[Federal Register Volume 71, Number 68 (Monday, April 10, 2006)]
[Proposed Rules]
[Pages 18030-18038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3188]
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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. 34-53560; File No. S7-07-06]
RIN 3235-AJ54
Joint Proposed 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 proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (together, the
``Commissions'') are proposing to adopt a new rule and to amend an
existing rule under the Commodity Exchange Act (``CEA'') and to adopt
two new rules under the Securities Exchange Act of 1934 (``Exchange
Act''). These proposed rules and rule amendments would 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''
would not be a security future and could trade subject to the exclusive
jurisdiction of the CFTC. In addition, the proposed rules would expand
the statutory listing standards requirements to permit security futures
to be based on debt securities, including narrow-based security indexes
composed of debt securities.
DATES: Comments must be received on or before May 10, 2006.
ADDRESSES: Comments should be sent to both agencies at the addresses
listed below.
CFTC: Comments may be submitted, identified by RIN 3038 AB86, by
any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include ``Application of the
Definition of Narrow-Based Security Index to Debt Securities Indexes''
in the subject line of the message.
[[Page 18031]]
Fax: 202/418-5521.
Mail: Send to Jean A. Webb, Secretary, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
Courier: Same as Mail above.
All comments received will be posted without change to http://www.cftc.gov, including any personal information provided.
SEC: Comments may be submitted by any of the following methods:
Electronic Comments
Use the SEC's Internet comment form http://www.sec.gov/rules/proposed.shtml; or
Send an e-mail to [email protected]. Please include
File Number S7-07-06 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-07-06. This file
number should be included on the subject line if e-mail is used. To
help us process and review your comments more efficiently, please use
only one method. The SEC will post all comments on the SEC's Internet
Web site (http://www.sec.gov/rules/proposed.shtml). Comments will also
be available for public inspection and copying in the SEC's Public
Reference Room, 100 F Street, NE., Washington, DC 20549. All comments
received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
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 proposing to add Rule
41.15 and to amend 41.21 under the CEA,\1\ and to add 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
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
characteristics.\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 characteristics 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. 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, may not be an appropriate
criterion for indexes composed of debt securities.\6\ Debt securities
generally do not trade in the same manner as equity securities.
Accordingly, most indexes comprised of debt securities, regardless of
the number or amount of underlying component securities in the index,
fall within the definition of narrow-based security index because few
debt securities meet the ADTV criterion in the 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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The Commissions believe that it is appropriate to exclude certain
debt securities indexes from the definition of ``narrow-based security
index'' using criteria that differ in certain respects from the
criteria applicable to equity securities to evaluate whether debt
securities indexes are narrow-based indexes. The Commissions believe
that using 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 permit security futures to be based on debt
securities indexes.\7\ In particular, the Commissions believe that the
modified criteria addressing diversification and public information
about, and market familiarity with, the issuer of the securities
underlying a debt securities index would 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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\7\ See 15 U.S.C. 78mm(a)(1).
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For this reason, the Commissions are proposing rules and rule
amendments to exclude from the definition of narrow-based security
index a debt securities index that meets certain criteria, as described
below. 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. In addition, the proposed rules and rule amendments would expand
the statutory listing standards to permit the trading of security
futures based on debt securities. The proposed rules and rule
amendments would permit the trading of security futures on single debt
securities and on narrow-based security indexes composed of debt
securities, subject to the Commissions' joint jurisdiction. Futures on
debt securities indexes that satisfy the criteria of the proposed
exclusion would be subject to the exclusive jurisdiction of the CFTC.
Although broad-based debt securities indexes that meet the criteria in
the
[[Page 18032]]
proposed rules should have a reduced likelihood of being readily
susceptible to manipulation, such indexes must also be determined to be
not readily susceptible to manipulation in accordance with Section
2(a)(1)(C)(ii)(II) of the CEA.
II. Proposed Rules Excluding Certain Debt Securities Indexes From the
Definition of Narrow-Based Security Index
The Commissions are proposing that a debt securities index that
satisfies the specified criteria would 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.
The proposed criteria specify:
The type of security that may be in the index;
The maximum weighting and concentration of securities of
any issuer in the index;
Eligibility conditions regarding the issuer of any
security in the index that is not an exempted security under the
Exchange Act; and
The minimum remaining outstanding principal amount of the
security in the index.
The exclusion also would provide a de minimis exception from
certain of the criteria regarding the issuer eligibility and minimum
outstanding remaining principal amount conditions if a predominant
percentage of the securities comprising the index's weighting satisfied
all the applicable criteria.
The proposed rules also contain a definition of ``control'' solely
to assess affiliation among issuers for purposes of determining
satisfaction of the criteria.
Under proposed Rule 41.15 under the CEA and proposed Rule 3a55-4
under the Exchange Act, an index would not be a narrow-based security
index if the index satisfied the criteria described below.
A. Index Composed Solely of Debt Securities
Accordingly, the Commissions' proposed exclusion from the
definition of ``narrow-based security index'' would require that each
component security of the index be a security \8\ that is a note, bond,
debenture, or evidence of indebtedness.\9\ Further, none of the
securities of an issuer included in the index could be an equity
security, as defined in Section 3(a)(11) of the Exchange Act and the
rules adopted thereunder.\10\ Thus, any security index that includes an
equity security would not qualify for the proposed exclusion for
indexes composed of debt securities.\11\ The Commissions request
comment on the proposed types of securities that could be included in a
debt securities index under this exclusion. The proposed rule and rule
amendments are intended to establish criteria for determining the
circumstances in which a debt securities index is not a narrow-based
security index.
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\8\ The term ``security'' is defined in Section 2(a)(1) of the
Securities Act of 1933, 15 U.S.C. 77b(a)(1) (the ``Securities
Act''), and Section 3(a)(10) of the Exchange Act, 15 U.S.C.
78c(a)(10).
\9\ See proposed Rule 3a55-4(a)(1) under the Exchange Act and
proposed Rule 41.15(a)(1) under the CEA. 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 the proposed rule and rule amendments.
\10\ 15 U.S.C. 78c(a)(11). See proposed Rule 3a55-4(a)(2) under
the Exchange Act and proposed Rule 41.15(a)(2) under the CEA. A
security convertible into an equity security is an equity security
under the Exchange Act and the Securities Act.
\11\ Indexes that include both an equity and debt security or
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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B. Number and Weighting of Index Components
The proposed exclusion also would include 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 for the index to qualify for the exclusion from
the definition of ``narrow-based security index.'' Specifically, the
debt securities index would have to satisfy each of the following
conditions regarding the number and weighting of its component
securities:
The index must be comprised of more than nine securities
issued by more than nine non-affiliated issuers; \12\
The securities of any issuer cannot comprise more than 30%
of the index's weighting; \13\ and
The securities of any five non-affiliated issuers cannot
comprise more than 60% of the index's weighting.\14\
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\12\ See proposed Rule 3a55-4(a)(3) under the Exchange Act and
proposed Rule 41.15(a)(3) under the CEA.
\13\ See proposed Rule 3a55-4(a)(4) under the Exchange Act and
proposed Rule 41.15(a)(4) under the CEA.
\14\ See proposed Rule 3a55-4(a)(5) under the Exchange Act and
proposed Rule 41.15(a)(5) under the CEA.
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The foregoing proposed 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.\15\ In addition, the proposed rules would provide that the term
``issuer'' includes a single issuer or group of affiliated issuers. An
issuer would be affiliated with another issuer for purposes of the
proposed exclusion if it controls, is controlled by, or is under common
control with, that other issuer. The proposed rules would 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. 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,\16\ certain rules under the Exchange Act
contain a 20% threshold for purposes of determining a relationship
between two or more entities.\17\ The definition of control would apply
solely to the proposed rules and is designed to provide a clear
standard for determining control and affiliation for purposes of the
proposed exclusion. The proposed rules make clear that for purposes of
weighting, all the debt securities of all affiliated issuers included
in the index would be aggregated so that the index is not concentrated
in securities of a small number of issuers and their affiliates.
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\15\ See supra note 4.
\16\ See, e.g., Rule 405 under the Securities Act [17 CFR
230.405] and Rule 12b-2 under the Exchange Act [17 CFR 240.12b-2].
\17\ See, e.g., Rule 13d-1(c) under the Exchange Act [17 CFR
240.13d-1(c)] and Securities Exchange Act Release No. 39538 (Jan.
12, 1998), 63 FR 2854 (Jan. 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 would require that an index meet
minimum diversification conditions with regard to both issuers and the
underlying securities and, therefore, the Commissions believe that
these criteria would reduce the likelihood that a future on such a debt
securities index would be too dependent on the price behavior of a
component single security, small group of securities or issuers or
their affiliates. The Commissions request comment on the above proposed
criteria. In particular, the Commissions request comment on whether the
proposed number and weighting criteria that are essentially the same as
for equity security indexes would provide for sufficient
diversification of the index with respect to both the securities and
the issuers. The Commissions request comment on whether different
number or weighting criteria would be appropriate, and request analysis
and empirical data regarding the debt market
[[Page 18033]]
as compared to the equity market to support any suggested modification
to the number or weighting criteria. The Commissions also request
comment on whether owning 20% of an issuer's equity or the ability to
direct the voting of 20% or more of an issuer's voting equity is an
appropriate threshold for determining whether there is control of an
issuer and therefore affiliation for purposes of the proposed
exclusion.
C. Issuer or Security Eligibility Criteria
The proposed criteria would require that for securities that are
not exempted securities under the Exchange Act and rules thereunder,
such as municipal securities or securities issued by the United States
government, the issuer of the component security must satisfy one of
the following:
The issuer must be required to file reports pursuant to
section 13 or 15(d) of the Exchange Act; \18\
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\18\ 15 U.S.C. 78m and 78o(d).
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The issuer must have a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more;
The issuer must have outstanding securities that are
notes, bonds, debentures, or evidences of indebtedness having a total
remaining principal amount of at least $1 billion; or
The issuer of the security must be a government of a
foreign country or a political subdivision of a foreign country.
The proposed 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 section 13 or
15(d) of the Exchange Act \19\ 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 that have either worldwide equity market
capitalization of $700 million or $1 billion in outstanding debt are
likely to have public information available about them.\20\
Accordingly, the issuer eligibility criteria should help ensure 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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\19\ 15 U.S.C. 78m and 78o.
\20\ 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 (Aug. 3, 2005).
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The issuer eligibility criteria would not apply if the component
security in the index is an exempted security, as defined in the
Exchange Act; \21\ or if the issuer of the security 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.\22\ 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 comprised of such debt securities. The
Commissions request comment on the proposed issuer eligibility
criteria. If commenters disagree with these criteria, the Commissions
request views as to what different or additional criteria would be
appropriate that would continue to satisfy the purpose of including
securities of issuers for which there is publicly available
information. The Commissions also request comment on the exception to
the specific issuer eligibility conditions for exempted debt
securities, as defined in the Exchange Act, and the debt securities
issued by a foreign government or political subdivision of a foreign
country that may be included in the debt securities index.
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\21\ See 15 U.S.C. 78c(a)(12). While issuers of exempt
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 for example, Rule 15c2-12 under the Exchange Act,
17 CFR 240.15c2-12.
\22\ In this regard, 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, Rule 3a12-8 under the
Exchange Act, 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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D. Minimum Principal Amount Outstanding
The proposed rules would require that each index component have a
total remaining principal amount of at least $250,000,000. Although
trading in most debt securities is limited, trading volume generally
increases for debt securities with $250,000,000 or more in total
remaining principal amount outstanding. The proposed criteria do not
require that the securities included in the index have an investment
grade rating. Nor do the criteria require particular trading volume,
due to the generally lower trading activity in the debt markets
compared to the equity markets. Instead, the Commissions are proposing
a minimum principal amount criterion which is intended, together with
the other proposed criteria geared to the debt securities market, to
provide a substitute criterion for trading volume.\23\ Accordingly, the
Commissions believe that adopting a minimum remaining principal amount
criterion, together with the other proposed criteria, would decrease
the likelihood that a future on such an index would be readily
susceptible to manipulation. The Commissions request comment on the
proposed $250,000,000 minimum principal amount requirement for each
security included in an index. Is $250,000,000 too high or too low for
purposes of the proposal? If so, what figure would be more appropriate
in light of the intent of the proposals? Commenters should provide
empirical facts, data, and analysis supporting any different minimum
principal amount.
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\23\ Based on data obtained from the Trade Reporting and
Compliance Engine (TRACE) database supplied by the National
Association of Securities Dealers, Inc., in the debt securities
market, trading activity in a debt security generally increases as
the principal amount of the debt security increases. It is important
to note, however, that generally non-investment-grade debt
securities trade more frequently than investment-grade debt
securities. Consequently, the Commissions believe that trading
volume would not be an appropriate determinant of whether a debt
securities index is narrow-based.
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E. De Minimis Exception
The proposed exclusion from the definition of narrow-based security
index would except an issuer included in a debt securities index from
the proposed issuer eligibility and minimum outstanding principal
balance criteria for securities of an issuer if:
All securities of such issuer included in the index
represent less than 5% of the index's weighting; \24\ and
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\24\ In determining whether the five percent threshold is met,
all securities of an issuer and it affiliates would be aggregated
because of the potential for concentrated risk of the index in a
limited group of issuers.
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Securities comprising at least 80% of the index's
weighting satisfy the
[[Page 18034]]
issuer eligibility and minimum outstanding principal balance
criteria.\25\
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\25\ The 80 percent calculation would be based on the entire
index's weighting without subtracting issuers who 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 proposed criteria.
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The Commissions preliminarily believe that an index that included 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 five percent weighting threshold and the 80 percent weighting
threshold must be met at the time of the assessment. The five percent
weighting threshold would ensure that issuers and securities not
satisfying certain of the proposed criteria would comprise only a very
small portion of the index. The 80 percent weighting threshold would
ensure that a predominant percentage of the securities and the issuers
in the debt securities index satisfied the proposed criteria. The
Commissions believe that the de minimis exception should allow debt
securities indexes that include debt securities of a small number of
issuers and securities that do not satisfy certain of the proposed
criteria to qualify for the proposed exclusion. The Commissions believe
that this de minimis exception would provide certain flexibility in
constructing an index or determining whether a debt securities index
satisfied the proposed exclusion.
The Commissions preliminarily believe that the proposed de minimis
exception would be appropriate for indexes that are predominantly
comprised of securities that satisfy the specified criteria, would be
consistent with the protection of investors, and would reduce the
likelihood that the index would be readily susceptible to manipulation.
The Commissions request comment on the proposed five percent threshold
for when the securities of an issuer and its affiliates represent a de
minimis proportion of an index. The Commissions also request comment on
whether 80 percent represents an appropriate proportion of a debt
securities index for purposes of the exclusion. If other thresholds are
suggested, please provide empirical data and analysis supporting such
other thresholds.
III. Tolerance Period
Section 1a(25)(B)(iii) of the CEA \26\ and Section 3(a)(55)(C)(iii)
of the Exchange Act \27\ 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.\28\
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\26\ 7 U.S.C. 1a(25)(B)(iii).
\27\ 15 U.S.C. 78c(a)(55)(C)(iii).
\28\ 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), and Section
3(a)(55)(E) of the Exchange Act, 15 U.S.C. 78c(a)(55)(E).
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In addition, Rules 41.12 under the CEA and 3a55-2 under the
Exchange Act 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 \29\ and Section
3(a)(55)(C)(iii) of the Exchange Act.\30\ 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.
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\29\ 7 U.S.C. 1a(25)(B)(iii).
\30\ 15 U.S.C. 78c(a)(55)(C)(iii).
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IV. Modification of the Statutory Listing Standards Requirements for
Security Futures Products
The Commodity Futures Modernization Act of 2000 \31\ amended the
Exchange Act and the CEA by, among other things, establishing the
criteria and requirements for listing standards regarding the category
of securities on which security futures products can be based. The
Exchange Act \32\ 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.\33\ The Exchange Act \34\ 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.\35\ The CEA states \36\ 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 meet the criteria specified in that
section. Similarly, the Exchange Act \37\ requires that the listing
standards filed with the SEC by an exchange or association meet
specified requirements.
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\31\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
\32\ Section 6(h)(1) of the Exchange Act, 15 U.S.C. 78f(h)(1).
\33\ 15 U.S.C. 78f(a) and 78o-3(a).
\34\ Section 6(h)(2) of the Exchange Act, 15 U.S.C. 78f(h)(2).
\35\ 7 U.S.C. 2(a)(1)(D)(i).
\36\ Section 2(a)(1)(D)(i) of the CEA, 7 U.S.C. 2(a)(1)(D)(i).
\37\ Section 6(h)(3) of the Exchange Act, 15 U.S.C. 78f(h)(3).
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In particular, the Exchange Act \38\ and the CEA \39\ 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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\38\ Section 6(h)(3)(D) of the Exchange Act, 15 U.S.C.
78f(h)(3)(D).
\39\ Section 2(a)(1)(D)(i)(III) of the CEA, 7 U.S.C.
2(a)(1)(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.\40\
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\40\ Section 6(h)(4)(A) of the Exchange Act, 15 U.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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Pursuant to this authority, the Commissions propose to amend CEA
Rule 41.21 and to add Exchange Act Rule 6h-2 to modify the 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 debt securities.
The Commissions note that the Exchange Act \41\ requires
[[Page 18035]]
that the listing standards for security futures products be no less
restrictive than comparable listing standards for options traded on a
national securities exchange or national securities association. In
addition, the CEA and the Exchange Act \42\ provide that the listing
standards for a security futures product must require that trading in
the security futures product not be 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 an underlying security, option
on such security, or option on a group or index including such
securities. The Commissions preliminarily believe that the proposed
modification to permit the listing of security futures on debt
securities and indexes composed of such debt securities would allow the
listing and trading of new and potentially useful financial products,
while providing the necessary safeguards to ensure that such products
are not readily susceptible to manipulation. Therefore, the Commissions
believe that the proposed modification would foster the development of
fair and orderly markets in security futures products, would be
appropriate in the public interest, and would be consistent with the
protection of investors. In the absence of this modification, security
futures on debt securities and indexes composed of such debt securities
would continue to be prohibited, thus preventing the development of
potentially useful financial products.
---------------------------------------------------------------------------
\41\ Section 6(h)(3)(C) of the Exchange Act, 15 U.S.C.
78f(h)(3)(C).
\42\ 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).
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V. Request for Comments
The Commissions solicit comments on all aspects of proposed Rule
41.15 and amendments to Rule 41.21 under the CEA and proposed Rule
3a55-4 and Rule 6h-2 under the Exchange Act. Specifically, the
Commissions seek comment on whether the proposed rules establish
appropriate criteria for identifying debt securities indexes that are
not narrow-based and, if not, what other or additional criteria would
be appropriate, providing empirical data and analysis supporting any
suggestions. Further, the Commissions solicit comment on whether any of
the proposed criteria is inappropriate and/or should not be included,
also providing detailed analysis and empirical support. In addition,
the Commissions seek comment on whether modifying the statutory listing
standards to permit security futures based on debt securities and debt
securities indexes that are narrow-based would foster 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. Commenters are also welcome to offer their
views on any other matters raised by the proposed rules. Commenters
should provide empirical data and analysis to support their
suggestions.
VI. Paperwork Reduction Act
CFTC: The Paperwork Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501
et seq., 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 proposed rule and
rule amendments do not require a new collection of information on the
part of any entities.
Accordingly, for purposes of the PRA, the CFTC certifies that the
proposed rule and rule amendments, if promulgated in final form, would
not impose any new reporting or recordkeeping requirements.
SEC: Proposed Rules 3a55-4 and 6h-2 would not impose a new
``collection of information'' within the meaning of the PRA.
VII. Costs and Benefits of the Proposed Rules
CFTC: Section 15(a) of the CEA 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 proposed regulations outweigh their costs.
Rather, Section 15(a) requires the CFTC to ''consider the cost and
benefits'' of the subject rules.
Section 15(a) further specifies that the costs and benefits of the
proposed rules shall be evaluated 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.
The proposed rule and rule amendments should foster the protection
of market participants and the public by establishing criteria for
futures on broad-based debt securities indexes that should 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 would be made available for listing and trading
pursuant to the proposed rules.
In addition, the proposed rule and rule amendments should 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 proposed rule
and rule amendments, 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 should
also be achieved because the proposed rules, 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 would render joint SEC and CFTC regulation unnecessary.
By not subjecting futures on debt securities indexes that meet the
proposed criteria to joint SEC and CFTC regulation, the costs for
listing such products should be minimized.
The proposed rule and rule amendments should 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 proposed rules, the CFTC believes that these costs
are outweighed in light of the factors and benefits discussed above.
Accordingly, the CFTC has determined to propose the addition and
amendment to Part 41 as set forth below. The CFTC specifically invites
public comment on its application of the criteria contained in section
15(a) of the CEA for consideration. Commenters are also invited to
submit any quantifiable data that they may have concerning the costs
and benefits of the proposed rule and rule amendments with their
comment letters.
[[Page 18036]]
SEC: Proposed Rule 6h-2 under the Exchange Act would permit a
national securities exchange, subject to certain conditions, to list
and trade security futures based on single debt securities and on
narrow-based indexes composed of debt securities. Proposed Rule 3a55-4
would exclude from the definition of a narrow-based security index debt
securities indexes that satisfy specified criteria. The SEC has
preliminarily identified certain costs and benefits relating to
proposed Rules 3a55-4 and 6h-2. The SEC requests comments on all
aspects of this cost-benefit analysis, including the identification of
any additional costs and/or benefits of the proposed rules. The SEC
encourages commenters to identify and supply any relevant data,
analysis, and estimates concerning the costs and/or benefits of the
proposed rules.
A. Benefits
The benefits of proposed Rules 3a55-4 and 6h-2 generally would
accrue from expanding the range of securities on which security futures
and other index futures may be based. Currently, security futures
cannot be based on debt securities or debt securities indexes. The
proposed rules and rule amendments would eliminate this prohibition. As
a result, the proposed rules and rule amendments would permit a greater
variety of financial products to be listed and traded that potentially
could facilitate price discovery and the ability to hedge. Investors
generally would benefit by having a wider choice of financial products
to buy and sell. The measure of this benefit would likely be correlated
to the volume of trading in these new instruments. Because security
futures based on debt securities would be new products, however, the
SEC is unable to quantify these benefits and therefore requests
comments, data, and estimates on these benefits.
Proposed Rule 3a55-4 provides criteria that would exclude from the
jurisdiction of the SEC futures contracts on certain debt securities
indexes. Futures contracts on debt securities indexes that do not meet
the criteria in proposed Rule 3a55-4 would be subject to the joint
jurisdiction of the SEC and CFTC, while debt securities indexes that
meet the criteria for the proposed exclusion would be subject to the
exclusive jurisdiction of the CFTC. The SEC requests comments, data,
and estimates regarding the benefits associated with allowing the
listing and trading of futures on debt securities and narrow-based debt
securities indexes under proposed Rule 6h-2 and with the exclusion
proposed in Rule 3a55-4.
B. Costs
In complying with proposed Rule 3a55-4, 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 would incur certain costs. A listing market that
wishes to list and trade such futures contracts would be required to
ascertain whether a particular debt securities index was or was not a
narrow-based security index, according to the criteria set forth in
proposed Rule 3a55-4, and thus whether a futures contract based on that
security index were subject to the joint jurisdiction of the SEC and
CFTC or to the exclusive jurisdiction of the CFTC. The SEC notes,
however, that any such costs replace the current cost of doing the same
analysis under the statutory definition of narrow-based security index.
Market participants that elect to create debt securities indexes would
also incur costs associated with constructing these products. Such
costs would be the existing costs of doing business. The SEC requests
comment as to the costs that such determinations would impose on
listing markets or other market participants. Commenters are encouraged
to submit empirical data to support these estimates and to identify any
other costs associated with the proposal that have not been considered
herein, and what the extent of those costs would be.
VIII. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
SEC: Section 3(f) of the Exchange Act \43\ 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 would promote efficiency, competition,
and capital formation. Section 23(a)(2) of the Exchange Act \44\
requires the SEC, in adopting rules under the Exchange Act, to consider
the impact any rule would have on competition. In particular, Section
23(a)(2) of the Exchange Act prohibits the SEC from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78c(f).
\44\ 15. U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
The SEC preliminarily believes that proposed Rule 3a55-4 would
promote efficiency by setting 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
sole jurisdiction of the CFTC.
Proposed Rules 3a55-4 and 6h-2 would lift the ban on the listing
and trading of security futures based on debt securities and narrow-
based debt securities indexes. Thus, the SEC preliminarily believes
that the proposed rules would not have an adverse effect on capital
formation.
The SEC preliminarily believes that the proposed rules would not
impose any significant burdens on competition. The SEC instead believes
that, by allowing listing markets to list and trade new financial
products, proposed Rule 6h-2 would promote competition by creating
opportunities for listing markets to compete in the market for such
products and perhaps for some of these new products to compete against
existing products.
The SEC requests comments on the potential benefits, as well as
adverse consequences, that may result with respect to efficiency,
competition, and capital formation if the proposed rules are adopted.
IX. Regulatory Flexibility Act Certifications
CFTC: The Regulatory Flexibility Act (``RFA'') \45\ requires
Federal agencies, in promulgating rules, to consider the impact of
those rules on small entities. The rules adopted herein would affect
contract markets and registered DTEFs. The CFTC previously established
certain definitions of ``small entities'' to be used by the CFTC in
evaluating the impact of its rules on small entities in accordance with
the RFA.\46\ In its previous determinations, the CFTC has concluded
that contract markets and DTEFs are not small entities for the purpose
of the RFA.\47\
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\45\ 5 U.S.C. 601 et seq.
\46\ 47 FR 18618-21 (Apr. 20, 1982).
\47\ 47 FR 18618, 18619 (Apr. 20, 1982) (discussing contract
markets); 66 FR 42256, 42268 (Aug. 10, 2001) (discussing DTEFs).
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Accordingly, the CFTC does not expect the rules, as proposed
herein, to have a significant economic impact on a substantial number
of small entities. Therefore, the Chairman, on behalf of the CFTC,
hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed
amendments will not have a significant economic impact on a substantial
[[Page 18037]]
number of small entities. The CFTC invites the public to comment on
this finding and on its proposed determination that the trading
facilities covered by these rules would not be small entities for
purposes of the RFA.
SEC: Section 603(a) \48\ of the Administrative Procedure Act
(``APA''),\49\ as amended by the RFA, generally requires the SEC to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \50\ Section 605(b) of the RFA specifically exempts
from this requirement any proposed rule, or proposed rule amendment,
which if adopted, would not ``have a significant economic impact on a
substantial number of small entities.'' Proposed Rules 3a55-4 and 6h-2
would permit the listing and trading of security futures based on debt
securities and establish criteria for excluding certain debt securities
indexes from the definition of narrow-based security index. Only
markets that are registered with the SEC as national securities
exchanges and designated as contract markets or derivatives transaction
execution facilities with the CFTC would be making determinations as to
the status of the debt securities indexes on which futures contracts
are trading. The national securities exchanges \51\ and contract
markets \52\ that would be subject to the proposed rules are not
``small entities'' for purposes of the Regulatory Flexibility Act.
Therefore, the proposed rules, if adopted, would not have a significant
economic impact on a substantial number of small entities for purposes
of the Regulatory Flexibility Act.
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\48\ 5 U.S.C. 603(a).
\49\ 5 U.S.C. 551 et seq.
\50\ Although Section 601(b) of the RFA defines the term ``small
entity,'' the statute permits agencies to formulate their own
definitions. The SEC has adopted definitions for the term small
entity for the purposes of SEC rulemaking in accordance with the
RFA. Those definitions, as relevant to this proposed rulemaking, are
set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act
Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
\51\ See 17 CFR 240.0-10(e). Paragraph (e) of Exchange Act Rule
0-10 provides that the term ``small entity,'' when referring to an
exchange, means any exchange that has been exempted from the
reporting requirements of 17 CFR 240.11Aa3-1 and is not affiliated
with any person that is not a small entity. Under this standard,
none of the exchanges affected by the proposed rule is a small
entity.
\52\ The CFTC 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. See 47 FR 18618-21
(Apr. 30, 1982). In its previous determinations, the CFTC has
concluded that contract markets are not small entities for the
purpose of the RFA. See id. at 18619 (discussing contract markets).
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For the above reasons, the SEC certifies that proposed Rules 3a55-4
and 6h-2 would not have a significant economic impact on a substantial
number of small entities. The SEC invites commenters to address whether
the proposed rules would have a significant economic impact on a
substantial number of small entities, and, if so, what would be the
nature of any impact on small entities. The SEC requests that
commenters provide empirical data to support the extent of such impact.
X. Consideration of Impact on the Economy
CFTC and SEC: For purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996 (``SBREFA''),\53\ the SEC and the CFTC
must advise the Office of Management and Budget as to whether the
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results or is likely to
result in: (1) An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease); (2) a major increase
in costs or prices for consumers or individual industries; or (3)
significant adverse effect on competition, investment or innovation. If
a rule is ``major,'' its effectiveness will generally be delayed for 60
days pending Congressional review. The SEC requests comment on the
potential impact of the proposed rules on the economy on an annual
basis. Commenters are requested to provide empirical data and other
factual support for their view to the extent possible.
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\53\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note
to 5 U.S.C. 601).
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XI. 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 \54\ and Sections
3(a)(55)(C)(vi), 3(b), 6(h), 23(a), and 36 of the Exchange Act,\55\ the
Commissions are proposing Rule 41.15 and amendments to Rule 41.21 under
the CEA,\56\ and Rules 3a55-4 and 6h-2 under the Exchange Act.\57\
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\54\ 7 U.S.C. 1a(25)(B)(vi) and 2(a)(1)(D).
\55\ 15 U.S.C. 78c(a)(55)(C)(vi), 78c(b), 78f(h), 78w(a), and
78mm.
\56\ 17 CFR 41.15 and 41.21.
\57\ 17 CFR 240.3a55-4.
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XII. Text of Proposed Rules
List of Subjects
17 CFR Part 41
Security futures products.
17 CFR Part 240
Securities.
Commodity Futures Trading Commission
In accordance with the foregoing, Title 17, chapter I, part 41 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 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
2. Add Section 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) 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;
(2) 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;
(3) The index is comprised of more than nine securities that are
issued by more than nine non-affiliated issuers;
(4) The securities of any issuer included in the index do not
comprise more than 30 percent of the index's weighting;
(5) The securities of any five non-affiliated issuers included in
the index do not comprise more than 60 percent of the index's
weighting;
(6) Except as provided in paragraph (8) of this section, for each
security of an issuer included in the index one of the following
criteria is satisfied:
(i) 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;
(ii) The issuer of the security has a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more;
(iii) The issuer of the security has outstanding securities that
are notes, bonds, debentures, or evidences of
[[Page 18038]]
indebtedness having a total remaining principal amount of at least $1
billion;
(iv) The security is an exempted security as defined in the
Securities Exchange Act of 1934 and the rules promulgated thereunder;
or
(v) The issuer of the security is a government of a foreign country
or a political subdivision of a foreign country; and
(7) Except as provided in paragraph (8) of this section, each
security of an issuer included in the index has a total remaining
principal amount of at least $250,000,000 except as provided in
paragraph (8) of this section.
(8) Paragraphs (a)(6) and (a)(7) of this section will not apply to
securities of an issuer included in the index if:
(i) All securities of such issuer included in the index represent
less than five percent of the index's weighting; and
(ii) Securities comprising at least 80 percent of the index's
weighting satisfy the provisions of paragraphs (a)(6) and (a)(7) 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) 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
3. Amend Section 41.21 by:
a. Removing ``or'' at the end of paragraph (a)(2)(i);
b. Removing ``; and,'' at the end of paragraph (a)(2)(ii) and
adding ``, or'' in its place;
c. Adding paragraph (a)(2)(iii);
d. Removing ``or'' at the end of paragraph (b)(3)(i)
e. Removing ``; and,'' at the end of paragraph (b)(3)(ii) and
adding ``, or'' in its place; and
f. Adding paragraph (b)(3)(iii).
The 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
In accordance with the foregoing, Title 17, chapter II, part 240 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
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.
* * * * *
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) 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;
(2) 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;
(3) The index is comprised of more than nine securities that are
issued by more than nine non-affiliated issuers;
(4) The securities of any issuer included in the index do not
comprise more than 30 percent of the index's weighting;
(5) The securities of any five non-affiliated issuers included in
the index do not comprise more than 60 percent of the index's
weighting;
(6) Except as provided in paragraph (a)(8) of this section, for
each security of an issuer included in the index one of the following
criteria is satisfied:
(i) 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));
(ii) The issuer of the security has a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more;
(iii) 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;
(iv) The security is an exempted security as defined in the Act and
the rules promulgated thereunder; or
(v) The issuer of the security is a government of a foreign country
or a political subdivision of a foreign country;
(7) Except as provided in paragraph (a)(8) of this section, each
security of an issuer included in the index has a total remaining
principal amount of at least $250,000,000 except as provided in
paragraph (a)(8) of this section; and
(8) Paragraphs (a)(6) and (a)(7) of this section will not apply to
securities of an issuer included in the index if:
(i) All securities of such issuer included in the index represent
less than five percent of the index's weighting; and
(ii) Securities comprising at least 80 percent of the index's
weighting satisfy the provisions of paragraphs (a)(6) and (a)(7) 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) 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.
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.
Dated: March 29, 2006.
By the Commodity Futures Trading Commission.
Jean A. Webb,
Secretary.
By the Securities and Exchange Commission.
Dated: March 29, 2006.
Nancy M. Morris,
Secretary.
[FR Doc. 06-3188 Filed 4-7-06; 8:45 am]
BILLING CODE 8010-01-P; 6351-01-P