Monday, November 14, 2011

In Comments to SEC, Hedge Fund Industry Supports SRO Circuit Breaker Rules

In a letter to the SEC, the Managed Funds Association expressed support for coordinated rule proposals from FINRA and other SROs amending SRO rules regarding market-wide circuit breakers. Specifically, the MFA urged the SEC and the SROs to adopt proposed changes that would replace the Dow Jones Industrial Average with the S&P 500 Index as the benchmark index for triggering market-wide circuit breakers. The hedge fund industry group favors the proposed changes to implement market-wide trading halts based on declines of 7%, 13% and 20%, respectively, in the S&P 500 Index. The group also expressed support for extending the period during which Level 1 and Level 2 declines would trigger a trading halt from 2:30 pm to 3:25 pm. The group urged the SROs to amend the proposed trading halts to require a trading halt until the next trading day in the event there is a Level 2 decline (13%) in the S&P 500 Index after the general cut-off time of 3:25 pm.

Earlier this year, in a letter to the Joint CFTF-SEC Advisory Committee on Emerging Regulatory Issues, the MFA said it generally supported the proposed changes to the SROs’ rules regarding market-wide circuit breakers. In commenting on the Advisory Committee’s report, the MFA said that the proposed changes will create symmetry in the treatment of securities during uncertain times and reduce the lack of uncertainty when a trading error occurs.

The MFA also supports the expansion of the circuit breaker rules based on the interconnected relationship of derivatives and their respective underlying securities. Along with the pause or halt of an underlying security, noted the group, any related exchange-traded derivative instruments should also be paused or halted. In this respect, the Commissions should consider establishing a threshold number of issuers or a weighting percentage as it pertains to underlying securities of an index that must be paused or halted before the related index is also paused or halted. In the association’s view, a limit up/limit down process will be less disruptive as it will greatly reduce market disruption from erroneous (unintentional or intentional) transaction reporting prints.