Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms

Securities and Exchange Commission’s Division of Trading and Market Associate Director David Shillman reported that the staff is almost ready to recommend three market rules for adoption. He noted that the Commission would likely bundle recommendations dealing with consolidated audit trail, market-wide circuit breaker changes, and limit up-limit down mechanisms. Schillman made his comments at SEC Speaks, which was sponsored by the Practising Law Institute, on February 24.

FINRA and the national securities exchanges submitted the proposal on limit up-limit down last year. Per the proposal, trades in listed securities would need to be executed within a range connected to recent instrument prices. The limits are set up to take the place of single stock circuit breakers (pilot basis-approval was given). Shillman noted that although single stock circuit breakers “have worked relatively well,” they are a “relatively blunt instrument” and a wrong trade can happen prior to the break’s activation. Such mistakes would be avoided with limit up-limit-down.

The exchanges and FINRA also proposed to update current market-wide circuit breakers, which would tighten the trigger-window for a market-wide stoppage to a 7% index from a 10% price movement. The pause that occurs in trading would also be shortened. Meantime, in 2010, the SEC had proposed a “consolidated audit trail,” which would be a national database for capturing in real time details on the National Market System securities and listed options. The customer’s identity would be included in the data.

Also addressing the audience at SEC speaks wasTrading Markets associate director Brian Bussey. He spoke about the Commission’s attempts to adopt final entity definitions for swaps. Bussey noted that even if the SEC were to adopt product and entity definitions, market participants are still anticipating an “implementation plan” for swaps rules (per the Dodd-Frank Wall Street Reform and Consumer Protection Act). The plan would include compliance dates for different rules, per the law’s Title VII. Prior to adopting the plan, there will be a concept release asking for comment.

Associate director Michael Macchiaroli, who also spoke, stated that current staff members believe that security-based swap dealers should have to contend with current net capital rule that involves a net liquid assets test. Broker-dealers that become swap dealers and those that are solely security-based swap dealers would also be subject to the same requirements. He said that financial firms, depending on their qualifications, will either be able to use models to calculate required capital or they will have to deal with a prescribed grid. Minimum capital requirements will vary from $100 million to $5 billion.

Contact our stockbroker fraud law firm to request your free case evaluation. Shepherd Smith Edwards and Kantas, LTD LLP represents investors nationwide.

SEC Staffer Says Recommendations On Volatility, CAT Proposals Coming Soon, , Bloomberg BNA Daily, March 2, 2012

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)


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