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC") (collectively
"Commissions") are proposing new rules under the Commodity Exchange
Act ("CEA") and the Securities Exchange Act of 1934 ("Exchange
Act") generally to provide that the listing standards of national
securities exchanges and national securities associations trading
security futures products establish a final settlement price for each
cash-settled security futures product that fairly reflects the opening
price of the underlying security or securities, and a halt in trading
in any security futures product when a regulatory halt is instituted by
the national securities exchange or national securities association
listing the security or securities underlying the security futures
product. The rules proposed today would set forth more specifically how
the exchange's or association's rules can satisfy the statutory
provisions of the Commodity Futures Modernization Act of 2000
("CFMA").
DATES: Comments must be received on or before October 1, 2001.
ADDRESSES: Comments should be sent to both agencies at the addresses
listed below.
CFTC: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington,
DC 20581, Attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521, or by e-mail to
[email protected]. Reference should be made to "Cash Settlement and
Regulatory Halt Requirements for Security Futures Products."
SEC: All comments concerning the rule proposal should be submitted
in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Comments
also may be submitted electronically at the following e-mail address:
[email protected]. All comment letters should refer to File No. S7-
15-01; this file number should be included on the subject line if e-
mail is used. Comment letters will be available for public inspection
and copying in the SEC's public reference room at the same address.
Electronically submitted comment letters will be posted on the SEC's
Internet web site (http://www.sec.gov). The SEC does not edit personal
identifying information, such as names or e-mail addresses, from
electronic submissions. Submit only the information you wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT:
CFTC: Richard A. Shilts, Acting Director, at (202) 418-5275; and
Thomas M. Leahy, Jr., Financial Instruments Unit Chief, at (202) 418-
5278, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW, Washington, DC 20581. E-mail: ([email protected])
or ([email protected]).
SEC: Alton Harvey, Office Head, at (202) 942-4167; Terri Evans,
Special Counsel, at (202) 942-4162; Michael Gaw, Special Counsel, at
(202) 942-0158; and Cyndi Nguyen, Attorney, at (202) 942-4163, Division
of Market Regulation, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION:
The Commissions today are requesting public comment on proposed
Rule 41.1,\1\ 41.25(a)(2),\2\ and 41.25(b)\3\ under the CEA and
proposed Rule 6h-1 under the Exchange Act,\4\ that generally provide
that the listing standards of national securities exchanges and
national securities associations trading security futures products
establish (i) a final settlement price for each cash-settled security
futures product that fairly reflects the opening price of the
underlying security or securities, and (ii) a halt in trading in any
security futures product when a regulatory halt is instituted by the
national securities exchange or national securities association listing
the security or securities underlying the security futures product.
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\1\ Proposed 17 CFR 41.1, hereinafter referred to as proposed
CFTC Rule 41.1.
\2\ Proposed 17 CFR 41.25(a)(2), hereinafter referred to as
proposed CFTC Rule 41.25(a)(2).
\3\ Proposed 17 CFR 41.25(b), hereinafter referred to as
proposed CFTC Rule 41.25(b).
\4\ Proposed 17 CFR 240.6h-1, hereinafter referred to as
proposed SEC Rule 6h-1.
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Table of Contents
I. Executive Summary
A. Settlement Prices for Cash-Settled Security Futures Products
B. Regulatory Halts
II. Discussion of Proposed Rulemaking
A. Staff Interpretive Guidance
B. Settlement Prices for Cash-Settled Security Futures Products
1. Prior Problems With Closing--Price Settlement Procedures
2. Requirements for Security Futures Products Using Cash
Settlement
a. Single-Stock Futures
b. Narrow-Based Security Index Futures
c. Exemption
d. Request for Comments Relating to Final Settlement Prices
C. Regulatory Halts
1. Background
a. News Pending Halts
b. Circuit Breaker Halts
2. Trading Halt Coordination in Security Futures Products
a. Trading Halt Coordination in Single-Stock Futures
b. Trading Halt Coordination in Narrow-Based Security Index
Futures
c. Request for Comments Relating to Trading Halts
III. Request for Comments
IV. Paperwork Reduction Act
V. Costs and Benefits of the Proposed Rulemaking
A. Benefits of Proposed SEC Rule 6h-1 Under the Exchange Act
B. Costs of Proposed SEC Rule 6h-1 Under the Exchange Act
C. Request for Comments
VI. Consideration of the Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
A. Settlement Prices for Cash-Settled Security Futures Products
1. Effects on Competition
2. Effects on Efficiency and Capital Formation
B. Trading Halts for Security Futures Products
1. Effects on Competition
2. Effects on Efficiency and Capital Formation
VII. Regulatory Flexibility Act
VIII. Statutory Basis and Text of Proposed Rule
I. Executive Summary
The CFMA \5\ authorizes the trading of futures on individual stocks
and narrow-based security indexes, and puts, calls, straddles, options,
or privileges thereon (collectively, "security futures products").\6\
The
[[Page 45905]]
CFMA defines security futures products as "securities" under the
Exchange Act,\7\ the Securities Act of 1933,\8\ the Investment Company
Act of 1940,\9\ and the Investment Advisers Act of 1940,\10\ and as
contracts of sale for future delivery of a single security or of a
narrow-based security index or options thereon under the CEA.\11\
Accordingly, the regulatory framework established by the CFMA for the
markets and intermediaries trading security futures products provides
the SEC and the CFTC with joint jurisdiction.
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\5\ Pub. L. No. 106-554, Appendix E, 114 Stat. 2763.
\6\ However, no person may offer to enter into, enter into, or
confirm the execution of any option on a security future for at
least three years after the enactment of the CFMA. See Section
2(a)(1)(D)(iii) of the CEA, 7 U.S.C. 2(a)(1)(D)(iii); Section
6(h)(6) of the Exchange Act, 15 U.S.C. 78f(h)(6).
\7\ See Section 3(a)(10) of the Exchange Act, 15 U.S.C.
78c(a)(10).
\8\ See Section 2(a)(1) of the Securities Act of 1933, 15 U.S.C.
77b(a)(1).
\9\ See Section 2(a)(36) of the Investment Company Act of 1940,
15 U.S.C. 80a-2(a)(36).
\10\ See Section 202(a)(18) of the Investment Advisers Act of
1940, 15 U.S.C. 80b-2(a)(18).
\11\ See Section 1a(31) of the CEA, 7 U.S.C. 1a(31).
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Under the Exchange Act, it is unlawful for any person to effect
transactions in security futures products that are not listed on a
national securities exchange \12\ or on a national securities
association registered pursuant to Section 15A(a) of the Exchange
Act.\13\ In addition, Section 6(h)(2) of the Exchange Act \14\ provides
that such an exchange or association may trade only those security
futures products that conform with listing standards filed by the
exchange or association with the SEC under Section 19(b) of the
Exchange Act \15\ and that meet certain criteria specified in Section
2(a)(1)(D)(i) of the CEA \16\ and the standards and conditions
enumerated in Section 6(h)(3) of the Exchange Act.\17\ In particular,
the CEA and the Exchange Act stipulate that the listing standards of an
exchange or association trading security futures products shall, among
other things, require that trading in the security futures product not
be readily susceptible to manipulation of the price of such security
futures product, nor to causing or being used in the manipulation of
the price of any underlying security or option thereon.\18\ In
addition, listing standards must require that the market on which the
security futures product trades has in place procedures to coordinate
trading halts between such market and any market on which any security
underlying the security futures product is traded and other markets on
which any related security is traded.\19\ The rule proposed today would
set forth more specifically how the exchange's or association's rules
can satisfy these statutory provisions.\20\
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\12\ Section 6(g) of the Exchange Act, 15 U.S.C. 78f(g), allows
a designated contract market under Section 5 of the CEA, 7 U.S.C. 7,
or a registered derivatives transaction execution facility under
Section 5a of the CEA, 7 U.S.C. 7a, to register as a national
securities exchange solely for the purpose of trading security
futures products ("Security Futures Product Exchange"). See
Securities Exchange Act Release No. 44692 (August 13, 2001), 66 FR
43721 (August 20, 2001) (adopting, in part, requirements for
designated contract markets and registered derivatives transaction
execution facilities to register as national securities exchanges).
By definition, the phrase "national securities exchange"
encompasses these notice-registered entities. For simplicity, this
rulemaking will refer to national securities exchanges and national
securities associations. But it should be noted that the CFTC's
rules govern designated contract markets and registered derivatives
transaction execution facilities, and therefore, the rule proposed
today by the CFTC contains language that differs from the rest of
this proposed rulemaking.
\13\ U.S.C. 78o-3(a). See Section 6(h)(1) of the Exchange Act,
15 U.S.C. 78f(h)(1). It should be noted that in an earlier release,
the SEC stated its belief that Section 6(h)(1) is designed to ensure
that a regulated national securities exchange or national securities
association establish terms for security futures products and
standards for the selection of underlying securities, consistent
with the Exchange Act's listing standard requirements. See
Securities Exchange Act Release No. 44434 (June 15, 2001), 66 FR
33283 (June 21, 2001) (order approving the Options Clearing
Corporation's ("OCC") proposed rule change allowing it to clear
transactions in security futures products effected on any national
securities exchange or association registered under Section 6(a) or
15A(a) of the Exchange Act or any designated contract market that is
registered as a national securities exchange under Section 6(g) of
the Exchange Act). Further, the SEC stated its belief that, as long
as the security futures products satisfy these requirements and the
coordinated surveillance and trading halt protections in Section
6(h)(5), they need not be cleared by OCC or any other specific
clearing organization. Id.
\14\ 15 U.S.C. 78f(h)(2).
\15\ 15 U.S.C. 78s(b).
\16\ 7 U.S.C. 2(a)(1)(D)(i).
\17\ 15 U.S.C. 78f(h)(3).
\18\ See Section 2(a)(1)(D)(i)(VII) of the CEA, 7 U.S.C.
2(a)(1)(D)(i)(VII); Section 6(h)(3)(H) of the Exchange Act, 15
U.S.C. 78f(h)(3)(H).
\19\ See Section 2(a)(1)(D)(i)(X) of the CEA, 7 U.S.C.
2(a)(1)(D)(i)(X); Section 6(h)(3)(K) of the Exchange Act, 15 U.S.C.
78f(h)(3)(K).
\20\ Section 9(b) of the Exchange Act states in part that "[i]t
shall be unlawful for any person to effect, by use of any facility
of a national securities exchange, in contravention of such rules
and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of
investors (1) any transaction in connection with any security
whereby any party to such transaction acquires * * * any security
futures product on the security; or (2) any transaction in
connection with any security with relation to which he has, directly
or indirectly, any interest in any * * * such security futures
product; or (3) any transaction in any security for the account of
any person who he has reason to believe has, and who actually has,
directly or indirectly, any interest in any * * * such security
futures product with relation to such security." 15 U.S.C. 78i(b).
In addition, Section 9(h)(1) of the Exchange Act states that "[i]t
shall be unlawful for any person * * * to use or employ any act or
practice in connection with the purchase or sale of any equity
security in contravention of such rules or regulations as the
Commission may adopt, consistent with the public interest, the
protection of investors, and the maintenance of fair and orderly
markets to prescribe means reasonably designed to prevent
manipulation of price levels of the equity securities market or a
substantial segment thereof." The SEC believes that the proposed
rule is necessary in the public interest, for the protection of
investors, and the maintenance of fair and orderly markets.
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A. Settlement Prices for Cash-Settled Security Futures Products
In the mid-1980s, the closing-price settlement procedures used by
cash-settled stock index futures and options \21\ often severely
strained the liquidity of the securities markets and raised concerns
that such liquidity constraints could provide opportunities for
manipulative or abusive trading practices. Consequently, markets
trading the most actively traded futures contracts and many stock index
option contracts moved to opening-price settlement procedures. To avert
similar liquidity constraints and to minimize opportunities for
manipulative and abusive trading practices, the Commissions
preliminarily believe that cash-settled security futures products
should be required to use opening-price settlement procedures.
Moreover, the Commissions preliminarily believe that opening-price
settlement procedures are consistent with the provisions of Section
2(a)(1)(D)(i)(VII) of the CEA \22\ and Section 6(h)(3)(H) of the
Exchange Act,\23\ because they would permit a national securities
exchange or a national securities association registered pursuant to
Section 15A(a) of the Exchange Act \24\ to trade only security futures
products that conform to listing standards that, among other things,
require that trading in a security futures product not be readily
susceptible to manipulation of the price of such product, nor to
causing or being used in the manipulation of the price of any
underlying security, option on such security, or option on a group or
index including such securities.\25\ Accordingly, proposed SEC Rule 6h-
1(b) and CFTC Rule 41.25(b)(1) would require that the final settlement
price of a cash-settled security futures product based on a single
security fairly reflect the opening price of the underlying security.
Similarly, proposed SEC Rule 6h-1(c) and CFTC Rule 41.25(b)(2) would
require that the final settlement price of a cash-settled security
futures product based on a narrow-based security index fairly reflect
the opening prices in the index's underlying
[[Page 45906]]
securities. The Commissions also are proposing that they may grant
exemptions to national securities exchanges or national securities
associations from such requirements.
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\21\ Index products are cash-settled, not physically settled.
\22\ 7 U.S.C. 2(a)(1)(D)(i)(VII).
\23\ 15 U.S.C. 78f(h)(3)(H).
\24\ 15 U.S.C. 78o-3(a).
\25\ See proposed SEC Rule 6h-1(f) and proposed CFTC Rule
41.25(b)(3), and infra discussion at Section II.B, Settlement Prices
for Cash-Settled Security Futures Products.
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B. Regulatory Halts
The securities markets have long-established procedures that
require cross-market trading halts in an equity security, related
equity securities, and related options whenever the market trading and
listing the equity security ("listing market") imposes a regulatory
halt in that security.\26\ The most common type of regulatory halt is
one that prevents trading in an equity security for a short time
(usually less than an hour) while material news about the security's
issuer is disseminated to investors. The markets coordinate cross-
market "news pending" regulatory halts to promote investor protection
and fair and orderly markets.\27\
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\26\ Cross-market halts are not required for non-regulatory
halts, such as when one market halts trading because of an imbalance
of buy and sell orders in a particular security or when trading is
disrupted on one market due to a problem in its systems or on its
trading floor.
\27\ See, e.g., infra note and accompanying text.
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The Commissions believe, therefore, that it would be appropriate
for news pending cross-market halt procedures to apply to security
futures products. The Commissions also believe that the application of
these procedures to security futures products is necessary to satisfy
the provisions of Section 2(a)(1)(D)(i)(X) of the CEA \28\ and Section
6(h)(3)(K) of the Exchange Act,\29\ which permit a national securities
exchange or a national securities association registered pursuant to
Section 15A(a) of the Exchange Act \30\ to trade only security futures
products that conform to listing standards that, among other things,
require procedures to "coordinate" trading halts between the listing
market for the underlying security and other markets that trade the
underlying security or any related security. The definition of
"regulatory halt" set forth in proposed SEC Rule 6h-1(a)(3) and CFTC
Rule 41.1(l) would include a delay, halt, or suspension of trading of a
security by the listing market as a result of pending news.\31\
Proposed SEC Rule 6h-1(d) and CFTC Rule 41.25(a)(2)(i) would require
that trading on a security futures product based on a single security
be halted at all times that such a news pending regulatory halt has
been instituted by the listing market for the underlying security.
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\28\ 7 U.S.C. 2(a)(1)(D)(i)(X).
\29\ 15 U.S.C. 78f(h)(3)(K).
\30\ 15 U.S.C. 78o-3(a).
\31\ Under the proposed rule, a pending news regulatory halt
includes halts that are the result of a determination that there are
matters relating to the security or issuer that have not been
adequately disclosed to the public, or that there are regulatory
problems relating to the security which should be clarified before
trading is permitted to continue. See proposed SEC Rule 6h-1(a)(3)
and proposed CFTC Rule 41.1(l).
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The other type of regulatory halt currently used by the securities
markets involves "circuit breaker" procedures.\32\ Since October
1988, the stock, options, and index futures markets have had in place
circuit breaker procedures that would impose brief cross-market trading
halts at predetermined thresholds during a severe market decline. The
coordinated cross-market trading halts provided by circuit breaker
procedures are designed to operate only during significant market
declines and to substitute orderly, pre-planned halts for the ad hoc
and destabilizing halts that can occur when market liquidity is
exhausted. The circuit breakers also protect investors and the markets
by providing opportunities for markets and market participants to
assess market conditions and potential systemic stress during a
historic market decline.\33\ In approving the original circuit breakers
proposed by the securities markets, the SEC noted that the circuit
breakers were not an attempt to prevent markets from reaching new price
levels, but an effort by the securities and futures markets to arrive
at a coordinated means to address potentially destabilizing market
volatility of the severity of the October 1987 market break.\34\
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\32\ See infra notes 77 and 78 and accompanying text.
\33\ See Circuit Breaker Report by the Staff of the President's
Working Group on Financial Markets dated August 18, 1998 ("Circuit
Breaker Report").
\34\ See Securities Exchange Act Release No. 26198 (October 19,
1988), 53 FR 41637 (October 24, 1988).
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For these same reasons, the Commissions believe that it is
important to require the application of cross-market circuit breaker
regulatory halt procedures to security futures products. Moreover, the
Commissions believe that such a requirement is necessary to satisfy the
requirements of Section 2(a)(1)(D)(i)(X) of the CEA\35\ and Section
6(h)(3)(K) of the Exchange Act.\36\ If cross-market circuit breaker
regulatory halt procedures were not applied to the security futures
products, such a failure would undermine the use of a trading halt in
the underlying securities. The definition of "regulatory halt" set
forth in proposed SEC Rule 6h-1(a)(3) and CFTC Rule 41.1(l), therefore,
would include a delay, halt, or suspension of trading of a security by
the listing market as a result of the operation of circuit breaker
procedures to halt or suspend trading in all equity securities trading
on the listing market. Proposed SEC Rule 6h-1(d) and CFTC Rule
41.25(a)(2)(i) would require that trading on a security futures product
based on a single security be halted at all times that such a circuit
breaker regulatory halt has been instituted by the listing market for
the underlying security.
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\35\ 7 U.S.C. 2(a)(1)(D)(i)(X).
\36\ 15 U.S.C. 78f(h)(3)(K).
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Index futures and options also have been subject to the markets'
circuit breaker procedures since their adoption in 1988.\37\ In view of
the broad-based indexes underlying current futures and options,
however, these products generally have not been subject to news pending
regulatory halts in the underlying securities. Nevertheless, the
Commissions believe that, under some circumstances, trading should be
halted in a security futures product based on a narrow-based security
index when a substantial portion of the underlying securities is halted
due to circuit breaker or news pending regulatory halts. Proposed SEC
Rule 6h-1(e) and CFTC Rule 41.25(a)(2)(ii), therefore, would require
that trading on a security futures product based on a narrow-based
security index be halted at all times that news pending or circuit
breaker regulatory halts have been instituted for one or more
underlying securities that constitute 30 percent or more of the market
capitalization of the narrow-based security index.\38\
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\37\ See Circuit Breaker Report, supra note.
\38\ For a further discussion of the 30 percent threshold, see
infra discussion at Section II.C.2(b), Trading Halt Coordination in
Narrow-Based Security Index Futures.
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II. Discussion of Proposed Rulemaking
Before a national securities exchange or national securities
association lists or trades security futures products, it is required
to file, pursuant to Section 19(b) of the Exchange Act,\39\ a proposed
rule change with the SEC establishing listing standards that comply
with Section 6(h)(3) of the Exchange Act.\40\ Generally, a national
securities exchange registered under Section 6(a) of the Exchange Act
\41\ or a national securities association registered under Section
15A(a) of the Exchange Act \42\ must file proposed rule changes with
the SEC pursuant to Section 19(b)(1) of the Exchange Act \43\ for
notice, comment, and SEC approval, prior to implementation, unless the
rule is otherwise permitted to become effective pursuant to Section
19(b)(3) of the
[[Page 45907]]
Exchange Act.\44\ A Security Futures Product Exchange \45\ or a
national securities association registered under Section 15A(k) of the
Exchange Act \46\ must generally submit, pursuant to Section 19(b)(7)
of the Exchange Act,\47\ proposed rule changes relating to certain
enumerated matters, including listing standards.
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\39\ 15 U.S.C. 78s(b).
\40\ 15 U.S.C. 78f(h)(3).
\41\ 15 U.S.C. 78f(a).
\42\ 15 U.S.C. 78o-3(a).
\43\ 15 U.S.C. 78s(b)(1).
\44\ 15 U.S.C. 78s(b)(3).
\45\ See supra note 12.
\46\ 15 U.S.C. 78o-3(k).
\47\ 15 U.S.C. 78s(b)(7).
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A. Staff Interpretive Guidance
Section 2(a)(1)(D)(i) of the CEA and Section 6(h)(3) of the
Exchange Act enumerate the standards and conditions that these listing
standards must meet.\48\ The rule being proposed today would identify
certain requirements that the Commissions believe are necessary to
satisfy these provisions. Because national securities exchanges and
national securities associations may desire to begin trading security
futures products prior to the Commissions taking final action on the
proposed rule, the SEC staff believes that a proposed rule change filed
by a national securities exchange registered under Section 6(a) of the
Exchange Act \49\ or a national securities association registered
pursuant to Section 15A(a) of the Exchange Act \50\ regarding listing
standards for security futures products would satisfy, in part, the
criteria enumerated in Section 6(h)(3)(H) and (K) of the Exchange Act
\51\ if such listing standards conformed to the proposed rule.
Therefore, until such time as the SEC acts on proposed SEC Rule 6h-1,
if those proposed listing standards are consistent with proposed SEC
Rule 6h-1, the SEC staff would recommend to the SEC that it approve
proposed rules to establish listing standards filed by national
securities exchanges and national securities associations and would not
recommend to the SEC that it abrogate proposed rules to establish
listing standards filed by Security Futures Product Exchanges.\52\ If,
after receiving comment on their proposal, the Commissions determine to
adopt a rule that is different from that proposed today, or to not
adopt a rule, exchanges and associations would be free, or may be
required, to propose changes to their listing standards.
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\48\ Section 2(a)(1)(D)(i) of the CEA, 7 U.S.C. 2(a)(1)(D)(i);
Section 6(h)(3) of the Exchange Act, 15 U.S.C. 78f(h)(3).
\49\ 15 U.S.C. 78f(a).
\50\ 15 U.S.C. 78o-3(a).
\51\ 15 U.S.C. 78f(h)(3)(H) and (K).
\52\ See supra note 12.
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B. Settlement Prices for Cash-Settled Security Futures Products
1. Prior Problems With Closing-Price Settlement Procedures
All currently traded index futures and options are cash-settled.
When stock index futures and options began trading in the mid-1980s,
virtually all of these products used closing-price settlement
procedures. Closing-price settlement procedures in index futures and
options generally base the index settlement price on the execution
prices from the last regular session trades in the underlying
securities. The cash settlement provisions of stock index futures and
options contracts facilitated the growth of sizeable index arbitrage
activities by firms and professional traders and made it relatively
easy for arbitrageurs to buy or sell the underlying stocks at or near
the market close on expiration Fridays \53\ in order to "unwind"
arbitrage-related positions. Because of cash settlement, the amount of
cash received by an arbitrageur by selling long positions (or the
amount of cash paid out to buy or cover short positions) in underlying
stocks at the close on expiration Friday would exactly match the amount
of cash that would have to be paid out to cover short positions (or
received from the sale of long positions) in the expiring index futures
or options.
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\53\ The term "expiration Fridays" refers to the third Friday
of each month that marks the expiration date for that month's
individual stock options, stock index options, and stock index
futures contracts. On the expiration date, options and futures
contracts cease to exist. Some stock index futures and options
expire on a quarterly basis, with their expiration Friday occurring
on the third Friday of the last month of the quarter (March, June,
September, and December).
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These types of unwinding programs at the close on expiration
Fridays often severely strained the liquidity of the securities
markets. Because unwinding programs sometimes consisted of large sell
(or buy) orders in individual securities, the securities markets often
found it extremely difficult to solicit sufficient buy or sell interest
to absorb the expiration-related programs within the limited time
permitted to establish closing prices shortly after 4:00 p.m.
(Eastern). It was not uncommon, therefore, for stock specialists to
have to drop share prices sharply at the close to establish sufficient
buy-side interest to draw in matching buy orders or to raise prices
sharply at the close to establish sufficient sell-side interest to draw
in matching sell orders.\54\ The time constraints faced by specialists
to establish closing prices that would reflect an equilibrium between
buy and sell interest resulted in sharp price movements in the indexes
underlying the futures or options. In addition, regulators and self-
regulators were concerned that the liquidity constraints faced by the
securities markets to accommodate expiration-related buy or sell
programs at the market close on expiration Fridays could exacerbate
ongoing market swings during an expiration and could provide
opportunities for entities to anticipate these pressures and enter
orders as part of manipulative or abusive trading practices designed to
artificially drive up or down share prices.\55\
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\54\ Steep discounts (premiums) were necessary in part because
traders who bought (sold) stocks to offset unwinding programs had to
maintain their newly acquired long (short) positions over the
weekend--during which time, they were subject to considerable market
risk.
\55\ The liquidity constraints faced by the securities markets
due to unwinding programs used in closing-price settlement
procedures were discussed by the SEC staff in its report on the
market decline on November 15, 1991. See SEC Division of Market
Regulation, Trading Analysis of November 15, 1991 (October 1992)
("Trading Analysis of November 15, 1991"). With respect to
concerns regarding manipulation, the Commissions note that the
Intermarket Surveillance Group ("ISG") was created under the
auspices of the SEC in 1981 as a forum to ensure that national
securities exchanges and national securities associations adequately
share surveillance information and coordinate inquiries and
investigations designed to address potential intermarket
manipulations and trading abuses. All national securities exchanges
and national securities associations are full members of the ISG.
Full members routinely share a great deal of surveillance and
investigatory information, and the SEC believes that this framework
has proven to be an essential mechanism to ensure that there is
adequate information sharing and investigatory coordination for
potential intermarket manipulations and trading abuses.
Since 1987, several futures exchanges and non-U.S. exchanges and
associations have been affiliate members of the ISG. Affiliate
members are required to share information on a more limited basis
with the ISG. To fulfill the requirement of the CEA and Exchange Act
that listing standards of exchanges and associations trading
security futures products "require procedures be in place for
coordinated surveillance among the markets on which the security
futures product is traded, any market on which the security
underlying the security futures product is traded, and any other
markets on which any related security is traded to detect
manipulation and insider trading," the Commissions believe that it
is essential that all such exchanges and associations be full
members of the ISG. In view of the essential role that the ISG
plays, the Commissions also believe that the ISG should grant full
memberships to all national securities exchanges and national
securities associations registered pursuant to Section 15A(a) of the
Exchange Act trading securities futures products, including Security
Futures Product Exchanges, upon a good-faith showing that the
entities meet the criteria for full membership.
---------------------------------------------------------------------------
To reduce such expiration-related strains on market liquidity, the
Chicago Mercantile Exchange ("CME") in 1987 switched from closing-
price settlement procedures to opening-price settlement procedures for
certain stock index futures. The CME's products included
[[Page 45908]]
the industry's most actively traded index futures contract, which was
based on the Standard & Poor's 500 Stock Index ("SPX Futures").\56\
Because SPX Futures were employed in the vast majority of index
arbitrage trading programs at that time, the adoption of opening-price
settlement procedures for these contracts had a significant effect on
unwinding programs in the securities markets on SPX Futures' quarterly
expirations.
---------------------------------------------------------------------------
\56\ The New York Futures Exchange also shifted its stock index
futures to opening-price settlement procedures in 1987.
---------------------------------------------------------------------------
Most other market participants began moving to opening-price
settlement procedures for stock index options contracts. For example,
the New York Stock Exchange ("NYSE") and the Chicago Board Options
Exchange ("CBOE") implemented opening-price settlement procedures for
certain index options in 1987.\57\ Other exchanges adopted similar
procedure \58\ for some of their index options.\59\ Exchanges also
incorporated opening-price settlement requirements as part of their
listing criteria for index options.\60\
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\57\ See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992); see, e.g., Securities Exchange
Act Release No. 24367 (April 17, 1987), 52 FR 13890 (April 27, 1987)
(approving CBOE proposal to list an option on an index that settled
based on the opening prices of component securities); Securities
Exchange Act Release No. 30944 (July 21, 1992), 57 FR 33376 (July
28, 1992) (approving CBOE proposal to, among other things, phase out
all index options on the Standard & Poor's 500 Stock Index using
closing-price settlement procedures); Securities Exchange Act
Release No. 24276 (March 27, 1987), 52 FR 10836 (April 3, 1987)
(permitting NYSE to base settlement on opening prices for options on
two indices); Securities Exchange Act Release No. 25804 (June 15,
1988), 53 FR 23474 (June 22, 1988) (approving NYSE proposal to,
among other things, provide for opening-price settlement of stock
index options).
\58\ See, e.g., Securities Exchange Act Release No. 26653 (March
21, 1989), 54 FR 12705 (March 28, 1989) (approving the American
Stock Exchange's ("Amex") proposal for options on an index using
settlement based on opening prices); Securities Exchange Release No.
31330 (October 16, 1992), 57 FR 48408 (October 23, 1992) (approving
Amex's proposal to, among other things, phase out certain options
where the settlement value upon expiration is based on the closing
prices of component securities); Securities Exchange Act Release No.
36236 (September 14, 1995), 60 FR 49031 (September 21, 1995)
(approving Pacific Stock Exchange ("PCX") proposal to revise the
terms of certain options contracts from closing-price settlement to
opening-price settlement); Securities Exchange Act Release No. 35131
(December 20, 1994), 59 FR 66990 (December 28, 1994) (giving
immediate effectiveness to a Philadelphia Stock Exchange's
("Phlx") proposal regarding options on an index using settlements
based on opening prices and satisfying generic listing criteria).
\59\ Some index options, such as CBOE's options contracts based
on the Standard & Poor's 100 Stock Index ("OEX options") retained
closing-price settlement procedures. CBOE believed that these
settlement procedures were appropriate for OEX options because these
contracts were used primarily by retail investors and were not
actively used in the types of index arbitrage unwinding programs
that had strained the liquidity of the securities market at the
close on expirations.
\60\ See Amex Rule 901C, Commentary .02(c) (listing requirements
for stock industry index groups pursuant to SEC Rule 19b-4(e)); CBOE
Rule 24.2(b)(1) (listing criteria for narrow-based security index
options under SEC Rule 19b-4(e)); PCX Rule 7.3(b)(1) (listing
criteria for narrow-based security index options); Phlx Rule
1009A(b)(1) (listing criteria for narrow-based security index
options pursuant to SEC Rule 19b-4(e)); see also Commentary to Phlx
Rule 1000A(b)(8) ("For any series of index options first opened
after March 30, 1987, the Exchange may, in its discretion, provide
that the calculation of the final index settlement value of any
index on which options are traded at the Exchange will be determined
by reference to the prices of the constituent stocks at a time other
than the close of trading on the last trading day before
expiration").
---------------------------------------------------------------------------
Opening-price settlement procedures offered several features that
facilitated the ability of the securities markets to handle expiration-
related unwinding programs. For example, the NYSE was able to use its
existing electronic order-routing systems and electronic specialist
books to process and match incoming unwinding stock orders before the
opening of the regular trading session at 9:30 a.m. (Eastern).
Specialists could then utilize long-standing procedures to disseminate
price indications in an orderly manner before index component stocks
opened for trading. Moreover, smaller price discounts or premiums were
needed to draw in orders to offset unwinding programs because traders
who entered the offsetting orders understood that they would have the
remainder of the trading session to trade out of any long or short
positions acquired at the opening. As a result, it appears that the
widespread adoption of opening-price settlement procedures in index
futures and options has served to mitigate the liquidity strains that
had previously been experienced in the securities markets on
expirations.
2. Requirements for Security Futures Products Using Cash Settlement
In view of the experience gained with settlements in cash-settled
stock index futures and options in the 1980s and in light of the
potential for manipulation of the underlying securities markets, the
Commissions preliminarily believe that it would be prudent, at the
outset of trading in these products, to require exchanges specifying
cash settlement in lieu of physical delivery for security futures
products to use a final settlement price that fairly reflects the
opening price of the underlying security or securities as the basis for
cash settling positions at contract expiration.\61\
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\61\ See proposed SEC Rule 6h-1(b) and (c) and proposed CFTC
Rule 41.25(b).
---------------------------------------------------------------------------
a. Single-Stock Futures
Proposed SEC Rule 6h-1(b) and CFTC Rule 41.25(b)(1) would require
that the final settlement price of a cash-settled security futures
product based on a single security fairly reflect the opening price of
the underlying security.\62\ While the emphasis in the proposed rule is
on cash settlements based on the opening price(s), the Commissions'
proposal would leave national securities exchanges and national
securities associations trading security futures products with some
flexibility in adopting rules that determine how the opening price is
defined for this purpose. For example, under the proposed rule, a
national securities exchange or national securities association could
define the opening price for a single-stock future as the trade-
weighted average price of the underlying security during the first few
minutes of trading of a regular trading session. Alternatively, the
opening price for a security futures product could be defined as the
price reported for the first trade in that security at the beginning of
the regular trading session.
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\62\ Proposed SEC Rule 6h-1(a)(1) and CFTC Rule 41.1(j) would
define "opening price" as the price at which a security opened for
trading, or a price that fairly reflects the price at which a
security opened for trading, during the regular trading session of
the national securities exchange or national securities association
that lists the security. Proposed SEC Rule 6h-1(a)(2) and CFTC Rule
41.1(k) would define the "regular trading session" of a security
as the normal hours for business of a national securities exchange
or national securities association that lists the security.
---------------------------------------------------------------------------
Proposed SEC Rule 6h-1(b) and CFTC Rule 41.25(b)(1) also would
require that, if an opening price for an underlying security is not
readily available, the final settlement price of the overlying cash-
settled security futures product must fairly reflect the price of the
underlying security during its most recent regular trading session. The
Commissions believe that, if the opening price for the underlying
security is not readily available, a price derived from the most recent
regular trading session of that security would be an appropriate
substitute.\63\ Again, the Commissions' proposal would provide national
securities exchanges and national securities associations with some
discretion to implement this general rule without dictating how the
[[Page 45909]]
settlement price for a security futures product is derived. For
example, while one national securities exchange or national securities
association may decide to establish rules that would use the closing
price from the most recent regular trading session if an opening price
for a security underlying a security futures product is not readily
available, another exchange or association could establish rules that
would use a trade-weighted average over some portion of that session in
such circumstances.
---------------------------------------------------------------------------
\63\ Although proposed SEC Rule 6h-1(b) and (c) and CFTC Rule
41.25(b)(1) and (b)(2) would not define when an opening price would
not be "readily available," national securities exchanges and
national securities associations would have to establish, as part of
their listing standards, rules that interpret this term. The
Commissions' overriding concern is that settlement prices for cash-
settled security futures products be established in a fair and
predictable manner.
---------------------------------------------------------------------------
The Commissions do not believe at present that national securities
exchanges and national securities associations should trade security
futures products that settle at prices established by other than the
most recent regular trading session. The Commissions believe that the
final settlement price for a cash-settled single-stock future should
reasonably reflect the opening price of the underlying security or, if
that is not readily available, a price fairly reflective of the price
in a liquid market for the underlying security. The Commissions believe
that a price derived from the regular trading session of the national
securities exchange or national securities association that lists the
underlying security would have the greatest likelihood of reflecting
the most reasonable price for that security, unlike a price generated
from an extended trading hours session.
b. Narrow-Based Security Index Futures
Proposed SEC Rule 6h-1(c) and CFTC Rule 41.25(b)(2) would require,
absent an exemption, national securities exchanges and national
securities associations to establish that the final settlement price of
a cash-settled narrow-based security index future reflect the opening
prices of the underlying securities. As with single-stock futures, the
Commissions are proposing that, if prices for one or more underlying
securities were not readily available, the settlement prices for those
securities would be derived from their most recent regular trading
session. For the securities that did open normally, the settlement
prices would be their respective opening prices.
c. Exemption
Proposed paragraph (f) of SEC Rule 6h-1 and paragraph (b)(3) of
CFTC Rule 41.25 would permit the Commissions to grant a national
securities exchange or national securities association an exemption
from the above requirements.\64\ The SEC would grant such an exception,
either conditionally or unconditionally, if it were necessary or
appropriate in the public interest, and consistent with the protection
of investors.\65\ The CFTC would grant such an exemption if the CFTC
determines that it would be consistent with the public interest, the
protection of investors, and otherwise furthers the provisions of the
CEA.\66\
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\64\ See proposed SEC Rule 6h-1(f), and proposed CFTC Rule
41.25(b)(3).
\65\ See Section 36 of the Exchange Act, 15 U.S.C. 78mm. In
granting the SEC broad exemptive authority in Section 36, Congress
intended to incorporate flexibility into the Exchange Act regulatory
scheme to reflect a rapidly changing marketplace. See H.R. Rep. No.
104-622 (1996).
\66\ Section 8a(5) of the CEA allows the CFTC to make and
promulgate such rules and regulations as, in the judgment of the
CFTC, are reasonably necessary to effectuate any of the provisions
or to accomplish any of the purposes of the CEA. 7 U.S.C. 12a(5).
The CFTC believes that granting an exemption to the use of opening
prices for cash settlement is consistent with Section 8a(5) of the
CEA, so long as the exemption is consistent with the public
interest, the protection of investors, and otherwise furthers the
provisions of the CEA.
---------------------------------------------------------------------------
d. Request for Comments Relating to Final Settlement Prices
The Commissions welcome comment on all aspects of the proposed rule
as they relate to final settlement prices for cash-settled security
futures products, including the following matters:
Q1. Commenters are requested to submit their views on whether cash-
settled security futures products should be permitted to trade with
closing-price settlement procedures. If so, commenters are asked to
provide policy arguments in support of their views.
Q2. If commenters believe that cash-settled security futures
products should be permitted to settle at the closing price, what
characteristics of security futures products would justify a
determination that the liquidity pressures on the underlying securities
market, associated with closing-price settlement procedures in index
futures, would not present opportunities for manipulative activities in
security futures products and their underlying securities?
Q3. Are there any additional safeguards that would be appropriate
for security futures product cash settlement procedures to ensure that
the anti-manipulation mandates in Section 2(a)(1)(D)(i)(VII) of the CEA
and Section 6(h)(3)(H) of the Exchange Act are satisfied?
Q4. Would any additional safeguards for cash settlement procedures
for security futures products be appropriate to promote the maintenance
of fair and orderly markets under the Exchange Act?
Q5. In view of the use of opening-price settlement procedures in
most actively traded index futures, what characteristics of security
futures products and the manner in which they trade would indicate that
opening-price settlement procedures would be inappropriate or
unworkable for security futures products?
Q6. Should the proposed rule provide national securities exchanges
or national securities associations any additional flexibility to
determine settlement prices when the regular session opening prices are
not readily available in one or more of the underlying securities?
Q7. Should the proposed rule require the use of only closing prices
from the most recent trading session when regular session opening
prices are not readily available in one or more of the underlying
securities?
C. Regulatory Halts
1. Background
Generally, there are two types of regulatory halts used in the
equity and options markets: news pending halts and circuit breaker
halts. News pending halts are designed to protect the interests of
current and potential shareholders by facilitating the orderly
dissemination of potentially market moving information and the
discovery of fair and reasonable prices for securities based on new
information. A news pending halt benefits current and potential
shareholders by halting all trading in the securities until there has
been an opportunity for the information to be disseminated to the
public. It also helps to ensure public confidence in the market and
promotes the integrity of the marketplace by giving the public an
opportunity to evaluate information in making investment decisions.
Circuit breakers are brief, coordinated cross-market trading halts used
by the major stock, options, and index futures markets to mitigate
systemic stress when a severe one-day market drop of historic
proportions prevents the financial markets from operating in an orderly
manner.\67\
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\67\ See Circuit Breaker Report, supra note 33.
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a. News Pending Halts
Currently, national securities exchanges and national securities
associations may impose brief trading halts in specific securities
pending the release of material information that would reasonably be
expected to affect the prices of those securities.\68\ Trading
[[Page 45910]]
halts give investors an opportunity to learn of and react to material
news. The NYSE and Amex, for example, follow procedures for regulatory
halts contained in the Consolidated Tape Association Plan ("CTA
Plan").\69\ Under the CTA Plan, a regulatory halt occurs whenever the
listing market (termed the "primary market") for any eligible
security, in the exercise of its regulatory functions, halts or
suspends trading in the security because the primary market has
determined (i) that there are matters relating to the security or
issuer that have not been adequately disclosed to the public, or (ii)
that there are regulatory problems relating to the security which
should be clarified before trading is permitted to continue.\70\ The
Commissions preliminarily believe that it may be appropriate to include
this definition of a news pending regulatory halt under the proposed
rule \71\ because the exchanges already have experience in applying the
requirement. When a regulatory trading halt is initiated by the primary
market for a security, the regional exchanges and Nasdaq Intermarket
also halt trading in the security, and the options exchanges halt
trading in related options. The options exchanges also halt trading in
an equity option when the underlying security has ceased trading.\72\
---------------------------------------------------------------------------
\68\ See, e.g., Amex, Listing Standards, Policies and
Requirements, Section 402(b); Boston Stock Exchange ("BSE") Rules
of the Board of Governors, Supplement to Chapter XXVII, Section 4;
National Association of Securities Dealers ("NASD") Rule 4120; and
NYSE Listed Company Manual, Sections 202.06 and 202.07.
\69\ See Securities Exchange Act Release No. 41315 (April 20,
199), 64 FR 23142 (April 29, 1999) (noting that the NYSE follows the
CTA Plan when instituting a regulatory halt); and Securities
Exchange Act Release No. 41877 (September 14, 1999), 64 FR 51566
(September 23, 1999) (noting that Amex follows the CTA Plan when
instituting a regulatory halt); see also CTA Plan (Second
Restatement), Section XI(a). The CTA Plan is a joint industry plan
that governs the consolidated transaction reporting system, and each
of the participants agrees to comply with the provisions of the
plan. Recognizing the importance of disseminating information with
respect to trading halts in certain securities, the CTA Plan imposes
notification obligations upon the primary market whenever a
regulatory halt occurs.
\70\ See CTA Plan (Second Restatement), Section XI(a). For
example, an event that may qualify under this standard and call for
a regulatory halt is when it is unclear whether a security continues
to meet the listing standards of the market on which the security is
listed.
\71\ See proposed SEC Rule 6h-1(a)(3) and proposed CFTC Rule
41.1(1).
\72\ The rules of the options exchanges generally provide for
halts in options whenever it is appropriate in the interests of a
far and orderly market and to protect investors. See Amex Rule
918(b); CB0E Rule 6.3(a) and .04 of the Interpretations and Policies
of CBOE Rule 6.3; International Securities Exchange ("ISE") Rule
702; PCX Rule 6.65(a); and Phlx Rule 1047(b).
---------------------------------------------------------------------------
The options markets also have in place rules regarding trading
halts on index options.\73\ Several of the options markets will halt
trading when, for example, a certain fixed percentage of the index
halts trading or when it is appropriate in the interests of a fair and
orderly market and to protect investors. For example, trading on the
PCX in any index option is halted whenever trading in underlying
securities whose weighted value represents more than 20 percent of the
value of a broad-based index or 10 percent of the value of other
indices is halted.\74\
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\73\ See Amex Rule 918C(b)(3); CBOE Rule 24.7; PCX Rule 7.11;
and Phlx Rule 1047A(c).
\74\ See PCX Rule 7.11. Similarly, under Phlx Rule 1047A(c),
trading in any index option may be halted whenever trading on the
primary market in underlying securities representing more than 10
percent of the current index value is halted or suspended, and there
is approval from two floor officials and the concurrence of a market
regulation officer. See Phlx Rule 1047A(c).
---------------------------------------------------------------------------
b. Circuit Breaker Halts
The Commissions approved various exchanges' circuit breaker
proposals in response to the October 1987 market break to permit these
brief, coordinated cross-market halts to provide opportunities during a
severe market decline to reestablish an equilibrium between buying and
selling interests in an orderly fashion, and help to ensure that market
participants have a reasonable opportunity to become aware of, and
respond to, significant price movements.\75\ The coordinated cross-
market trading halts provided by circuit breaker procedures are
designed to operate only during significant market declines and to
substitute orderly, pre-planned halts for the ad hoc and destabilizing
halts which can occur when market liquidity is exhausted.\76\
Currently, all stock exchanges and the NASD have rules or policies to
implement coordinated circuit breaker halts.\77\ The options markets
also have rules applying circuit breakers.\78\ Finally, the index
futures exchanges have adopted circuit breaker halt procedures in
conjunction with their price limit rules \79\ for index products.\80\
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\75\ See Securities Exchange Act Release No. 26198 (October 19,
1988), 53 FR 41637 (October 24, 1988) (Amex, CBOE, NASD, NYSE).
\76\ See Circuit Breaker Report, supra note 33.
\77\ See Securities Exchange Act Release No. 39846 (April 9,
1998), 63 FR 18477 (April 15, 1998) (order approving proposals by
Amex, BSE, Chicago Stock Exchange ("CHX"), NASD, NYSE, and Phlx).
See also Amex Rule 117; BSE, Rules of the Board of Governors,
Section 34A; CHX Rule 10A; Cincinnati Stock Exchange ("CSE") Rule
12.11; NYSE Rule 80B; PCX Rule 4.22 (a), (b), and (c); and Phlx Rule
133. CSE Rule 12.11 gives the chairman or the president of the CSE
the power to suspend trading whenever he or she believes that such
suspension would be in the public interest, which has been
interpreted as requiring the CSE, as a matter of policy, to halt
trading in all equities traded on the CSE in conjunction with halted
trading at all other U.S. equity and equity-related markets. See
Securities Exchange Act Release No. 26440 (January 10, 1989), 54 FR
1830 (January 17, 1989). The NASD also recognizes the risks imposed
on any single market that remains open while all other U.S. markets
have halted trading in response to extraordinary price movements,
and maintains a market closing policy to halt, upon SEC request, all
domestic trading in both securities listed on the Nasdaq Stock
Market and all equity and equity-related securities trading in the
over-the-counter market should other major securities markets
initiate market-wide trading halts in response to extraordinary
market conditions. See NASD Rule 4120; NASD IM-4120-4. The SEC notes
that it has a standing request with the NASD to halt trading as
quickly as practicable whenever the NYSE and other equity markets
have suspended trading. See Securities Exchange Act Release No.
39582 (January 26, 1998), 63 FR 5408 (February 2, 1998).
\78\ See Amex Rule 950 (applying Amex Rule 117, Trading Halts
Due to Extraordinary Market Volatility, to options transactions);
CBOE Rule 6.3B; ISE Rule 703; PCX Rule 4.22 (which applies to
options contracts through Rules 6.1(a) and (e)); and Phlx Rule 133.
\79\ A price limit, in itself, does not halt trading in the
futures, but prohibits trading at prices below the pre-set limit
during a price decline. Intraday price limits are removed at pre-set
times during the trading session, such as ten minutes after the
thresholds are reached or at 3:30 p.m., whichever is earlier. Daily
price limits remain in effect for the entire trading session.
Specific price limits are set for each stock index futures contract.
There are no price limits for U.S. stock index options, equity
options, or stocks.
\80\ See, e.g., CME Rule 4002.I. The CME will implement a
circuit breaker trading halt in SPX Futures if the 10 percent
circuit breaker halt has been imposed in the securities markets and
the futures are "locked" at their 10 percent price limit. Trading
will not reopen in SPX Futures until the circuit breaker halt has
been lifted in the securities markets and trading has resumed in
stocks comprising at least 50 percent of the index capitalization.
The CME will implement another circuit breaker trading halt in SPX
Futures if the 20 percent circuit breaker halt has been imposed in
the securities markets and the futures are locked at their 20
percent price limit. Once again, trading will not reopen in SPX
Futures until the circuit breaker halt has been lifted in the
securities markets and trading has resumed in stocks comprising at
least 50 percent of the index capitalization.
---------------------------------------------------------------------------
The current circuit breaker procedures call for cross-market
trading halts when the Dow Jones Industrial Average ("DJIA") declines
by 10 percent, 20 percent, and 30 percent from the previous day's
closing value. At the beginning of each quarter, the markets use the
average closing value of the DJIA for the previous month to establish
specific point-decline triggers for the quarter.\81\ Specifically, a
one-hour cross-market halt will be implemented if the DJIA declines by
10 percent prior to 2 p.m., and a one-half hour halt will be
implemented if the DJIA declines by 10 percent between 2 p.m. and 2:30
p.m.\82\ If the DJIA declines by 10 percent at or after 2:30 p.m.,
trading generally will not halt when the 10 percent level is reached.
If the DJIA declines 20 percent prior to 1 p.m., trading will halt for
two
[[Page 45911]]
hours; trading will halt for one hour if the DJIA declines 20 percent
between 1 p.m. and 2 p.m.; and trading will halt for the remainder of
the day if a 20 percent decline occurs at or after 2 p.m. If the DJIA
declines 30 percent at any time, trading will halt for the remainder of
the day.
---------------------------------------------------------------------------
\81\ See Circuit Breaker Report, supra note , p. 2.
\82\ See, e.g., NYSE Rule 80b.
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2. Trading Halt Coordination in Security Futures Products
As discussed above, Section 2(a)(1)(D)(i)(X) of the CEA \83\ and
Section 6(h)(3)(K) of the Exchange Act \84\ provide that listing
standards for security futures products must require procedures to
"coordinate" trading halts between the market that trades the
security futures product, the market that lists and trades the
underlying security, and other markets on which any related security is
traded. Proposed SEC Rule 6h-1 and CFTC Rule 41.25(a)(2) would help
assure such coordination, as well as preserve the investor protection
and market integrity provisions of regulatory halt procedures in the
securities markets.
---------------------------------------------------------------------------
\83\ 7 U.S.C. 2(a)(1)(D)(i)(X).
\84\ 15 U.S.C. 78f(h)(3)(K).
---------------------------------------------------------------------------
a. Trading Halt Coordination in Single-Stock Futures
Specifically, proposed SEC Rule 6h-1(d) and CFTC Rule
41.25(a)(2)(i) would require national securities exchanges and national
securities associations to halt trading in a single-stock future while
a regulatory halt has been implemented by the listing market for the
underlying security.\85\The halt in the security futures product market
would have to occur during the same time as a regulatory halt
instituted on the listing market. Thus, if the listing market halted
trading in a security for 30 minutes, the security futures product
market could not institute a halt and then reopen trading in the
security futures product after two minutes. The Commissions believe
that the purpose of halting trading in the underlying security would be
frustrated if market participants could circumvent this halt by trading
during the halt in the related security futures product.\86\
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\85\ Proposed SEC Rule 6h-1(a)(3) and CFTC Rule 41.1(l) would
define "regulatory halt" as a delay, halt, or suspension in the
trading of a security that is instituted by the national securities
exchange or national securities association that lists the security,
as a result of: (i) pending news, or (ii) the operation of circuit
breaker procedures to halt or suspend trading in all equity
securities trading on that national securities exchange or national
securities association.
\86\ The trading halt provisions of proposed SEC Rule 6h-1(d)
and CFTC Rule 41.25(a)(2)(i) would not be exclusive. The proposed
rule is not designed to preclude a market trading security futures
products from halting trading for other appropriate reasons, such as
operational difficulties being experienced by the market or its
automated systems or concerns over clearance and settlement
operations.
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b. Trading Halt Coordination in Narrow-Based Security Index Futures
Proposed SEC Rule 6h-1(e) and CFTC Rule 41.25(a)(2)(ii) would also
require national securities exchanges and national securities
associations to halt trading under certain circumstances in a security
futures product based on a narrow-based security index. Although broad-
based security indices have large numbers of component securities, so
that it is extremely unlikely that news pending regulatory halts would
be imposed simultaneously in securities representing a significant
portion of any index, this may not be the case with all narrow-based
security indexes. Accordingly, the proposal would require trading to be
halted in a narrow-based security index futures product when securities
representing 30 percent or more of the market capitalization of the
narrow-based security index \87\are subject to a regulatory halt.\88\
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\87\ The Commissions jointly proposed rules to establish the
method of determining the market capitalization of a narrow-based
security index. See Securities Exchange Act Release No. 44288 (May
10, 2001), 66 FR 27560 (May 17, 2001).
\88\ As with proposed SEC Rule 6h-1(d) and CFTC Rule
41.25(a)(2)(i), the trading halt provisions of proposed SEC Rule 6h-
1(e) and CFTC Rule 41.25(a)(2)(ii) would not be exclusive. The
proposed rule is not designed to preclude a market trading security
futures products based on narrow-based security indexes from halting
trading at a threshold of less than 30% of the market capitalization
of the index or for other appropriate reasons, such as operational
difficulties being experienced by the market or its automated
systems or concerns over clearance and settlement operations.
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The Commissions do not believe that trading of a security futures
product based on a narrow-based security index should necessarily be
halted because a trading halt has been instituted for only one, low-
weighted component security. However, regulatory halts of components
could affect a sufficiently large portion of an index to make continued
trading of the security futures product a means to improperly
circumvent regulatory halts in the underlying securities. For example,
if a security futures product is based on a narrow-based security index
consisting of two stocks and regulatory halts have been imposed by the
listing market in one of the component stocks for pending news, the
halt would be undermined if trading continued in the security futures
product, because the security represents a substantial portion of the
index value. Under these circumstances, the Commissions do not believe
that trading halt procedures would be coordinated, as contemplated by
Section 2(a)(1)(D)(i)(X) of the CEA \89\ and Section 6(h)(3)(K) of the
Exchange Act,\90\ if the security futures product continued to trade
while investors were precluded from trading the underlying securities.
Moreover, the SEC believes that continued trading in the security
futures product under these circumstances could undercut key provisions
in the securities laws designed to protect investors and promote the
fair and orderly operation of the markets.
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\89\ 7 U.S.C. 2(a)(1)(D)(i)(X).
\90\ 15 U.S.C. 78f(h)(3)(K).
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The Commissions preliminarily believe that the 30 percent threshold
is appropriate because it appears to be sufficiently large to avoid
imposing trading halts in security futures products unnecessarily when
halts have been implemented in a few isolated underlying securities. In
addition, the Commissions believe that the proposed 30 percent
threshold is consistent with the definition of "narrow-based security
index" under the CEA and the Exchange Act.\91\ In general, indexes in
which a component security is more than 30 percent of an index's
weighting are considered narrow-based and, therefore, futures on such
indexes are "securities." This 30 percent threshold represents, in
part, a determination by Congress as to when an index becomes so highly
concentrated in one security that trading in a future on that index
becomes a surrogate for trading in the underlying security. For this
reason, the Commissions preliminarily believe that when trading is
halted in a component security or securities of an index that represent
30 percent or more of that index's weighting, trading should also be
halted in the futures overlying that index.
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\91\ See Section 3(a)(55) of the Exchange Act, 15 U.S.C.
78c(a)(55), and Section 1a(25) of the CEA, 7 U.S.C. 1a(25). The
Commissions jointly proposed rules to establish the method of
determining the market capitalization of a narrow-based security
index. See supra note 87.
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c. Request for Comments Relating to Trading Halts
The Commissions welcome comment on all aspects of the proposed rule
as it relates to trading halts for security futures products, including
the following matters:
Q8. Do commenters believe that there are circumstances in which
permitting a single stock futures product to trade while the underlying
security is subject to a regulatory halt in the listing market would be
consistent with the mandate
[[Page 45912]]
in Section 2(a)(1)(D)(i)(X) of the CEA \92\ and Section 6(h)(3)(K) of
the Exchange Act,\93\ requiring a national securities exchange or
national securities association on which security futures products
trade to have procedures to coordinate trading halts with the listing
market of the underlying security?
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\92\ 7 U.S.C. 2(a)(1)(D)(i)(X).
\93\ 15 U.S.C. 78f(h)(3)(K).
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Q9.If a regulatory halt is in place for securities representing 30
percent or more of a narrow-based security index's capitalization, do
commenters believe that there are circumstances in which permitting a
security futures product based on such an index to trade would be
consistent with the mandate in Section 2(a)(1)(D)(i)(X) of the CEA \94\
and Section 6(h)(3)(K) of the Exchange Act,\95\ requiring a national
securities exchange or national securities association on which
security futures products trade to have procedures to coordinate
trading halts with the listing market of the underlying security? Do
commenters recommend using a higher or lower threshold percentage of an
index's capitalization before an index future must halt trading?
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\94\ 7 U.S.C. 2(a)(1)(D)(i)(X).
\95\ 15 U.S.C. 78f(h)(3)(K).
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Q10. If so, would trading halts in securities representing a larger
percentage of the index capitalization warrant a halt in the overlying
narrow-based security index future? For example, would halts in
underlying securities representing 50 percent \96\ of the index
capitalization warrant a halt in trading the narrow-based security
index future?
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\96\ The Commissions note that, following a circuit breaker
trading halt in SPX Futures on the CME, trading would not reopen
until the circuit breaker halt has been lifted in the securities
markets, and trading has resumed in stocks comprising at least 50
percent of the index capitalization. See supra note 80.
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Q11. If continued trading in security futures products were
permitted even if halts had been instituted for most or all of the
underlying securities, would this put additional price pressure on the
underlying security or securities when reopenings are attempted after
the halts were lifted? How would this promote the maintenance of fair
and orderly markets under the Exchange Act?
Q12. Is the proposed definition of "regulatory halt" sufficient
to address all instances in which trading in security futures products
should halt when trading is unavailable in the underlying security?
Q13. Do commenters believe that the Commissions should apply a
standard, other than a percentage threshold of an index's
capitalization, in determining whether a trading halt is appropriate
for a narrow-based security index?
III. Request for Comments
The Commissions solicit comments on all aspects of proposed CFTC
Rule 41.25(a)(2) and 41.25(b) under the CEA and proposed SEC Rule 6h-1
under the Exchange Act. In addition to the questions posed above,
commenters are welcome to offer their views on any other matter raised
by the proposed rule.
IV. Paperwork Reduction Act
CFTC: The Paperwork Reduction Act ("PRA") of 1995 (44 U.S.C. 3501
et seq.) imposes certain requirements on federal agencies (including
the CFTC) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. This proposed
rulemaking contains information collection requirements within the
meaning of the PRA. The CFTC has submitted a copy of this part to the
Office of Management and Budget ("OMB") for its review in accordance
with 44 U.S.C. 3507(d).
Collection of Information: Part 41, Relating to Security Futures
Products, OMB Control Number 3038-XXXX.
An agency may not conduct or sponsor, and a person is not required
to respond to, an information collection unless it displays a currently
valid OMB control number. The CFTC is currently requesting a control
number for this information collection from OMB.
As noted above, the CFMA lifted the ban on trading single stock and
narrow-based stock index futures and established a framework for the
joint regulation of these products by the CFTC and the SEC. In
addition, the CFMA amended the CEA and the Exchange Act by adding a
definition of "narrow-based security index," which establishes an
objective test of whether a security index is narrow-based.\97\ Futures
contracts on security indexes that meet the statutory definition are
jointly regulated by the CFTC and the SEC. Futures contracts on indexes
that do not meet the statutory definition remain under the sole
jurisdiction of the CFTC.
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\97\ See Section 1a(25)(A) of the CEA, 7 U.S.C. 1a(25)(A);
Section 3(a)(55)(B) of the Exchange Act, 15 U.S.C. 77c(a)(55)(B).
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The effect of proposed CFTC Rule 41.25(a)(2) and 41.25(b) will be
to increase the burden previously submitted to OMB by 68 hours
resulting from the preparation of materials to be filed with the CFTC
in connection with the listing of security futures products by
designated contract markets and registered derivatives transaction
execution facilities.
The estimated burden of proposed CFTC Rule 41.25(a)(2) and 41.25(b)
was calculated as follows:
Estimated number of respondents: 17.
Total annual responses: 850.
Estimated average number of hours per response: .08.
Estimated total number of hours of annual burden: 68.
This annual reporting burden represents an increase of 68 hours as
a result of the proposed new rule.
It should be noted that proposed CFTC Rule 41.25(a)(2) and 41.25(b)
is part of a larger proposed rulemaking that will require designated
contract markets and registered derivatives transaction execution
facilities to certify that they meet the listing standards criteria of
part 41. Specifically, proposed CFTC Rule 41.23 will require that
before these boards of trade list a new security futures product for
trading, they certify that they comply with a number of listing
standards set forth in proposed CFTC Rule 41.22, as well as the
additional conditions for trading set forth in proposed CFTC Rule
41.25. In a previous notice of proposed rules, the CFTC estimated that
the burden of each submission under proposed CFTC Rule 41.23 would be
approximately one (1) hour. The extra burden imposed on designated
contract markets and registered derivatives transaction execution
facilities in certifying that they meet the criteria of proposed CFTC
Rule 41.25(a)(2) and 41.25(b) should be minimal, since this
certification will be a part of a larger certification. Nevertheless,
the CFTC estimates that the additional burden imposed by this rule will
create a burden of no more than .08 hours (approximately five (5)
minutes) per response.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Building, Washington, DC 20503, Attention: Desk Officer for the
Commodity Futures Trading Commission.
The CFTC considers comments by the public on this proposed
collection of information in:
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the CFTC,
including whether the information will have a practical use;
Evaluating the accuracy of the CFTC's estimate of the
burden of the
[[Page 45913]]
proposed collection of information, including the validity of the
methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronic submission of responses).
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register. A
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication. This does not affect the
deadline for the public to comment to the CFTC on the proposed
regulation. Copies of the information collection submission to OMB are
available from the CFTC from the CFTC Clearance Officer, 1155 21st
Street, NW, Washington, DC 20581, (202) 418-5160.
SEC: Certain provisions of the proposed rule contain "collection
of information requirements" within the meaning of the PRA.\98\
Accordingly, the SEC submitted the collection of information
requirements to the OMB for review in accordance with 44 U.S.C. 3507
and 5 CFR 1320.11. The SEC is revising the collection of information
titled "Rule 19b-4 and Form 19b-4," OMB Control No. 3235-0045. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number.
---------------------------------------------------------------------------
\98\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Exchange Act, as amended by the CFMA, provides that a national
securities exchange or national securities association may trade
security futures products only if the listing standards for such
products conform with the requirements set forth in Section 6(h)(3) of
the Exchange Act.\99\ These listing standards must, among other things,
require that: (1) trading in security futures products not be readily
susceptible to price manipulation,\100\ and (2) the exchange or
association on which the security futures product is traded has in
place procedures to coordinate trading halts with the market listing
the security or securities underlying the security futures
product.\101\ To further these statutory mandates, the SEC is proposing
SEC Rule 6h-1, which would provide that the listing standards of
national securities exchanges and national securities associations
trading security futures products establish: (1) A final settlement
price for each cash-settled security futures product that fairly
reflects the opening price of the underlying security or securities
rather than the closing price, on the grounds that settlement based on
the closing price creates greater volatility and more opportunity for
price manipulation; and (2) a halt in trading in any security futures
product when a regulatory halt is instituted by the national securities
exchange or national securities association listing the security or
securities underlying the security futures product.
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\99\ 15 U.S.C. 78f(h)(3).
\100\ See 15 U.S.C. 78f(h)(3)(H).
\101\ See 15 U.S.C. 78f(h)(3)(K).
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The SEC anticipates that national securities exchanges and national
securities associations that wish to trade security futures products
would file with the SEC proposed rule changes, pursuant to Section
19(b) of the Exchange Act,\102\ to establish listing standards that are
consistent with the requirements set forth in Section 6(h)(3) of the
Exchange Act.\103\ The SEC would review the proposed rule changes
submitted by national securities exchanges and national securities
associations in the manner prescribed by Section 19(b) of the Exchange
Act.\104\ In addition, the SEC would publish these proposed rule
changes to afford the public an opportunity to comment on the listing
standards adopted by exchanges and associations with respect to
security futures products. The SEC estimates that there would be 17
respondents to the proposed rule: 9 currently registered national
securities exchanges, 1 national securities association (the NASD) that
operates a securities market (Nasdaq), and an estimated 7 futures
markets that are expected to register as Security Futures Product
Exchanges. The information collected pursuant to proposed SEC Rule 6h-1
would not be kept confidential and would be publicly available.
---------------------------------------------------------------------------
\102\ 15 U.S.C. 78s(b).
\103\ 15 U.S.C. 78f(h)(3).
\104\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
The SEC estimates the paperwork burden for each respondent, to
comply with proposed SEC Rule 6h-1 would be 10 hours of legal work at
$128/hour,\105\ for a total cost of $1280 per respondent. The SEC
estimates that the total burden on all respondents would be 170 hours
(10 hours/response x 17 respondents x 1 response/respondent), for a
total cost of $21,760 ($1280/response x 17 respondents x 1
response/respondent). These burdens would be incurred on a one-time
basis and would not recur.
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\105\ The estimated rate of $128 per hour is derived from the
SIA Management and Professional Earnings, Table 107 (Attorney, New
York), and includes a 35 percent differential for bonus, overhead,
and other expenses.
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As set forth in SEC Rule 17a-1,\106\ a national securities exchange
or national securities association is required to retain records of the
collection of information for at least five years, the first two years
in an easily accessible place. However, Rule 17a-1 requires a Security
Futures Product Exchange to retain only those records relating to
persons, accounts, agreements, contracts, and transactions involving
security futures products.\107\
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\106\ 17 CFR 240.17a-1.
\107\ See 15 U.S.C. 78q(b)(4)(B).
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Pursuant to 44 U.S.C. 3506(c)(2)(B), the SEC solicits comments to:
(1) Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information would have practical utility;
(2) Evaluate the accuracy of the SEC's estimate of the burden of
the proposed collections of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collections of information on those
who are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information
requirements proposed above should direct them to the following
persons: (1) Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10102, New Executive Office Building, Washington, DC
20503; and (2) Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 5th Street, NW, Washington, DC 20549-0609, with
reference to File No. S7-15-01.
OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication, so a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days of publication. The SEC has submitted the proposed collections
of information to OMB for approval. Requests for the materials
submitted to OMB by the SEC
[[Page 45914]]
with regard to these collections of information should be in writing,
refer to File No. S7-15-01, and be submitted to the Securities and
Exchange Commission, Records Management, Office of Filings and
Information Services, 450 5th Street, NW, Washington, DC 20549.
V. Costs and Benefits of the Proposed Rulemaking
CFTC: Section 15 of the CEA requires the CFTC to consider the costs
and benefits of its action before issuing a new regulation.\108\ The
CFTC understands that, by its terms, section 15 does not require the
CFTC to quantify the costs and benefits of a new regulation or to
determine whether the benefits of the proposed regulation outweigh its
costs. Nor does it require that each proposed rule be analyzed in
isolation when that rule is a component of a larger package of rules or
rule revisions. Rather, section 15 simply requires the CFTC to
"consider the costs and benefits" of its action.
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\108\ 7 U.S.C. 19.
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Section 15 further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the CFTC could in its discretion give
greater weight to any one of the five enumerated areas of concern and
could in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
The proposed rule constitutes one part of a package of related rule
provisions. The rule provides guidance and establishes procedures for
trading facilities in order to facilitate compliance with governing
laws related to security futures products.
The CFTC has considered the costs and benefits of the proposed rule
as a totality, in light of the specific areas of concern identified in
section 15. The proposed rule should have no effect, from the
standpoint of imposing costs or creating benefits, on the financial
integrity or price discovery function of the futures and options
markets or on the risk management practices of trading facilities or
others. The proposed rule also should have no material effect on the
protection of market participants and the public and should not impact
the efficiency and competition of the markets.
Accordingly, the CFTC has determined to propose the rule discussed
above. The CFTC invites public comment on the application of the cost-
benefit provision of section 15 of the CEA in regard to the proposed
rule. Commenters also are invited to submit any data that they may have
quantifying the costs and benefits of the proposed rule.
SEC: The CFMA \109\ authorizes the trading of futures on individual
stocks and narrow-based security indexes, and puts, calls, straddles,
options, or privileges thereon (collectively, "security futures
products").\110\ The CFMA requires, among other things, that trading
in the security futures product not be readily susceptible to
manipulation of the price of such security futures product, nor to
causing or being used in the manipulation of the price of any
underlying security or option thereon.\111\ In addition, listing
standards must require that the market on which the security futures
product trades has in place procedures to coordinate trading halts
between such market and any market on which any security underlying the
security futures product is traded and other markets on which any
related security is traded.\112\
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\109\ Pub. L. No. 106-554, Appendix E, 114 Stat. 2763.
\110\ However, no person may offer to enter into, enter into, or
confirm the execution of any option on a security future for at
least three years after the enactment of the CFMA. See Section
2(a)(1)(D)(iii) of the CEA, 7 U.S.C. 2(a)(1)(D)(iii); Section
6(h)(6) of the Exchange Act, 15 U.S.C. 78f(h)(6).
\111\ See Section 2(a)(1)(D)(i)(VII) of the CEA, 7 U.S.C.
2(a)(1)(D)(i)(VII); Section 6(h)(3)(H) of the Exchange Act, 15
U.S.C. 78f(h)(3)(H).
\112\ See Section 2(a)(1)(D)(i)(X) of the CEA, 7 U.S.C.
2(a)(1)(D)(i)(X); Section 6(h)(3)(K) of the Exchange Act, 15 U.S.C.
78f(h)(3)(K).
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Accordingly, the SEC is proposing new SEC Rule 6h-1 under the
Exchange Act generally to provide that the listing standards of
national securities exchanges and national securities associations
trading security futures products establish (1) a final settlement
price for each cash-settled security futures product that fairly
reflects the opening price of the underlying security or securities,
and (2) a halt in trading in any security futures product when a
regulatory halt is instituted by the national securities exchange or
national securities association listing the security or securities
underlying the security futures product.\113\
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\113\ Proposed SEC Rule 6h-1.
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Specifically, proposed SEC Rule 6h-1(a) would provide the
definitions of the terms "opening price," "regular trading
session," and "regulatory halt." \114\ Proposed SEC Rule 6h-1(b)
would require that the settlement price of a cash-settled security
futures product based on a single security fairly reflect the opening
price of the underlying security.\115\ Similarly, proposed SEC Rule 6h-
1(c) would require that the settlement price of a cash-settled security
futures product based on a narrow-based security index fairly reflect
the opening prices in the index's underlying securities.\116\
Furthermore, the SEC is proposing SEC Rule 6h-1(d) to require that
trading on a security futures product based on a single security be
halted at all times that a regulatory halt has been instituted by the
listing market due to pending news or the operation of circuit breaker
procedures for the underlying security.\117\ Likewise, proposed SEC
Rule 6h-1(e) would require that trading of a security futures product
based on a narrow-based security index be halted at all times that a
regulatory halt has been instituted for one or more underlying
securities that constitute 30 percent or more of the market
capitalization of the narrow-based security index.\118\
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\114\ Proposed SEC Rule 6h-1(a).
\115\ Proposed SEC Rule 6h-1(b).
\116\ Proposed SEC Rule 6h-1(c).
\117\ Proposed SEC Rule 6h-1(d).
\118\ Proposed SEC Rule 6h-1(e).
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The SEC is considering the costs and benefits of proposed SEC Rule
6h-1 and requests comment on all aspects of this cost-benefit analysis,
including identification of additional costs or benefits of the
proposed rule. The SEC encourages commenters to identify, discuss,
analyze, and supply relevant data concerning the proposed rule.
A. Benefits of Proposed SEC Rule 6h-1 Under the Exchange Act
Proposed SEC Rule 6h-1(a) would define the terms "opening price,"
"regular trading session," and "regulatory halt," and, therefore,
the SEC preliminarily believes that there would be no costs imposed on
the respondents arising from proposed SEC Rule 6h-1(a). However, in
providing the definitions of the relevant terms, the SEC preliminarily
believes that proposed SEC Rule 6h-1(a) should benefit respondents by
providing legal certainty to respondents when complying with the rule.
The SEC also preliminarily believes that the provisions for cash-
settled security futures products under proposed SEC Rule 6h-1(b) and
(c) is necessary to minimize opportunities for intermarket
manipulations and to promote the fair and orderly operation
[[Page 45915]]
of the securities markets. In particular, opening-price settlement
procedures appear to be necessary to satisfy the provisions of Section
2(a)(1)(D)(i)(VII) of the CEA \119\ and Section 6(h)(3)(H) of the
Exchange Act \120\ that listing standards for security futures products
must require that trading in a security futures product not be readily
susceptible to manipulation of the price of such product, nor to
causing or being used in the manipulation of the price of any
underlying security, option on such security, or option on a group or
index including such securities.
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\119\ 7 U.S.C. 2(a)(1)(D)(i)(VII).
\120\ 15 U.S.C. 78f(h)(3)(H).
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Furthermore, the SEC preliminarily believes that using opening-
price settlement procedures should avoid the problems caused by
arbitrageurs unwinding large arbitrage-related positions at the market
close on expiration Fridays that would severely strain the liquidity of
the securities markets. Closing-price settlement procedures often made
it extremely difficult for the securities markets to solicit sufficient
buy or sell interest to match up with the expiration-related programs
that often created buy or sell imbalances within the limited time
permitted to establish closing prices shortly after 4:00 p.m.
(Eastern). Therefore, it was not uncommon for stock specialists to drop
share prices sharply at the close in order to provide sufficient
discounts to draw in matching buy orders or raise prices sharply at the
close to provide sufficient premiums to draw in matching sell orders.
Furthermore, closing-price settlement procedures imposed time
constraints on specialists to establish closing prices that would
result in an equilibrium between buy and sell interest, which in turn
produced sharp price movements in the indexes underlying the index
futures or options contracts. In addition, the SEC preliminarily
believes that the liquidity constraints associated with expiration-
related buy or sell programs at the close on expiration Fridays would
aggravate ongoing market swings during an expiration and provide
opportunities for entities to anticipate these pressures and enter
orders as part of manipulative or abusive trading practices designed to
artificially drive up or down share prices.\121\
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\121\ The liquidity constraints faced by the securities markets
due to unwinding programs used in closing-price settlement
procedures were discussed by the SEC staff in its report on the
market decline on November 15, 1991. See Trading Analysis of
November 15, 1991, supra note 55.
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The SEC preliminarily believes that proposed SEC Rule 6h-1(b) and
(c), which require opening-price settlement procedures for cash-settled
security futures products, should facilitate the ability of the
securities markets to handle expiration-related unwinding programs and
should mitigate the liquidity strains that had previously been
experienced in the securities markets on expirations. It is likely that
smaller price discounts or premiums will be needed to draw in orders to
offset unwinding programs since traders who enter the offsetting orders
will have the remainder of the trading session to trade out of any long
or short positions acquired at the opening.
Furthermore, the SEC preliminarily believes that the language of
the proposed rule will provide national securities exchanges and
national securities associations with flexibility in establishing the
procedures for determining the opening price at which to settle for a
particular security futures product. For instance, a national
securities exchange or a national securities association would be free
to define the opening price as a trade-weighted average price of the
underlying security during the first few minutes of trading of a
regular trading session or the price reported for the first trade in
the underlying security at the beginning of the regular trading
session. In addition, proposed SEC Rule 6h-1(b) and (c) also would
require that, if an opening price for an underlying security is not
readily available, the settlement price of the overlying cash-settled
security futures product or the cash-settled narrow-based security
index future must fairly reflect the price of the underlying security
or securities during its most recent regular trading session. Again,
the proposal would provide national securities exchanges and national
securities associations with some discretion to implement this general
rule without dictating how the settlement price is derived for a
security futures product.
Further, the SEC believes that the exemption provided for in
proposed SEC Rule 6h-1(f), which allows the SEC to provide exemptions
from this section,\122\ would provide national securities exchanges and
national securities associations with sufficient flexibility to use a
price outside of the opening price for cash settled security futures
products. Accordingly, proposed SEC Rule 6h-1(f) would benefit national
securities exchanges and national securities associations by providing
them with flexibility in responding to changing market conditions, as
well as provide the SEC with continued oversight over the respondents
by granting an exemption when it is necessary or appropriate in the
public interest and is consistent with the protection of investors.
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\122\ The SEC may grant an exemption, either unconditionally or
on specified terms and conditions, from using an opening price
settlement for cash settled security futures products if it finds
that such exemption is necessary or appropriate in the public
interest and consistent with the protection of investors. See
Section 36 of the Exchange Act, 15 U.S.C. 78mm.
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Proposed SEC Rule 6h-1(d) and (e) would require trading to be
halted on security futures products at all times that a regulatory halt
has been instituted for the underlying security or for one or more
underlying securities that constitute 30 percent or more of the market
capitalization of the narrow-based security index. The proposal would
help preserve the investor protection and market integrity provisions
of regulatory halt procedures in the securities markets. The SEC
preliminarily believes that the close relationship between the
underlying security or securities and the pricing of the overlying
security futures product generally justifies a regulatory halt of the
security futures product at all times that a regulatory halt has been
instituted for the underlying security or securities.\123\
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\123\ The trading halt provisions of proposed SEC Rule 6h-1(d)
and CFTC Rule 41.25(a)(2)(i) would not be exclusive. The proposed
rule is not designed to preclude a market trading security futures
products from halting trading for other appropriate reasons, such as
operational difficulties being experienced by the market or its
automated systems or concerns over clearance and settlement
operations.
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With respect to regulatory halts due to pending news, proposed SEC
Rule 6h-1(d) and (e) would benefit current and potential shareholders
by providing an opportunity for material information about the
underlying security or securities to be disseminated to the public.
Pending news development may have a significant effect on trading, and
the SEC believes that all investors should have an opportunity to learn
of and react to material information in order to make informed
investment judgments.\124\ Accordingly, such news pending regulatory
halts would foster public confidence in the market and promote the
integrity of the market place. Furthermore, the SEC preliminarily
believes that requiring an exchange or association to halt trading on a
security futures product at all times that a regulatory halt has been
instituted for the underlying security or securities should contribute
to the maintenance of an efficient market.
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\124\ See Securities Exchange Act Release No. 32890 (September
14, 1993), 58 FR 48916 (September 20, 1993).
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[[Page 45916]]
In addition, the SEC preliminarily believes that instituting a
regulatory halt in the trading of security futures product due to the
operation of circuit breakers would further protect investors and the
markets by mitigating potential systemic stress during a historic
market decline and allow for the reestablishment of an equilibrium
between buying and selling interests in an orderly fashion. The SEC
generally believes that pre-determined, coordinated, cross-market
operations of circuit breakers would effectively address market
declines that threaten to result in ad hoc and potentially
destabilizing market closings. The SEC preliminarily believes that the
circuit breakers levels are sufficiently broad enough to be triggered
only on rare occasions and represent a reasonable means to protect the
nation's financial markets and participants from rapid market
declines.\125\ Circuit breaker procedures would also help to ensure
that market participants had a reasonable opportunity to become aware
of, and respond to, significant price movements.
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\125\ See Securities Exchange Act Release No. 27370 (October 23,
1989), 54 FR 43881 (October 27, 1989).
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With respect to narrow-based security indexes, the SEC believes
that trading should necessarily be halted when a trading halt has been
instituted for a sufficiently large portion of an index in order to
prevent continued trading of the security futures product from becoming
a means to improperly circumvent regulatory halts in the underlying
securities. If trading in only one component security is halted,
continued trading in a security index future in which such a security
represents a substantial portion of the index value could also
undermine the trading halt in the underlying security. The SEC
preliminarily believes that trading halt procedures also would not be
coordinated, as contemplated by Section 2(a)(1)(D)(i)(X) of the CEA
\126\ and Section 6(h)(3)(K) of the Exchange Act,\127\ if the security
futures product continued to trade while investors were precluded from
trading some or all of the underlying securities. Moreover, the SEC
preliminarily believes that continued trading in the security futures
product under these circumstances would undercut key provisions in the
securities laws designed to protect investors and promote the fair and
orderly operation of the markets. Accordingly, the SEC believes that a
general practice whereby trading is halted for the security futures
product when investors lack access to current pricing information in
the primary market for the underlying security should contribute to the
maintenance of fair and orderly markets. Therefore, proposed SEC Rule
6h-1(e) would require a trading halt in the security futures product
overlying the index when trading is halted in a component security or
securities of an index that represents 30 percent or more of the
index's weighting. Moreover, the SEC believes that this coordination of
trading halts, as contemplated by proposed SEC Rule 6h-1(d) and (e),
would generally benefit investors and the market by providing less
opportunity for abuse and manipulation.
---------------------------------------------------------------------------
\126\ 7 U.S.C. 2(a)(1)(D)(i)(X).
\127\ 15 U.S.C. 78f(h)(3)(K).
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Proposed SEC Rule 6h-1(d) and (e) also would further increase
investor confidence in the stability of the markets by assuring
investors and the public that the national securities exchanges and
national securities associations trading security futures product are
reasonably equipped to handle market demand and pending material news.
Furthermore, in order to be effective, circuit breakers have to be
coordinated across stock, stock index futures, and options markets in
order to prevent intermarket problems of the kind experienced in
October 1987.\128\ Since the markets currently coordinate regulatory
halts between the listing market for the underlying security and other
markets that trade the underlying security or any related security in
order to promote investor protection and fair and orderly markets,
proposed SEC Rule 6h-1(d) and (e) would help ensure such coordination
and effectiveness through the use of regulatory halts in the markets
trading security futures products.
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\128\ In response to the events of October 19, 1987, when the
Dow Jones Industrial Average ("DJIA") sustained a one-day decline
of 508 points (22.6%), the nation's securities and futures markets
in 1988 adopted rules that provide for coordinated, cross-market
trading halts in all equity and equity-derivative markets following
specified declines in the DJIA. See Circuit Breaker Report, supra
note. See also Securities Exchange Act Release No. 38080 (December
23, 1996), 61 FR 69126 (December 31, 1996) (citing the SEC's desire
to have coordinated mechanisms across these markets to deal with
potential volatility that may develop during periods of extreme
downward volatility).
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The SEC also preliminarily believes that the proposed rule will
provide all market participants a clear guideline of when regulatory
halts are to be observed for trading in the security futures products.
B.Costs of Proposed SEC Rule 6h-1 under the Exchange Act
The SEC estimates that there would be 17 respondents to the
proposed rule: 9 currently registered national securities exchanges, 1
national securities association (the NASD) that operates a securities
market (Nasdaq), and an estimated 7 futures markets that are expected
to register as Security Futures Product Exchanges.
National securities exchanges and national securities associations
may file proposed rule changes pursuant to Section 19(b) of the
Exchange Act \129\ to implement proposed SEC Rule 6h-1.\130\ However,
the SEC notes that even in the absence of proposed SEC Rule 6h-1,
pursuant to the CFMA, to trade security futures products, each of the
respondents would have to file one or more proposed rule changes to
adopt listing standards for security futures products.
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\129\ 15 U.S.C. 78s(b).
\130\ The SEC has adopted Rule 19b-7, which would direct
Security Futures Product Exchanges to file proposed rule changes on
Form 19b-7. See Securities Exchange Act Release No. 44692, supra
note 12.
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Under Rule 17a-1 of the Exchange Act,\131\ a national securities
exchange or national securities association is required to retain
records of the collection of information for at least 5 years, with the
first 2 years in an easily accessible place. However, Rule 17a-1
requires a Security Futures Product Exchange to retain only those
records relating to persons, accounts, agreements, contracts, and
transactions involving security futures products.\132\ As discussed
above, the SEC also does not believe that the collection of information
required by proposed SEC Rule 6h-1 would result in any additional
clerical work or miscellaneous clerical expenses since these clerical
burdens would be incurred even in the absence of proposed SEC Rule 6h-1
\133\ and are actually due to the statutory requirement. The SEC
preliminarily believes that respondents would not incur any additional
capital or start-up costs, nor any additional operational or
maintenance costs to comply with the collection of information
requirements under proposed SEC Rule 6h-1.\134\
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\131\ 17 CFR 240.17a-1.
\132\ See 15 U.S.C. 78q(b)(4)(B).
\133\ See Paperwork Reduction Act discussion at Section IV.
\134\ Id.
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In addition, proposed SEC Rule 6h-1 would require respondents that
chose to trade these products to develop a system for determining the
settlement price of a cash-settled security futures product
[[Page 45917]]
to fairly reflect the opening price of the underlying security.
However, because respondents to the proposed rule currently have
systems in place to determine opening prices, the SEC preliminarily
believes that respondents complying with the settlement provisions of
proposed SEC Rule 6h-1 would only incur minimal operational or
maintenance costs to reconfigure their current settlement procedures to
fairly reflect the opening price of the underlying security.
Finally, the SEC preliminarily believes that national securities
exchanges and national securities associations would incur operational
costs in developing a system to monitor when other markets have
instituted a regulatory halt for an underlying security of the security
futures product in order to comply with proposed SEC Rule 6h-1(b) and
(c). However, the SEC notes that 9 of the estimated 17 respondents are
already required to provide notification of regulatory halts since they
are participants of the Consolidated Tape Association Plan ("CTA
Plan") \135\ and thus, should already have systems in place to monitor
each other of regulatory halts being instituted. The SEC also estimates
that each of the remaining respondents will have to develop a similar
system to monitor when regulatory halts have been instituted by the
primary market of the underlying security. The SEC requests comments on
the number of respondents who will actually have to develop a
monitoring and notification system and the estimated costs in
developing such a system.
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\135\ The CTA Plan is a joint industry plan that governs the
consolidated transaction reporting system. Parties to the CTA Plan
are as follows: the American Stock Exchange, Inc., Boston Stock
Exchange, Inc., Chicago Board Options Exchange, Inc., Chicago Stock
Exchange, Inc., Cincinnati Stock Exchange, Inc., National
Association of Securities Dealers, Inc., New York Stock Exchange,
Inc., Pacific Stock Exchange, Inc., and Philadelphia Stock Exchange,
Inc. See CTA Plan (Second Restatement), Section III (a).
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C. Request for Comments
The SEC requests data to quantify the costs and benefits above. The
SEC seeks estimates of these costs and benefits, as well as any costs
and benefits not already described, which may result from the adoption
of this proposed rule.
The SEC requests comment on the estimate of the number of
respondents that would be affected by proposed SEC Rule 6h-1 and the
costs and benefits associated with complying with the proposed rule.
The SEC specifically requests comments on the operational and
maintenance costs associated with the proposal and whether these costs
would be significant. Commenters should provide analysis and empirical
data to support their views on the costs and benefits associated with
the proposal.
VI. Consideration of the Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
SEC: Section 3(f) of the Exchange Act \136\ requires the SEC,
whenever it is engaged in rulemaking, and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider whether the action will promote efficiency,
competition, and capital formation. In addition, Section 23(a)(2) of
the Exchange Act \137\ requires the SEC, when promulgating rules under
the Exchange Act, to consider the impact any such rules would have on
competition. Section 23(a)(2) of the Exchange Act further provides that
the SEC may not adopt a rule that would impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Exchange Act. The SEC has considered the proposed rule in light of the
standards set forth in Sections 3(f) and 23(a)(2) of the Exchange
Act.\138\
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\136\ 15 U.S.C. 78c(f).
\137\ 15 U.S.C. 78w(a)(2).
\138\ 15 U.S.C. 78c(f) and 78w(a)(2). The CFTC is not required
to evaluate proposed rules under these standards.
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A. Settlement Prices for Cash-Settled Security Futures Products
1. Effects on Competition
Proposed SEC Rule 6h-1(b) and (c) would require national securities
exchanges and national securities associations that trade security
futures products to trade cash-settled security futures products only
if the final settlement price for each cash-settled security futures
products fairly reflects the opening price for the underlying security
or securities. If adopted, the proposal may affect competition, as
national securities exchanges and national securities associations
would not be able to choose between using opening prices and closing
prices for settlement of cash-settled security futures products.
However, as discussed above, the SEC preliminarily believes that the
benefits to be gained by such restriction justify any potential costs,
and that any such restriction is appropriate in furtherance of the
purposes of the Exchange Act, particularly the purpose of reducing
market volatility and the opportunities for market manipulation. The
SEC solicits comment on the impact on competition of the proposed rule
regarding settlement prices for cash-settled security futures products.
2. Effects on Efficiency and Capital Formation
The SEC preliminarily believes that, as addressed above, the
proposal regarding settlement prices for cash-settled security futures
products would reduce market volatility and opportunities for market
manipulation of security futures products and would ultimately improve
efficiency and capital formation by strengthening investors' confidence
in the market for these products. Commenters are invited to submit
comments on the effect of the proposed rule regarding settlement prices
for cash-settled security futures products on efficiency and capital
formation.
B. Trading Halts for Security Futures Products
1. Effects on Competition
The SEC acknowledges that the proposed rule establishing a criteria
for trading halts for security futures products could impose a burden
on competition, because national securities exchanges and national
securities associations that trade a security futures product would not
be permitted to act as a surrogate market for an underlying security or
securities when such security or securities are subject to a regulatory
halt on the listing market. However, as discussed more fully above, the
SEC preliminarily believes that any burden on competition as a result
of a trading halt is appropriate in furtherance of the purposes of the
Exchange Act. The SEC solicits comment on the impact on competition of
the proposed rule regarding trading halts for security futures
products.
2. Effects on Efficiency and Capital Formation
The SEC preliminarily believes that the proposal regarding trading
halts for security futures products, which would require national
securities exchanges and national securities associations to halt
trading in security futures products when trading is halted in the
underlying security or securities, will ultimately improve efficiency
and capital formation by creating a fairer and more orderly
marketplace. Commenters are invited to submit comments on the effect of
the proposed rule regarding trading halts for security futures products
on efficiency and capital formation.
[[Page 45918]]
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the SEC also is requesting information regarding the
potential impact of the proposed rule on the economy on an annual
basis. Commentators should provide empirical data to support their
views.
VII. Regulatory Flexibility Act
CFTC: The Regulatory Flexibility Act ("RFA") requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities.\139\ The rule adopted herein would affect designated
contract markets and registered derivatives transaction execution
facilities. The CFTC has previously established certain definitions of
"small entities" to be used in evaluating the impact of its rules on
small entities in accordance with the RFA.\140\ In its previous
determinations, the CFTC has concluded that contract markets are not
small entities for the purpose of the RFA.\141\ The CFTC has also
recently proposed determining that the other trading facilities subject
to its jurisdiction, for reasons similar to those applicable to
contract markets, would not be small entities for purposes of the
RFA.\142\
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\139\ 5 U.S.C. 601 et seq.
\140\ See 47 FR 18618-21 (April 30, 1982).
\141\ See id. at 18619 (discussing contract markets).
\142\ See 66 FR 14262, 14268 (March 9, 2001).
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Accordingly, the CFTC does not expect the rule, as proposed herein,
to have a significant economic impact on a substantial number of small
entities. Therefore, the Acting Chairman, on behalf of the CFTC, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the proposed amendments
will not have a significant economic impact on a substantial number of
small entities. The CFTC invites the public to comment on the finding
that this proposed rule would not have a significant economic impact on
a substantial number of small entities.
SEC: Section 3(a) of the RFA \143\ requires the SEC to undertake an
initial regulatory flexibility analysis of the proposed rules on small
entities unless the SEC certifies that the rule, if adopted, would not
have a significant economic impact on a substantial number of small
entities.\144\ Proposed SEC Rule 6h-1 would require national security
exchanges and national security associations trading security futures
products to trade cash-settled security futures products only if the
final settlement price for each cash-settled security futures product
fairly reflects the opening price of the underlying security or
securities, and to halt in trading in any security futures product when
a regulatory halt is instituted for the underlying security or
securities of the security futures product. There are nine currently
registered national securities exchanges, one national securities
association, and seven futures markets that are likely to register as
Security Futures Product Exchanges, all of which would be subject to
the proposed rule and none of which are small entities. The SEC has
certified that the proposed rule, if adopted, would not have a
significant economic impact on a substantial number of small entities.
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\143\ 5 U.S.C. 603(a).
\144\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
A copy of the certification is attached as Appendix A.
VIII. Statutory Basis and Text of Proposed Rule
List of Subjects
17 CFR Part 41
Security futures products, Trading halts and Settlement provisions.
17 CFR Part 240
Securities.
Commodity Futures Trading Commission
17 CFR Chapter I
The CFTC has authority to propose these rules pursuant to sections
2(a)(1)(D)(i)(VII), 2(a)(1)(D)(i)(X), and 8a(5) of the CEA, 7 U.S.C.
2(a)(1)(D)(i)(VII), 2(a)(1)(D)(i)(X), and 12a(5).
In accordance with the foregoing, Title 17, Chapter I of the Code
of Federal Regulations is proposed to be amended by amending Part 41 as
follows:
PART 41--SECURITY FUTURES PRODUCTS
1. The authority citation for Part 41 is revised to read as
follows:
Authority: 7 U.S.C. 1a(25), 2(a), 6j, 7a-2(c) and 12a(5).
2. Section 41.1 is amended by adding paragraphs (j), (k) and (l) to
read as follows:
Sec. 41.1 Definitions.
For purposes of this part:
* * * * *
(j) Opening price means the price at which a security opened for
trading, or a price that fairly reflects the price at which a security
opened for trading, during the regular trading session of the national
securities exchange or national securities association that lists the
security.
(k) Regular trading session of a security means the normal hours
for business of a national securities exchange or national securities
association that lists the security.
(l) Regulatory halt means a delay, halt, or suspension in the
trading of a security, that is instituted by the national securities
exchange or national securities association that lists the security, as
a result of:
(1) A determination that there are matters relating to the security
or issuer that have not been adequately disclosed to the public, or
that there are regulatory problems relating to the security which
should be clarified before trading is permitted to continue; or
(2) The operation of circuit breaker procedures to halt or suspend
trading in all equity securities trading on that national securities
exchange or national securities association.
3. Section 41.25, as proposed on July 20, 2001, 66 FR 37932, is
further proposed to be amended by revising paragraphs (a)(2) and (b) to
read as follows:
Sec. 41.25 Additional conditions for trading for security futures
products.
(a) Common provisions. * * *
(2) Regulatory Trading Halts. The rules of a designated contract
market or registered derivatives transaction execution facility that
lists or trades one or more security futures products must include the
following provisions:
(i) Trading of a security futures product based on a single
security shall be halted at all times that a regulatory halt has been
instituted for the underlying security; and
(ii) Trading of a security futures product based on a narrow-based
security index shall be halted at all times that a regulatory halt has
been instituted for one or more underlying securities that constitute
30 percent or more of the market capitalization of the narrow-based
security index.
* * * * *
(b) Special requirements for cash-settled contracts. For cash-
settled security futures products, the cash-settlement price must be
reliable and acceptable, be reflective of prices in the underlying
securities market and be not readily susceptible to manipulation.
(1) The final settlement price of a cash-settled security futures
product based on a single security shall fairly reflect the opening
price of the underlying security. If an opening price for the
underlying security is not readily available, the final settlement
price of the security futures product shall fairly reflect the price of
the underlying security during its most recent regular
[[Page 45919]]
trading session; and (1) The final settlement price of a cash-settled
security futures product based on a narrow-based security index shall
fairly reflect the opening prices of the underlying securities. If an
opening price for one or more underlying securities is not readily
available, the final settlement price of the narrow-based security
index future shall, for the underlying securities for which opening
prices are not readily available, fairly reflect the prices of those
underlying securities during their most recent regular trading session.
(2) The Commission may exempt from the provisions of paragraphs (b)(1)
and (b)(2) of this section, either unconditionally or on specified
terms and conditions, any designated contract market or registered
derivatives transaction execution facility, when the Commission
determines that an exemption is consistent with the public interest,
the protection of investors, and otherwise furthers the purposes of the
Act.
* * * * *
Issued in Washington, DC on August 24, 2001 by the Commodity
Futures Trading Commission.
Jean A. Webb,
Secretary.
Securities and Exchange Commission
17 CFR Chapter II
The SEC is proposing the rules pursuant to its authority under
Exchange Act Sections 6, 9, 15A, 19, 23(a), and 36, 15 U.S.C. 78f, 78i,
78o-3, 78s, 78w(a), and 78mm.
In accordance with the foregoing, Title 17, Chapter II, part 240 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1,
78k, 78k-1, 78l, 78m, 78n, 78o, 78o-3, 78p, 78q, 78s, 78u-5, 78w,
78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3,
80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Section 240.6h-1 is added to read as follows:
Sec. 240.6h-1 Settlement and regulatory halt requirements for security
futures products.
(a) For the purposes of this section:
(1) Opening price means the price at which a security opened for
trading, or a price that fairly reflects the price at which a security
opened for trading, during the regular trading session of the national
securities exchange or national securities association that lists the
security.
(2) Regular trading session of a security means the normal hours
for business of a national securities exchange or national securities
association that lists the security.
(3) Regulatory halt means a delay, halt, or suspension in the
trading of a security, that is instituted by the national securities
exchange or national securities association that lists the security, as
a result of:
(i) A determination that there are matters relating to the security
or issuer that have not been adequately disclosed to the public, or
that there are regulatory problems relating to the security which
should be clarified before trading is permitted to continue; or
(ii) The operation of circuit breaker procedures to halt or suspend
trading in all equity securities trading on that national securities
exchange or national securities association.
(b) The final settlement price of a cash-settled security futures
product based on a single security shall fairly reflect the opening
price of the underlying security. If an opening price for the
underlying security is not readily available, the final settlement
price of the security futures product shall fairly reflect the price of
the underlying security during its most recent regular trading session.
(c) The final settlement price of a cash-settled security futures
product based on a narrow-based security index shall fairly reflect the
opening prices of the underlying securities. If an opening price for
one or more underlying securities is not readily available, the final
settlement price of the narrow-based security index future shall, for
the underlying securities for which opening prices are not readily
available, fairly reflect the prices of those underlying securities
during their most recent regular trading session.
(d) Trading of a security futures product based on a single
security shall be halted at all times that a regulatory halt has been
instituted for the underlying security.
(e) Trading of a security futures product based on a narrow-based
security index shall be halted at all times that a regulatory halt has
been instituted for one or more underlying securities that constitute
30 percent or more of the market capitalization of the narrow-based
security index.
(f) The Commission may exempt from the provisions of paragraphs (b)
and (c) of this section, either unconditionally or on specified terms
and conditions, any national securities exchange or national securities
association if the Commission determines that such exemption is
necessary or appropriate in the public interest, and consistent with
the protection of investors.
By the Securities and Exchange Commission.\145\
\145\ Chairman Pitt did not participate in this matter.
Dated: August 24, 2001.
Margaret H. McFarland,
Deputy Secretary.
Appendix A
Note: Appendix A to the preamble will not appear in the Code of
Federal Regulations.
Regulatory Flexibility Act Certification
The Securities and Exchange Commission ("Commission") hereby
certifies pursuant to 5 U.S.C. 605(b) that proposed Rule 6h-1 under
the Securities Exchange Act of 1934 ("Exchange Act"), which
generally would provide that the listing standards of national
security exchanges and national security associations trading
security futures products establish (i) a settlement price for each
cash-settled security futures product that fairly reflects the
opening price of the underlying security or securities, and (ii) a
halt in trading in any security futures product when a regulatory
halt is instituted by the national securities exchange or national
securities association listing the security or securities underlying
the security futures product, would not, if adopted, have a
significant economic impact on a substantial number of small
entities. Proposed Rule 6h-1 under the Exchange Act likely would
apply to nine currently registered national securities exchanges,
one national securities association, and an estimated seven futures
markets that are expected to register as Security Futures Product
Exchanges, none of which is a small entity for the purpose of the
Regulatory Flexibility Act. Accordingly, proposed Rule 6h-1, if
adopted, would not have a significant economic impact on a
substantial number of small entities.
By the Commission.
Dated: August 24, 2001.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-21886 Filed 8-29-01; 8:45 am]
BILLING CODE 6351-01-P