Notice2022-05975
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Pilot Period Related to FINRA Rule 6121.02 (Market-Wide Circuit Breakers in NMS Stocks)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 22, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 55 (Tuesday, March 22, 2022)</title>
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[Federal Register Volume 87, Number 55 (Tuesday, March 22, 2022)]
[Notices]
[Pages 16265-16268]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-05975]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94428; File No. SR-FINRA-2022-005]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Extend the Pilot Period Related to FINRA Rule
6121.02 (Market-Wide Circuit Breakers in NMS Stocks)
March 16, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 10, 2022, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. FINRA has designated
the proposed rule change as constituting a ``non-controversial'' rule
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which
renders the proposal effective upon receipt of this filing by the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to extend the pilot period related to FINRA Rule
6121.02 (Market-wide Circuit Breakers in NMS Stocks) to the close of
business on April 18, 2022.
The text of the proposed rule change is available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a>, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA proposes to extend the pilot related to the market-wide
circuit breaker in Rule 6121.02 to the close of business on April 18,
2022.
Background
The Market-Wide Circuit Breaker (``MWCB'') rules, including FINRA
Rule 6121.02, provide an important, automatic mechanism that is invoked
to promote stability and investor confidence during periods of
significant stress when cash equities securities experience extreme
market-wide declines. The MWCB rules are designed to slow the effects
of extreme price declines through coordinated trading halts across both
cash equity and equity options securities markets.
[[Page 16266]]
The cash equities rules governing MWCBs were first adopted in 1988
and, in 2012, FINRA and all U.S. cash equity exchanges amended their
cash equities uniform rules on a pilot basis (the ``Pilot Rules,''
i.e., for FINRA, Rule 6121.02).\4\ The Pilot Rules currently provide
for trading halts in all cash equity securities during a severe market
decline as measured by a single-day decline in the S&P 500 Index
(``SPX'').\5\ Under the Pilot Rules, a market-wide trading halt will be
triggered if SPX declines in price by specified percentages from the
prior day's closing price of that index. The triggers are set at three
circuit breaker thresholds: 7% (Level 1), 13% (Level 2), and 20% (Level
3). A market decline that triggers a Level 1 or Level 2 halt after 9:30
a.m. and before 3:25 p.m. would halt market-wide trading for 15
minutes, while a similar market decline at or after 3:25 p.m. would not
halt market-wide trading. (Level 1 and Level 2 halts may occur only
once a day.) A market decline that triggers a Level 3 halt at any time
during the trading day would halt market-wide trading for the remainder
of the trading day.
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\4\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129) (``Pilot
Rules Approval Order'').
\5\ The rules of the equity options exchanges similarly provide
for a halt in trading if the cash equity exchanges invoke a MWCB
Halt. See, e.g., NYSE Arca Rule 6.65-O(d)(4).
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The Commission approved the Pilot Rules, the term of which was to
coincide with the pilot period for the Plan to Address Extraordinary
Market Volatility Pursuant to Rule 608 of Regulation NMS (the ``LULD
Plan''),\6\ including any extensions to the pilot period for the LULD
Plan.\7\ In April 2019, the Commission approved an amendment to the
LULD Plan for it to operate on a permanent, rather than pilot,
basis.\8\ In conjunction with the proposal to make the LULD Plan
permanent, FINRA amended Rule 6121.02 to untie Rule 6121.02's
effectiveness from that of the LULD Plan and to extend Rule 6121.02's
effectiveness to the close of business on October 18, 2019.\9\ FINRA
subsequently amended Rule 6121.02 to extend Rule 6121.02's
effectiveness for an additional year to the close of business on
October 18, 2020,\10\ then until the close of business on October 18,
2021.\11\ Most recently, FINRA extended the pilot until the close of
business on March 18, 2022.\12\
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\6\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down
Release''). The LULD Plan provides a mechanism to address
extraordinary market volatility in individual securities.
\7\ See Securities Exchange Act Release Nos. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (Order Approving File No. SR-
FINRA-2011-054); and 68778 (January 31, 2013), 78 FR 8668 (February
6, 2013) (Notice of Filing and Immediate Effectiveness of File No.
SR-FINRA-2013-011) (Proposed Rule Change to Delay the Operative Date
of FINRA Rule 6121.02).
\8\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving the Eighteenth
Amendment to the National Market System Plan To Address
Extraordinary Market Volatility).
\9\ See Securities Exchange Act Release No. 85547 (April 8,
2019), 84 FR 14981 (April 12, 2019) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2019-010).
\10\ See Securities Exchange Act Release No. 87078 (September
24, 2019), 84 FR 51669 (September 30, 2019) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2019-023).
\11\ See Securities Exchange Act Release No. 90160 (October 13,
2020), 85 FR 67072 (October 21, 2020) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2020-033).
\12\ See Securities Exchange Act Release No. 93300 (October 13,
2021), 86 FR 57867 (October 19, 2021) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2021-027).
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FINRA now proposes to amend Rule 6121.02 to extend the pilot to the
close of business on April 18, 2022. This filing does not propose any
substantive or additional changes to Rule 6121.02.
The MWCB Task Force and the March 2020 MWCB Events
In late 2019, Commission staff requested the formation of a MWCB
Task Force (``Task Force'') to evaluate the operation and design of the
MWCB mechanism. The Task Force included representatives from the SROs,
the Commission, CME, the Commodity Futures Trading Commission
(``CFTC'') and the securities industry, and conducted several
organizational meetings in December 2019 and January 2020.
In Spring 2020, the MWCB mechanism proved itself to be an effective
tool for protecting markets through turbulent times. In March 2020, at
the outset of the worldwide COVID-19 pandemic, U.S. equities markets
experienced four MWCB Level 1 halts, on March 9, 12, 16, and 18, 2020.
In each instance, the markets halted as intended upon a 7% drop in the
S&P 500 Index, and resumed as intended 15 minutes later.
In response to these events, in the Spring and Summer of 2020, the
Task Force held ten meetings that were attended by Commission staff,
with the goal of performing an expedited review of the March 2020 halts
and identifying any areas where the MWCB mechanism had not worked
properly. Given the risk of unintended consequences, the Task Force did
not recommend changes that were not rooted in a noted deficiency. The
Task Force recommended creating a process for a backup reference price
in the event that SPX were to become unavailable, and enhancing
functional MWCB testing. The Task Force also asked CME to consider
modifying its rules to enter into a limit-down state in the futures
pre-market after a 7% decline instead of 5%. CME made the requested
change, which became effective on October 12, 2020.\13\
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\13\ See <a href="https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2020/9/20-392_1.pdf">https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2020/9/20-392_1.pdf</a>; <a href="https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2020/9/20-392_2.pdf">https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2020/9/20-392_2.pdf</a>.
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The MWCB Working Group's Study
On September 17, 2020, the Director of the Commission's Division of
Trading and Markets asked the SROs to conduct a more complete study of
the design and operation of the Pilot Rules and the LULD Plan during
the period of volatility in the Spring of 2020.
In response to the request, the SROs created a MWCB ``Working
Group'' composed of SRO representatives and industry advisers that
included members of the advisory committees to both the LULD Plan and
the NMS Plans governing the collection, consolidation, and
dissemination of last-sale transaction reports and quotations in NMS
Stocks. The Working Group met regularly from September 2020 through
March 2021 to consider the Commission's request, review data, and
compile its study. The Working Group's efforts in this respect
incorporated and built on the work of an MWCB Task Force.
The Working Group submitted its study to the Commission on March
31, 2021 (the ``Study'').\14\ In addition to a timeline of the MWCB
events in March 2020, the Study includes a summary of the analysis and
recommendations of the MWCB Task Force; an evaluation of the operation
of the Pilot Rules during the March 2020 events; an evaluation of the
design of the current MWCB system; and the Working Group's conclusions
and recommendations.
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\14\ See Report of the Market-Wide Circuit Breaker (``MWCB'')
Working Group Regarding the March 2020 MWCB Events, submitted March
31, 2021 (the ``Study''), available at <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse/Report_of_the_Market-Wide_Circuit_Breaker_Working_Group.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse/Report_of_the_Market-Wide_Circuit_Breaker_Working_Group.pdf</a>.
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In the Study, the Working Group concluded: (1) The MWCB mechanism
set out in the Pilot Rules worked as intended during the March 2020
events; (2) the MWCB halts triggered in March 2020 appear to have had
the intended effect of calming volatility in the market, without
causing harm; (3) the
[[Page 16267]]
design of the MWCB mechanism with respect to reference value (SPX),
trigger levels (7%/13%/20%), and halt times (15 minutes) is
appropriate; (4) the change implemented in Amendment 10 to the Plan to
Address Extraordinary Market Volatility (the ``Limit Up/Limit Down
Plan'' or ``LULD Plan'') did not likely have any negative impact on
MWCB functionality; and (5) no changes should be made to the mechanism
to prevent the market from halting shortly after the opening of regular
trading hours at 9:30 a.m.
In light of the foregoing conclusions, the Working Group also made
several recommendations, including that the Pilot Rules should be
permanent without any changes.\15\
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\15\ See the Study, supra note 14, at 46.
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Proposal To Extend the Operation of the Pilot Rules Pending the
Commission's Consideration of the NYSE's Filing To Make the Pilot Rules
Permanent
On July 16, 2021, the NYSE proposed a rule change to make the Pilot
Rules permanent, consistent with the Working Group's
recommendations.\16\ On August 27, 2021, the Commission extended its
time to consider the NYSE's proposed rule change to October 20,
2021.\17\ On September 30, 2021, the Commission instituted proceedings
to determine whether to approve or disapprove the NYSE's proposed rule
change.\18\ On January 7, 2022, the Commission extended its time to act
on the proceedings to determine whether to approve or disapprove the
NYSE's proposed rule change to March 19, 2022.\19\ FINRA now proposes
to extend the expiration date of FINRA Rule 6121.02 to the end of
business on April 18, 2022 to provide additional time to permit FINRA
to prepare a proposed rule change to make the market-wide circuit
breaker pilot under Rule 6121.02 permanent if the Commission approves
the NYSE's proposed rule change to make the Pilot Rules permanent.
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\16\ See Securities Exchange Act Release No. 92428 (July 16,
2021), 86 FR 38776 (July 22, 2021) (Notice of Filing File No. SR-
NYSE-2021-40).
\17\ See Securities Exchange Act Release No. 92785A (August 27,
2021), 86 FR 50202 (September 7, 2021) (Notice of Designation of a
Longer Period for Commission Action on File No. SR-NYSE-2021-40).
\18\ See Securities Exchange Act Release No. 93212 (September
30, 2021), 86 FR 55066 (October 5, 2021) (Order Instituting
Proceedings to Determine Whether to Approve or Disapprove File No.
SR-NYSE-2021-40).
\19\ See Securities Exchange Act Release No. 93933 (January 7,
2022), 87 FR 2189 (January 13, 2022) (Notice of Designation of a
Longer Period for Commission Action on Proceedings to Determine
Whether to Approve or Disapprove File No. SR-NYSE-2021-40).
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FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the SEC waive the requirement that
the proposed rule change not become operative for 30 days from the date
of filing, so that FINRA can implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that its proposal is consistent with Section 15A(b)
of the Act,\20\ in general, and furthers the objectives of Section
15A(b)(6) of the Act,\21\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. The market-wide circuit breaker mechanism under Rule 6121.02
is an important, automatic mechanism that is invoked to promote
stability and investor confidence during a period of significant stress
when securities markets experience extreme broad-based declines.
Extending the market-wide circuit breaker pilot under Rule 6121.02 for
an additional month would ensure the continued, uninterrupted operation
of a consistent mechanism to halt trading across the U.S. markets while
FINRA prepares a proposed rule change to make the market-wide circuit
breaker pilot under Rule 6121.02 permanent if the Commission approves
the NYSE's proposed rule change to make the Pilot Rules permanent.
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\20\ 15 U.S.C. 78o-3(b).
\21\ 15 U.S.C. 78o-3(b)(6).
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FINRA also believes that the proposed rule change promotes just and
equitable principles of trade in that it promotes transparency and
uniformity across markets concerning when and how to halt trading in
all stocks as a result of extraordinary market volatility. Based on the
foregoing, FINRA believes the benefits to market participants under
Rule 6121.02 should continue on a pilot basis because they will promote
fair and orderly markets and protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will impose
any burden on competition not necessary or appropriate in furtherance
of the purposes of the Act because the proposal would ensure the
continued, uninterrupted operation of a consistent mechanism to halt
trading across the U.S. markets while FINRA prepares a proposed rule
change to make the market-wide circuit breaker pilot under Rule 6121.02
permanent if the Commission approves the NYSE's proposed rule change to
make the Pilot Rules permanent.
Further, FINRA understands that other SROs will file proposals to
extend their rules regarding the market-wide circuit breaker pilot.
Thus, the proposed rule change will help to ensure consistency across
market centers without implicating any competitive issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-
4(f)(6)(iii) thereunder.\23\
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\22\ 15 U.S.C. 78s(b)(3)(A)(iii).
\23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4 requires a
self-regulatory organization to give the Commission written notice
of its intent to file a proposed rule change under that subsection
at least five business days prior to the date of filing, or such
shorter time as designated by the Commission. FINRA has fulfilled
this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\25\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. FINRA asked that the
Commission waive the 30 day operative delay so that the proposal may
become operative immediately upon filing. Extending the Pilot Rules'
effectiveness to the close of business on April 18, 2022 will extend
the protections provided by the Pilot Rules, which would otherwise
expire in less than 30 days. Waiver of the operative delay would
therefore permit uninterrupted continuation of the MWCB pilot while the
Commission reviews the NYSE's proposed rule change to make the Pilot
Rules permanent. Therefore, the Commission hereby waives the 30-day
[[Page 16268]]
operative delay and designates the proposed rule change as operative
upon filing.\26\
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\24\ 17 CFR 240.19b-4(f)(6).
\25\ 17 CFR 240.19b-4(f)(6)(iii).
\26\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#dfadaab3baf2bcb0b2b2bab1abac9facbabcf1b8b0a9"><span class="__cf_email__" data-cfemail="4b393e272e66282426262e253f380b382e28652c243d">[email protected]</span></a>. Please include
File Number SR-FINRA-2022-005 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2022-005. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2022-005 and should be submitted on or before April 12, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05975 Filed 3-21-22; 8:45 am]
BILLING CODE 8011-01-P
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