[Federal Register Volume 61, Number 50 (Wednesday, March 13, 1996)]
[Rules and Regulations]
[Pages 10271-10274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5968]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-36940, International Series Release No. 948, File No.
S7-34-95]
RIN 3235-AG68
Exemption of the Securities of the Federative Republic of Brazil,
the Republic of Argentina, and the Republic of Venezuela Under the
Securities Exchange Act of 1934 for Purposes of Trading Futures
Contracts on those Securities
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting an amendment to Rule 3a12-8 under the
Securities Exchange Act of 1934 that would designate debt obligations
issued by the Federative Republic of Brazil (``Brazil''), the Republic
of Argentina (``Argentina''), and the Republic of Venezuela
(``Venezuela'') (collectively the ``Additional Countries'') as
``exempted securities'' for the purpose of marketing and trading
futures contracts on those securities in the United States. The purpose
of this amendment is solely to permit futures on the sovereign debt of
the Additional Countries to be traded in the United States. This change
is not intended to have any substantive effect on the operation of the
Rule.
EFFECTIVE DATE: March 13, 1996.
[[Page 10272]]
FOR FURTHER INFORMATION CONTACT: James T. McHale, Attorney, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Division''), Securities and Exchange Commission (Mail Stop 5-1), 450
Fifth Street, N.W., Washington, D.C. 20549, at (202) 942-0190.
SUPPLEMENTARY INFORMATION:
I. Introduction
Under the Commodity Exchange Act (``CEA''), it is unlawful to trade
a futures contract on any individual security, unless the security in
question is an exempted security (other than a municipal security) for
the purposes of the Securities Act of 1933 (``Securities Act'') or the
Securities Exchange Act of 1934 (``Exchange Act'').\1\ Debt obligations
of foreign governments are not exempted securities under either of
these statutes. The Commission, however, has adopted Rule 3a12-8 under
the Exchange Act (``Rule'') \2\ to designate debt obligations issued by
certain foreign governments as exempted securities under the Exchange
Act solely for the purpose of marketing and trading futures contracts
on those securities in the United States. The foreign governments
currently designated in the Rule are Great Britain, Canada, Japan,
Australia, France, New Zealand, Austria, Denmark, Finland, the
Netherlands, Switzerland, Germany, the Republic of Ireland, Italy, the
Kingdom of Spain, and Mexico (the ``Designated Foreign Governments'').
As a result of being included in the Rule, futures contracts on the
debt obligations of these countries may be sold in the United States,
as long as the other terms of the Rule are satisfied.
\1\ The term ``exempted security'' is defined in Section 3 of
the Securities Act, 15 U.S.C. Sec. 77c, and Section 3(a)(12) of the
Exchange Act, 15 U.S.C. Sec. 78c(a)(12).
\2\ 17 CFR 240.3a12-8
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On December 13, 1995, the Commission issued a release proposing to
amend Rule 3a12-8 to designate the debt obligations of the Additional
Countries as exempted securities, solely for the purpose of futures
trading.\3\ No comment letters were received in response to the
proposal.
\3\ See Securities Exchange Act Release No. 36580 (``Proposing
Release'') (December 13, 1995), 60 FR 65607 (December 20, 1995).
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The Commission is adopting this amendment to the Rule, adding
Brazil, Argentina and Venezuela to the list of countries whose debt
obligations are exempted by Rule 3a12-8. In order to qualify for the
exemption, futures contracts on debt obligations of the Additional
Countries would have to meet all the other requirements of the Rule.
II. Background
Rule 3a12-8 was adopted in 1984 \4\ pursuant to the exemptive
authority in Section 3(a)(12) of the Exchange Act in order to provide a
limited exception to the CEA's prohibition on the trading of futures
overlying individual securities.\5\ As originally adopted, the Rule
provided that debt obligations of the United Kingdom and Canada would
be deemed to be exempted securities, solely for the purpose of
permitting the offer, sale, and confirmation of ``qualifying foreign
futures contracts'' on such securities, so long as the securities in
question were neither registered under the Securities Act nor the
subject of any American depositary receipt so registered. A futures
contract on such a debt obligation is deemed under the Rule to be a
``qualifying foreign futures contract'' if delivery under the contract
is settled outside the United States and is traded on a board of
trade.\6\
\4\ See Securities Exchange Act Release Nos. 20708 (``Original
Adopting Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984) and
19811 (``Original Proposing Release'') (May 25, 1983), 48 FR 24725
(June 2, 1983).
\5\ In enacting the Futures Trading Act of 1982, Congress
expressed its understanding that neither the SEC nor the Commodity
Futures Trading Commission (``CFTC'') had intended to bar the sale
of futures contracts on debt obligations of the United Kingdom of
Great Britain and Northern Ireland (``United Kingdom'') to U.S.
persons, and its expectation that administrative action would be
taken to allow the sale of such futures contracts in the United
States. See Original Proposing Release, supra note 4, 48 FR at 24725
[citing 128 Cong. Rec. H7492 (daily ed. September 23, 1982)
(statements of Representatives Daschle and Wirth)].
\6\ As originally adopted, the Rule required that the board of
trade be located in the country that issued the underlying
securities. This requirement was eliminated in 1987. See Securities
Exchange Act Release No. 24209 (March 12, 1987), 52 FR 8875 (March
20, 1987).
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The conditions imposed by the Rule were intended to facilitate the
trading of futures contracts on foreign government securities in the
United States while requiring offerings of foreign government
securities to comply with the federal securities laws. Accordingly, the
conditions set forth in the Rule were designed to ensure that markets
for futures on these instruments would not be used to avoid the
securities law registration requirements.
Subsequently, the Commission amended the Rule to include the debt
securities issued by Japan, Australia, France, New Zealand, Austria,
Denmark, Finland, the Netherlands, Switzerland, Germany, Ireland,
Italy, Spain, and, most recently, Mexico.7
\7\ As originally adopted, the Rule applied only to British and
Canadian government debt securities. See Original Adopting Release,
supra note 4. In 1986, the Rule was amended to include Japanese
government debt securities. See Securities Exchange Act Release No.
23423 (July 11, 1986), 51 FR 25996 (July 18, 1986). In 1987, the
Rule was amended to include debt securities issued by Australia,
France and New Zealand. See Securities Exchange Act Release No.
25072 (October 29, 1987), 52 FR 42277 (November 4, 1987). In 1988,
the Rule was amended to include debt securities issued by Austria,
Denmark, Finland, the Netherlands, Switzerland, and West Germany.
See Securities Exchange Act Release No. 26217 (October 26, 1988), 53
FR 43860 (October 31, 1988). In 1992 the Rule was again amended to
(1) include debt securities offered by the Republic of Ireland and
Italy, (2) change the country designation of ``West Germany'' to the
``Federal Republic of Germany,'' and (3) replace all references to
the informal names of the countries listed in the Rule with
references to their official names. See Securities Exchange Act
Release No. 30166 (January 6, 1992), 57 FR 1375 (January 14, 1992).
In 1994, the Rule was amended to include debt securities issued by
the Kingdom of Spain. See Securities Exchange Act Release No. 34908
(October 27, 1994), 59 FR 54812 (November 2, 1994). Finally, in 1995
the Rule was amended to include Mexican sovereign debt. See
Securities Exchange Act Release No. 36530 (November 30, 1995) 60 FR
62323 (December 6, 1995) (``Mexico Adopting Release'').
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The Chicago Mercantile Exchange (``CME'') has informed the
Commission that U.S. citizens may be interested in futures products
based on the debt obligations of the Additional Countries, and has
requested that Rule 3a12-8 be amended to facilitate such trading.8
The CME has represented that it intends to develop a futures contract
market in Brady bonds issued by the Additional Countries.9 Brady
bonds are issued pursuant to the Brady plan, which allows developing
countries to restructure their commercial bank debt by issuing long-
term dollar denominated bonds.10 The Commission
[[Page 10273]]
understands that Brady bonds issued by the Additional Countries are
currently traded primarily in the over-the-counter market in the United
States.
\8\ See Letter from William J. Brodsky, President and Chief
Executive Officer, CME, to Arthur Levitt, Jr., Chairman, Commission,
dated November 10, 1995 (``CME Petition''). The Commission
subsequently received a request from the New York Cotton Exchange
(``NYCE'') to amend the Rule to include the same Additional
Countries. See Letter from Philip McBride Johnson, Esq., Skadden,
Arps, Slate, Meagher & Flom, to Jonathan G. Katz, Secretary,
Commission, dated November 30, 1995.
\9\ The marketing and trading of foreign futures contracts is
subject to regulation by the CFTC. In particular, Section 4b of the
CEA authorizes the CFTC to regulate the offer and sale of foreign
futures contracts to U.S. residents, and Rule 9 (17 CFR 30.9),
promulgated under Section 2(a)(1)(A) of the CEA, is intended to
prohibit fraud in connection with the offer and sale to U.S. persons
of futures contracts executed on foreign exchanges. Additional rules
promulgated under 2(a)(1)(A) of the CEA govern the domestic offer
and sale of futures and options contracts traded on foreign boards
of trade. These rules require, among other things, that the domestic
offer and sale of foreign futures be effected through the CFTC
registrants or through entities subject to a foreign regulatory
framework comparable to that governing domestic futures trading. See
17 CFR 30.3, 30.4, and 30.5 (1991).
\10\ There are several types of Brady bonds, but ``Par Bradys''
and ``Discount Bradys'' represent the great majority of issues in
the Brady bond market. In general, both Par Bradys and Discount
Bradys are secured as to principal at maturity by U.S. Treasury
zero-coupon bonds. Additionally, usually 12 to 18 months of interest
payments are also secured in the form of a cash collateral account,
which is maintained to pay interest in the event that the sovereign
debtor misses an interest payment.
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The Commission is amending Rule 3a12-8 to add Brazil, Argentina,
and Venezuela to the list of countries whose debt obligations are
deemed to be ``exempted securities'' under the terms of the Rule. Under
this amendment, the existing conditions set forth in the Rule (i.e.,
that the underlying securities not be registered in the United
States,11 that the futures contracts require delivery outside the
United States,12 and that the contracts be traded on a board of
trade) would continue to apply.
\11\ The Commission notes that while no Brady bonds issued by
the Additional Countries are currently registered in the United
States, certain sovereign debt issues of Argentina and Venezuela
have been so registered. Futures on U.S.-registered debt securities
of Argentina and Venezuela (or any sovereign debt which in the
future becomes so registered) would not be deemed exempt securities
under Rule 3a12-8.
\12\ The CME's proposed futures contracts will be cash-settled
(i.e., settlement of the futures contracts will not entail delivery
of the underlying securities). The Commission has recognized that a
cash-settled futures contract is consistent with the requirement of
the Rule that delivery must be made outside the United States. See
Securities Exchange Act Release No. 25072 (October 29, 1987), 52 FR
42277 (November 4, 1987).
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III. Discussion
For the reasons discussed below, the Commission finds that it is
consistent with the public interest and the protection of investors
that Rule 3a12-8 be amended to include the sovereign debt obligations
of the Additional Countries. The Commission believes that the trading
of futures contracts on the sovereign debt of the Additional Countries
could provide U.S. investors and dealers with a vehicle for hedging the
risks involved in holding debt instruments of the Additional Countries
and that the sovereign debt of the Additional Countries should be
subject to the same regulatory treatment under the Rule as that of the
Designated Foreign Governments.
In determining whether to amend the Rule to add proposed countries,
the Commission has considered whether there is an active and liquid
secondary trading market in the particular sovereign debt. In this
regard, the amount of outstanding sovereign debt of Brazil, Argentina,
and Venezuela is large and secondary trading appears to be active and
liquid. According to the CME, as of December 31, 1993, the total public
and publicly guaranteed debt 13 of Brazil, Argentina, and
Venezuela was approximately US$86 billion, US$55 billion, and US$74
billion, respectively.14 Moreover, the cash market for Brady bonds
issued by the Additional Countries evidences relatively active trading.
Based on data provided by the CME, the total 1994 trading volume in the
Brady bonds of Brazil, Argentina, and Venezuela was approximately
US$371 billion, US$360 billion, and US$320 billion,
respectively.15 As is the case for all sovereign issuers, there
are less actively traded sovereign debt instruments issued by the
Additional Countries, but the Commission believes that as a whole the
sovereign debt market for the Additional Countries is sufficiently
liquid and deep for purposes of Rule 3a12-8. Accordingly, the
Commission believes that it is appropriate to exempt the sovereign debt
of Brazil, Argentina, and Venezuela because of the overall depth and
liquidity of the existing cash market in the Additional Countries
sovereign debt.
\13\ Public debt is an external obligation of a public debtor,
including the national government, a political subdivision (or any
agency of either) and autonomous public bodies. Publicly guaranteed
debt is an external obligation of a private debtor that is
guaranteed for repayment by a public entity.
\14\ See Letter from Carl A. Royal, Senior Vice President and
Special Counsel, CME, to James T. McHale, Attorney, OMS, Division,
Commission, dated November 30, 1995 (citing the World Bank's 1995
World Debt Tables as the source for this information) (``November 30
letter''). As mentioned earlier, the Commission recently amended the
Rule to include the debt securities of Mexico. As of March 31, 1995
there was approximately US$87.5 billion face amount Mexican
government debt issued and outstanding of various classes and
maturities. See Mexico Adopting Release, supra note 7.
\15\ See November 30 letter, supra note 14. The total 1994
dollar-based trading volume in Mexican Brady bonds was approximately
US$282.3 billion. See Mexico Adopting Release, supra note 7.
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The Commission also believes that the amendment offers potential
benefits for U.S. investors. As stated above, the amendment will allow
U.S. boards of trade to offer in the United States, and U.S. investors
to trade, a greater range of futures contracts on foreign government
debt obligations. Specifically, the trading of futures on the sovereign
debt of Brazil, Argentina, and Venezuela should provide U.S. investors
with a vehicle for hedging the risks involved in holding positions in
the underlying sovereign debt of the Additional Countries. The
Commission does not anticipate that the amendment will result in any
direct cost for U.S. investors or others. The amendment will impose no
recordkeeping or compliance burdens, and merely would provide a limited
purpose exemption under the federal securities laws. The restrictions
imposed under the amendment are identical to the restrictions currently
imposed under the terms of the Rule and are designed to protect U.S.
investors.
In the Proposing Release the Commission solicited comment on the
general application and operation of the Rule given the increased
globalization of the securities markets since the Rule was adopted. The
Commission intends to consider this issue further, but does not believe
it should delay the inclusion of the Additional Countries in the list
of countries whose debt obligations are exempted under Rule 3a12-8.
Nevertheless, the Commission continues to welcome suggestions on
potential restructuring of Rule 3a12-8 to adapt to the ever-increasing
internationalization of the securities markets.
IV. Regulatory Flexibility Act Consideration
Chairman Levitt has certified in connection with the Proposing
Release that this amendment, if adopted, would not have a significant
economic impact on a substantial number of small entities. The
Commission received no comments on this certification.
V. Effects on Competition and Other Findings
Section 23(a)(2) of the Exchange Act 16 requires the
Commission, in adopting rules under the Exchange Act, to consider the
competitive effects of such rules, if any, and to balance any impact
with the regulatory benefits gained in terms of furthering the purposes
of the Exchange Act. The Commission has considered the amendment to the
Rule in light of the standards cited in Section 23(a)(2) and believes
that adoption of the amendment will not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act. As stated above, the amendment is designed to
assure the lawful availability in this country of futures contracts on
the government debt of the Additional Countries that otherwise would
not be permitted to be marketed under the terms of the CEA. The
amendment thus serves to expand the range of financial products
available in the United States and enhances competition in financial
markets. Insofar as the Rule contains limitations, they are designed to
promote the purposes of the Exchange Act by ensuring that futures
trading on government securities of the Additional Countries is
consistent with the goals and purposes of the federal securities
[[Page 10274]]
laws by minimizing the impact of the Rule on securities trading and
distribution in the United States.
\16\ 15 U.S.C Sec. 78w(a)(2).
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Because the amendment to the Rule is exemptive in nature, the
Commission has determined to make the foregoing action effective
immediately upon publication in the Federal Register.17
\17\ 15 U.S.C. Sec. 553(d).
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VI. Statutory Basis
The amendment to Rule 3a12-8 is being adopted pursuant to 15 U.S.C.
Secs. 78a et seq., particularly Sections 3(a)(12) and 23(a), 15 U.S.C.
Secs. 78c(a)(12) and 78w(a).
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of the Adopted Amendment
For the reasons set forth above, the Commission is amending Part
240 of Chapter II, Title 17 of the Code of Federal Regulations 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, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Section 240.3a12-8 is amended by removing the word ``or'' at the
end of paragraph (a)(1)(xv), removing the ``period'' at the end of
paragraph (a)(1)(xvi) and adding ``;'' in its place, and adding
paragraph (a)(1)(xvii), paragraph (a)(1)(xviii), and paragraph
(a)(1)(xix) to read as follows:
Sec. 240.3a12-8 Exemption for designated foreign government securities
for purposes of futures trading.
(a) * * *
(1) * * *
(xvii) the Federative Republic of Brazil;
(xviii) the Republic of Argentina; or
(xix) the Republic of Venezuela.
* * * * *
Dated: March 7, 1996.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5968 Filed 3-12-96; 8:45 am]
BILLING CODE 8010-01-P