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Mechanisms to Enhance Open and Timely Communication Between Market Authorities of Related Cash and Derivative Markets During Periods of Market Disruption

5. Types of Information Market Authorities Consider Important and Useful to Address Market Disruption

5.1 In assessing what types of information could be useful to communicate during periods of market disruption, the Working Party members determined to:
- identify the structural measures currently in place in participating jurisdictions to minimize the adverse effects of market disruption; /

- identify the types of information which individual participating jurisdictions consider relevant to share during periods of market disruption; / and

- identify issues relevant to the implementation of any such mechanism for communication, consultation or coordination purposes. Structural Measures in Place to Address Market Disruption

5.2 After the 1987 market crash, the attention of regulators focused on developing structural measures to minimize the adverse effects of market disruption. In addressing that issue, the report on "Measures to Minimize Market Disruption" identified circuit breakers, shock absorbers and price limits as examples of such regulatory measures.

5.3 In addition to the above measures, the measures identified below also have been implemented in various jurisdictions in advance of and also in response to market disruption. Knowledge of measures implemented by one market authority may be of interest to a market authority of a related market because the effects of such measures (e.g., enhanced margin calls may lead to liquidity restraints, changes in trading hours during periods of market volatility could result in migration of trading volume to other markets, and changes in time of settlements may produce anomalies in price correlations) could implicate the structural measures of that market authority:

  • (a) margin requirements - including levels, types, required timeframes for payment and cross-margining -- margin requirements for derivative products generally are established at a level sufficient to cover a certain (typically one day) price move based upon historical volatility and, at the customer level, reflect the type of transaction involved (e.g., speculative or hedge). In the case of futures, frequently the variation in price is collected daily and paid from persons holding contracts losing value to persons holding contracts gaining value. On days when extreme market moves occur, clearing organizations and brokerage firms may make intraday margin calls for variation margin and may require clearing members or traders to deposit additional standing margin immediately or risk having their positions liquidated. Cross-margining systems permit market participants to deposit a single margin payment to support positions on different markets where movements in one position tend to be offset by price movements in the other market;
  • (b) position and exercise limits - such limitations generally are intended to minimize the potential for market disruption;
  • (c) frontrunning restrictions - intermarket frontrunning is generally defined as trading in one market with knowledge of an imminent transaction in a related market that reasonably can be expected to have a market impact in relation to trading in the first market;
  • (d) listing or contract design standards and changes thereto - see paper of the Working Party on Regulation of Secondary Markets on "Contract Design of Derivative Products on Stock Indices" approved by IOSCO in October 1992;
  • (e) changes in trading hours;
  • (f) changes in time of settlement or manner of calculating settlement price;
  • (g) contingency planning - following the 1987 and 1989 market breaks, some Working Party members developed written contingency plans which address types of actions to be taken in the event of unusual price volatility or market disruption. Other jurisdictions, in anticipation of market problems relative to the Persian Gulf War, in addition to following routine volatile market procedures, encouraged markets to engage in contingency planning activities including: (1) simulation analysis to test the potential effects of any unusual price volatility to determine which firms would be most affected and to aid in emergency planning; (2) special review of margin levels based on historical volatility in light of projected events; (3) review of the accounts and financial positions of large traders to determine if carrying firms had adequate assurances of their customers' capabilities to meet their obligations; (4) review of wire transfer arrangements for large accounts and accounts located outside the jurisdiction; and (5) review and simulation testing of a market's ability to halt or otherwise accommodate trading during times of unusual market volatility or disturbance, including review and stress and/or capacity testing of any relevant automated systems;
  • (h) intra-jurisdiction coordination forums for relevant market authorities; and
  • (i) affirmative obligations on markets to maintain orderly markets and emergency authority to take action without prior review of other authorities.

Information as to Implementation of Measures in Place

5.4 Working Party members generally believe that advance knowledge of another jurisdiction's structural measures to minimize the effects of market disruption can be of critical importance in assisting them to respond appropriately during market events. For example, general knowledge of another market authority's contingency plan or other structural measures such as triggers for and implementation of trading halt mechanisms, plans to increase margin levels or price limits upon the occurrence of specified events, or changes in trading hours could be helpful in planning appropriate regulatory responses in anticipation of potentially disruptive market events. In addition, market authorities may wish to prepare a contingency plan which identifies such structural measures as well as key individuals at each relevant market authority to be contacted during periods of market stress, and periodically verify that the plan information is current.

5.5 Subject to the concerns expressed in paragraphs 5.13-5.14 below, Working Party Members generally expressed interest in the timely availability of information relating to regulatory action by a market authority as follows:

    - individual instrument or market-wide quotation and trading halts or suspensions;

    - resumption of trading following any quotation and/or trading halt or suspension;

    - alerts/monitoring/watches placed on a given instrument;

    - expansion of price limits;

    - passing of any level of trading which triggers a watch/halt/circuit breaker/speed bump, etc.;

    - triggering of any alerts/monitoring/watches or other uncommon action with respect to any fund or loan facility that is intended to fulfill execution or clearing obligations of a market participant (including customers) which "fails" on a given transaction, or payment;

    - triggering of any alerts/monitoring/watches or other uncommon action with respect to any market participant's (including customers') net capital levels, including the depletion of any market participant's (including customers') net capital levels below market requirements (see discussion in paragraph 5.13 below, however);

    - emergency action taken in response to, for example, manipulative activity, failure of payment system, governmental intervention, physical emergencies such as bomb threats, fire, floods, computer or communication system failures or bankruptcy; and

    - changes in margin levels or methodologies.

5.6 Market authorities should take into account whether publicly available information on regulatory or likely regulatory action will be accurate and consider whether to set up private mechanisms for sharing information in case of the failure, cessation or questionable reliability of public sources. Further, consideration of the timing of when the information becomes available to another market authority may be important in developing mechanisms to enhance open and timely communication. For example, although a trading halt or resumption of trading would become public information upon its occurrence, market authorities may need access to information regarding anticipated action with respect to any regulatory measure to dispel local rumors, and to plan for potential impacts in related markets.

Market Information

a. Price Information 5.7 Working Party members uniformly believe that information on price should be shared. Information under this category would include:
    - opening value of instrument on given trading day(s);

    - instrument value throughout given trading day(s) and average instrument value over given range of trading days;

    - currency changes throughout given trading day(s) and average currency changes over given range of trading days;

    - constituent prices throughout given trading day(s) and average constituent prices over given range of trading days;

    - highest bid/lowest offer or sale on given day(s) at time of given trades;

    - fluctuations in value throughout given day(s) and/or period(s); - expansion of price limits; and - settlement prices.

5.8 In most cases, price information on exchange-traded products, particularly products which are related and traded internationally, will be available through public means. However, to the extent a market authority may wish to obtain any analysis on price-related information, such information may not be publicly available.

b. Trading Activity

5.9 The types of information relevant to analyzing trading activity on markets could include:
    - general trading activity in the market throughout the day(s) and/or period(s) (including number and size of orders and executions);

    - trading activity in any instrument throughout a given day(s) and/or period(s) (including number, size, price and time of orders and executions) and identity of customer(s) for whom a given transaction was executed)(see discussion in paragraphs 5.13-5.14 below, however); and

    - trading activity of any market participant in relation to an instrument throughout given day(s) and/or period(s) (including number, size, price and time of orders and executions) and identity of customer(s) for whom a given transaction was executed)(see discussion in paragraphs 5.13-5.14 below, however).

c. Other

5.10 Some Working Party members caution that no benefit can be derived by constructing mechanisms for open and timely communication which duplicate existing commercial media for obtaining information, especially as regulatory resources already will be strained during periods of market disruption. Other members believe that to the extent information generated by electronic services is made available to regulators before its publication, market authorities may wish to consider sharing such information prior to its general availability. Other Working Party members note that market authorities should consider taking steps prior to any market disruption to ascertain what type of information is available through commercial sources and the accuracy and immediacy of information generally provided through such sources. Market authorities may wish to make prior arrangements to obtain information from appropriate market authorities if such commercial sources prove inadequate during periods of market disruption.

5.11 In assessing the types of information market authorities consider important and useful to address market disruptions, Working Party members agree that: • The information which may be needed to develop approaches to minimize the adverse effects of market disruptions include:

    - contingency plans, contact persons and structural measures to address market disruption,

    - market conditions:

    -- actions taken under contingency plans, market interventions and implementation of structural measures,

    -- prices,

    -- trading activities such as trading volume, state of program trading, including arbitrage transactions,

    -- aggregate market data, such as open interests of related products and clearing data.

• Market authorities for related cash and derivative markets should be encouraged to develop mechanisms to share the aforesaid information.

Participant Information

5.12 Market participant information which could be shared includes:
    - net capital levels, including depletions of levels below market requirements;

    - trading activity in particular markets, indicating number, size, price and type of orders and executions; and

    - firm defaults.

5.13 There is a divergence of views among Working Party members as to whether participant (including customer) information should be shared during market disruptions. Some members believe that any vehicle developed to address systemic risk through facilitating open and timely communication during periods of market disruption, to the extent possible, not result in the identification of specific traders and their trading activities or develop information which could be used subsequently for investigatory and enforcement purposes. 5.14 In particular, some Working Party members expressed concern about sharing information which would separately disclose individual market participant's positions, or the capital status of firms or financial problems which market participants may be experiencing as a result of the market disruption or in anticipation of the market event. These members considered such information more appropriately the subject of a financial information sharing arrangement or an investigatory and enforcement arrangement. Some members also indicated that they may be restricted from sharing such information by confidentiality and other use restrictions. For these and other reasons, certain market authorities may be unable to share certain participant information.

5.15 Other Working Party members believe that the full range of information which may be necessary to address the market disruption ought to be the subject of any communication mechanism, particularly as the effects of any market disruption can be exacerbated by the problems experienced by particular firms due to position (either proprietary or customer) concentrations and/or cash flow problems (including as to particular customers of the firm). In addition, the suspension during periods of market disruption of the trading or clearing privileges of market participants active in one market will be of interest and concern to many Working Party members who may want to protect themselves and market participants from dealing with persons who are the subject of serious regulatory concern to another market authority.

5.16 For the reasons stated above, Working Party members agree that: • Market participant information specifically related to the market disruption, including the positions of firms, also may be relevant. However, the sensitivity of such information and confidentiality and other legal constraints may restrict how or whether it is provided and who is a competent authority to provide, receive and use it.

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