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Appendix 1: Measures to Minimize Adverse Effects of Market Disruption
Circuit Breakers or Trading Halts
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ASC Securities - Australian Stock Exchange (ASX): The ASX has not adopted specific circuit breakers such as downside price limits, position limits, liquidation restrictions or restrictions on certain types of trading. However, temporary trading halts can and do occur following a market sensitive announcement by the company. In the case of a take-over announcement, the ASX will place the Securities of that company into "Adjust Phase" followed by a period of "Pre-Opening." For a Part C take-over, only the broker standing in the market is allowed to enter a new bid during the period of "Adjust." During "Adjust," a broker may remove a bid or offer but cannot enter any new order that will improve the position or quantity of the bid or offer. For announcements of a general nature that are price sensitive, the ASX will place the stock (the subject of the announcement) onto "Pre-Opening." During this period, brokers may enter bids and offers at any price, however, trades are not executed by SEATS until the stock resumes normal trading. The ASX can also call a halt to general trading, under Business Rule 2.13(2), for a period not exceeding 30 minutes. This rule is enforced if in the opinion of the Board it is appropriate for the maintenance of a fair and informed market. Under the rule the market is placed into the Pre-Opening Phase, that is a period of time when bids or offers may be entered or canceled, but no transactions can be effected. Options - Australian Options Market (AOM): The ASX's rules incorporate those governing the trading of Options through the AOM. The trading on the Exchange of any Option shall be halted or suspended whenever the Exchange deems such action appropriate in the interest of maintaining a fair and orderly market and to protect investors. Among the factors that may be considered are: Trading in the Underlying Securities has been halted or suspended in the Primary Market; The opening of such Underlying Securities in the Primary Market has been delayed because of unusual circumstances; The Exchange has been advised that the issuer of the Underlying Securities is about to make an important announcement affecting such issuer; or Other unusual conditions or circumstances are present. To date the AOM has halted all trading in Options when the Underlying Security on the Primary Market has been halted. Futures - Sydney Futures Exchange (SFE): There are currently no circuit breakers in operation in the futures market other than for: System failure that can occur on the SYCOM system. Memorandum of Understanding that currently exists between the SFE and Comex regarding the Gold Futures. SYCOM is the system that allows trading of futures to occur whilst the trading floor is closed. There shall be a Pre-Opening Phase of five minutes (or such longer period as the SYCOM Manager or Chief Executive considers necessary) before allowing SYCOM trading to recommence, during which such live orders retained in the SYCOM System may be canceled or new orders entered (other than during the last thirty (30) seconds). If the Chief Executive or SYCOM Manager is of the view that for whatever reason trading cannot commence, or following a disruption trading will not be able to recommence for at least 30 minutes, Members may execute trades over telephone communication during the period that the SYCOM system is unavailable. The SYCOM Manager will announce the times of commencement and completion of telephone trading which in any case must not extend beyond normal SYCOM trading hours. Any trades executed over the telephone must be for the purpose of liquidating a position that has already been established. Full details of trades executed on the telephone must be recorded by both parties in writing and sent to the Exchange before 8:00 am the following day. The SFE has not observed abnormal trading in its contracts during periods when other markets have closed due to unusual volatility or sharp movements. ASE Zurich Stock Exchange (ZSE): According to article 3, paragraph 5 of the Rules of the Zurich Stock Exchange, trading in any given securities will be suspended for a certain period of time if: the opening price differs substantially from the closing price of the previous trading day sequential prices differ substantially in the course of the trading session. The conditions for such trading halt are defined by the Board of the Zurich Stock Exchange following consultation with the Stock Exchange Commission of the Canton of Zurich. Since September 1990, the conditions for trading halts have been set as follows: Shares and Similar Securities: If the opening price differs 10 percent or more from the previous closing price or if a price difference of 10 percent or more is recorded between two paid prices during the session, a trading halt is imposed for at least 30 minutes. If the situation is registered towards the end of the trading session, however, the trading halt can be reduced to 15 minutes. Rights Issues and Covered Warrants: No trading halts unless a trading halt has been imposed on the underlying securities. Straight Bonds: If the opening price differs 5 percent or more from the previous closing price or if a price difference of 5 percent or more is recorded between two paid prices during the session, a trading halt is imposed for at least 30 minutes. Convertible Bonds and Equity Linked Bonds: No trading halts unless a trading halt has been imposed on the underlying or related shares. Swiss Options and Financial Futures Exchange (SOFFEX): Based on its Rules and Regulations SOFFEX will call for a trading halt of individual stock-options if the underlying securities have been suspended at the ZSE. In the case of Index Options and Futures, trading may be restricted or temporarily suspended by SOFFEX as deemed necessary to maintain a fair and orderly market if the index is not available or the index does not reflect the actual stock market situation for a certain period of time. BDF Frankfurt Stock Exchange: The Frankfurt Stock Exchange has no fixed schedule for specific circuit breakers, speed bumps or trading halts. Paragraph 23 (Cessation and Suspension of Official Quotation) of the Rules and Regulations of the Frankfurt Stock Exchange says that: "(1) The Board of Governors may 1. suspend official quotation if orderly stock exchange trading appears to be temporarily jeopardized or if it seems advisable in order to protect the general public; 2. cease official quotation if orderly stock exchange trading no longer appears to be guaranteed. (2) In the case of securities, the power to suspend official quotation is also vested in the supervisor. (3) The suspension and cessation of official quotation shall be made public." The same procedure applies for the Regulated Market and the Free Market. DTB: Paragraph 24 (Revocation of Admission; Suspension of Trading) of the Rules and Regulations of the DTB: "(1) The Board of Governors may revoke the admission to trading of options and futures contracts or suspend the trading thereof if such action appears to be necessary for the protection of the public, particularly if the quotation of a security on a stock exchange designated by the Exchange for this purpose has been suspended . . . . (3) If trading in any options or futures contract . . . is suspended, in whole or in part, no new orders and quotes may be entered and no open positions may be closed respecting such contract for the duration of the suspension, nor, if exercise is possible under the terms of the contract, may any open positions be exercised during this period. All pending orders and quotes will be canceled. The resumption of trading in suspended contracts shall commence with a Pre-Trading Period." CFTC Circuit Breakers: Following the October 1987 stock market decline, the President's Working Group on Financial Markets (the "Working Group") proposed a system of coordinated price limits and trading halts and reopenings. This system, which the Working Group referred to as a "circuit breaker" mechanism, was intended to deal with "large, rapid market declines that threaten to create panic conditions" and to avoid ad hoc trading disruptions in volatile markets. The CFTC, through its membership in the Working Group, has actively pursued the goal of implementing coordinated circuit breakers across exchanges. Moreover, the two largest commodity exchanges, the Chicago Mercantile Exchange ("CME") and the Chicago Board of Trade ("CBT") have taken the initiative on several key issues in this area. The New York Stock Exchange ("NYSE"), CME, CBT, New York Futures Exchange ("NYFE"), Kansas City Board of Trade ("KCBT"), Chicago Board Options Exchange ("CBOE") and the American Stock Exchange ("AMEX") have adopted circuit breakers similar to those recommended by the Working Group. See Table 1. Shock Absorbers: In addition, several futures exchanges have adopted "shock absorbers" or "speed bumps" which are intended to slow down, but not to halt, stock index futures trading. These less restrictive trading rules consist of price limits at levels much narrower than the levels recommended by the Working Group for the setting of "circuit breakers," price limits and trading halts. These include "opening" price limits for stock index futures traded at the CME or the NYFE and which are effective only for the first ten minutes of trading, and "interim" price decline limits for stock index futures traded at the CME, CBT, KCBT, and NYFE. See Table 1. See also SEC section below. Table 1 PRICE LIMITS FOR SELECTED STOCK INDEX FUTURES CONTRACTS
*/ The NYFE's NYSE Utility Index futures contract provides for a trading halt whenever there is either a trading halt or a limit bid or offer in the NYFE's NYSE Composite Index futures contract. **/ The CME's S&P MidCap 400 and Russell 2000 stock index futures contracts provide for price limits and circuit breakers analogous to those of its S&P 500 stock index futures contract. Similarly, the CBT's Wilshire Small Cap stock index futures contract provides for price limits and circuit breakers analogous to those of its Major Market Index futures contract. †/ Circuit Breakers: In general, trading in domestic stock index futures contracts halts when NYSE trading halts pursuant to NYSE Rule 80B, that is, for at least one hour when the Dow Jones Industrial Average (DJIA) declines 250 points from its previous closing value, and for at least two hours when the DJIA declines 400 points. In general, futures trading does not reopen after a NYSE halt until stocks representing in excess of fifty percent of capitalization of the relevant index have reopened for and are trading. As of March 31, 1993 CNV COB Daily price limits are implemented in cash and derivative markets. Securities traded on the French markets are divided into two categories according to the number and volume of daily transactions and price limits vary according to the category to which the securities belong. For instance, for the more liquid category, when the price movement of a security exceeds 10% from the quoted price at the close of the previous market day, quotation is suspended for 15 minutes. After 15 minutes, transactions begin again. If the price then goes up or down by more than 5%, transactions are again suspended for 15 minutes. The 5% threshold may apply once more before transactions are halted for the rest of the day. When transactions are suspended in the cash market on a given security, due to undue price movement, transactions on the option based on the underlying security are also suspended. Further, when more than 35% of the capitalization of the CAC40 Index is unable to be quoted, the calculation of the CAC40 Index is suspended and the index is replaced by a trend indicator. When less than 25% of the capitalization of the CAC40 Index is able to be quoted, quotations on the derivative markets are suspended for half an hour or one hour when additional margin deposits are requested. CONSOB The CONSOB responses to the CFTC questionnaire on circuit breakers in the Italian market focus on the cash market. To date, only financial futures on government bonds are traded on the Italian market. However, plans to introduce a stock index futures contract are at an advanced stage. As far as the cash market is concerned, a temporary trading suspension is triggered by any price change of more than 10% on the closing price of the previous day. Trading resumes just before the close of the market. This circuit breaker operates at any time of the day, and irrespective of the trading method. This is the only circuit breaker for floor-traded securities; these securities have two trading procedures, a call auction ("listino") and a continuous auction trading section ("durante"). In addition, for stocks that are traded on the computerized system ("continua"), there is an automatic temporary suspension whenever there is a tick-by-tick price change of more than 4%. The floor market re-opens through a call auction procedure that consolidates all the order flow at a given point in time and helps to stabilize the market as well. The computerized market re-opens with an electronic call auction procedure, too; this procedure is the same as the one used at the opening. The objective of temporary trading suspensions is to give market participants enough time to evaluate the imbalance between demand and supply and to encourage the entry of stabilizing orders. In addition, the temporary suspension gives the issuer enough time to disclose new information to the market if this is deemed necessary. In the case of a market break, the following mechanisms can be put in place at the discretion of the Commission: - a ban on short sales; - a reduction in margin requirements for uncovered long positions on the repo market (a bull speculator can enter the repo market as a lender of the stock he has just bought and reverse the position at the end of the cycle). / There are no explicit circuit breakers for the case where the market as a whole breaks. However, in the case of the 1987 market break, activation of the individual temporary trading suspension procedure for a large number of individual stocks worked as a de-facto market circuit breaker. In addition, the mechanical extension of this procedure to a stock index future would create a circuit breaker on that market too. CVMQ Cash Products: One mechanism which exists in this market is called circuit breakers. This mechanism applies only in the case of a substantial decrease of the Dow Jones Industrial Average. In such circumstances trading shall be halted in all securities in conjunction with the Toronto Stock Exchange which coordinates with the New York Stock Exchange. The principle of sharing information and communication between exchanges applies to the trading halt on specific stock of an inter-listed company. However, the company is responsible for advising all exchanges on which its securities are listed of any disclosure which it proposes to make. Derivative Products: The Montreal Exchange puts in place its own market mechanisms relating to the trading rules and surveillance such as the daily fluctuation price limits on the trading halt order. Depending on the features of the derivative contracts, some trading halts are foreseen in specific conditions such as points limits. The Interaction Between Both Products: The Market Surveillance Department has the responsibility to impose a trading halt on a stock in certain circumstances such as a market disruption on both markets. MOF An exchange can halt trading in such case that the exchange recognizes that trading shows unusual movement or it is inappropriate to continue trading in light of a fair and orderly market. OSC Circuit Breakers: Circuit breakers exist on both the Toronto Stock Exchange ("TSE") and the Toronto Futures Exchange ("TFE"). The TSE's circuit breaker is activated by changes on the NYSE and the TFE circuit breaker is dependent upon the activation of the TSE circuit breaker, except in Emergency Situations. (See below and response of OSC in section VI under Emergency Actions.) The TFE - On February 5, 1990, the Board of Governors of the Toronto Futures Exchange passed By-law No. 36, which provides that trading is halted whenever TSE circuit breakers take effect, and provides discretion to the Board of Governors to deal with settlement of contracts effected by circuit breakers as "Emergency Situations," as provided in subsections 10.05(1) and (2). This By-law provision addresses those situations wherein circuit breakers come into effect during the last day of trading of an index futures contract or on any day that spot contracts trade. It also deals with the situation of circuit breakers interfering with the opening or closing indices on expiry Fridays. Subsection 10.05(3) of the By-law reads as follows: "(a) Notwithstanding sections 12.22, 12.47, 12.52, 12.56, 12.73, and 12.78, there shall be no trading in TSE Oil and Gas Index Contracts, TSE Oil and Gas Spot Index Contracts, TSE 35 Index Contracts, TSE 35 Spot Index Contracts, TSE 300 Composite Spot Index Contracts or TSE 300 Composite Index Contracts whenever the Toronto Stock Exchange, pursuant to its published policy on 'circuit breakers,' has halted trading in all equities listed thereon as a result of large price movements of equities generally. (b) In the event trading is halted pursuant to paragraph (a) in TSE 300 Composite Spot Index Contracts, TSE Oil and Gas Spot Index Contracts or TSE 35 Spot Index Contracts or on the last day of trading of TSE 35 Index Contracts, TSE 300 Composite Index Contracts or TSE Oil and Gas Index Contracts the Board may in its sole discretion deem this an Emergency Situation pursuant to subsections 10.05(1) and (2). (c) In the event trading of all equities is halted on the Toronto Stock Exchange pursuant to its published policy on 'circuit breakers' at the time normally used for determining official TSE index opening or closing levels the Board may in its sole discretion deem this an Emergency Situation pursuant to subsections 10.05(1) and (2)."
The TSE - The TSE policies and by-law provisions which trigger the above TFE circuit breakers were passed on February 28, 1989 by the TSE Board of Governors. The Board of Governors decided that in the event that markets in the United States are closed pursuant to the NYSE circuit breaker rules approved by the United States Securities and Exchange Commission, the TSE market will also close for the same period. The TSE Policy provides that the following procedure should take place in the event that circuit breakers are invoked in the United States. Universal trading halted in the United States - The TSE will halt trading in all securities for one hour in conjunction with U.S. markets when the Dow Jones Industrial Average ("DJIA") falls 250 points, and for two hours when the DJIA falls 400 points. A re-opening following a 400-point drop would depend on whether the NYSE re-opens. TSE circuit breaker is not dependent upon TSE 300 index - The TSE did not adopt a circuit breaker based on the TSE 300 because the Canadian market takes its lead primarily from the U.S. market. In the event that the Canadian market experiences a substantial drop independent of the New York market, such a circumstance can be dealt with by section 10.05(3) -Emergency Situations, discussed in section VI below. Halts in individual stocks in U.S. - If an inter-listed issue is halted because of an order imbalance due to program trading, the TSE may continue to trade the stock if the responsible Registered Trader is willing to make a market. If the Registered Trader is not, the TSE will also halt and then re-open in conjunction with NYSE. This policy contains provisions providing for situations in which the NYSE segregates program trades; if there is a serious imbalance as a result, the stock is halted and the imbalance is advertised. The TSE procedures for implementing the circuit breaker provide that, as soon as the TSE Surveillance Department has been officially notified that trading on the NYSE has ceased (verbal notification procedures have been arranged between the TSE and the NYSE), the Computer Operations Department will take the necessary steps to also cease trade on the Floor and in CATS. The TSE has appointed two contacts in the Computer Operations Department and, in their absence, the Computer Operator Supervisor is to be notified. Any of these TSE personnel have the authority, on request from the Market Surveillance Department, to halt trading in all stocks, options and futures on the TSE Floor and trading in the CATS System. At the time of the halt, the siren must be activated as it would to signify the official opening or closing of a TSE regular trading session. If trading is allowed to resume within the same day as the halt, the siren will again be activated to signify such re-opening. When a halt in trading is due to such unusual circumstances and occurs during normal trading hours, the siren will not automatically sound. As a result, a call must be made immediately to the Floor Operations Department, as well as the CATS Operations Department in order to alert the appropriate personnel. The Market Surveillance Department will also immediately call the Montreal, Vancouver and Alberta Stock Exchanges and the Canadian Dealing Network in order for them to halt their markets. Pre-opening orders will be allowed to be entered or removed, as the case may be, approximately one-half hour prior to the re-opening time. This will allow Registered Traders the time to better establish an opening price for their stocks of responsibility by providing the conditions of a pre-opening period. Trading Halts: The TFE - Members of the TFE Options Floor Procedure Committee or Floor Officials have the authority to delay the opening of trading on the Options Floor in any TFE Option for any period in order to assist in the orderly opening of such trading. In addition, the Chairman and Vice-Chairman of the Options Floor Procedure Committee, either acting together or separately with a Floor Official or with any other two members of the Options Floor Committee, have similar authority in order to assist in re-establishing orderly trading. At the request of the Exchange, the Options Floor Procedure Committee is required to halt trading. Finally, trading may be suspended at any time by the Exchange in the interest of maintaining a fair and orderly market. The TSE - Section 701 of Part VIII of the TSE Company Manual provides that: "The Toronto Stock Exchange may at any time (a) temporarily halt trading in any listed securities; or (b) suspend from trading or delist a company's securities if the Exchange is satisfied that: (i) the company has failed to comply with any of the provisions of its Listing Agreement with the Exchange; or (ii) such action is necessary in the public interest." Although the trading halt powers can be used in periods of market disruption, they are used most frequently where there is significant volatility or activity in the securities of a particular issuer. The halt of trading is a temporary measure which is generally employed when a material change occurs during normal trading hours which requires immediate public disclosure. Where trading is halted in a particular security, the halt will not last more than one hour following a dissemination of the announcement. Its purpose is simply to give the company time to comply with the Exchange's timely disclosure policy to allow the Exchange to take such action as it deems to be in the public interest in order to, for example, maintain an orderly market. In some cases, a halt may be changed to a trading suspension. Where a company has been unable to release news after the close of the market, the Exchange may halt trading pending a corporate announcement to allow for the dissemination of that information. In addition, during the period when trading is halted, no Exchange member is allowed to execute an order in the over-the-counter market. Trading is also halted when the market activity indicates that a news item appears to be available to some investors but not to the public at large, and the company either will not or cannot make a clarifying statement. If trading is halted but an announcement is not immediately forthcoming, the Exchange will establish a re-opening time, which shall not be later than twenty-four hours after the time that the halt was imposed. If the company will not make an announcement despite urging by the Exchange, then the Exchange will issue a notice stating the reason for the halt, that an announcement was not forthcoming from the company and that trading will presume at a specific time. While halting is generally an action undertaken at the Commission's initiative, in certain instances companies request halting because they are unable to make full disclosure, even though unusual trading is taking place. Where this occurs, the determination that trading should be halted is made by the Exchange. With respect to options which trade on the TSE, section 22.30 of the Exchange By-laws provides that any two of the Chairman and the Vice-Chairman of the Options Floor Procedure Committee and Options Floor Official, acting together, or any of them acting with any other two Options Floor Governors, shall have authority to interrupt or halt trading on the Options Floor in any class of options at any time and for any period in order to assist in re-establishing orderly trading, and shall have authority to make such decisions as may be required at any time for conducting trading notations in any option. Similar powers exist in section 27.36 of the TSE General By-law with respect to IMS Options traded on the Exchange. SEC Circuit Breakers: Coordinated circuit breaker mechanisms were implemented for all U.S. securities markets after the October 1987 market break in order to substitute planned trading halts for unplanned and destabilizing market closings during turbulent market conditions. These market-wide, universal circuit breakers provide for: a one-hour trading halt of all securities and related derivative instruments after a 250-point decline in the Dow Jones Industrial Average ("DJIA"); and a two-hour trading halt after a 400-point decline in the DJIA. / The circuit breaker mechanisms originally were approved by the Securities and Exchange Commission ("SEC") on a pilot basis. / During the past two years, the SEC approved rule changes submitted by the American Stock Exchange, Inc. ("AMEX"), Boston Stock Exchange, Inc. ("BSE"), Midwest Stock Exchange, Inc. ("MSE"), New York Stock Exchange, Inc. ("NYSE"), Philadelphia Stock Exchange, Inc. ("PHLX") and the National Association of Securities Dealers, Inc. ("NASD") to extend the effectiveness of their circuit breaker procedures. / The Chicago Board Options Exchange, Inc. ("CBOE"), Cincinnati Stock Exchange, Inc. ("CSC") and Pacific Stock Exchange, Inc. ("PSE") circuit breaker procedures previously have been approved on a permanent basis. / "Speed Bumps": In addition, the self-regulatory organizations ("SROs"), with the approval of the SEC, have implemented a number of measures that, while not as comprehensive as circuit breakers, also are designed to calm the stock and derivative markets during periods of unusual volatility. These rules are referred to as "speed bumps" because they are designed to slow down the pace of activity during such periods without closing the markets completely. The most significant of these "speed bumps" is NYSE Rule 80A, which was approved by the SEC on a pilot basis in July, 1990 / and on a permanent basis in 1991. / Rule 80A is designed to ensure that index arbitrage will be exercised only in a market-stabilizing manner during volatile market conditions. Thus, Rule 80A places conditions on index arbitrage orders to buy or sell component stocks of the Standard & Poor's 500 Stock Price Index ("S&P 500 Index") effected on the NYSE when the DJIA advances or declines by 50 points or more from its previous day's closing value. When the DJIA advances 50 points, Rule 80A provides that index arbitrage orders to buy the component stocks of the S&P 500 Index on the NYSE must be entered for the remainder of that day with a "buy minus" instruction, which means that such orders can only be executed when the last reported price movement in each of those stocks (including the price movement, if any, from the arbitrage transaction) was a decline in the price of that stock. / Conversely, when the DJIA declines 50 points, index arbitrage orders to sell component stocks of the S&P 500 Index on the NYSE must be entered for the remainder of that day with a "sell plus" instruction, which means that such orders can only be executed when the last reported price movement in each of those stocks (including the price movement, if any, from the arbitrage transaction) was an increase in the price of that stock. / A NYSE report to the SEC analyzing the effectiveness of the pilot rules on curbing destabilization and retaining liquidity during a volatile market concluded that Rule 80A has had a significant impact on index arbitrage and has dampened the momentum in the cash and futures markets when the DJIA moves 50 points. In addition, the Report also found that while the prohibitions of Rule 80A are in effect, short-term cash-market volatility is reduced, while at the same time reducing or leaving unchanged short-term futures-market volatility. Most importantly, the NYSE report found that the triggering of Rule 80A has not caused significant divergence in pricing between the stock, stock index futures and stock index options markets. Accordingly, the SEC found NYSE Rule 80A to be a modest but useful step by the NYSE to attempt to address the issue of market volatility, and approved it on a permanent basis. SFC Neither the Hong Kong Futures Exchange ("HKFE") nor the Stock Exchange of Hong Kong ("SEHK") has specific provisions imposing circuit breakers or trading halts with respect to large, rapid movements of market prices. However, if the SEHK considers it necessary for the protection of investors or the maintenance of an orderly market, the SEHK may suspend dealings in any security, whether requested by the issuer or not. One of the situations in which the SEHK might exercise this discretion is "news pending" i.e., suspension of the relevant security pending the dissemination of certain price sensitive information. SIB The securities and futures exchanges in London do not have arrangements for circuit breakers or trading halts. During periods of rapid market movements the London Stock Exchange may declare market maker quotations "indicative" to provide greater flexibility to market makers in the negotiation of prices. The London Stock Exchange may suspend stocks on a case-by-case basis prior to a price-sensitive announcement (usually at the issuer's request) or where it deems information available from the issuer is inadequate to maintain a proper market in the shares. The TSE Policy provides that the following procedure should take place in the event that circuit breakers are invoked in the United States. Universal trading halted in the United States - The TSE will halt trading in all securities for one hour in conjunction with U.S. markets when the Dow Jones Industrial Average ("DJIA") falls 250 points, and for two hours when the DJIA falls 400 points. A re-opening following a 400-point drop would depend on whether the NYSE re-opens. TSE circuit breaker is not dependent upon TSE 300 index - The TSE did not adopt a circuit breaker based on the TSE 300 because the Canadian market takes its lead primarily from the U.S. market. In the event that the Canadian market experiences a substantial drop independent of the New York market, such a circumstance can be dealt with by section 10.05(3) -Emergency Situations, discussed in section VI below. Halts in individual stocks in U.S. - If an inter-listed issue is halted because of an order imbalance due to program trading, the TSE may continue to trade the stock if the responsible Registered Trader is willing to make a market. If the Registered Trader is not, the TSE will also halt and then re-open in conjunction with NYSE. This policy contains provisions providing for situations in which the NYSE segregates program trades; if there is a serious imbalance as a result, the stock is halted and the imbalance is advertised. The TSE procedures for implementing the circuit breaker provide that, as soon as the TSE Surveillance Department has been officially notified that trading on the NYSE has ceased (verbal notification procedures have been arranged between the TSE and the NYSE), the Computer Operations Department will take the necessary steps to also cease trade on the Floor and in CATS. The TSE has appointed two contacts in the Computer Operations Department and, in their absence, the Computer Operator Supervisor is to be notified. Any of these TSE personnel have the authority, on request from the Market Surveillance Department, to halt trading in all stocks, options and futures on the TSE Floor and trading in the CATS System. At the time of the halt, the siren must be activated as it would to signify the official opening or closing of a TSE regular trading session. If trading is allowed to resume within the same day as the halt, the siren will again be activated to signify such re-opening. When a halt in trading is due to such unusual circumstances and occurs during normal trading hours, the siren will not automatically sound. As a result, a call must be made immediately to the Floor Operations Department, as well as the CATS Operations Department in order to alert the appropriate personnel. The Market Surveillance Department will also immediately call the Montreal, Vancouver and Alberta Stock Exchanges and the Canadian Dealing Network in order for them to halt their markets. Pre-opening orders will be allowed to be entered or removed, as the case may be, approximately one-half hour prior to the re-opening time. This will allow Registered Traders the time to better establish an opening price for their stocks of responsibility by providing the conditions of a pre-opening period. Trading Halts: The TFE - Members of the TFE Options Floor Procedure Committee or Floor Officials have the authority to delay the opening of trading on the Options Floor in any TFE Option for any period in order to assist in the orderly opening of such trading. In addition, the Chairman and Vice-Chairman of the Options Floor Procedure Committee, either acting together or separately with a Floor Official or with any other two members of the Options Floor Committee, have similar authority in order to assist in re-establishing orderly trading. At the request of the Exchange, the Options Floor Procedure Committee is required to halt trading. Finally, trading may be suspended at any time by the Exchange in the interest of maintaining a fair and orderly market. The TSE - Section 701 of Part VIII of the TSE Company Manual provides that: "The Toronto Stock Exchange may at any time (a) temporarily halt trading in any listed securities; or (b) suspend from trading or delist a company's securities if the Exchange is satisfied that: (i) the company has failed to comply with any of the provisions of its Listing Agreement with the Exchange; or (ii) such action is necessary in the public interest." Although the trading halt powers can be used in periods of market disruption, they are used most frequently where there is significant volatility or activity in the securities of a particular issuer. The halt of trading is a temporary measure which is generally employed when a material change occurs during normal trading hours which requires immediate public disclosure. Where trading is halted in a particular security, the halt will not last more than one hour following a dissemination of the announcement. Its purpose is simply to give the company time to comply with the Exchange's timely disclosure policy to allow the Exchange to take such action as it deems to be in the public interest in order to, for example, maintain an orderly market. In some cases, a halt may be changed to a trading suspension. Where a company has been unable to release news after the close of the market, the Exchange may halt trading pending a corporate announcement to allow for the dissemination of that information. In addition, during the period when trading is halted, no Exchange member is allowed to execute an order in the over-the-counter market. Trading is also halted when the market activity indicates that a news item appears to be available to some investors but not to the public at large, and the company either will not or cannot make a clarifying statement. If trading is halted but an announcement is not immediately forthcoming, the Exchange will establish a re-opening time, which shall not be later than twenty-four hours after the time that the halt was imposed. If the company will not make an announcement despite urging by the Exchange, then the Exchange will issue a notice stating the reason for the halt, that an announcement was not forthcoming from the company and that trading will presume at a specific time. While halting is generally an action undertaken at the Commission's initiative, in certain instances companies request halting because they are unable to make full disclosure, even though unusual trading is taking place. Where this occurs, the determination that trading should be halted is made by the Exchange. With respect to options which trade on the TSE, section 22.30 of the Exchange By-laws provides that any two of the Chairman and the Vice-Chairman of the Options Floor Procedure Committee and Options Floor Official, acting together, or any of them acting with any other two Options Floor Governors, shall have authority to interrupt or halt trading on the Options Floor in any class of options at any time and for any period in order to assist in re-establishing orderly trading, and shall have authority to make such decisions as may be required at any time for conducting trading notations in any option. Similar powers exist in section 27.36 of the TSE General By-law with respect to IMS Options traded on the Exchange. SEC Circuit Breakers: Coordinated circuit breaker mechanisms were implemented for all U.S. securities markets after the October 1987 market break in order to substitute planned trading halts for unplanned and destabilizing market closings during turbulent market conditions. These market-wide, universal circuit breakers provide for: a one-hour trading halt of all securities and related derivative instruments after a 250-point decline in the Dow Jones Industrial Average ("DJIA"); and a two-hour trading halt after a 400-point decline in the DJIA. / The circuit breaker mechanisms originally were approved by the Securities and Exchange Commission ("SEC") on a pilot basis. / During the past two years, the SEC approved rule changes submitted by the American Stock Exchange, Inc. ("AMEX"), Boston Stock Exchange, Inc. ("BSE"), Midwest Stock Exchange, Inc. ("MSE"), New York Stock Exchange, Inc. ("NYSE"), Philadelphia Stock Exchange, Inc. ("PHLX") and the National Association of Securities Dealers, Inc. ("NASD") to extend the effectiveness of their circuit breaker procedures. / The Chicago Board Options Exchange, Inc. ("CBOE"), Cincinnati Stock Exchange, Inc. ("CSC") and Pacific Stock Exchange, Inc. ("PSE") circuit breaker procedures previously have been approved on a permanent basis. / "Speed Bumps": In addition, the self-regulatory organizations ("SROs"), with the approval of the SEC, have implemented a number of measures that, while not as comprehensive as circuit breakers, also are designed to calm the stock and derivative markets during periods of unusual volatility. These rules are referred to as "speed bumps" because they are designed to slow down the pace of activity during such periods without closing the markets completely. The most significant of these "speed bumps" is NYSE Rule 80A, which was approved by the SEC on a pilot basis in July, 1990 / and on a permanent basis in 1991. / Rule 80A is designed to ensure that index arbitrage will be exercised only in a market-stabilizing manner during volatile market conditions. Thus, Rule 80A places conditions on index arbitrage orders to buy or sell component stocks of the Standard & Poor's 500 Stock Price Index ("S&P 500 Index") effected on the NYSE when the DJIA advances or declines by 50 points or more from its previous day's closing value. When the DJIA advances 50 points, Rule 80A provides that index arbitrage orders to buy the component stocks of the S&P 500 Index on the NYSE must be entered for the remainder of that day with a "buy minus" instruction, which means that such orders can only be executed when the last reported price movement in each of those stocks (including the price movement, if any, from the arbitrage transaction) was a decline in the price of that stock. / Conversely, when the DJIA declines 50 points, index arbitrage orders to sell component stocks of the S&P 500 Index on the NYSE must be entered for the remainder of that day with a "sell plus" instruction, which means that such orders can only be executed when the last reported price movement in each of those stocks (including the price movement, if any, from the arbitrage transaction) was an increase in the price of that stock. / A NYSE report to the SEC analyzing the effectiveness of the pilot rules on curbing destabilization and retaining liquidity during a volatile market concluded that Rule 80A has had a significant impact on index arbitrage and has dampened the momentum in the cash and futures markets when the DJIA moves 50 points. In addition, the Report also found that while the prohibitions of Rule 80A are in effect, short-term cash-market volatility is reduced, while at the same time reducing or leaving unchanged short-term futures-market volatility. Most importantly, the NYSE report found that the triggering of Rule 80A has not caused significant divergence in pricing between the stock, stock index futures and stock index options markets. Accordingly, the SEC found NYSE Rule 80A to be a modest but useful step by the NYSE to attempt to address the issue of market volatility, and approved it on a permanent basis. SFC Neither the Hong Kong Futures Exchange ("HKFE") nor the Stock Exchange of Hong Kong ("SEHK") has specific provisions imposing circuit breakers or trading halts with respect to large, rapid movements of market prices. However, if the SEHK considers it necessary for the protection of investors or the maintenance of an orderly market, the SEHK may suspend dealings in any security, whether requested by the issuer or not. One of the situations in which the SEHK might exercise this discretion is "news pending" i.e., suspension of the relevant security pending the dissemination of certain price sensitive information. SIB The securities and futures exchanges in London do not have arrangements for circuit breakers or trading halts. During periods of rapid market movements the London Stock Exchange may declare market maker quotations "indicative" to provide greater flexibility to market makers in the negotiation of prices. The London Stock Exchange may suspend stocks on a case-by-case basis prior to a price-sensitive announcement (usually at the issuer's request) or where it deems information available from the issuer is inadequate to maintain a proper market in the shares.
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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 *
Appendix 1: Measures to Minimize Adverse Effects of Market Disruption
