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Appendix 1: Measures to Minimize Adverse Effects of Market Disruption
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ASC Emergency Action: Currently the board of the ASX has the following power under paragraph 71 of the ASX Articles of Association: "71. (1) If in the opinion of the board (not less than 9 directors concurring) a state of emergency exists the board may: (a) suspend Official Meetings for a designated period but such period shall not exceed 21 days without the approval of Members in general meeting: (2) In the event of conflict between temporary Rules made under sub-article (1)(b) and the existing Articles and Rules the temporary Rules will prevail." Market Surveillance: SFE supplies to the ASC on a monthly basis the following information:
ASX Business Rule 3.15 provides that information relating to dealings in securities by clients may be reported to the Exchange Surveillance Department, and that officers and employees of that Department may disclose such information to any authorized person and to other persons or bodies as specified in the Rule. The provisions of this Rule allow for the ASX to exchange confidential broker/client information in accordance with a memorandum of understanding entered into with the home or any overseas regulatory authority for the maintenance and promotion of an efficient, informed and properly regulated market. On 18 December 1992, the ASC formally signed an MOU with the ASX. Under ASX Rule 3J(10), the ASX has the right to use as it sees fit, any information supplied to it by a listed company. This includes the passing of the information to any other Exchange. The F.I.B.V. Members (ASX is a member) have agreed to pass on information to each other if the security is quoted on the other Exchange. This is a general agreement amongst the members, but F.I.B.V. has no powers to enforce it. Coordination Arrangements: Following the review of the 1987 Market Break by the ASC's predecessor (the National Companies and Securities Commission ("NCSC")) arrangements were put in place to ensure information sharing and contact arrangements involving major regulators and self regulatory organizations were agreed. It is expected that the recently established Council of Financial Supervisors will review these arrangements to ensure that they remain adequate. ASE BDF Frankfurt Stock Exchange: The conditions for trading of the Frankfurt Stock Exchange require that if a Kursmakler notices a severe deviation from the last price based on existing orders he has to indicate this in the case of bonds by + (increase of more than 1.5%), ++ (increase of more than 3%), in the case of shares by + (5-10%), ++ (10-20%) and +++ (more than 20%). In the case of a decrease the same procedure applies using the symbols -, --, ---. If these measures are undertaken a new price may be fixed only after an appropriate time period and only with the consent of the supervisor. In a letter to all market participants dated August 17, 1990, the Frankfurt Stock Exchange informed the market participants about measures to be undertaken in periods of extraordinary price and turnover volatility. (Please note that these measures refer to price volatility in individual securities, they do not refer to the whole market.) Market administrators may open trading early and extend trading hours. Number of staff of supervisors and of Kursmaklers may be increased. Special phone and telefax lines should be used to improve communication between market participants and the stock exchange. DTB: Paragraph 21 (Supervision and Control of the Adherence to Exchange Rule) of the Rules and Regulations of the DTB: "(1) The Board of Directors of the Exchange may at any time, in order to supervise the adherence to laws, decrees, Conditions for Trading and other rules and regulations affecting the Exchange, request required information and proof from Exchange Members. (2) The Board of Directors of the Exchange, one of its representatives, or an auditor to be chosen by the Board . . . are entitled to review specific or all business activities of an Exchange member to assure that they adhere to the regulations mentioned in para. (1) above . . . ." Paragraph 32 (Supervision of Position Limits) of the Rules and Regulations of the DTB: "The Board of Directors may control all position accounts, including the agent position accounts, of an Exchange member for adherence to the position limits." CFTC CFTC Emergency Powers: Section 8a(9) of the CEA authorizes the CFTC: "to direct an [exchange], whenever it has reason to believe that an emergency exists, to take such action as in the Commission's judgment is necessary to maintain or restore orderly trading in or liquidation of any futures contract, including, but not limited to, the setting of temporary emergency margin levels on any futures contract, and the fixing of limits that may apply to a market position acquired in good faith prior to the effective date of the Commission's action. The term 'emergency' mean[s] in addition to threatened or actual market manipulation and concerns, any act of the United States or a foreign government affecting a commodity or any other major market disturbance which prevents the market from accurately reflecting the forces of supply and demand for such commodity." Exchange Emergency Actions: Under CFTC rules, the term "emergency" means any of the following occurrences or circumstances which, in the opinion of the governing board of an exchange, requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of or delivery pursuant to, any contracts on such exchange: "(i) Any manipulative activity or attempted manipulative activity; (ii) Any actual, attempted, or threatened corner, squeeze, congestion, or undue concentration of positions; (iii) Any circumstances which may materially affect the performance of contracts traded on the contract market, including failure of the payment system; (iv) Any action taken by the United States or any foreign government or any state or local governmental body, any other contract market, board of trade, or any other exchange or trade association (foreign or domestic), which may have a direct impact on trading on the [exchange]; (v) Any circumstances which may have a severe, adverse effect upon the physical functions of a contract market including, for example, fire or other casualty; bomb threats, substantial inclement weather; power failures; communications breakdowns, computer system breakdowns; screen-based trading system breakdowns; malfunctions of plumbing, heating, ventilation and air conditioning systems; and transportation breakdowns; (vi) The bankruptcy or insolvency of any member or member firm of the contract market or the imposition of any injunction or other restraint by any government agency, court or arbitrator upon a member of the [exchange] which may affect the ability of that member to perform on its contracts; (vii) Any circumstance in which it appears that a member or any other person has failed to perform contracts, is insolvent, or is in such financial or operational condition or is conducting business in such a manner that such person cannot be permitted to continue in business without jeopardizing the safety of customer funds, members of the contract market, or the [exchange]; and (viii) Any other unusual, unforeseeable and adverse circumstance with respect to which it is not practicable for the [exchange] to submit, in a timely fashion, a rule to the Commission for prior review under [the CEA]." A temporary emergency rule may provide for, or may authorize the exchange to undertake actions necessary or appropriate to meet the emergency, including, but not limited to, such action as: "(i) Limiting trading to liquidation only, in whole or in part, or limiting trading to liquidation only except for new sales by parties who have the commodity to delivery pursuant to such sales; (ii) Extending or shortening the expiration date for trading in contracts; (iii) Altering delivery terms or conditions; (iv) Modifying price limits; (v) Modifying circuit breakers; (vi) Ordering the liquidation of contracts, the fixing of a settlement price or the reduction in positions; (vii) Ordering the transfer of contracts, and the money, securities, and property securing such contracts, held on behalf of customers by a member of the [exchange] to another member, or other members, of the [exchange] willing to assume such contracts or obligated to do so; (viii) Extending, limiting or changing hours of trading; (ix) Suspending trading; and (x) Modifying or suspending any provision of the rules of the [exchange] including any [exchange] prohibition against dual trading." Under CFTC regulation 1.41(f), an exchange may place a temporary emergency rule into immediate effect without prior CFTC approval and without compliance with the ten-day notice requirement under section 5a(a)(12)(A) of the CEA. A temporary emergency rule may not extend beyond the duration of the emergency, as determined by the exchange, and may not continue beyond 30 days after the rule is first put into effect, without express CFTC authorization. In addition, a temporary emergency rule may not remain in effect for more than 90 days after it is first put into effect. On April 26, 1993, the CFTC adopted rules establishing new procedures related to futures exchange emergency actions. Specifically, the rule amendments require an exchange to make every effort practicable to notify the CFTC of its intention to implement, modify or terminate a temporary emergency rule, prior to taking such action, and establish procedures for a CFTC determination whether to allow an emergency rule to remain in effect. The exchange also is required to supplement its notice with specific information and documentation regarding the emergency action taken, including, among other things, a summary of the substantive reasons in support of and in opposition to any matter voted on that related to the emergency action, and information concerning the gross positions of members who participated in taking the emergency action and those of their affiliated firms. Within ten days of receipt of such required information, the CFTC will make a determination either to permit the emergency rule to remain in effect or to suspend the effect of the rule pending further review. Among other things, the rule makes clear that emergency actions may be taken by futures self regulatory organizations to address payment system and automated system malfunctions, as well as malfunctions of trading facilities. An exchange emergency rule would violate Regulation 1.41(f) if it were arbitrary, capricious, or an abuse of discretion; lacking a reasonable basis in fact; or taken in bad faith by the exchange or its officials. In addition, section 8a(9) of the CEA generally provides that the CFTC may direct an exchange to take action necessary to maintain or restore orderly trading whenever the CFTC has reason to believe that an emergency exists. Market Surveillance: CFTC rule 1.51(a)(1) requires each exchange to maintain a continuing affirmative action program to secure compliance with the CEA and exchange rules and by-laws. Such program must include a surveillance of market activity for indications of possible congestion or other market situations conducive to possible price distortion. The CFTC's Guideline No. 2 provides guidance as to the components of an adequate market surveillance program. Each exchange establishes its own committees responsible for market surveillance and its compliance staff assumes the daily market surveillance activities. In addition, the CFTC staff monitors daily activity in all futures and option markets to detect and prevent price manipulation and other abusive trading practices. See Section II. Position and Exercise Limits. Frontrunning Information: Antifraud provisions of the CEA and rules thereunder prohibit trading ahead of a customer order. Moreover, all futures exchanges that trade stock index futures contracts prohibit intermarket frontrunning. Intermarket frontrunning is generally defined as trading in one market with knowledge of an imminent transaction in a related market which reasonably can be expected to have an immediate favorable market impact in relation to trading in the first market. The CFTC approved rule interpretations prohibiting intermarket frontrunning at the CME on September 23, 1988, at NYFE on November 16, 1988, at the CBT on September 1, 1989, and a rule to that effect at the KCBT on February 9, 1989. The issuance and contents of these interpretations as well as that of the NYSE were coordinated so as to address intermarket frontrunning in the same manner. In addition, all futures exchanges have rules, consistent with the antifraud provisions of the CEA, which prohibit trading ahead of customer orders. Finally, as discussed below, information sharing measures also will assist in the detection of intermarket frontrunning. Domestic Coordination and Information Sharing: - Sharing of Financial Information The Intermarket Financial Surveillance Group ("IFSG") was formed in 1988 to provide a coordinating body to address financial surveillance issues relevant to both futures and securities markets. The IFSG includes most of the principal commodity and securities exchanges as well as the National Futures Association and the National Association of Securities Dealers. The members of the IFSG have agreed to share financial information with respect to "high risk" member firms as commonly defined by the group. The agreement also provides for the exchange of information upon request regarding capital, segregation of customer funds, margins, liquidity problems, omnibus accounts and or carrying brokers, and pay/collect data with respect to such high risk firms. Topics discussed by the IFSG have included: the capital treatment of funds deposited at affiliated entities of securities and futures brokers; reporting requirements respecting material inadequacies in internal controls; the SEC rule regarding capital withdrawals from brokers; offshore depositories; new CBT and NFA minimum capital requirements; capital treatment for certificates of deposit and commercial paper; and issues arising from the failure of Drexel Burnham Lambert Group, Inc. Each of the futures clearing houses, as well as the OCC, have signed a Market Information Sharing Agreement which provides for the sharing of pay and collect information among participants to the agreement. All futures clearing organizations and, as of October 1989, OCC participate in the sharing of this information which is collected and disseminated each trading day by the BOTCC. In addition, the clearing houses have formally amended this agreement to provide for the sharing of margin surplus and deficit information. The CFTC staff has developed a Financial Surveillance Information System ("FSIS"), which uses large trader reports and open contract data received on a daily basis from futures commission merchants ("FCMs") to monitor and assess the effect of price movements on such firms' capital. The system aggregates large trader and open interest data so as to provide a composite profile of FCM customer and proprietary positions in all futures markets. The system calculates the gain or loss for the most recent one and five day periods on all positions reported by each FCM and compares such calculated gain or loss to the firm's most recent reported excess capital. The system will facilitate intensified monitoring of firms with calculated losses that exceed certain parameters in relation to their reported excess net capital. This system is now routinely generating information. The CFTC anticipates that the aggregate position data generated by this system could be made available to exchanges and other regulators during periods of market volatility. The system also could provide a model for data systems that would reflect all market exposures, including domestic and foreign securities positions. The CME and the BOTCC have organized a Clearing Organization and Clearing Bank Roundtable, which meets on a quarterly basis in order to maintain lines of communication among clearing organizations in the futures and securities industries, the banks which support settlement services for these clearing organizations and their regulators. The Roundtable group addressed a wide range of topics, including the expansion of the Fedwire's hours of operations, increased use of intraday settlements, cross-margining proposals, 24-hour trading, developments in the standardization of margin systems across exchanges and clearing organizations, and the potential effects of domestic foreign currency accounts on securities and futures settlements. As a result of Roundtable meetings, there also have been discussions between the CME and the OCC about working together to encourage New York banks to be available to support morning settlements by 8:00 a.m. EST. The Joint Audit Committee ("JAC"), which consists of representatives of the financial compliance departments of each of the futures self-regulatory organizations, was established in 1979 to coordinate audit and financial surveillance programs, including information-sharing. CFTC staff frequently attend JAC meetings to discuss financial compliance issues. - Sharing of Surveillance Information The CFTC and the futures exchanges have coordinated their efforts with the SEC and the securities exchanges' efforts to conduct surveillance for possible intermarket frontrunning and other intermarket abuse. In addition to the other coordination efforts described below, the CFTC coordinates with the SEC and the exchanges when it reviews intermarket trading strategies such as index arbitrage. The CFTC also has shared relevant large trader and exchange audit trail data with the SEC. The Intermarket Surveillance Group ("ISG") is composed of representatives from all U.S. securities and options markets. The ISG was formed in the early 1980's to provide a mechanism for sharing regulatory information relevant to intermarket and other trading violations. In 1988, several U.S. futures exchanges, including the CBT and the CME, began participating in meetings of the ISG and several foreign exchanges also participate as affiliate members. Quarterly meetings of the ISG, as well as frequent meetings of a subgroup on intermarket abuses, have resulted in more uniform definitions of intermarket abuses and have provided a forum for coordinating joint surveillance efforts. Through their involvement in the ISG, the CME and CBT and the NYSE separately have established information sharing arrangements that provide for the daily exchange of certain agreed-upon surveillance information. This includes data from the NYSE on its program trades and data from the CME and CBT on large stock index futures transactions. Using data from the NYSE, for example, the CME generates a daily computer report which analyzes trading in the CME futures contract based on the S&P 500 stock index and NYSE program trades for possible intermarket frontrunning. The CBT also has a daily computerized report that compares the NYSE and CBT data for instances of possible intermarket frontrunning. The exchanges have integrated these reports into their surveillance programs. Currently, the CME and CBOE are negotiating an information sharing agreement similar to those existing between other futures and securities exchanges. The exchanges intend to conduct surveillance over trading in the CME's S&P 500 stock index and the CBOE's S&P 100 options contract. The smaller stock index futures exchanges, NYFE and KCBT, have arranged to obtain data from the NYSE and Philadelphia Stock Exchange, respectively, for purposes of conducting intermarket frontrunning surveillance on an as-needed basis. The NYFE, which is an affiliate of the NYSE, provides the NYSE with data on its quarterly stock index futures expirations, periods which are associated with higher than usual volume levels. At the CFTC's urging, the futures exchanges formed the Joint Compliance Committee ("JCC") to foster improvements and uniformity in their systems and procedures used for trade practice compliance. The JCC has developed uniform definitions of trade practice offenses and routinely meets to exchange information on automated compliance systems and other surveillance matters with a view to improving exchange compliance programs. - CFTC and Exchange Contingency Planning and Coordination Coordination of regulatory and self-regulatory activities has increased in recent years through the establishment, or augmentation, of groups designed to foster coordination of specific intramarket or intermarket regulatory or self-regulatory activities (see discussion above). The CFTC is in the process of revising its existing market volatility contingency plan which is designed to provide CFTC staff with appropriate procedures and relevant information to assist its evaluation of potential actions in responding to market events and conditions during periods of extreme market volatility. During these periods of extreme market volatility, the CFTC staff's surveillance activities are intensified to provide the CFTC with information that will assist decision-making on regulatory and market issues and determine whether firms and other entities subject to the CFTC's regulatory oversight are in financial or operational difficulty. The contingency plan also delineates the primary responsibilities of the CFTC staff, and identifies individuals to be contacted at the CFTC, other regulatory agencies, futures and securities self-regulatory organizations, and other key market participants for each specialized area of market monitoring or other necessary regulatory actions during a period of extreme market volatility. In response to significant volatility in the crude oil markets following the Iraqi invasion of Kuwait, the CFTC recommended to all U.S. futures exchanges and their clearing organizations various contingency planning activities including: that "what-if" analyses be undertaken to test the potential effects of any unusual price volatility, to determine which firms would be most affected by such price moves, and to aid in emergency planning; that a special review of margin levels be made in the context of current events; that increased margin compliance work at member firms be undertaken; that the accounts and financial positions of large traders be reviewed to determine that the carrying firms had adequate assurances of their customers' capabilities to meet their obligations; and that wire transfer arrangements be in place for all of a firm's large accounts, given the potential size of margin calls. CFTC staff also recommended that price limits and trading pauses be considered on a temporary or emergency basis; that lines of communication be maintained with certain cash markets closely connected with U.S. energy futures markets; and that the exchanges review their contingency plans, volatile market procedures and lists of contact persons. Following certain ad hoc cooperative efforts in response to a flood in Chicago's business district in April 1992, the Chicago futures and securities exchanges and clearinghouses formed the Vulnerability Assessment Group ("VAG") to help each other enhance their ability to respond to similar emergencies in a more organized manner. The VAG serves as a vehicle for identifying areas of mutual concern, sharing ideas and approaches to reduce risk, and preparing, to the extent possible, for the continuation of trading and clearing activities in the event of a physical emergency. The futures participants of the VAG -- the CME, CBT and BOTCC -- inform the CFTC periodically of the VAG's various activities.
- CFTC Contingency Planning and Coordination with Other Regulators In addition to the regular interagency quarterly surveillance meetings conducted by the Commission's market surveillance staff, the CFTC continues to share information and coordinate activities with other regulators at expirations of stock index contracts and on days of unusual price volatility. The CFTC continues to communicate with other regulatory and self-regulatory groups periodically, maintaining in place lines of communication in the event of any market emergency. CFTC staff have also continued to participate as observers in meetings of the SEC's Market Transactions Advisory Committee ("MTAC") which was established pursuant to a directive of the Market Reform Act, / including the MTAC's Crisis Financing, Gridlock and Broker Bankruptcy and Liquidation Subgroups. The MTAC and its subgroups last met on April 2, 1993. The CFTC's 1992 reauthorization legislation authorized the CFTC to promulgate "risk assessment" rules which will require futures commission merchants to provide reports to the CFTC regarding the activities of their affiliates that are reasonably likely to affect the financial or operational conditions of the FCMs themselves. The risk assessment rules will permit better assessment of material risks with respect to the financial conditions of FCMs resulting from activities of their affiliates and may help the CFTC to avoid or to better manage market disruptions. CFTC staff have been working with SEC staff on the development of the risk assessment rules to formulate a coordinated approach that will avoid duplicative reporting. CFTC staff will consult other financial regulators as this project progresses. The CFTC also has a longstanding policy of sharing surveillance information with other federal regulators to promote a coordinated response to potential market problems. In 1980 the CFTC formally established information-sharing agreements with the Federal Reserve Board and the Department of the Treasury regarding interest rate and foreign currency futures markets. In 1982, the CFTC formally entered into a comparable information-sharing agreement with the SEC regarding stock-index futures contracts. Moreover, since 1982, SEC officials have joined with FRB and Treasury officials in the quarterly surveillance staff meetings conducted by CFTC market surveillance staff. Further, under the Market Reform Act of 1990, the CFTC is required to produce yearly until May 31, 1995 a report on its intermarket coordination activities. International Coordination and Information Sharing: Examples of the CFTC's efforts to enhance communication among relevant authorities on a cross-border basis with respect to non-enforcement matters include financial information sharing memoranda of understanding ("FISMOU"). These arrangements provide a formal mechanism to exchange information concerning the financial and operational viability of firms for monitoring and, in several cases, risk-assessment purposes. The CFTC currently has three such arrangements in place with Canada (Ontario and Quebec), France and the United Kingdom. In addition, as events warrant and on a case-by-case basis the CFTC communicates with foreign counterparts to address market events. For example, following the Iraqi invasion of Kuwait, among other actions taken, CFTC staff contacted authorities in major market jurisdictions for an assessment of futures market activities in oil, stock indexes, currencies and bonds. CNV COB Emergency Action, Market Surveillance and Information Sharing: Clearing houses which record each transaction have to be licensed credit firms. Therefore, clearing houses have to comply with all regulations issued by the Banking Regulation Committee. The law of January 24th 1984 provides that when the Banque de France has some fears regarding the solvency of a licensed credit firm, it can ask the shareholders of the firm to take measures in order to solve the difficulties encountered. In that case, the Banque de France can also organize cooperation with credit firms in order to ensure the continued functioning of the market and to protect the interests of customers. Article 21 of the law of the 22nd of January 1988 provides that the CBV, the CMT, the COB and the Banking Commission are authorized to share necessary information for the execution of their mission. The inspection and enforcement departments of the supervising authorities also meet on a regular basis to coordinate their activities. Enforcement of laws and regulations governing the functioning of the cash and derivative markets are organized at two main levels: at the exchange level and, at the COB level. The COB can conduct investigations in order to ensure its supervisory function. Its market surveillance department has different programs to detect unusual price or movement and/or trading activity, discrepancies between the prices of the futures contracts or options and the underlying asset, and heavy buying or selling preceding an important announcement. The COB can investigate on the demand of a foreign authority having comparable powers. When this demand is formulated by an authority of a non-member State of the EEC, this investigation is subject to a reciprocity condition. The ordinance of the 28th of September 1967, amended by the law of the 2nd of August 1989, provides that professional secrecy does not prohibit the COB from communicating information to a requesting authority of a EEC member state having comparable powers and compelled to uphold the same professional secrecy. Under reciprocity, the COB can also communicate information to authorities of other countries having comparable powers. This foreign authority must hold to the same professional secrecy standards with the same guarantees as in France. Based upon these legal terms, the COB can conclude, with its foreign counterparts, administrative agreements in order to implement this cooperation. Administrative Agreement with the SEC: December 14, 1989 Administrative Agreement with the CFTC: June 6, 1990 Mutual Recognition Memorandum of Understanding with the CFTC: June 6, 1990 Memorandum Respecting Administrative Arrangements with Ontario Securities Commission, Commission des Valeurs Mobilieres du Quebec: January 31, 1992 Memorandum Respecting Administrative Arrangements with British Columbia Securities Commission: October 6, 1992 CONSOB CVMQ Financial Positions of Its Members: ME has the responsibility for the surveillance and monitoring of the financial situation of its members. In fact, there are information sharing mechanisms in place between Canadian Exchanges and Securities Commissions. Market authorities with the collaboration of the Canadian Investor Protection Fund have developed the early warning system ("EAS"). The goal of EAS is to measure the characteristics which are likely to identify a firm heading into financial trouble and to impose a series of restrictions and sanctions to reduce further financial deterioration. Market Surveillance: The Market Surveillance Section of the Exchange maintains a continuous stock watch. MOF Changes in Trading Hours: The exchange can, when it deems it necessary, temporarily change the trading hours. Other Regulatory Measure for Trading Restrictions: Advancing the date when customer and/or exchange members shall deposit the margin, etc. OSC Market Surveillance: The Market Surveillance Section of the Exchange maintains a continuous stock watch program which is designed to highlight unusual market activity such as unusual price and volume changes in a stock relative to its historical trading pattern. Where unusual trading activity takes place in a listed security, the intelligent Market Monitor alerts surveillance staff, indicating whether the alert is most urgent, less urgent or least urgent. The Markets Surveillance Section then attempts to determine the specific cause of such activity. If the specific cause cannot be determined immediately through news releases or by reviewing information about the stock such as trading statistics, past contact with the surveillance department or by comparing performance against select indices, company management will be contacted. If a situation is identified as one which requires a news release, the company will be asked by the Market Surveillance Section to make an immediate announcement. If the company is unaware of any undisclosed developments, then the Market Surveillance staff will continue to monitor trading activity and may subsequently ask the company to make a statement to the effect that it is unaware of any circumstances which would justify the trading activity which is occurring. Emergency Action: The TFE - Emergency Situations - Subsection 10.05 of the By-law reads as follows: "(1) The Board shall have the power to determine that a situation exists which disrupts or may disrupt the fair and orderly trading in a TFE futures contract or threaten the integrity, liquidity, orderly liquidation or delivery of any TFE futures contract, and such situation shall be considered an emergency. Such situations shall include, but are not limited to: ... (2) In the event that the Board determines that an Emergency Situation exists, it may take such action as in its discretion appears necessary to prevent, correct or alleviate the emergency condition. Without limiting the foregoing, the Board may: (a) suspend trading; TSE - In addition to the policy set out in section I. (Circuit Breakers or Trading Halts) above, section 10.01(3) of the General By-law of the Exchange provides for emergency powers to suspend, reduce, or extend trading as necessary. Subsection (3) reads as follows: "In the event of an emergency, the Chairman or, in his absence, the Vice-Chairman or, in the absence of both of them, the President may at any time suspend all trading at any Session or Sessions or reduce, extend or otherwise alter the time of any Session or Sessions." SEC Market Surveillance: In the U.S., the securities exchanges and the National Association of Securities Dealers (for the over-the-counter market), acting in their capacity as self-regulatory organizations, have the primary responsibility to maintain routine market surveillance functions to identify and address trading abuses and other illegal activity involving their own markets. The SEC also maintains its own market-monitoring program, known as "MarketWatch," which ensures that the SEC is aware of any sudden market developments or sharp price swings that require prompt regulatory scrutiny. This MarketWatch program is maintained routinely throughout normal trading hours, but is greatly expanded during periods of extreme market volatility. The SEC's MarketWatch staff gathers market-related information by direct, minute-by-minute monitoring of market conditions using the Commission's automated market information systems. These systems track price and volume movements in U.S. and international stock and bond markets, as well as related futures and currency markets. Major newswires also are monitored for stories that may be influencing market movements. In addition, enhanced communication systems are used by MarketWatch staff members to keep in close contact with the various U.S. markets. For example, a terminal for the intermarket shout-down communications system, referred to as the Information Network for Futures, Options, and Equities ("INFOE"), is located in MarketWatch, and is used to track developments at the nation's stock, options, and futures markets. These developments would include trading halts, price limits, circuit breakers, and systems or trading problems. MarketWatch staff members also maintain close contacts with their counterparts at the securities self-regulatory organizations and at other regulatory agencies such as the CFTC and the Federal Reserve Bank of New York. Frontrunning Restriction: The securities SROs have issued circulars clarifying their intramarket frontrunning policies. Generally, the SROs define frontrunning as the practice of trading a security while in possession of material, non-public information regarding an imminent block transaction in the same or related security. The NYSE and the CME and the NYSE and the New York Futures Exchange also have adopted a joint policy that specifically defines and prohibits certain intermarket trading between their respective equities and futures markets, while not prohibiting legitimate trading activities. The policy states that a member or person executing or causing the execution of, for an account in which such member or person has a direct or indirect pecuniary interest, or for an account over which such member or person exercises investment discretion, certain intermarket transactions to take advantage of material, non-public information that reasonably can be expected to have an immediate, favorable impact in relation to such transaction, may be in violation of the respective exchange's rules. In particular, the policy provides that a transaction in any stock index futures contract, or an option thereon, when such member or person has acquired knowledge of the imminent execution of another person's stock program transaction, may be in violation of the exchange's rules. Conversely, the policy also states that stock transactions with the knowledge of the imminent execution of another person's transaction in stock index futures, or options thereon, may be in violation of the exchange's rules. / Exchange Listing Standards: U.S. securities exchanges and the NASD have standards that must be met in order for stocks, bonds, options and/or warrants to be traded on such exchanges. These standards, imposed by the exchanges and approved by the SEC, are required to ensure the financial health and adequacy of the corporation or issuer underlying the stock, bond, option or warrant. Equity Listing Standards - There are no uniform listing standards for equities; it varies by exchange. Options Listing Standards - In the case of standardized equity options, the listing and maintenance standards, respectively, for underlying securities are as follows. There are no uniform listing standards for stock index options. - A minimum of 7 and 6.3 million shares outstanding respectively, which are owned by persons other than "insiders" as defined in Section 16 of the Exchange Act. - A minimum of 2,000 and 1,600 shareholders, respectively. - Trading volume of at least 2.4 and 1.8 million shares, respectively, during the past 12 months. Stock Index and Currency Warrants Listing Standards - To be eligible to issue stock index and currency warrants traded on a national securities exchange, an issuer must: - have assets in excess of $100 million; and In addition, each warrant issue must satisfy the following requirements:
These standards are designed to ensure that the issuer can meet its obligations under the warrants and that the market for the warrants will be fair and orderly. / SFC Emergency The Council of the SEHK is empowered to adjust the trading hours, if in the opinion of the Council the functioning of the trading hall is, or is threatened or likely to be, severely and adversely affected by an emergency. The HKFE may suspend trading in any market in the event of an emergency and also if, in its opinion, no orderly trading in a particular market can take place. For the avoidance of doubt, fluctuations in prices in any market operated by HKFE or in any other markets shall not constitute circumstances affecting orderly trading for this purpose. To the extent that circumstances permit, there shall be prior consultation with the SFC before trading is suspended. Information Sharing In Hong Kong the problem of communication between different market authorities has to some extent been minimized since the establishment of SFC in 1989, as the SFC is now the sole authority that oversees both the equity and derivative markets. During periods of market disruption, the SFC plays an important role in coordinating the two markets. The SFC recognizes the importance of close relationships with other international financial markets and has established information sharing agreements with numerous other market authorities including the U.S., U.K., Canada and Australia, to name but a few. In addition, in June 1993, a Memorandum of Regulatory Cooperation was signed by the SFC, SEHK, the China Securities Regulatory Commission, the Shanghai Securities Exchange, and the Shenzen Stock Exchange. This Memorandum establishes and fosters cooperation between the Hong Kong and Chinese regulatory authorities for the protection of investors and preservation of market integrity in both jurisdictions. SIB None.
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Appendix 1: Measures to Minimize Adverse Effects of Market Disruption
