[Federal Register: July 13, 2006 (Volume 71, Number 134)]
[Rules and Regulations]
[Page 39534-39543]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jy06-8]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 41
RIN 3038 AB86
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-54106; File No. S7-07-06]
RIN 3235-AJ54
Joint Final Rules: Application of the Definition of Narrow-Based
Security Index to Debt Securities Indexes and Security Futures on Debt
Securities
AGENCIES: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint final rules.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (together, the
``Commissions'') are adopting a new rule and amending an existing rule
under the Commodity Exchange Act (``CEA'') and adopting two new rules
under the Securities Exchange Act of 1934 (``Exchange Act''). The rules
will modify the applicable statutory listing standards requirements to
permit security futures to be based on individual debt securities or a
narrow-based security index composed of such securities. In addition,
these rules and rule amendment will exclude from the definition of
``narrow-based security index'' debt securities indexes that satisfy
specified criteria. A future on a debt securities index that is
excluded from the definition of narrow-based security index will not be
a security future and may trade subject to the exclusive jurisdiction
of the CFTC.
EFFECTIVE DATE: August 14, 2006.
FOR FURTHER INFORMATION CONTACT:
CFTC: Elizabeth L. Ritter, Deputy General Counsel, at 202/418-5052,
or Julian E. Hammar, Counsel, at 202/418-5118, Office of General
Counsel; or Thomas M. Leahy, Jr., Associate Director, Product Review,
at 202/418-5278, Division of Market Oversight, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
SEC: Yvonne Fraticelli, Special Counsel, at 202/551-5654; or Leah
Mesfin, Special Counsel, at 202/551-5655, Office of Market Supervision,
Division of Market Regulation, Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549-6628.
SUPPLEMENTARY INFORMATION: The Commissions are adopting Rule 41.15 and
amending Rule 41.21 under the CEA,\1\ and adding Rule 3a55-4 and Rule
6h-2 under the Exchange Act.\2\
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\1\ All references to the CEA are to 7 U.S.C. 1 et seq.
\2\ All references to the Exchange Act are to 15 U.S.C. 78a et
seq.
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I. Introduction
A. Background
Futures contracts on single securities and on narrow-based security
indexes (collectively, ``security futures'') are jointly regulated by
the CFTC and the SEC.\3\ The definition of narrow-based security index
under both the CEA and the Exchange Act sets forth the criteria for
such joint regulatory jurisdiction. Futures on indexes that are not
narrow-based security indexes are subject to the exclusive jurisdiction
of the CFTC. Under the CEA and the Exchange Act, an index is a narrow-
based security index if it meets any one of four criteria.\4\ Further,
the CEA and Exchange Act provide that, notwithstanding the statutory
criteria, an index is not a narrow-based security index if a contract
of sale for future delivery on the index is traded on or subject to the
rules of a board of trade and meets such requirements as are jointly
established by rule, regulation, or order of the Commissions.\5\
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\3\ See Section 1a(31) of the CEA, 7 U.S.C. 1a(31); Section
3(a)(55)(A) of the Exchange Act, 15 U.S.C. 78c(a)(55)(A).
\4\ The four criteria are as follows: (1) It has nine or fewer
component securities; (2) any one of its component securities
comprises more than 30% of its weighting; (3) any group of five of
its component securities together comprise more than 60% of its
weighting; or (4) the lowest weighted component securities
comprising, in the aggregate, 25% of the index's weighting have an
aggregate dollar value of average daily trading volume (``ADTV'') of
less than $50 million (or in the case of an index with 15 or more
component securities, $30 million). See Section 1a(25)(A)(i)-(iv) of
the CEA, 7 U.S.C. 1a(25)(A)(i)-(iv); Section 3(a)(55)(B)(i)-(iv) of
the Exchange Act, 15 U.S.C. 78c(a)(55)(B)(i)-(iv).
\5\ See Section 1a(25)(B)(vi) of the CEA, 7 U.S.C.
1a(25)(B)(vi); Section 3(a)(55)(C)(vi) of the Exchange Act, 15
U.S.C. 78c(a)(55)(C)(vi).
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The statutory definition of narrow-based security index was
designed primarily for indexes composed of equity securities, not debt
securities.\6\ For example, while three criteria in the narrow-based
security index definition evaluate the composition and weighting of the
securities in the index, another criterion evaluates the liquidity of
an index's component securities. The liquidity criterion in the
statutory definition of narrow-based security index, which is important
for indexes composed of common stock, is not an appropriate criterion
for indexes composed of debt securities because debt securities
generally do not trade in the same manner as equity securities. In
particular, because few debt securities meet the ADTV criterion in the
statutory definition of narrow-based security index, most indexes
composed of debt securities, regardless of the number or amount of
underlying component securities in the index, would fall within the
statutory definition of narrow-based security index.
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\6\ Debt securities include notes, bonds, debentures, or
evidences of indebtedness.
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On April 10, 2006, the Commissions proposed rules \7\ that would
exclude debt securities indexes that satisfied certain criteria from
the statutory definition of narrow-based security index. Futures on
debt securities indexes that satisfy the criteria of the exclusion
would not be security futures and thus would be subject to the
exclusive jurisdiction of the CFTC. In addition, the proposed rules and
rule amendment would modify the statutory listing standards to permit
the trading of security futures on single debt securities and narrow-
based security indexes composed of debt securities.
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\7\ See Securities Exchange Act Release No. 53560 (March 29,
2006), 71 FR 18030 (April 10, 2006) (``Proposing Release'').
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The Commissions received comment letters on the proposed rules from
two futures exchanges, the Chicago Mercantile Exchange (``CME'') and
the Board of Trade of the City of Chicago (``CBOT''),\8\ and from the
Futures Industry Association (``FIA'').\9\ All of the commenters
generally supported the Commissions' proposal. The CME and the CBOT
requested the opportunity for public comment on the listing standards
[[Page 39535]]
that would apply to security futures on debt securities and indexes
composed of debt securities.\10\ In addition, the CBOT suggested that
the Commissions reduce the minimum remaining outstanding principal
amount requirement from $250,000,000 to $100,000,000.\11\
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\8\ See letter from Craig S. Donohue, Chief Executive Officer,
CME, to Jean A. Webb, Secretary, CFTC, and Jonathan G. Katz,
Secretary, SEC, dated April 25, 2006 (``CME Letter''); letter from
Bernard Dan, CBOT, to Jean A. Webb, Secretary, CFTC, and Nancy M.
Morris, Secretary, SEC, dated May 10, 2006 (``CBOT Letter'').
\9\ See letter from John M. Damgard, President, FIA, to Jean A.
Webb, Secretary, CFTC, and Nancy M. Morris, Secretary, SEC, dated
May 16, 2006 (``FIA Letter''). In addition, the FIA supported the
comments of the CME and the CBOT and urged the Commissions to
propose a regulatory standard governing the offer and sale of
security futures contracts on indexes composed of non-U.S. equities
that trade on or are subject to the rules of exchanges or boards of
trade located outside of the United States. Because the proposed
rules did not relate to indexes composed of non-U.S. equities, the
Commissions are not addressing this comment in this release.
\10\ See CME Letter, supra note 8, at 2; CBOT Letter, supra note
8, at 3-4.
\11\ See CBOT Letter, supra note 8; at 2-3.
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The FIA asked the Commissions to confirm that: (1) A debt security
index that meets the criteria in the rules would be broad-based even if
the index included products or instruments that are not securities; and
(2) in a debt securities index that includes both exempted securities
and securities that are not exempted securities, it would be necessary
to take into account only securities that are not exempted securities
in determining compliance with the criteria in the rules.\12\ These
comments are discussed more fully below.
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\12\ See FIA Letter, supra note 9, at 2.
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B. Overview of Adopted Rules
After careful consideration, the Commissions have determined to
adopt the rules and rule amendment largely as proposed, with changes to
address certain issues raised by the commenters. The Commissions
believe it is appropriate to exclude certain debt securities indexes
from the statutory definition of narrow-based security index using
criteria that differ in certain respects from the criteria applicable
to indexes composed of equity securities. The Commissions believe that
such modified criteria for debt securities indexes are necessary or
appropriate in the public interest and consistent with the protection
of investors because the criteria recognize the differences between
equity and debt and would permit security futures to be based on debt
securities indexes.\13\ In particular, the Commissions believe that the
modified criteria addressing diversification and public information
about, and market familiarity with, the issuers of the securities
underlying a debt securities index will reduce the likelihood that a
future on such an index would be readily susceptible to manipulation
and thus are more appropriate criteria for debt securities indexes.
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\13\ See 15 U.S.C. 78mm(a)(1).
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1. CEA Rule 41.21 and Exchange Act Rule 6h-2
The Commissions are amending CEA Rule 41.21 and adopting Exchange
Act Rule 6h-2 to modify the statutory listing standards for security
futures to permit the trading of security futures based on debt
securities that are notes, bonds, debentures, or evidences of
indebtedness and indexes composed of such securities.
2. CEA Rule 41.15 and Exchange Act Rule 3a55-4
The Commissions are adopting CEA Rule 41.15 and Exchange Act Rule
3a55-4, which exclude from the definition of narrow-based security
index any debt securities index that satisfies certain criteria.
Specifically, CEA Rule 41.15 and Exchange Act Rule 3a55-4 provide that
a debt securities index will not be considered a narrow-based security
index for purposes of Section 3(a)(55) of the Exchange Act and Section
1a(25) of the CEA if: (1) Each index component is a security that is a
note, bond, debenture, or evidence of indebtedness; (2) the index is
comprised of more than nine securities issued by more than nine non-
affiliated issuers; (3) the securities of any issuer included in the
index do not comprise more than 30% of the index's weighting; (4) the
securities of any five non-affiliated issuers included in the index do
not comprise more than 60% of the index's weighting; and (5) the issuer
of a security included in an index satisfies certain requirements.
For securities that are not exempted securities, CEA Rule 41.15 and
Exchange Act Rule 3a55-4 require that the issuer of a component
security: (1) Be required to file reports pursuant to section 13 or
15(d) of the Exchange Act; (2) have worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more; (3) have outstanding securities that are notes, bonds,
debentures, or evidences of indebtedness with a total remaining
principal amount of at least $1 billion; or (4) be a government of a
foreign country or a political subdivision of a foreign country.
In addition, CEA Rule 41.15 and Exchange Act Rule 3a55-4 require
each security of an issuer included in an index to have a total
remaining principal amount outstanding of at least $250,000,000.
Alternatively, to respond to the CBOT's comment, the final rule permits
a municipal security in the index to have only $200,000,000 total
remaining principal amount outstanding if the issuer of such municipal
security has outstanding debt securities with a total remaining
principal amount of at least $1 billion.
CEA Rule 41.15 and Exchange Act Rule 3a55-4 provide a de minimis
exception from the issuer eligibility and minimum outstanding principal
balance criteria if a predominant percentage of the securities
comprising the index's weighting satisfy all of the applicable
criteria.
In addition, in response to the FIA's comments, the Commissions are
adding an alternative provision that would permit exempted securities
that are debt securities (other than municipal securities) to be
excluded from an index in determining whether such index is not a
narrow-based security index under the rules.
Finally, CEA Rule 41.15 and Exchange Act Rule 3a55-4 contain a
definition of ``control'' solely to assess affiliation among issuers
for purposes of determining satisfaction of the criteria established in
the rules.
II. Discussion of Final Rules
A. Modification of the Statutory Listing Standards Requirements for
Security Futures Products
The Commodity Futures Modernization Act of 2000 \14\ amended the
Exchange Act. and the CEA by, among other things, establishing the
criteria and requirements for listing standards for securities on which
security futures products can be based. The Exchange Act \15\ provides
that it is unlawful for any person to effect transactions in security
futures products that are not listed on a national securities exchange
or a national securities association registered pursuant to Sections
6(a) or 15A(a), respectively, of the Exchange Act.\16\ The Exchange Act
\17\ further provides that such exchange or association is permitted to
trade only security futures products that conform with listing
standards filed with the SEC and that meet the criteria specified in
Section 2(a)(1)(D)(i) of the CEA.\18\ The CEA \19\ states that no board
of trade shall be designated as a contract market with respect to, or
registered as a derivatives transaction execution facility (``DTEF'')
for, any contracts of sale for future delivery of a security futures
product unless the board of trade and the applicable contract met the
criteria specified in that section. Similarly, the Exchange Act \20\
requires that the listing standards filed with the SEC by an
[[Page 39536]]
exchange or association meet specified requirements.
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\14\ Pub. L. 106-554, 114 Stat. 2763 (2000).
\15\ Section 6(h)(1) of the Exchange Act, 15 U.S.C. 78f(h)(l).
\16\ 15 U.S.C. 78f(a) and 78o-3(a).
\17\ Section 6(h)(2) of the Exchange Act, 15 U.S.C. 78f(h)(2).
\18\ 7 U.S.C. 2(a)(1)(D)(i).
\19\ Section 2(a)(1)(D)(i) of the CEA, 7 U.S.C. 2(a)(1)(D)(i).
\20\ Section 6(h)(3) of the Exchange Act, 15 U.S.C. 78f(h)(3).
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In particular, the Exchange Act \21\ and the CEA \22\ require that,
except as otherwise provided in a rule, regulation, or order, a
security future must be based upon common stock and such other equity
securities as the Commissions jointly determine appropriate. A security
future on a debt security or a debt securities index currently would
not satisfy this requirement.
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\21\ Section 6(h)(3)(D) of the Exchange Act, 15 U.S.C.
78f(h)(3)(D).
\22\ Section 2(a)(1)(D)(i)(III) of the CEA, 7 U.S.C.
2(a)(I)(D)(i)(III).
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The Exchange Act and the CEA, however, provide the Commissions with
the authority to jointly modify this requirement to the extent that the
modification fosters the development of fair and orderly markets in
security futures products, is necessary or appropriate in the public
interest, and is consistent with the protection of investors.\23\
Pursuant to this authority, the Commissions have determined that it is
appropriate in the public interest and consistent with the protection
of investors to amend CEA Rule 41.21 and adopt Exchange Act Rule 6h-2
to permit the trading of security futures based on debt securities that
are notes, bonds, debentures, or evidences of indebtedness and indexes
composed of such securities. This modification is necessary to allow
the listing and trading of new and potentially useful financial
products.
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\23\ Section 6(h)(4)(A) of the Exchange Act, 15U.S.C.
78f(h)(4)(A); Section 2(a)(1)(D)(v)(I) of the CEA, 7 U.S.C.
2(a)(1)(D)(v)(I).
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Security futures on debt securities or indexes composed of debt
securities must also conform with the listing standards of the national
securities exchange or national securities association on which they
trade. The Exchange Act requires, among other things, that such listing
standards be no less restrictive than comparable listing standards for
options traded on a national securities exchange or national securities
association.\24\ In addition, the issuer of any security underlying the
security future, including each component security of a narrow-based
security index, would have to be subject to the reporting requirements
of the Exchange Act due to the requirement that the security be
registered under Section 12 of the Exchange Act.\25\ The listing
standards for a security future also must require that trading in the
security future not be readily susceptible to manipulation of the price
of such security future, nor to causing or being used in the
manipulation of the price of an underlying security, option on such
security, or option on a group or index including such securities.\26\
Because these listing standards will continue to provide important
investor protections and safeguards against such products being readily
susceptible to manipulation or causing or being used in the
manipulation of any underlying security or option on such underlying
security or securities, the Commissions believe that new Exchange Act
Rule 6h-2 and the amendments to CEA Rule 41.21 will foster the
development of fair and orderly markets in security futures products,
are appropriate in the public interest, and are consistent with the
protection of investors.
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\24\ Section 6(h)(3)(C) of the Exchange Act, 15 U.S.C.
78f(h)(3)(C).
\25\ Section 2(a)(l)(D)(i)(I) of the CEA, 7 U.S.C.
2(a)(l)(D)(i)(I); Section 6(h)(3)(A) of the Exchange Act, 15 U.S.C.
78f(h)(3)(A).
\26\ Section 2(a)(l)(D)(i)(VII) of the CEA, 7 U.S.C.
2(a)(l)(D)(i)(VII); Section 6(h)(3)(H) of the Exchange Act, 15
U.S.C. 78f(h)(3)(H).
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B. Rules Excluding Certain Debt Securities Indexes From the Definition
of Narrow-Based Security Index
The Commissions are adopting new CEA Rule 41.15 and Exchange Act
Rule 3a55-4, which exclude from the statutory definition of narrow-
based security index any debt securities index that satisfies certain
criteria. A futures contract on such an index would not be a security
future and thus would be subject to the exclusive jurisdiction of the
CFTC. The Commissions believe that the criteria in the rules, including
the requirements relating to the maximum weighting and concentration of
securities of an issuer in an index, the eligibility conditions for
issuers, and the minimum remaining outstanding principal amount
requirement should reduce the likelihood that a future on such an index
would be readily susceptible to manipulation or could be used to
manipulate the market for the underlying debt securities.\27\
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\27\ Although broad-based debt securities indexes that meet the
criteria in the rules should have a reduced likelihood of being
readily susceptible to manipulation, such indexes also must be
determined to be not readily susceptible to manipulation, in
accordance with Section 2(a)(1)(C)(ii)(II) of the CEA, 7 U.S.C.
2(a)(1)(C)(ii)(II).
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1. Index Composed Solely of Debt Securities
The new rules require that, for an index to qualify for the
exclusion from the definition of ``narrow-based security index,'' each
component security of the index must be a security \28\ that is a note,
bond, debenture, or evidence of indebtedness.\29\ Further, none of the
securities of an issuer included in the index may be an equity
security, as defined in Section 3(a)(11) of the Exchange Act and the
rules adopted thereunder.\30\ Thus, any security index that includes an
equity security will not qualify for the exclusion for indexes composed
of debt securities.\31\
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\28\ The term ``security'' is defined in Section 2(a)(1) of the
Securities Act of 1933 (the ``Securities Act''), 15 U.S.C.
77b(a)(1), and Section 3(a)(10) of the Exchange Act, 15 U.S.C.
78c(a)(10).
\29\ See Exchange Act Rule 3a55-4(a)(1); CEA Rule 41.15(a)(1).
The federal securities laws do not contain a single definition of
``debt security.'' The Commissions, therefore, are using the terms
found in the Trust Indenture Act of 1939, 15 U.S.C. 77aaa-bbb (which
governs debt securities of all types), to define the debt securities
for purposes of these rules and rule amendment.
\30\ 15 U.S.C. 78c(a)(11). See Exchange Act Rule 3a55-4(a)(2);
CEA Rule 41. 15(a)(2). A security convertible into an equity
security is an equity security under the Exchange Act and the
Securities Act.
\31\ Indexes that include both equity and debt securities would
be subject to the criteria for narrow-based security indexes
enumerated in Section 1a(25) of the CEA and Section 3(a)(55) of the
Exchange Act.
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The FIA asked the Commissions to confirm that a debt security index
that meets the criteria in the rules would be broad-based even if the
index included products or instruments that ar not securities.\32\ The
Commissions' proposed rules required that each component security of an
index be a security that is a note, bond, debenture, or evidence of
indebtedness. The Commissions did not propose or solicit comment on
whether, and to what extent, indexes that include instruments that are
not securities should be excluded from the definition of narrow-based
security index and have not, to date, considered the regulatory
implications of so excluding futures on indexes composed of different
product classes. Accordingly, the Commissions are adopting these
requirements as proposed without permitting indexes under the criteria
to include products or instruments that are not securities.
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\32\ See FIA Letter, supra note 9, at 2. The FIA letter did not
elaborate on what these other products or instruments might be.
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2. Number and Weighting of Index Components
The exclusion also includes conditions relating to the minimum
number of securities of non-affiliated issuers that must be included in
an index and the maximum permissible weighting of securities in the
index. The new rules provide that, for an index to qualify for the
exclusion:
• The index must be composed of more than nine securities
issued by more than nine non-affiliated issuers; \33\
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\33\ See Exchange Act Rule 3a55-4(a)(3); CEA Rule 41.15(a)(3).
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[[Page 39537]]
• The securities of any issuer cannot comprise more than 30%
of the index's weighting; \34\ and
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\34\ See Exchange Act Rule 3a55-4(a)(4); CEA Rule 41. 15(a)(4).
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• The securities of any five non-affiliated issuers cannot
comprise more than 60% of the index's weighting.\35\
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\35\ See Exchange Act Rule 3a55-4(a)(5); CEA Rule 41. 15(a)(5).
The foregoing conditions are virtually identical to the criteria
contained in the Exchange Act and the CEA that apply in determining if
a security index would not be a narrow-based security index.\36\
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\36\ See supra note 4.
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In addition, the new rules provide that the term ``issuer''
includes a single issuer or group of affiliated issuers.\37\ An issuer
would be affiliated with another issuer for purposes of the exclusion
if it controls, is controlled by, or is under common control with, that
other issuer. The rules define control, solely for purposes of the
exclusion, to mean ownership of 20% or more of an issuer's equity or
the ability to direct the voting of 20% or more of an issuer's voting
equity.\38\ The definition of control will apply solely to CEA Rule
41.15 and Exchange Act Rule 3a55-4 and is designed to provide a clear
standard for determining control and affiliation for purposes of the
exclusion. Determining whether issuers are affiliated is important in
assessing whether an index satisfies the conditions in the rules
adopted today because the debt securities of all affiliated issuers
included in an index must be aggregated.
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\37\ See Exchange Act Rule 3a55-4(b); CEA Rule 41.15(b).
\38\ While the definition of affiliate under the federal
securities laws is generally a facts-and-circumstances determination
based on the definition of affiliate contained in such laws, see,
e.g. , Securities Act Rule 405, 17 CFR 230.405; Exchange Act Rule
12b-2, 17 CFR 240.12b-2, certain rules under the Exchange Act
contain a 20% threshold for purposes of determining a relationship
between two or more entities. See, e.g., Exchange Act Rule 13d-1(c),
17 CFR 240.13d-1(c); Securities Exchange Act Release No. 39538
(January 12, 1998), 63 FR 2854 (January 16, 1998). See also Rule 3-
05 under Regulation S-X, 17 CFR 210.3-05.
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The number and weighting criteria require that an index meet
minimum diversification conditions with regard to both issuers and the
underlying securities. These criteria provide that for purposes of
weighting, all debt securities of all affiliated issuers included in
the index are aggregated so that the indexes are not concentrated in
the securities of a small number of issuers and their affiliates. These
criteria are important elements of the Commissions' determination that
the rules are consistent with the protection of investors because they
reduce the likelihood that a future on such a debt securities index
would be overly dependent on the price behavior of a component single
security, small group of securities or issuers, or group of securities
issued by affiliated parties.
3. Issuer or Security Eligibility Criteria
New CEA Rule 41.15 and Exchange Act Rule 3a55-4 require that, for
an index to qualify for the exclusion from the definition of narrow-
based security index, the issuer of each component security that is not
an exempted security under the Exchange Act and the ,rules thereunder
must satisfy one of the following:
• The issuer is required to file reports pursuant to
Sections 13 or 15(d) of the Exchange Act; \39\
• The issuer has a worldwide market value of its outstanding
common equity held by non-affiliates of $700 million or more; or
• The issuer has outstanding securities that are notes,
bonds, debentures, or evidences of indebtedness having a total
remaining principal amount of at least $1 billion.
These issuer eligibility criteria are aimed at conditioning the
exclusion for a debt securities index from the definition of narrow-
based security index on the public availability of information about
the issuers of the securities included in the index. For example, an
issuer that is required to file reports pursuant to Sections 13 or
l5(d) of the Exchange Act \40\ makes regular and public disclosure
through its Exchange Act filings. For issuers that are not required to
file reports with the SEC under the Exchange Act, the Commissions
similarly believe that issuers having worldwide equity market
capitalization of $700 million or $1 billion in outstanding debt are
likely to have public information available about them.\41\
Accordingly, the issuer eligibility criteria are designed to provide
that, other than with respect to exempted securities in the index, the
debt securities index includes debt securities of issuers for which
public information is available, thereby reducing the likelihood that
an index qualifying for the exclusion would be readily susceptible to
manipulation.
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\39\ 15 U.S.C. 78m and 78o(d).
\40\ 15 U.S.C. 78m and 78o.
\41\ These thresholds are similar to ones the SEC recently
adopted in its Securities Offering Reform rules. See Securities Act
Release No. 8591 (July 19, 2005), 70 FR 44722 (August 3, 2005).
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Under the rules adopted by the Commissions today, the issuer
eligibility criteria do not apply to index components that are exempted
securities, as defined in the Exchange Act,\42\ or to an issuer that is
a government of a foreign country or a political subdivision of a
foreign country. The Commissions believe that it is appropriate to
allow indexes qualifying for the exclusion to include exempted
securities and the debt obligations of foreign countries and their
political subdivisions. Current law permits futures on individual
exempted debt securities, other than municipal securities, and on
certain foreign sovereign debt obligations.\43\ Because a future may be
based on one of these exempted debt securities, the Commissions believe
that it is reasonable and consistent with the purposes of the CEA and
the Exchange Act to allow futures to be based on indexes composed of
such debt securities.
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\42\ See 15 U.S.C. 78c(a)(12). While issuers of exempted
securities are not subject to the same issuer eligibility
conditions, other existing rules and regulatory regimes applicable
to most of such issuers provide for ongoing public information about
such issuers. See, e.g. Exchange Act Rule 15c2-12, 17 CFR 240.15c2-
12.
\43\ Section 2(a)(1)(C)(iv) of the CEA, 7 U.S.C. 2(a)(1)(C)(iv),
prohibits any person from entering into a futures contract on any
security except an exempted security under Section 3(a)(12) of the
Exchange Act, 15 U.S.C. 78c(a)(12), other than a municipal security,
as defined in Section 3(a)(29) of the Exchange Act, 15 U.S.C.
78c(a)(29). In addition, Exchange Act Rule 3a12-8, 17 CFR 240.3a12-
8, deems the debt obligations of specified foreign governments to be
exempted securities for the purpose of permitting the offer, sale,
and confirmation of futures contracts on those debt obligations in
the United States..
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4. Minimum Principal Amount Outstanding
The rules require that, for a securities index to qualify for the
exclusion, each index component, other than a municipal security in
certain cases, must have a total remaining principal amount of at least
$250,000,000. Although trading in most debt securities is limited,
trading volume is generally larger for debt securities with
$250,000,000 or more in total remaining principal amount
outstanding.\44\ The new rules do not require that the securities
included in the index have an investment grade rating. Nor do the rules
require particular trading volume, due to the generally lower trading
activity in the debt markets compared to the equity markets. Trading
activity in a debt security generally increases as the principal amount
of the debt security increases. However, non-investment-grade debt
securities generally trade more frequently than investment-grade debt
securities. As a result of the type of trading activity that occurs in
the
[[Page 39538]]
debt markets, the Commissions do not believe that trading volume is an
appropriate criterion for determining whether a debt securities index
is narrow-based. Instead, the Commissions are adopting a minimum
principal amount criterion which is intended, together with the other
criteria in the rules adopted today geared to the debt securities
market, to provide a substitute criterion for trading volume.
Accordingly, the Commissions believe that including a minimum remaining
principal amount criterion, together with the other criteria, will
decrease the likelihood that a future on an index qualifying for the
exclusion from the definition of narrow-based security index would be
readily susceptible to manipulation.
---------------------------------------------------------------------------
\44\ This is based on data obtained from the Trace Reporting and
Compliance Engine (TRACE) database supplied by NASD.
---------------------------------------------------------------------------
The CBOT urged the Commissions to reduce the minimum remaining
outstanding principal amount threshold from $250,000,000 to
$100,000,000.\45\ The CBOT presented data indicating that only a small
number of municipal debt securities are issued in principal amounts
exceeding $250,000,000 and argued that it would be difficult to
construct an index qualifying for the exclusion composed of municipal
securities. The CBOT believed a $100,000,000 threshold was appropriate
because it would make it-more likely that an exchange would be able to
identify a sufficient number of municipal debt securities to be
included in an index. The CBOT did not provide any data regarding other
debt securities or any data or arguments to demonstrate how its
proposed $100,000,000 threshold was consistent with the principle that
an index based on municipal debt securities meeting its threshold would
not be readily susceptible to manipulation.
---------------------------------------------------------------------------
\45\ See CBOT Letter, supra note 8, at 2-3.
---------------------------------------------------------------------------
The Commissions intend the $250,000,000 threshold to be a proxy for
the statutory trading volume criterion for equity securities. As
discussed above, trading activity in a debt security generally
increases as the principal amount of the debt security increases. The
$250,000,000 threshold is not designed to maximize the number of
securities that may be included in an index qualifying for an exclusion
from the definition of narrow-based security index. Rather, by limiting
an index primarily to more liquid securities, this criterion increases
the likelihood that information about such securities will be publicly
available and that the securities will have a larger market following.
The $250,000,000 threshold, together with the other criteria, is
designed to reduce the likelihood that the index would be readily
susceptible to manipulation.
The Commissions are addressing the CBOT's comment in the final
rules by adopting an alternate test for municipal securities. A
municipal security could either: (1) Meet the original $250,000,000
threshold; or (2) meet the following two-part test: (a) The security
has a remaining principal amount outstanding of $200,000,000; and (b)
the issuer of the security has outstanding securities that are notes,
bonds, debentures, or evidences of indebtedness having a total
remaining principal amount of at least $1 billion.\46\ As discussed
above, the Commissions believe that issuers with $1 billion or more in
outstanding debt are likely to be followed in the market, and that
information about such issuers is more likely to be publicly
available.\47\ Providing an alternate lower threshold for principal
amount outstanding should provide some flexibility in constructing
indexes that include municipal securities by expanding the number of
municipal securities issues that could be eligible. At the same time,
the alternate $200,000,000 threshold is designed to reduce the
likelihood that the market for a security is not highly illiquid and
thus more readily susceptible to manipulation.\48\ Furthermore, the
requirement that the issuer of the security have total debt outstanding
of at least $1 billion increases the likelihood that information about
the issuer and its securities will be publicly available. The
availability of such information should reduce the likelihood that the
issuer's securities--including those with a minimum principal amount
outstanding of $200,000,000--would be readily susceptible to
manipulation.
---------------------------------------------------------------------------
\46\ CEA Rule 41.15(a)(l)(vii)(B); Exchange Act Rule 3a55-
4(a)(1)(vii)(B).
\47\ See supra note 41 and accompanying text.
\48\ In a 2004 study of the municipal securities market, the SEC
staff found that, over a 10.5-month period, one-third of municipal
issuers had no trades in their debt securities and two-thirds of
municipal issuers had 25 or fewer trades in their securities. Only
2% of municipal issuers had 1,000 or more trades in their securities
during that 10.5-month period. See Office of Economic Analysis,
Office of Municipal Securities, and Division of Market Regulation,
Report on Transactions in Municipal Securities (2004), at 17.
---------------------------------------------------------------------------
5. De Minimis Exception
As the Commissions proposed, the final rules exclude an index from
the definition of ``narrow-based security index'' even if certain of
the issuers of the underlying securities do not meet the issuer
eligibility and the securities do not meet the minimum outstanding
principal balance requirements. Specifically, an index will still
qualify for the exclusion even if an issuer does not satisfy the
eligibility criteria described above \49\ or the securities do not have
$250,000,000, or, for municipal securities of issuers with at least $1
billion in outstanding principal amount of debt, $200,000,000 in
remaining principal amount, as applicable, if:
---------------------------------------------------------------------------
\49\ See supra notes 28-46 and accompanying text.
---------------------------------------------------------------------------
• All securities of such issuer included in the index
represent less than 5% of the index's weighting; \50\ and
---------------------------------------------------------------------------
\50\ In determining whether the 5% threshold is met, all
securities of an issuer and its affiliates would be aggregated
because of the potential for concentrated risk of the index in a
limited group of issuers.
---------------------------------------------------------------------------
• Securities comprising at least 80% of the index's
weighting satisfy the issuer eligibility and minimum outstanding
principal balance criteria.\51\
---------------------------------------------------------------------------
\51\ The 80% calculation is based on the entire index's
weighting without subtracting issuers that are not required to
satisfy the issuer eligibility criteria and minimum outstanding
principal amount criteria. This is important to ensure that a
predominant percentage of the index satisfies the required criteria.
---------------------------------------------------------------------------
The Commissions believe that an index that includes a very small
proportion of securities and issuers that do not satisfy certain of the
above criteria should nevertheless be excluded from the definition of
narrow-based security index. To satisfy the exclusion, both the 5% and
the 80% weighting thresholds must be met at the time of the assessment.
The 5% weighting threshold is designed to provide that issuers and
securities not satisfying certain of the criteria will comprise only a
very small portion of the index. The 80% weighting threshold is
designed to provide that a predominant percentage of the securities and
the issuers in the debt securities index satisfy the criteria. By
allowing debt securities indexes that include debt securities of a
small number of issuers and securities that do not satisfy certain of
the criteria to qualify for the exclusion, the de minimis exception
provides some flexibility in constructing an index or determining
whether a debt securities index satisfies the exclusion. The
Commissions believe that the de minimis exemption is appropriate for
indexes that are predominantly composed of securities that satisfy the
specified criteria, and that providing such flexibility is consistent
with the protection of investors and is not likely to increase the
possibility that an index that qualifies for the exclusion would be
readily susceptible to manipulation.
[[Page 39539]]
6. Indexes That Include Exempted Securities
The FIA asked the Commissions to confirm that, in an index that
includes exempted securities and securities that are not exempted
securities, only securities that are not exempted securities must be
taken into account in determining compliance with the rules'
criteria.\52\ To address the FIA's comment and to clarify the treatment
of an index that includes both exempted debt securities and debt
securities that are not exempted securities, the final rules permit,
but do not require, certain of the index's exempted debt securities
(other than municipal securities) to be excluded from the index in
determining whether the index is not a narrow-based security index
under the rules.\53\ Persons making the determination regarding the
appropriate treatment under the rules of a debt security index that
includes both exempted and non-exempted debt securities may use either
test for determining whether the debt security index is not narrow-
based. Under the alternative method for determining whether a debt
security index is not narrow-based, exempted debt securities (other
than municipal securities) may be excluded from the application of the
rule criteria. If exempted debt securities are excluded from the
application of the rule criteria, the remaining portion of the index
must satisfy each of the rule's criteria without taking into account
the portion of the index composed of the exempted debt securities in
order for the index as a whole to not be a narrow-based security index
under the rules.
---------------------------------------------------------------------------
\52\ See FIA Letter, supra note 9, at 2.
\53\ See CEA Rule 41.15(a)(2); Exchange Act Rule 3a55-4(a)(2).
---------------------------------------------------------------------------
The Commissions believe this new provision is consistent with the
objective and intent of the proposed rules. The Commissions also
believe it responds to the FIA's request for clarification of the
treatment of indexes that include exempted securities and securities
that are not exempted securities.
C. Tolerance Period
Section 1a(25)(B)(iii) of the CEA \54\ and Section 3(a)(55)(C)(iii)
of the Exchange Act \55\ provide that, under certain conditions, a
future on a security index may continue to trade as a broad-based index
future, even when the index temporarily assumes characteristics that
would render it a narrow-based security index under the statutory
definition. An index qualifies for this tolerance and therefore is not
a narrow-based security index if: (1) A future on the index traded for
at least 30 days as an instrument that was not a security future before
the index assumed the characteristics of a narrow-based security index;
and (2) the index does not retain the characteristics of a narrow-based
security index for more than 45 business days over three consecutive
calendar months.\56\
---------------------------------------------------------------------------
\54\ 7 U.S.C. 1a(25)(B)(iii).
\55\ 15 U.S.C. 78c(a)(55)(C)(iii).
\56\ If the index becomes narrow-based for more than 45 days
over three consecutive calendar months, the statute then provides an
additional grace period of three months during which the index is
excluded from the definition of narrow-based security index. See
Section 1a(25)(D) of the CEA, 7 U.S.C. 1a(25)(D); Section
3(a)(55)(E) of the Exchange Act, 15 U.S.C. 78c(a)(55)(E).
---------------------------------------------------------------------------
In addition, current CEA Rule 41.12 \57\ and Exchange Act Rule
3a55-2 \58\ address the circumstance when a broad-based security index
underlying a future becomes narrow-based during the first 30 days of
trading. In such case, the future does not meet the requirement of
having traded for at least 30 days to qualify for the tolerance period
granted by Section 1a(25)(B)(iii) of the CEA \59\ and Section
3(a)(55)(C)(iii) of the Exchange Act.\60\ These rules, however, provide
that the index will nevertheless be excluded from the definition of
narrow-based security index throughout that first 30 days, if the index
would not have been a narrow-based security index had it been in
existence for an uninterrupted period of six months prior to the first
day of trading.
III. Listing Standards for Security Futures on Debt Securities
The listing standards requirements for security futures are set
forth in Section 2(a)(1)(D)(i) of the CEA \61\ and Section 6(h)(3) of
the Exchange Act.\62\ Among other things, the listing standards for
security futures products must be no less restrictive than comparable
listing standards for options traded on a national securities exchange
or national securities association,\63\ and the listing standards must
require that trading in the security futures product not be readily
susceptible to manipulation of the price of the security futures
product, or to causing or being used in the manipulation of the price
of an underlying security, option on such security, or option on a
group or index including such securities.\64\
---------------------------------------------------------------------------
\57\ 17 CFR 41.12.
\58\ 17 CFR 240.3a55-2.
\59\ 7 U.S.C. 1a(25)(B)(iii).
\60\ 15 U.S.C. 78c(a)(55)(C)(iii).
\61\ 7 U.S.C. 2(a)(1)(D)(i).
\62\ 15 U.S.C. 78f(h)(3).
\63\ See Section 6(h)(3)(C) of the Exchange Act, 15 U.S.C.
78f(h)(3)(C).
\64\ See Section 2(a)(1)(D)(i)(VII) of the CEA, 7 U.S.C.
2(a)(1)(D)(i)(VII); Section 6(h)(3)(H) of the Exchange Act, 15
U.S.C. 78f(h)(3)(H).
---------------------------------------------------------------------------
The CME and CBOT urged the SEC to publish for comment the listing
standards that would apply to security futures on debt securities.\65\
The commenters maintained that interested parties should have an
opportunity to provide meaningful comment on the listing standards for
such security futures.
---------------------------------------------------------------------------
\65\ See CME Letter, supra note 8, at 2; CBOT Letter, supra note
8, at 3-4.
---------------------------------------------------------------------------
As noted above, the Exchange Act and the CEA require that the
listing standards for security futures be no less restrictive than
comparable listing standards for exchange-traded options.\66\ This
statutory standard does not require that the SEC adopt rules. Instead,
the Exchange Act contemplates that exchanges proposing to list and
trade security futures products must file proposed rule changes that
include listing standards that, among other things, are consistent with
this standard.\67\ Currently, the only debt securities on which options
trade are U.S. Treasury securities.\68\ The SEC, however, recently
published for comment a proposed rule change by the Chicago Board
Options Exchange to list options on certain corporate debt
securities.\69\ The SEC would welcome comments from the CME and others
on the CBOE's proposal, particularly as it relates to comparable
listing standards for security futures on debt securities.
---------------------------------------------------------------------------
\66\ See supra note 63.
\67\ A proposed rule change must, among other things, satisfy
the substantive requirements of Section 6 of the Exchange Act and
the procedural requirements of Section 19 of the Exchange Act.
\68\ See CBOE Rule 21.1 et seq.
\69\ See Securities Exchange Act Release No. 53935 (June 2,
2006), 71 FR 34174 (June 13, 2006).
---------------------------------------------------------------------------
IV. Paperwork Reduction Act
CFTC: The Paperwork Reduction Act of 1995 (``PRA''),\70\ imposes
certain requirements on federal agencies (including the CFTC) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The rule and rule amendment do not
require a new collection of information on the part of any entities.
---------------------------------------------------------------------------
\70\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
SEC: The PRA does not apply because new Exchange Act Rules 3a55-4
and 6h-2 do not impose any new ``collection of information''
requirements within the meaning under the PRA.
[[Page 39540]]
V. Costs and Benefits of Final Rules
CFTC: Section 15(a) of the CEA \71\ requires the CFTC to consider
the costs and benefits of its actions before issuing new regulations
under the CEA. By its terms, Section 15(a) does not require the CFTC to
quantify the costs and benefits of new regulations or to determine
whether the benefits of the regulations outweigh their costs. Rather,
Section 15(a) requires the CFTC to ``consider the cost and benefits''
of the subject rules in light of five broad areas of market and public
concern: (1) Protection of market participants and the public; (2)
efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery; (4) sound risk management practices; and
(5) other public interest considerations. The CFTC may, in its
discretion, give greater weight to any one of the five enumerated areas
of concern and may, in its discretion, determine that, notwithstanding
its costs, a particular rule is necessary or appropriate to protect the
public interest or to effectuate any of the provisions or to accomplish
any of the purposes of the CEA.
---------------------------------------------------------------------------
\71\ 7 U.S.C. 15(a).
---------------------------------------------------------------------------
The rule and rule amendment will foster the protection of market
participants and the public by establishing criteria for futures on
broad-based debt securities indexes that will reduce the likelihood
that these products would be readily susceptible to manipulation. The
statutory listing standards for security futures provide for similar
protection of market participants with regard to security futures on
narrow-based debt securities indexes and individual debt securities
that will be made available for listing and trading pursuant to the
final rules.
In addition, the rule and rule amendment will encourage the
efficiency and competitiveness of futures markets by permitting the
listing for trading of new and potentially useful products on debt
securities and security indexes. In the absence of the rule and rule
amendment, futures on debt securities indexes that meet the proposed
criteria for non-narrow-based security index treatment, as well as
security futures on narrow-based debt securities indexes and individual
debt securities, would be prohibited. Efficiencies will also be
achieved because the rule and rule amendment, in establishing criteria
for broad-based debt securities indexes, take into consideration the
characteristics of such indexes and the issuers of the underlying debt
securities that render joint SEC and CFTC regulation unnecessary. By
not subjecting futures on debt securities indexes that meet the
criteria to joint SEC and CFTC regulation, the costs for listing such
products will be minimized.
The rule and rule amendment will have no material impact from the
standpoint of imposing costs or creating benefits, on price discovery,
sound risk management practices, or any other public interest
considerations.
Although exchanges may incur costs in order to determine whether a
debt securities index meets the criteria to be considered broad-based
established by the rules, the CFTC believes that these costs are
outweighed in light of the factors and benefits discussed above.
SEC: New Exchange Act Rule 6h-2 permits a national securities
exchange to list and trade security futures based on a security that is
a note, bond, debenture, or evidence of indebtedness or on a narrow-
based index composed of such securities. New Exchange Act Rule 3a55-4
excludes from the definition of ``narrow-based security index'' those
debt securities indexes that satisfy certain criteria.
A. Benefits
The benefits of new Exchange Act Rules 6h-2 and 3a55-4 are related
to the benefits that will accrue as a result of expanding the range of
securities on which security futures and other index futures may be
based. By permitting the trading of security futures based on debt
securities or debt securities indexes and excluding certain indexes
based on debt securities from the definition of narrow-based security
index, new Exchange Act Rule 6h-2 permits a greater variety of
financial products to be listed and traded that potentially could
facilitate price discovery and the ability to hedge. New Exchange Act
Rule 3a55-4 provides clear, objective criteria for excluding from the
jurisdiction of the SEC futures contracts on certain debt securities
indexes. By providing an objective rule to determine when a debt
securities index is not a narrow-based securities index for purposes of
the Exchange Act Section 3(a)(55), new Exchange Act Rule 3a55-4
alleviates any additional regulatory costs of dual CFTC and SEC
jurisdiction where it is appropriate to do so. Futures contracts on
debt securities indexes that do not meet the criteria in Exchange Act
Rule 3a55-4 for the exclusion from the definition of narrow-based debt
security index will be subject to the joint jurisdiction of the SEC and
CFTC. Futures on debt securities indexes that do meet the criteria for
the exclusion, however, will be subject to the exclusive jurisdiction
of the CFTC and may be traded only on designated contract markets and
registered DTEFs. Investors generally will benefit from the new rules
by having a wider choice of financial products to buy and sell. The
amount of the benefit will likely be correlated to the volume of
trading in these new instruments.
B. Costs
In complying with the new rules, a national securities exchange,
national securities association, designated contract market, registered
DTEF, or foreign board of trade (each a ``listing market'') that wishes
to list and trade futures contracts based on debt securities indexes
will incur certain costs.\72\ A listing market that wishes to list and
trade such a futures contract will be required to ascertain whether the
underlying debt securities index is or is not a narrow-based debt
security index, according to the criteria set forth in Rule 3a55-4, and
thus whether a future on such debt security index is subject to the
exclusive jurisdiction of the CFTC or to the joint jurisdiction of the
SEC and CFTC. This analysis will have to be performed at the initial
listing and monitored periodically to ensure continued compliance under
new Exchange Act Rule 3a55-4. The SEC notes, however, that in the
absence of new Exchange Act Rule 3a55-4, a listing market desiring to
list futures on a debt securities index would still have to bear the
costs associated with performing a similar analysis under the statutory
definition of narrow-based security index. The costs associated with
new Exchange Act Rule 3a55-4 would largely replace the costs of
performing an analysis under the statutory definition of narrow-based
security index for debt securities indexes and, therefore, there is
little or no cost increase.
---------------------------------------------------------------------------
\72\ In the Proposing Release, supra note 7, the Commissions
requested comment on the costs and benefits associated with the
proposed rules and rule amendment but did not receive any specific
cost or benefit data in response.
---------------------------------------------------------------------------
The determination of whether a debt securities index is excluded
from the definition of narrow-based debt security index will require
listing markets to make certain calculations based on the type of
issuer and concentration of the security in the index, including
calculations, as appropriate, relating to the issuer eligibility
provisions,\73\ the
[[Page 39541]]
total outstanding principal of each of the underlying securities, and
calculations related to the weighting of each of the securities in the
index. A listing market may incur costs if it contracts with an outside
party to perform these calculations. In addition, a listing market may
incur costs associated with obtaining and accessing appropriate data
from an independent third-party vendor. For example, a listing market
may be required to pay certain fees to a vendor to acquire the
necessary information. Furthermore, if these calculations require data
that are not readily available, particularly if foreign data are
needed, a listing market may possibly incur additional costs to obtain
such data.
---------------------------------------------------------------------------
\73\ The issuer eligibility calculations for issuers of non-
exempted securities, non-Exchange Act reporting issuers, or issuers
that are not foreign governments could include the worldwide market
value of outstanding common equity held by non-affiliates of such
issuer or the aggregate remaining principal amount of outstanding
debt of such issuer.
---------------------------------------------------------------------------
Market participants that elect to create debt securities indexes
for trading futures thereon will also incur non-regulatory costs
associated with constructing these products. Such costs will be the
ordinary costs of doing business.
VI. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
SEC: Section 3(t) of the Exchange Act \74\ requires the SEC, when
engaged in a rulemaking that requires it to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider whether the action will promote efficiency, competition,
and capital formation. Section 23(a)(2) of the Exchange Act \75\
requires the SEC, in adopting rules under the Exchange Act, to consider
the impact any rule will have on competition. In particular, Section
23(a)(2) of the Exchange Act prohibits the SEC from adopting any rule
that will impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. In the Proposing
Release, the SEC requested comment on these statutory considerations
and received none that addressed them specifically.
---------------------------------------------------------------------------
\74\ 15 U.S.C. 78c(f).
\75\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
New Exchange Act Rule 6h-2 will permit the listing and trading of
security futures based on debt securities and narrow-based debt
securities indexes. New Exchange Act Rule 3a55-4 sets forth clear
methods and guidelines for a listing market to distinguish futures
contracts on debt securities indexes that are subject to joint
jurisdiction of the SEC and CFTC from futures contracts on debt
securities indexes that are subject to the exclusive jurisdiction of
the CFTC. The SEC believes that the new rules, by allowing listing
markets to list and trade new financial products, will promote
efficiency and competition. The new rules will create opportunities for
listing markets to compete in the market for such new products and
perhaps to create new products that will compete with existing
products. The resulting increased competition and more efficient
markets should not have an adverse impact on capital formation.
VII. Regulatory Flexibility Act Certifications
CFTC: The Regulatory Flexibility Act (``RFA'') \76\ requires
federal agencies, in promulgating rules, to consider the impact of
those rules on small entities. The rules herein will affect contract
markets and registered DTEFs. The CFTC previously established certain
definitions of Itsmall entities It to be used by the CFTC in evaluating
the impact of its rules on small entities in accordance with the
RFA.\77\ In its previous determinations, the CFTC has concluded that
contract markets and DTEFs are not small entities for the purpose of
the RFA.\78\
---------------------------------------------------------------------------
\76\ 5 U.S.C. 601 et seq.
\77\ See 47 FR 18618 (April 20, 1982).
\78\ See 47 CFR 18618, 18619 (April 20, 1982) (discussing
contract markets); 66 FR 42256, 42268 (August 10, 2001) (discussing
DTEFs).
---------------------------------------------------------------------------
SEC: In the Proposing Release, the Commission certified, pursuant
to Section 605(b) of the RFA \79\ that new Exchange Act Rules 3a55-4
and 6h-2 would not have a significant economic impact on a substantial
number of small entities. The Commission solicited comment as to the
nature of any impact on small entities, including empirical data to
support the extent of such impact costs and benefits associated with
the proposed amendment, and no comments were received.
---------------------------------------------------------------------------
\79\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
VIII. Statutory Authority
Pursuant to the CEA and the Exchange Act, and, particularly,
Sections 1a(25)(B)(vi) and 2(a)(1)(D) of the CEA \80\ and Sections
3(a)(55)(C)(vi), 3(b), 6(h), 23(a), and 36 of the Exchange Act,\81\ the
Commissions are adopting Rule 41.15 and amendments to Rule 41.21 under
the CEA,\82\ and Rules 3a55-4 and 6h-2 under the Exchange Act.\83\
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\80\ 7 U.S.C. 1a(25)(B)(vi) and 2(a)(1)(D).
\81\ 15 U.S.C. 78c(a)(55)(C)(vi), 78c(b), 78f(h), 78w(a), and
78mm.
\82\ 17 CFR 41.15 and 41.21.
\83\ 17 CFR 250.3a55-4 and 240.6h-2.
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IX. Text of Adopted Rules
List of Subjects
17 CFR Part 41
Security futures products.
17 CFR Part 240
Securities.
Commodity Futures Trading Commission
0
In accordance with the foregoing, Title 17, chapter I, part 41 of the
Code of Federal Regulations is amended as follows:
PART 41--SECURITY FUTURES PRODUCTS
0
1. The authority citation for part 41 continues to read as follows:
Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat.
2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
Subpart B--Narrow-Based Security Indexes
0
2. Add Sec. 41.15 to read as follows:
Sec. 41.15 Exclusion from definition of narrow-based security index
for indexes composed of debt securities.
(a) An index is not a narrow-based security index if:
(1)(i) Each of the securities of an issuer included in the index is
a security, as defined in section 2(a)(1) of the Securities Act of 1933
and section 3 (a)(10) of the Securities Exchange Act of 1934 and the
respective rules promulgated thereunder, that is a note, bond,
debenture, or evidence of indebtedness;
(ii) None of the securities of an issuer included in the index is
an equity security, as defined in section 3(a)(11) of the Securities
Exchange Act of 1934 and the rules promulgated thereunder;
(iii) The index is comprised of more than nine securities that are
issued by more than nine non-affiliated issuers;
(iv) The securities of any issuer included in the index do not
comprise more than 30 percent of the index's weighting;
(v) The securities of any five non-affiliated issuers included in
the index do not comprise more than 60 percent of the index's
weighting;
(vi) Except as provided in paragraph (a)(1)(viii) of this section,
for each security of an issuer included in the index one of the
following criteria is satisfied:
(A) The issuer of the security is required to file reports pursuant
to section 13 or section 15(d) of the Securities Exchange Act of 1934;
[[Page 39542]]
(B) The issuer of the security has a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more;
(C) The issuer of the security has outstanding securities that are
notes, bonds, debentures, or evidences of indebtedness having a total
remaining principal amount of at least $1 billion;
(D) The security is an exempted security as defined in section
3(a)(12) of the Securities Exchange Act of 1934 and the rules
promulgated thereunder; or
(E) The issuer of the security is a government of a foreign country
or a political subdivision of a foreign country; and
(vii) Except as provided in paragraph (a)(1)(viii) of this section,
for each security of an issuer included in the index one of the
following criteria is satisfied:
(A) The security has a total remaining principal amount of at least
$250,000,000; or
(B) The security is a municipal security (as defined in section
3(a)(29) of the Securities Exchange Act of 1934 and the rules
promulgated thereunder) that has a total remaining principal amount of
at least $200,000,000 and the issuer of such municipal security has
outstanding securities that are notes, bonds, debentures, or evidences
of indebtedness having a total remaining principal amount of at least
$1 billion; and
(viii) Paragraphs (a)(1)(vi) and (a)(1)(vii) of this section will
not apply to securities of an issuer included in the index if:
(A) All securities of such issuer included in the index represent
less than five percent of the index's weighting; and
(B) Securities comprising at least 80 percent of the index's
weighting satisfy the provisions of paragraphs (a)(1)(vi) and
(a)(1)(vii) of this section.
(2)(i) The index includes exempted securities, other than municipal
securities as defined in section 3(a)(29) of the Securities Exchange
Act of 1934 and the rules promulgated thereunder, that are:
(A) Notes, bonds, debentures, or evidences of indebtedness; and
(B) Not equity securities, as defined in section 3(a)(11) of the
Securities Exchange Act of 1934 and the rules promulgated thereunder;
and
(ii) Without taking into account any portion of the index composed
of such exempted securities, other than municipal securities, the
remaining portion of the index would not be a narrow-based security
index meeting all the conditions under paragraph (a)(1) of this
section.
(b) For purposes of this section:
(1) An issuer is affiliated with another issuer if it controls, is
controlled by, or is under common control with, that issuer.
(2) For purposes of this section, ``control'' means ownership of 20
percent or more of an issuer's equity, or the ability to direct the
voting of 20 percent or more of the issuer's voting equity.
(3) The term ``issuer'' includes a single issuer or group of
affiliated issuers.
Subpart C--Requirements and Standards for Listing Security Futures
Products
0
3. Amend Sec. 41.21 by:
0
a. Removing ``or'' at the end of paragraph (a)(2)(i);
0
b. Removing ``; and,'' at the end of paragarph (a)(2)(ii) and adding
``, or'' in its place;
0
c. Adding paragrahph (a)(2)(iii);
0
d. Removing ``or'' at the end of paragraph (b)(3)(i);
0
e. Removing ``; and,'' at the end of paragraph (b)(3)(ii) and adding
``, or'' in its place; and
0
f. Adding paragarph (b)(3)(iii).
The revisions and additions read as follows:
Sec. 41.21 Requirements for underlying securities.
(a) * * *
(2) * * *
(iii) A note, bond, debenture, or evidence of indebtedness; and
* * * * *
(b) * * *
(3) * * *
(iii) A note, bond, debenture, or evidence of indebtedness; and
* * * * *
Securities and Exchange Commission
0
In accordance with the foregoing, Title 17, chapter II, part 240 of the
Code of Federal Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless
otherwise noted.
* * * * *
0
2. Section 240.3a55-4 is added to read as follows:
Sec. 240.3a55-4 Exclusion from definition of narrow-based security
index for indexes composed of debt securities.
(a) An index is not a narrow-based security index if:
(1)(i) Each of the securities of an issuer included in the index is
a security, as defined in section 2(a)(1) of the Securities Act of
1933(15 U.S.C. 77b(a)(1)) and section 3(a)(10) of the Act (15 U.S.C.
78c(a)(10)) and the respective rules promulgated thereunder, that is a
note, bond, debenture, or evidence of indebtedness;
(ii) None of the securities of an issuer included in the index is
an equity security, as defined in section 3(a)(11) of the Act (15
U.S.C. 78c(a)(11)) and the rules promulgated thereunder;
(iii) The index is comprised of more than nine securities that are
issued by more than nine non-affiliated issuers;
(iv) The securities of any issuer included in the index do not
comprise more than 30 percent of the index's weighting;
(v) The securities of any five non-affiliated issuers included in
the index do not comprise more than 60 percent of the index's
weighting;
(vi) Except as provided in paragraph (a)(1)(viii) of this section,
for each security of an issuer included in the index one of the
following criteria is satisfied:
(A) The issuer of the security is required to file reports pursuant
to section 13 or section 15(d) of the Act (15 U.S.C. 78m and 78o(d));
(B) The issuer of the security has a [Worldwide market value of its
outstanding common equity held by non-affiliates of $71 million or
more;
(C) The issuer of the security has outstanding securities that are
notes, bonds, debentures, or evidences of indebtedness having a total
remaining principal amount of at least $1 billion;
(D) The security is an exempted security as defined in section
3(a)(12) of the Act (15 U.S.C. 78c(a)(12)) and the rules promulgated
thereunder; or
(E) The issuer of the security is a government of a foreign country
or a political subdivision of a foreign country;
(vii) Except as provided in paragraph (a)(1)(viii) of this section,
for each security of an issuer included in the index one of the
following criteria is satisfied
(A) The security has a total remaining principal amount of at least
$250,000,000; or
(B) The security is a municipal security, as defined in section
3(a)(29) of the Act (15 U.S.C. 78c(a)(29)) and the rules promulgated
thereunder that has a total remaining principal amount of at
[[Page 39543]]
least $200,000,000 and the issuer of such municipal security has
outstanding securities that are notes, bonds, debentures, or evidences
of indebtedness having a total remaining principal amount of at least
$1 billion; and
(viii) Paragraphs (a)(1)(vi) and (a)(1)(vii) of this section will
not apply to securities of an issuer included in the index if:
(A) All securities of such issuer included in the index represent
less than 5 percent of the index's weighting; and
(B) Securities comprising at least 80 percent of the index's
weighting satisfy the provisions of paragraphs (a)(1)(vi) and
(a)(1)(vii) of this section; or
(2)(i) The index includes exempted securities, other than municipal
securities, as defined in section 3(a)(29) of the Act and the rules
promulgated thereunder, that are:
(A) Notes, bonds, debentures, or evidences of indebtedness; and
(B) Not equity securities, as defined in section 3(a)(11) of the
Act (15 U.S.C. 78c(a)(11)) and the rules promulgated thereunder; and
(ii) Without taking into account any portion of the index composed
of such exempted securities, other than municipal securities, the
remaining portion of the index would not be a narrow-based security
index: meeting all the conditions under paragraph (a)(1) of this
section.
(b) For purposes of this section:
(1) An issuer is affiliated with another issuer if it controls, is
controlled by, or is under common control with, that issuer.
(2) For purposes of this section, control means ownership of 20
percent or more of an issuer's equity, or the ability to direct the
voting of 20 percent or more of the issuer's voting equity.
(3) The term issuer includes a single issuer or group of affiliated
issuers.
0
3. Section 240.6h-2 is added to read as follows:
Sec. 240.6h-2 Security future based on note, bond, debenture, or
evidence of indebtedness.
A security future may be based upon a security that is a note,
bond, debenture, or evidence of indebtedness or a narrow-based security
index composed of such securities.
By the Commodity Futures Trading Commission.
Eileen A. Donovan,
Acting Secretary.
By the Securities and Exchange Commission.
Dated: July 6, 2006.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-6136 Filed 7-12-06; 8:45 am]
BILLING CODE 8040-01-M