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Singapore – The Implementation Of Circuit Breakers.

3 March, 2014

 

Legal News & Analysis – Asia Pacific – Singapore  Capital Markets

 

The Singapore Stock Exchange Limited (the “SGX“) recently adopted a circuit breaker model with intended effect from 24 February 2014. Circuit breakers will apply to all stocks and units that are components of the Straits Times Index or the MSCI Singapore Free Index; and will include securities such as real estate investment trusts, business trusts, funds, exchange-traded funds and exchange-traded notes which have a starting reference price of at least S$0.50. Marginable Futures Contracts comprising the above-mentioned instruments will also be subject to the automatic price control mechanism.

 
Background

 
The SGX first considered circuit breakers in July 2011 as a safeguard against incidents of excessive volatility of stock prices, such as the May 2010 “Flash Crash” in the United States of America where the Dow Jones Industrial Average dropped hundreds of points within minutes, only to regain most of it nearly as quickly. A second consultation paper was issued in June 2013, with the intention of effectuating circuit breakers following favourable comments received from the market in response to its initial public consultation in 2011. The implementation is timely given recent volatility in prices of penny stocks on the SGX.

 
The Model

 
The new rules will affect approximately 300 securities, which account for an estimated 90% of total market capitalisation and more than 80% of daily average trading on the SGX-ST. The circuit breakers will not be relevant to the following instruments, namely:

 
(a) New listings on the first day of trading;
(b) Unit shares;
(c) Securities in buying-in markets;
(d) Direct business transactions; and
(e) Stocks priced below S$0.50.

 
A circuit breaker “refers to such maximum allowable price advance or decline from a reference price” for a security or futures contract during the operating trading phase between 09:00 a.m. and 17:00 p.m. on a normal trading day. As such, when an incoming order seeks to be partially or fully matched at a price more than 10% above or below the reference price, the circuit breaker will be triggered and the 5 minute cooling-off period will be activated whereby new orders outside the price band will be rejected. Exceptionally, upon commencement of a pre-close phase, a suspension or a trading halt, the cooling-off period may be shorter than the prescribed 5 minutes.

 
Determination Of The Reference Price

 
The reference price is established in accordance with the following:

 
(a) The first reference price at the start of the trading day is:

(i) the opening price of the day; failing which
(ii) the last traded price of the previous trading day; failing which
(iii) the last available traded price.

 
(b) The reference price for the rest of the trading day (excluding the first five minutes of the trading day) is:

(i) the last traded price as of 5 minutes prior to each potential trade; failing which
(ii) the first reference price at the start of that trading day.

 
Where no trades have been executed during the cooling-off period, the first trade after the cooling-off period may be conducted at a price outside the price band, which will serve as the reference price for the next 5 minutes.

 
(c) The reference price post suspension or trading halt during the operation of the circuit breaker is:

(i) the equilibrium price; failing which
(ii) the last traded price preceding the suspension or trading halt; failing which
(iii) the first reference price at the start of the trading day.


Illustration

 
As provided in Practice Note 8.10A, where:

 

  • Security A has an opening price of S$1.00 and no trades are executed until 11:00 a.m. where an incoming buy order for 1 lot of Security A at S$1.20 attempts to match against a resting sell order for 5 lots of Security A at S$1.20;
  • the incoming buy order will be rejected as it would result in a trade beyond the upper limit of 10% above the reference price of S$1.00, at S$1.10, and the cooling-off period will commence in effect from 11:00 a.m. to 11.05 a.m.;
  • during the cooling-off period, only trades at prices 10% above and below the reference price may be executed, that is, any buy orders outside of the price band of $0.90 and $1.10 will be rejected; and
  • if no trades occur during the cooling-off period, and the 11:00 a.m. incoming buy order and resting sell order remains the same at 11.06 a.m., the trade will be executed with the new reference price established at S$1.20.

 
For more details and illustrations of the operation of circuit breakers, please refer to the Frequently Asked Questions relating to circuit breakers and Practice Note 8.10A of the SGX-ST Rules.

 
Conclusion

 
It is envisioned that the implementation of circuit breakers will mitigate market disorderliness caused by rapid and unchecked price movements, thereby reducing frenzied transactions during such occurrences, effectively maintaining confidence amongst market participants.

 
The above-mentioned consultation papers, rule amendments and Practice Note 8.10A with regard to circuit breakers may be retrieved from the SGX’s website at http://www.sgx.com.

 

ATMD Bird & Bird

 

For further information, please contact:

 

Marcus Chow, Partner, AMD Bird  & Bird

marcus.chow@twobirds.com

 

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