Commodity Futures Trading Commission Securities and Exchange Commission Joint Order Excluding From the Definition of Narrow-Based Security Index Those Security Indexes That Qualified for the Exclusion From That Definition Under Section 1A (25)(B)(v) of the

[Federal Register: June 6, 2002 (Volume 67, Number 109)]
[Notices]
[Page 38941-38942]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jn02-43]


COMMODITY FUTURES TRADING COMMISSION

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46009]


Joint Order Excluding From the Definition of Narrow-Based
Security Index Those Security Indexes That Qualified for the Exclusion
From That Definition Under Section 1a(25)(B)(v) of the Commodity
Exchange Act and Section 3(a)(55)(C)(v) of the Securities Exchange Act
of 1934

AGENCIES: Commodity Futures Trading Commission and Securities and
Exchange Commission.

ACTION: Joint order.

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SUMMARY: The Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC") (collectively
"Commissions") by joint order under the Commodity Exchange Act
("CEA") and the Securities Exchange Act of 1934 ("Exchange Act")
are excluding certain security indexes from the definition of "narrow-
based security index." Specifically, the Commissions are excluding
from the definition of the term "narrow-based security index" those
security indexes that qualified for the exclusion from that definition
under Section 1a(25)(B)(v) of the CEA and Section 3(a)(55)(C)(v) of the
Exchange Act, pursuant to authority under Section 1a(25)(B)(vi) of the
CEA and Section 3(a)(55)(C)(vi) of the Exchange Act.

EFFECTIVE DATE: June 21, 2002.

FOR FURTHER INFORMATION CONTACT: CFTC: Elizabeth L. Ritter, Esq.,
Deputy General Counsel, or Julian E. Hammar, Esq., Attorney, Office of
General Counsel, Commodity Futures Trading Commission, 1155 21st
Street, NW, Washington, DC 20581. Telephone (202) 418-5120. E-mail:
[email protected], [email protected].
    SEC: Ira L. Brandriss, Special Counsel, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-1001. Telephone (202) 942-0148.

SUPPLEMENTARY INFORMATION: The Commodity Futures Modernization Act
("CFMA"),\1\ which became law on December 21, 2000, establishes a
framework for the joint regulation of the trading of futures contracts
on single securities and on narrow-based security indexes
(collectively, "security futures") by the CFTC and the SEC.
Previously, these products generally were statutorily prohibited from
trading in the United States. Under the CFMA, designated contract
markets and registered derivatives transaction execution facilities
("DTEFs") may trade security futures if they register with the SEC
and comply with certain other requirements of the Exchange Act.\2\
Likewise, national securities exchanges and national securities
associations registered under Section 15A(a) of the Exchange Act \3\
may trade security futures if they register with the CFTC and comply
with certain other requirements of the CEA.\4\
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    \1\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
    \2\ 15 U.S.C. 78a et seq.
    \3\ 15 U.S.C. 78o-3(a).
    \4\ 7 U.S.C. 1 et seq.
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    To distinguish between security futures on narrow-based security
indexes, which are jointly regulated by the Commissions, and futures
contracts on broad-based security indexes, which are under the
exclusive jurisdiction of the CFTC, the CFMA also amended the CEA and
the Exchange Act by adding an objective definition of "narrow-based
security index." \5\
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    \5\ Section 1a(25) of the CEA, 7 U.S.C. 1a(25), and Section
3(a)(55) of the Exchange Act, 15 U.S.C. 78c(a)(55).
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    This definition excludes from its scope certain security indexes
that satisfy specified criteria. A futures contract on an index that
meets the criteria of any of the six exclusions from the definition of
narrow-based security index is not a security future under the
securities laws, and thus is subject solely to the jurisdiction of the
CFTC.
    One such exclusion was enacted by Congress essentially as a
temporary "grandfather" provision, permitting the offer and sale in
the United States of security index futures traded on or subject to the
rules of foreign boards of trade that were authorized by the CFTC
before the CFMA was enacted.\6\ Specifically, this exclusion provides
that, until June 21, 2002, a security index is not a narrow-based
security index if: (1) It is traded on or subject to the rules of a
foreign board of trade; (2) the offer and sale in the United States of
a futures contract on the index was authorized before the date of
enactment of the CFMA; and (3) the conditions of such authorization
continue to be met.\7\
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    \6\ Prior to the effective date of the CFMA, these futures
contracts were offered to U.S. customers pursuant to no-action
letters issued by the CFTC and its staff, to which the SEC did not
object. See infra note 8.
    \7\ Section 1a(25)(B)(v) of the CEA and Section 3(a)(55)(C)(v)
of the Exchange Act.
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    Because the Commissions' staffs previously determined that such
foreign index futures were not readily susceptible to manipulation,
such index futures commenced trading under the

[[Page 38942]]

regulatory framework in place prior to enactment of the CFMA.
Therefore, to prevent disruption to participants who trade futures
contracts on security indexes that are currently excluded from the
definition of a narrow-based security index under this provision, the
Commissions believe it is appropriate to extend this exclusion beyond
June 21, 2002. In this regard, the Commissions believe it is
appropriate to establish, under section 1a(25)(B)(vi) of the CEA and
section 3(a)(55)(C)(vi) of the Exchange Act, that each such index
continue to be excluded from the definition of a narrow-based security
index, provided that it continues to be traded on or subject to the
rules of a foreign board of trade and that the conditions under which
the offer and sale of a futures contract on the index in the United
States was authorized continue to be met.\8\
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    \8\ For a list of security indexes underlying futures contracts
that have received no-action relief prior to the enactment of the
CFMA, see the CFTC's Backgrounder on its website at http://www.cftc.gov/opa/backgrounder/opapart30.htm.
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    Accordingly,
    It is ordered, pursuant to Section 1a(25)(B)(vi) of the CEA and
Section 3(a)(55)(C)(vi) of the Exchange Act, that an index is not a
narrow-based security index if: (1) It is traded on or subject to the
rules of a foreign board of trade; (2) the offer and sale in the United
States of a contract of sale for future delivery on the index was
authorized before the date of the enactment of the CFMA; and (3) the
conditions of such authorization continue to be met.

    By the Commodity Futures Trading Commission.

    Dated: May 31, 2002.
Jean Webb,
Secretary.


    By the Securities and Exchange Commission.

    Dated: May 31, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14134 Filed 6-5-02; 8:45 am]
BILLING CODE 6351-01-P; 8010-01-P
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