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SEC Seeks Comments on Proposed Rules to Update Market-Wide Circuit Breakers

Wednesday, September 28, 2011

SEC Press Release No. PR-2011-190 (Sept. 27, 2011); File No. SR-BATS-2011-38 (Sept. 27, 2011); File No. SR-BX-2011-68 (Sept. 27, 2011); File No. SR-BYX-2011-25 (Sept. 27, 2011); File No. SR-C2-2011-24 (Sept. 27, 2011); File No. SR-CBOE-2011-87 (Sept. 27, 2011);File No. SR-EDGA-2011-31 (Sept. 27, 2011); File No. SR-EDGX-2011-30 (Sept. 27, 2011); File No. SR-FINRA-2011-54 (Sept. 27, 2011); File No. SR-NYSE-2011-48 (Sept. 27, 2011); File No. SR-NYSEAmex-2011-73 (Sept. 27, 2011); File No. SR-NYSEArca-2011-68 (Sept. 27, 2011);File No. SR-Phlx-2011-129 (Sept. 27, 2011) The Securities and Exchange Commission (SEC) announced that the Financial Industry Regulatory Authority (FINRA), along with BATS Exchange, Inc., BATS Y Exchange, Inc., C2 Options Exchange, Inc., Chicago Boards Options Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., New York Stock Exchange, LLC, NYSE Amex, LLC, and NYSE Arca, Inc. (Exchanges), filed rule proposals to update existing market-wide circuit breakers in an effort to address extraordinary volatility across the securities markets. The severe market disruptions of May 6, 2010 failed to trigger market-wide circuit breakers, which led FINRA and the Exchanges to reassess whether such circuit breakers needed to be modified and updated. In fact, the existing circuit breaker rules, which were adopted originally in October 1988, have been triggered only once in 1997. For more information see,Bloomberg Law Reports®—Securities Law, SEC Congressional Testimony, Testimony Concerning the Severe Market Disruption on May 6, 2010(May 11, 2010) and Bloomberg Law Reports®—Securities Law, SEC Report, Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues (Sept. 30, 2010). The SEC also took action after the May 6 events, including approving new rules that require the Exchanges and FINRA to pause trading in certain individual securities if the price moves 10 percent or more in a five-minute period. See Bloomberg Law Reports®—Securities Law, SEC Approves Stock-by-Stock Circuit Breaker Rule Proposals (June 14, 2010). The SEC now seeks comment on FINRA's and the Exchanges' proposed rule changes, which remain subject to SEC approval following a 21 day public comment period.

Market-wide Circuit Breaker Proposed Rules

Circuit breakers, if triggered, halt trading in all exchange-listed securities throughout the U.S. markets. Nevertheless, FINRA's and the Exchanges' rule proposals would not only update the market-wide circuit breakers, but also (1) reduce the market decline percentage thresholds necessary to trigger a circuit breaker, (2) shorten the duration of the resulting trading halts, and (3) change the reference index used to measure a market decline. Specifically, the rule proposals would revise the following existing market-wide circuit breakers: (1) reduce market decline percentage thresholds necessary to trigger a circuit breaker from 10, 20, and 30 percent to 7, 13, and 20 percent from the prior day's closing price; (2) shorten the duration of the resulting trading halts that do not close the market for the day from 20, 60, or 120 minutes to 15 minutes; (3) simplify the structure of circuit breakers so that rather than six there are only two relevant trigger time periods, before and after 3:25 PM; (4) use the broader S&P 500 Index as the pricing reference to measure a market decline, instead of the Dow Jones Industrial Average; and (5) recalculate the trigger thresholds daily rather than quarterly. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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