[Federal Register: July 20, 2001 (Volume 66, Number 140)]
[Proposed Rules]
[Page 37932-37939]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20jy01-12]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 41
RIN 3038-AB73
Listing Standards and Conditions for Trading Security Futures
Products
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: The Commodity Futures Trading Commission ("CFTC" or
"Commission") proposes Rules 41.21 through 41.25 under the Commodity
Exchange Act ("CEA").\1\ These proposed rules relate to new statutory
provisions enacted by the Commodity Futures Modernization Act of 2000
("CFMA") \2\ that specify listing standards and conditions for
trading of security futures products. These proposed rules also
establish requirements related to the reporting of data, trading halts,
position limits, and special provisions relating to contract design of
cash-settled security futures products and the physical delivery of
security futures products.
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\1\ 7 U.S.C. 1 et seq.
\2\ Pub. L. 106-554, 114 Stat. 2763. The text of the CFMA may be
accessed on the Internet at http://agriculture.house.gov/txt5660.pdf.
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DATES: Comments must be received on or before August 20, 2001.
ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to 202-418-5521, or by e-mail to
[email protected].
Reference should be made to "Listing Standards and
Conditions for Security Futures."
FOR FURTHER INFORMATION CONTACT: Richard A. Shilts, Acting Director,
Division of Economic Analysis; Thomas M. Leahy, Jr., Financial
Instruments Unit Chief, Division of Economic Analysis; or Gabrielle A.
Sudik, Attorney, Office of the General Counsel, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, D.C. 20581. Telephone: 202-418-5000. E-mail:
([email protected]), ([email protected]), or
([email protected]).
SUPPLEMENTARY INFORMATION: The Commodity Futures Trading Commission
today proposes for public comment new rules 41.21 through 41.25 under
part 41, 17 CFR part 41, under the Commodity Exchange Act as amended by
the Commodity Futures Modernization Act of 2000 (7 U.S.C. 1 et seq., as
amended by Appendix E of Pub. L. 106-554, 114 Stat. 2763).
Table of Contents
I. Background
II. Section-By-Section Analysis
III. Request For Comments
IV. Costs And Benefits Of The Proposed Rules
V. Related Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
VI. Statutory Authority
Text of Proposed Rules
I. Background
On December 21, 2000, the CFMA was signed into law. Among other
things, the CFMA lifted the ban on single stock and narrow-based stock
index futures ("security futures").\3\ In addition, the CFMA
established a framework for the joint regulation of security futures
products \4\ by the CFTC and the Securities and Exchange Commission
("SEC").\5\
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\3\ See section 251(a) of the CFMA. This trading previously had
been prohibited by section 2(a)(1)(B)(v) of the CEA.
\4\ The term "security futures product" is defined in section
1a(32) of the CEA and section 3(a)(56) of the Exchange Act to mean
"a security future or any put, call, straddle, option, or privilege
on any security future." The term "security future" is defined in
section 1a(31) of the CEA and section 3(a)(55)(A) of the Exchange
Act to include futures contracts on individual securities and on
narrow-based security indexes: The term "narrow-based security
index" is defined in section 1a(25) of the CEA and section
3(a)(55)(B) of the Exchange Act. Because the CFMA also provides that
options on security futures cannot be traded until at least December
21, 2003, security futures are the only security futures product
that may be available for trading until that date.
\5\ The CFMA also prescribes the dates on which security futures
trading can commence. Specifically, principal-to-principal
transactions between institutions cannot commence until August 21,
2001 and retail transactions cannot commence until December 21,
2001. Both starting dates are conditioned upon the registration of a
futures association as a national securities association under the
Exchange Act. Section 202(a) of the CFMA; Section 6(g)(5) of the
Exchange Act.
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[[Page 37933]]
Prior to enactment of the CFMA, the Shad-Johnson Accord
("Accord") \6\ governed trading in contracts of sale for future
delivery ("futures contracts" or "futures") on securities and
security indexes. Negotiated by the Chairmen of the SEC and the CFTC in
1982 and signed into law in 1983, the Accord permitted futures
exchanges to offer futures contracts on security indexes if the
contracts satisfied certain statutory criteria: (1) The contract had to
be cash-settled; (2) the contract could not be readily susceptible to
manipulation; and (3) the underlying securities had to measure and
reflect the entire market or a substantial segment of the market, i.e.,
it was a "broad-based" security index. The Accord prohibited any
futures on security indexes that did not meet these criteria.\7\
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\6\ The Accord was codified in the Securities Act Amendments of
1982, which amended section 2 of the Securities Act of 1933, section
3 of the Securities Exchange Act of 1934, and section 2(a)(1)(B) of
the Commodity Exchange Act.
\7\ See id.
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In addition to repealing the prohibition on certain types of
security futures, the CFMA amended the CEA and the Securities Exchange
Act of 1934 ("Exchange Act") by adding a definition of "narrow-based
security index." Futures contracts on security indexes that are
narrow-based security indexes will be jointly regulated by the CFTC and
the SEC under the framework established by the CFMA. Section 2(a)(1)(D)
of the CEA and section 6(h) of the Exchange Act establish listing
standards and conditions for entities wishing to list and trade
security futures products.
It is important that the listing standards and conditions in the
CEA and the Exchange Act be easily understood and applied by boards of
trade. The rules proposed today address issues related to these
standards and establish uniform requirements related to position
limits, as well as provisions to minimize the potential for
manipulation and disruption to the futures markets and underlying
securities markets. Additional conditions related to trading halts and
acceptable procedures for cash settlement will be addressed in a future
joint rulemaking by the Commission and the SEC.
II. Section-by-Section Analysis
Purpose and Scope
Section 251 of the CFMA amends section 2 of the CEA by providing
that in order for a board of trade to list security futures products,
the security futures products and the securities underlying the
security futures products must meet a number of standards and
conditions termed "listing standards." Boards of trade may list for
trading only security futures products that conform to the conditions
and criteria specified in section 2(a)(1)(D)(i) of the CEA, which,
among other criteria, requires that security futures products not be
readily susceptible to manipulation. Except as otherwise provided in a
rule, regulation or order, the underlying security or securities must
be registered pursuant to section 12 of the Exchange Act and must be
based upon common stock or such other equity securities as the
Commission and the SEC jointly determine appropriate. These listing
standards also relate to rules regarding settlement; who may deal in
security futures products; prohibitions on dual trading; the prevention
of price manipulation; and rules governing surveillance, audit trails,
trading halts, and margin requirements. These proposed rules would
implement these provisions of the CFMA and enumerate certain
requirements and conditions for listing and trading security futures
products.
Furthermore, section 6(h)(2) of the Exchange Act, as amended by
section 206 of the CFMA, provides that security futures products must
conform to listing standards that the national securities exchange or
national securities association registered under section 15A of the
Exchange Act ("exchange or association") files with the SEC under
section 19(b) of the Exchange Act. Section 6(h)(2) of the Exchange Act
also requires that a national securities exchange or national
securities association meet the requirements of section 2(a)(1)(D)(i)
of the CEA. In addition, section 6(h)(3)(C) of the Exchange Act imposes
the additional requirement that the exchange or association's listing
standards for security futures products must be no less restrictive
than comparable listing standards for security options. The SEC may
issue guidance for boards of trade as to the listing standards that
would satisfy this requirement.
Security futures products may be traded on any board of trade that
is designated as a contract market by the Commission pursuant to
section 5 of the CEA or that is registered with the Commission as a
derivatives transaction execution facility ("DTF") pursuant to
section 5a of the CEA. In addition, section 5f(a) of the CEA permits
certain entities that are otherwise regulated by the SEC to be
designated contract markets for the limited purpose of trading security
futures products. Specifically, any board of trade that is registered
with the SEC as a national securities exchange pursuant to section 6(a)
of the Exchange Act, is registered with the SEC as a national
securities association pursuant to section 15A(a) of the Exchange Act,
or is an alternative trading system ("ATS") as defined by section
1a(1) of the CEA shall be a designated contract market in security
futures products if certain conditions are met.\8\
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\8\ See 66 FR 29517-23 (May 31, 2001). In that notice, the
Commission proposed new regulations that would provide notice
procedures for a national securities exchange, a national securities
association, or an alternative trading system to become a designated
contract market in security futures products. By registering with
the Commission, a national securities exchange, a national
securities association, or an alternative trading system is, by
definition, a designated contract market for purposes of trading
security futures products. Hence, references in the proposed rules
to designated contract markets include notice-registered contract
markets, except where otherwise noted.
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Section 41.21 Requirements for Underlying Securities
Paragraph (a) of proposed section 41.21 addresses security futures
products based on a single security. Paragraph (a) implements the
requirements of sections 2(a)(1)(D)(i)(I) and (III) of the CEA \9\ by
providing that a security futures product based on a single security
may be traded if, except as otherwise provided by a rule, regulation or
order, the security is registered pursuant to section 12 of the
Exchange Act and the security is common stock or other equity security
as the Commission and the SEC determine appropriate. Furthermore,
security futures products must conform to other regulations issued by
the SEC, in accordance with section 6(h) of the Exchange Act, as
amended by section 206 of the CFMA.
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\9\ Section 251 of the CFMA added subparagraph (D) to section
2(a)(1) of the CEA.
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Paragraph (b) of proposed section 41.21 addresses security futures
products based on two or more securities. Subsection (b) implements a
substantive provision of section 1a of the CEA, as amended by section
101 of the CFMA, by providing that a futures contract based on an index
comprised of two or more securities may be traded as a security futures
product if: (1) The index meets the narrow-based security index
definition found in section 1a(25)
[[Page 37934]]
of the CEA; \10\ (2) the securities are registered pursuant to section
12 of the Exchange Act; (3) the securities are common stock or other
equity securities as the Commission and the SEC determine appropriate;
and (4) the securities meet the listing standards required by the SEC
pursuant to section 6(h) of the Exchange Act.
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\10\ Section 1a(25) of the CEA defines a narrow-based security
index as an index: (i) that is comprised of nine or fewer component
securities; (ii) in which a component security comprises more than
30 percent of the index's weighting; (iii) in which the five highest
weighted component securities in the aggregate comprise more than 60
percent of the index's weighting; or (iv) in which the lowest
weighted component securities comprising, in the aggregate, 25
percent of the index's weighting have an aggregate dollar value of
average daily trading volume of less than $50 million or, in the
case of an index with 15 or more component securities, $30 million.
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Paragraph (c) of proposed section 41.21 is reserved for rulemaking
pursuant to section 2(a)(1)(D)(v) of the CEA, which allows the
Commission and the SEC to jointly modify the criteria of sections
2(a)(1)(D)(i)(I) and 2(a)(1)(D)(i)(III) of the CEA.
Section 41.22 Required Certifications
Section 2(a)(1)(D)(vii) of the CEA makes it unlawful for a
designated contract market or registered derivatives transaction
execution facility to list for trading or execution a security futures
product unless it has provided the Commission with a certification that
the security futures product and the board of trade meet specified
requirements. Accordingly, as discussed below, paragraphs (b) through
(j) of proposed section 41.22 require designated contract markets and
registered derivatives transaction execution facilities to certify that
they meet the specified requirements of section 2(a)(1)(D)(vii) of the
CEA. In addition, paragraph (a) of proposed Sec. 41.22 requires a
designated contract market or registered derivatives transaction
execution facility to certify that the security or securities
underlying a security futures product meet the requirements of proposed
rule 41.21, including the requirement that the securities underlying a
security futures product conform to the listings standards filed with
the SEC under section 19(b) of the Exchange Act, as discussed above.
Section 2(a)(1)(D)(i)(II) of the CEA provides that, if a security
futures product is not cash-settled, the designated contract market or
registered derivatives transaction execution facility must have
arrangements with a clearing agency registered with the SEC for the
payment and delivery of the securities underlying the security futures
product. Paragraph (b) of proposed Sec. 41.22 implements this provision
by requiring a certification that the designated contract market or
registered derivatives transaction execution facility will comply with
this requirement.
Section 2(a)(1)(D)(i)(V) of the CEA provides that only futures
commission merchants, introducing brokers, commodity trading advisors,
commodity pool operators or associated persons subject to suitability
rules comparable to those of a national securities association
registered pursuant to section 15A(a) of the Exchange Act (including
notice-registered brokers or dealers) \11\ may solicit, accept orders
for, or otherwise deal in any transaction in or in connection with
security futures products. Paragraph (d) of proposed Sec. 41.22
implements this provision by requiring a certification that only these
entities and persons, except to the extent otherwise permitted under
the Exchange Act and the rules and regulations thereunder, may accept
orders for or otherwise deal in security futures products.
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\11\ Section 4f of the CEA, as amended by section 252(b) of the
CFMA, allows brokers and dealers registered with the SEC to register
with the Commission as futures commission merchants or introducing
brokers so long as they adhere to certain requirements regarding
transactions in connection with security futures products.
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Section 2(a)(1)(D)(i)(VI) of the CEA provides that security futures
products must be subject to the prohibition against dual trading in
section 4j of the CEA or section 11(a) of the Exchange Act. Paragraph
(e) of proposed Sec. 41.22 implements this requirement by requiring a
designated contract market or registered derivatives transaction
execution facility to prohibit dual trading in accordance with proposed
section 41.27.
Notice designated contract markets are exempt from the provisions
of section 4j of the CEA by virtue of section 5f(b)(1)(B). A notice
designated contract market therefore does not need to certify that it
is acting in accordance with proposed rule 41.27. However, it should be
noted that notice designated contract markets are still bound by the
prohibition against dual trading under section 11(a) of the Exchange
Act and any accompanying rules and regulations.
Section 2(a)(1)(D)(i)(VII) of the CEA requires that designated
contract markets and registered derivatives transaction execution
facilities maintain procedures to prevent manipulation of the price of
security futures products, any underlying security, an option on such
security, or an option on a group or index including such security.
Paragraph (f) of proposed Sec. 41.22 requires a certification that
trading in the security futures product will not be readily susceptible
to manipulation of the price of such security futures product or of the
price of any underlying security or securities or any option thereon.
Section 2(a)(1)(D)(i)(VIII) of the CEA requires designated contract
markets and registered derivatives transaction execution facilities on
which security futures products are traded to coordinate surveillance
with markets that trade the underlying security or any related
security, in order to detect manipulation and insider trading. This
requirement is proposed to be implemented by paragraph (g) of proposed
Sec. 41.22, which requires that a board of trade certify that it is a
member of the Intermarket Surveillance Group (the "ISG").
The Intermarket Surveillance Group was created under the auspices
of the SEC in 1983 as a forum to ensure that national securities
exchanges and national securities associations adequately share
surveillance information and coordinate inquiries and investigations
designed to address potential intermarket manipulations and trading
abuses. All national securities exchanges and national securities
associations are full members of the ISG. Full members routinely share
a great deal of surveillance and investigatory information, and this
framework has proven to be an essential mechanism to ensure that there
is adequate information sharing and investigatory coordination for
potential intermarket manipulations and trading abuses.
In view of the growth of stock index futures contracts, since 1987,
several futures exchanges and non-U.S. exchanges and associations have
been affiliate members of the ISG. Affiliate members are required to
share information on a more limited basis with the ISG.
To ensure that boards of trade have procedures in place for the
coordinated surveillance required by section 2(a)(1)(D)(i)(VIII) of the
CEA, the Commission believes that it is essential that all boards of
trade that trade security futures products be full members of the ISG.
In view of this proposed requirement and recognizing the essential role
played by the ISG, as noted above, the Commission also believes that
the ISG should grant full memberships to all boards of trade that trade
security futures products upon a
[[Page 37935]]
good-faith showing that such entities meet the criteria for full
membership.\12\
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\12\ The Commission understands that the SEC concurs with the
Commission's belief regarding the requirement that boards of trade
trading security futures become full ISG members and that such
boards of trade be granted full ISG membership.
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Section 2(a)(1)(D)(i)(IX) of the CEA requires that designated
contract markets and registered derivatives transaction execution
facilities on which security futures products are traded have audit
trails in place to facilitate the coordinated surveillance required by
subclause (VIII). Paragraph (h) of proposed Sec. 41.22 implements this
requirement. The Commission believes that the audit trails already in
place on designated contract markets can serve this purpose. Based on
future developments of markets for security futures products,
modifications may be appropriate.
Section 2(a)(1)(D)(i)(X) of the CEA requires that designated
contract markets and registered derivatives transaction execution
facilities have in place procedures to coordinate trading halts between
boards of trade. Paragraph (i) of proposed Sec. 41.22 requires a board
of trade to certify that it has such procedures in place.
Alternative trading systems, national securities associations
registered pursuant to section 15A(a) of the Securities Exchange Act of
1934 or national securities exchanges registered pursuant to section
6(a) of the Securities Exchange Act of 1934 of which an alternative
trading system is a member do not need to make certifications under
paragraphs (g), (h), and (i) of this section, as provided by sections
2(a)(1)(D)(i)(VIII)-(X).
Section 2(a)(1)(D)(i)(XI) of the CEA requires that the margin
requirements for security futures products comply with the regulations
prescribed pursuant to section 7(c)(2)(B) of the Exchange Act.
Paragraph (j) of proposed Sec. 41.22 implements this section by
requiring a certification of compliance with the margin requirements
currently being drafted in a separate rulemaking.\13\
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\13\ The proposed rules regarding margin requirements will be
published in the near future. Once the margin requirement rules are
published, the final version of these rules will note the part and
section wherein margin requirements can be found.
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Section 41.23 Listing of Security Futures Products for Trading
Section 2(a)(1)(D)(vii) of the CEA prescribes that a designated
contract market or registered derivatives transaction execution
facility must provide the Commission with a certification of compliance
with section 2(a)(1)(D)(i) of the CEA before trading or executing a
security futures product. Paragraph (a) of proposed Sec. 41.23
implements this requirement by describing the documents that must be
filed with the Commission, including documents and certifications
required by proposed Secs. 41.22 and 41.25.
Paragraph (b) of proposed Sec. 41.23 prescribes the procedures for
voluntary submission by designated contract markets or registered
derivatives transaction execution facilities of security futures
products for Commission approval, as permitted by section 5c(c)(2) of
the CEA. Notice designated contract markets would not be permitted to
request Commission approval of security futures products, since they
are exempt from the provisions of 5c of the CEA by virtue of section
5f(b)(1)(D) of the CEA.
Section 41.24 Rule Amendments Relating to Security Futures Products
Section 5c(c)(1) of the CEA, as enacted by section 113 of the CFMA,
provides that a registered entity may implement a rule or rule
amendment by certifying that the new rule or rule amendment complies
with the CEA.\14\ Paragraph (a) of proposed Sec. 41.24 requires
designated contract markets (including notice designated contract
markets) and registered derivatives clearing organizations to file with
the Commission any rule or rule amendment. Designated contract markets
pursuant to section 5 of the CEA and registered derivatives clearing
organizations pursuant to section 5b of the CEA (but not notice
designated clearing organizations), must follow the procedures for
self-certification of rules and rule amendments relating to security
futures contained in proposed Sec. 41.24(a)(4).
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\14\ Section 1a(29) of the CEA defines registered entities as
designated contract markets, registered derivatives transaction
execution facilities, registered derivatives clearing organizations,
and notice-designated contract markets.
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Paragraph (b) of proposed Sec. 41.24 would mandate that the
procedures of paragraph (a) also apply to the self-certification of
rules relating to security futures products by registered derivatives
transaction execution facilities, notwithstanding proposed Sec. 37.7.
Paragraph (c) of proposed Sec. 41.24 would allow a designated
contract market, registered derivatives transaction execution facility,
or registered derivatives clearing organization to submit rules for
Commission approval, as permitted by section 5c(c)(2) of the CEA.
However, notice designated contract markets would not be permitted to
request Commission approval of rules, since section 5f of the CEA
exempts these entities from section 5c(c)(2) of the CEA.
Section 41.25 Additional Conditions for Trading Security Futures
Products
Section 2(a)(1)(D)(i)(VII) of the CEA requires that trading in a
security futures product not be readily susceptible to manipulation of
the price of the security futures product, the price of any underlying
security, option on such security, or option on a group or index of
including such securities. Proposed Sec. 41.25 establishes requirements
in this regard related to data reporting, trading halts, position
limits, and certain contract design features. Paragraph (a) of proposed
Sec. 41.25 establishes requirements that are common to all security
futures products, while paragraphs (b) and (c) establish requirements
for cash-settled and physical delivery contracts, respectively.
Paragraph (a)(1) of proposed Sec. 41.25 requires designated
contract markets and registered derivatives transaction execution
facilities to comply with part 16 of the Commission's regulations
regarding the daily reporting of market data. Paragraph (a)(2) is
reserved for the establishment of rules providing for regulatory halts
for trading in security futures products, which will be addressed in a
separate rulemaking. Paragraph (a)(3) requires designated contract
markets and registered derivatives transaction execution facilities to
establish speculative position limits or position accountability rules
for security futures products, generally based on the average daily
trading volume of the underlying security during the most recent six-
month period.
Specifically, the Commission is proposing to require boards of
trade to adopt speculative position limit or position accountability
rules for listed security futures. The level of the position limit and
whether a position limit is required depends upon the trading activity
and capitalization of the security or securities underlying the
security future. The speculative position limit level adopted by a
board of trade should be consistent with the obligation in section
2(a)(1)(D)(i)(VII) of the CEA that the designated contract market or
registered derivatives transaction execution facility maintain
procedures to prevent manipulation of the price of the security futures
product and the underlying security or securities.
The position limit levels proposed in this rule are set at levels
comparable to the limits that currently apply to
[[Page 37936]]
options on individual securities. However, the proposed position limit
requirements for security futures differ from individual security
option position limit rules in several ways. In this regard, the
proposed limits would only apply to an expiring security futures
contract during its five last trading days. The Commission believes
that it is during that time period that the potential for manipulation
based on an extraordinarily large futures position would most likely
occur. Further, for security futures contracts based on a security that
has an average daily trading volume greater than 20 million shares, the
Commission believes that the threat of manipulation is sufficiently
reduced such that an exchange could substitute a position
accountability rule for a fixed position limit. Under such a rule, a
trader holding a position in a security future that exceeded a
threshold level determined by the exchange (e.g., no more than 22,500
contracts of 100 shares) would agree to provide information to the
exchange regarding that position and consent to halt increasing the
position if requested by the exchange.
Paragraph (b) of proposed Sec. 41.25 relates to security futures
products that are cash settled. This paragraph provides that the cash-
settlement provisions of security futures products must be reliable and
acceptable, reflect the price of the underlying security or securities,
and not be readily susceptible to manipulation. Paragraph (b) is in
part reserved for specific rules relating to special requirements
regarding the cash-settlement price, which will be addressed in a
separate rulemaking.
Paragraph (c) of proposed Sec. 41.25 relates to security futures
products that are settled by actual delivery of the underlying security
or securities. This paragraph provides that a board of trade must
effect physical delivery through a clearing agency registered pursuant
to section 17A of the Exchange Act. This provision implements section
2(a)(1)(D)(i)(II) of the CEA, which requires that, if a security
futures product is not cash settled, the board of trade on which the
product is traded must have arrangements in place with such a clearing
agency for payment and delivery of the underlying securities.
III. Request for Comments
The Commission solicits comments on all aspects of Proposed Rules
41.21 through 41.25 under the CEA. In particular, do the proposed
filing and certification procedures represent effective and reasonable
ways to ensure that the requirements of the CEA and the Exchange Act
are satisfied? In addition, the Commission seeks comments on whether
the proposed position limit provisions are appropriate to deter
manipulation in security futures products, and whether it is desirable
to establish the applicable position limit levels based on average
daily trading volume and capitalization of the underlying securities.
The Commission also seeks comment on whether any potential manipulation
of security futures products is more likely to occur at contract
expiration than at other times. Commenters are welcome to offer their
views on any other matter raised by the proposed rules.
IV. Costs and Benefits of the Proposed Rules
Section 15 of the CEA requires the Commission to consider the costs
and benefits of its action before issuing a new regulation.\15\ The
Commission understands that, by its terms, section 15 does not require
the Commission to quantify the costs and benefits of a new regulation
or to determine whether the benefits of the proposed regulation
outweigh its costs. Nor does it require that each proposed rule be
analyzed in isolation when that rule is a component of a larger package
of rules or rule revisions. Rather, section 15 simply requires the
Commission to "consider the costs and benefits" of its action.
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\15\ 7 U.S.C. 19.
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Section 15 further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
Protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas of concern
and could in its discretion determine that, notwithstanding its costs,
a particular rule was 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.
The proposed rules constitute one part of a package of related rule
provisions. The rules provide guidance and establish procedures for
trading facilities in order to facilitate compliance with governing
laws related to security futures products.
The Commission has considered the costs and benefits of the
proposed rules as a totality, in light of the specific areas of concern
identified in section 15. The proposed rules should have no effect,
from the standpoint of imposing costs or creating benefits, on the
financial integrity or price discovery function of the futures and
options markets or on the risk management practices of trading
facilities or others. The proposed rules also should have no material
effect on the protection of market participants and the public and
should not impact the efficiency and competition of the markets.
Accordingly, the Commission has determined to propose the rules
discussed above. The Commission invites public comment on the
application of the cost-benefit provision of section 15 of the CEA in
regard to the proposed rules. Commenters also are invited to submit any
data that they may have quantifying the costs and benefits of the
proposed rules.
V. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act ("PRA") of 1995 (44 U.S.C. 3501 et
seq.) imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. This proposed
rulemaking contains information collection requirements within the
meaning of the PRA. The Commission has submitted a copy of this part to
the Office of Management and Budget (OMB) for its review in accordance
with 44 U.S.C. 3507(d).
Collection of Information: Part 41, Relating to Security Futures
Products, OMB Control Number 3038-XXXX.
An agency may not conduct or sponsor, and a person is not required
to respond to, an information collection unless it displays a currently
valid OMB control number. The Commission is currently requesting a
control number for this information collection from OMB.
As noted above, the CFMA lifted the ban on trading single stock and
narrow-based stock index futures and established a framework for the
joint regulation of these products by the Commission and the SEC. In
addition, the CFMA amended the CEA and the Exchange Act by adding a
definition of "narrow-based security index," which establishes an
objective test of whether a security index is narrow-based.\16\ Futures
contracts on security indexes that meet the statutory definition are
jointly regulated by the Commission and the SEC. Futures contracts on
indexes that do not meet the statutory definition
[[Page 37937]]
remain under the sole jurisdiction of the Commission.
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\16\ See section 1a(25)(A) of the CEA and section 3(a)(55)(B) of
the Exchange Act.
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The effect of proposed rules 41.22, 41.23, 41.24, and 41.25 will be
to increase the burden previously submitted to OMB by 750 hours
resulting from the preparation of materials to be filed with the
Commission in connection with the listing of security futures products
by designated contract markets and registered derivatives transaction
execution facilities.
The estimated burden of proposed rules 41.22, 41.23, 41.24, and
41.25 was calculated as follows:
Estimated number of respondents: 15.
Total annual responses: 50.
Estimated average number of hours per response: 1.
Estimated total number of hours of annual burden: 750.
This annual reporting burden represents an increase of 750 hours as
a result of the proposed new rules.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Building, Washington, DC 20503, Attention: Desk Officer for the
Commodity Futures Trading Commission.
The Commission considers comments by the public on this proposed
collection of information in:
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the Commission's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronic submission of responses).
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register. A
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication. This does not affect the
deadline for the public to comment to the Commission on the proposed
regulations.
Copies of the information collection submission to OMB are
available from the Commission from the CFTC Clearance Officer, 1155
21st Street, NW, Washington, DC 20581, (202) 418-5160.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA") requires federal agencies,
in promulgating rules, to consider the impact of those rules on small
entities.\17\ The rules adopted herein would affect contract markets
and other trading facilities. The Commission has previously established
certain definitions of "small entities" to be used in evaluating the
impact of its rules on small entities in accordance with the RFA.\18\
In its previous determinations, the Commission has concluded that
contract markets are not small entities for the purpose of the RFA.\19\
The Commission has also recently proposed determining that the other
trading facilities subject to its jurisdiction, for reasons similar to
those applicable to contract markets, would not be small entities for
purposes of the RFA.\20\
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\17\ 5 U.S.C. 601 et seq.
\18\ See 47 FR 18618-21 (April 30, 1982).
\19\ See id. at 18619 (discussing contract markets).
\20\ See 66 FR 14262, 14268 (March 9, 2001).
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Accordingly, the Commission does not expect the rules, as proposed
herein, to have a significant economic impact on a substantial number
of small entities. Therefore, the Acting Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
proposed amendments will not have a significant economic impact on a
substantial number of small entities. The Commission invites the public
to comment on this finding and on its proposed determination that
trading facilities such as registered derivatives transaction execution
facilities are not small entities for purposes of the RFA.
VI. Statutory Authority
The Commission has the authority to propose these rules pursuant to
sections 1a, 2(a)(1)(D), and 5c(c) of the CEA, [7 U.S.C. 1a,
2(a)(1)(D), and 7a-2(c)].
List of Subjects in 17 CFR Part 41
Security futures products.
Text of Proposed Rules
In accordance with the foregoing, Title 17, chapter I of the Code
of Federal Regulations is proposed to be amended as follows:
PART 41--SECURITY FUTURES PRODUCTS
1. The authority citation for Part 41 is proposed to be revised to
read as follows:
Authority: 7 U.S.C. 1a(25), 2(a), 6j, 7a-2(c) and 12a(5).
2. Subpart C is proposed to be added to read as follows:
Subpart C--Requirements and Standards for Security Futures Products
Sec.
41.21 Requirements for underlying securities.
41.22 Required certifications.
41.23 Listing of security futures products for trading.
41.24 Rule amendments to security futures products.
41.25 Additional conditions for trading security futures products.
Subpart C--Requirements and Standards for Listing Security Futures
Products
Sec. 41.21 Requirements for underlying securities.
(a) Security futures products based on a single security. A
security future is eligible to be traded only if the security
underlying the security future is:
(1) A security registered pursuant to section 12 of the Securities
Exchange Act of 1934;
(2) The security is:
(i) Common stock, or
(ii) Such other equity security as the Commission and the SEC
jointly deem appropriate; and,
(3) The security conforms with the listing standards that the
designated contract market or registered derivatives transaction
execution facility has filed with the SEC under section 19(b) of the
Securities Exchange Act of 1934.
(b) Security futures product based on two or more securities. An
index of two or more securities is eligible to be traded as a security
future only if:
(1) The index is a narrow-based security index as defined in
section 1a(25) of the Act;
(2) The securities in the index are registered pursuant to section
12 of the Securities Exchange Act of 1934;
(3) The securities in the index are:
(i) Common stock, or
(ii) Such other equity securities as the Commission and the SEC
jointly deem appropriate; and,
(4) The index conforms with the listing standards that the
designated contract market or registered derivatives transaction
execution facility has filed with the SEC under section 19(b) of the
Securities Exchange Act of 1934.
(c) [Reserved for future rulemaking regarding exemptions to the
listing
[[Page 37938]]
standards set forth in paragraphs (a) and (b) of this section.]
Sec. 41.22 Required certifications.
It shall be unlawful for a designated contract market or registered
derivatives transaction execution facility to list for trading or
execution a security futures product unless the designated contract
market or registered derivatives transaction execution facility has
provided the Commission with a certification that the specific security
futures product or products and the designated contract market or
registered derivatives transaction execution facility meet, as
applicable, the following criteria:
(a) The underlying security or securities satisfy the requirements
of Sec. 41.21;
(b) If the security futures product is not cash settled,
arrangements are in place with a clearing agency registered pursuant to
section 17A of the Securities Exchange Act of 1934 for the payment and
delivery of the securities underlying the security futures product;
(c) [Reserved for common clearing following compliance date];
(d) Only futures commission merchants, introducing brokers,
commodity trading advisors, commodity pool operators or associated
persons subject to suitability rules comparable to those of a national
securities association registered pursuant to section 15A(a) of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder, except to the extent otherwise permitted under the
Securities Exchange Act of 1934 and the rules and regulations
thereunder, will solicit, accept any order for, or otherwise deal in
any transaction in or in connection with security futures products;
(e) If the board of trade is a designated contract market pursuant
to section 5 of the Act or is a registered derivatives transaction
execution facility pursuant to section 5a of the Act, dual trading in
these security futures products is restricted in accordance with
Sec. 41.27;
(f) Trading in the security futures products is not readily
susceptible to manipulation of the price of such security futures
product, nor to causing or being used in the manipulation of the price
of any underlying security, option on such security, or option on a
group or index including such securities, consistent with the
conditions for trading of Sec. 41.25;
(g) The board of trade is a member of the Intermarket Surveillance
Group. A board of trade that is an alternative trading system, national
securities association registered pursuant to section 15A(a) of the
Securities Exchange Act of 1934 or national securities exchange
registered pursuant to section 6(a) of the Securities Exchange Act of
1934 of which such alternative trading system is a member, does not
need to make this certification;
(h) An audit trail is in place to facilitate coordinated
surveillance among the board of trade, any market on which any security
underlying a security futures product is traded, and any market on
which any related security is traded. A board of trade that is an
alternative trading system, national securities association registered
pursuant to section 15A(a) of the Securities Exchange Act of 1934 or
national securities exchange registered pursuant to section 6(a) of the
Securities Exchange Act of 1934 of which such alternative trading
system is a member, does not need to make this certification;
(i) Procedures are in place to coordinate regulatory trading halts
between the board of trade and markets on which any security underlying
the security futures product is traded and other markets on which any
related security is traded. A board of trade that is an alternative
trading system, national securities association registered pursuant to
section 15A(a) of the Securities Exchange Act of 1934 or national
securities exchange registered pursuant to section 6(a) of the
Securities Exchange Act of 1934 of which such alternative trading
system is a member, does not need to make this certification; and
(j) The margin requirements for the security futures product will
comply with the provisions specified in rule [XX].\1\
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\1\ As noted in the preamble, the cross-reference to the margin
requirement rule will be inserted in the final rules when those
proposed rules are published.
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Sec. 41.23 Listing of security futures products for trading.
(a) Initial listing of products for trading. To list new security
futures products for trading, a designated contract market or
registered derivatives transaction execution facility shall submit to
the Commission at its Washington, D.C. headquarters, either in
electronic or hard-copy form, to be received by the Commission no later
than the day prior to the initiation of trading, a filing that:
(1) Is labeled "Listing of Security Futures Product;'
(2) Includes a copy of the product's rules, including its terms and
conditions;
(3) Includes the certifications required by Sec. 41.22;
(4) Includes a certification that the terms and conditions of the
contract comply with the additional conditions for trading of
Sec. 41.25; and
(5) If the board of trade is a designated contract market pursuant
to section 5 of the Act or a registered derivatives transaction
execution facility pursuant to section 5a of the Act, it includes a
certification that the security futures product complies with the Act
and rules thereunder.
(b) Voluntary submission of security futures products for
Commission approval. A designated contract market or registered
derivatives transaction execution facility may request that the
Commission approve any security futures product under the procedures of
Sec. 40.5 of this chapter, provided however that the registered entity
shall include the certification required by Sec. 41.22 with its
submission under Sec. 40.5 of this chapter. Notice designated contract
markets may not request Commission approval of security futures
products.
Sec. 41.24 Rule amendments to security futures products.
(a) Self-certification of rules and rule amendments by designated
contract markets and registered derivatives clearing organizations. A
designated contract market or registered derivatives clearing
organization may implement any new rule or rule amendment relating to a
security futures product by submitting to the Commission at its
Washington, DC headquarters, either in electronic or hard-copy form, to
be received by the Commission no later than the day prior to the
implementation of the rule or rule amendment, a filing that
(1) Is labeled "Security Futures Product Rule Submission";
(2) Includes a copy of the new rule or rule amendment;
(3) Includes a certification that the designated contract market or
registered derivatives clearing organization has filed the rule or rule
amendment with the Securities and Exchange Commission, if such a filing
is required; and
(4) If the board of trade is a designated contract market pursuant
to section 5 of the Act or is a registered derivatives clearing
organization pursuant to section 5b of the Act, it includes the
documents and certifications required to be filed with the Commission
pursuant to Sec. 40.6 of this chapter, including a certification that
the security futures product complies with the Act and rules
thereunder.
(b) Self-certification of rules by registered derivatives
transaction execution facilities. Notwithstanding
[[Page 37939]]
Sec. 37.7 of this chapter, a registered derivatives transaction
execution facility may only implement a new rule or rule amendment
relating to a security futures product if the registered derivatives
transaction execution facility has certified the rule or rule amendment
pursuant to the procedures of paragraph (a) of this section.
(c) Voluntary submission of rules for Commission review and
approval. A designated contract market, registered derivatives
transaction execution facility, or a registered derivatives clearing
organization clearing security futures products may request that the
Commission approve any rule or proposed rule or rule amendment relating
to a security futures product under the procedures of Sec. 40.5 of this
chapter, provided however that the registered entity shall include the
certifications required by Sec. 41.22 with its submission under
Sec. 40.5 of this chapter. Notice designated contract markets may not
request Commission approval of rules.
Sec. 41.25 Additional conditions for trading for security futures
products.
(a) Common provisions.--(1) Reporting of data. The designated
contract market or registered derivatives transaction execution
facility shall comply with chapter 16 of this title requiring the daily
reporting of market data.
(2) Regulatory Trading Halts. [Reserved for contemporaneous
rulemaking.]
(3) Speculative Position Limits. The designated contract market or
registered derivatives transaction execution facility shall have rules
in place establishing position limits or position accountability
procedures for the expiring futures contract month. The designated
contract market or registered derivatives transaction execution
facility shall,
(i) Adopt a net position limit no greater than 13,500 (100-share)
contracts applicable to positions held during the last five trading
days of an expiring contract month; except where,
(A) For security futures products where, for the most recent six-
month period, the average daily trading volume in the underlying
security exceeds 20 million shares, or exceeds 15 million shares and
there are more than 40 million shares of the underlying security
outstanding, the designated contract market or registered derivatives
transaction execution facility may adopt a net position limit no
greater than 22,500 (100-share) contracts applicable to positions held
during the last five trading days of an expiring contract month; or
(B) For security futures products where, for the most recent six-
month period, the average daily trading volume in the underlying
security exceeds 20 million shares and there are more than 40 million
shares of the underlying security outstanding, the designated contract
market or registered derivatives transaction execution facility may
adopt a position accountability rule. Upon request by the designated
contract market or registered derivatives transaction execution
facility, traders who hold net positions greater than 22,500 (100-
share) contracts, or such lower level specified by exchange rules, must
provide information to the exchange and consent to halt increasing
their positions when so ordered by the exchange.
(ii) For a security futures product comprised of more than one
security, to be eligible for paragraphs (a)(3)(i)(A) and (a)(3)(i)(B)
of this section, the average daily trading volume required must apply
to the least liquid security in the index.
(iii) Exchanges may approve exemptions from these position limits
pursuant to rules that are consistent with Sec. 150.3 of this chapter.
(b) Special requirements for cash-settled contracts. For cash-
settled security futures products, the cash-settlement price must be
reliable and acceptable, be reflective of prices in the underlying
securities market and be not readily susceptible to manipulation. To
meet these requirements, the designated contract market or registered
derivatives transaction execution facility must have rules providing
that: [Reserved for contemporaneous rulemaking.]
(c) Special requirements for physical delivery contracts. For
security futures products settled by actual delivery of the underlying
security or securities, payment and delivery of the underlying security
or securities must be effected through a clearing agency that is
registered pursuant to section 17A of the Securities Exchange Act of
1934.
Issued in Washington, DC, on July 12 , 2001, by the Commission.
Jean A. Webb,
Secretary.
[FR Doc. 01-17904 Filed 7-19-01; 8:45 am]
BILLING CODE 6351-01-P