[Federal Register Volume 64, Number 43 (Friday, March 5, 1999)]
[Rules and Regulations]
[Pages 10564-10567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5445]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-41116, International Series Release No. 1186, File No.
S7-15-98]
RIN 3235-AH46
Exemption of the Securities of the Kingdom of Belgium 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 is adopting an
amendment to Rule 3a12-8 that would designate debt obligations issued
by the Kingdom of Belgium as ``exempted securities'' for the purpose of
marketing and trading of futures contracts on those securities in the
United States. The amendment is intended to permit futures trading on
the sovereign debt of Belgium.
EFFECTIVE DATE: March 5, 1999.
FOR FURTHER INFORMATION CONTACT: Joshua Kans, Attorney, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Division''), Securities and Exchange Commission (Mail Stop 10-1),
450 Fifth Street, NW, Washington, DC 20549, at 202/942-0079.
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)
under the Securities Act of 1933 (``Securities Act'') or the Securities
Exchange Act of 1934 (``Exchange Act''). Debt obligations of foreign
governments are not exempted securities under either of these statutes.
The Securities and Exchange Commission (``SEC'' or ``Commission''),
however, has adopted Rule 3a12-8 \1\ (``Rule'') under the Exchange Act
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. As amended, 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, Spain, Mexico, Brazil,
Argentina, and Venezuela (the ``Designated Foreign Governments''). As a
result, 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.
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\1\ 17 CFR 240.3a12-8.
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On June 8, 1998, the Commission issued a release proposing to amend
Rule 3a12-8 to designate the debt obligations of the Kingdom of Belgium
(``Belgium'') as exempted securities, solely for the purpose of futures
trading.\2\ No comment letters were received in response to the
proposal.
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\2\ See Securities Exchange Act Release No. 40077 (``Proposing
Release'') (June 8, 1998), 63 FR 32628 (June 15, 1998).
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The Commission today is adopting this amendment to the Rule, adding
Belgium to the list of countries whose debt obligations are exempted by
Rule 3a12-8. In order to qualify for the exemption, futures contracts
on the debt obligations of Belgium would have to meet all the other
existing requirements of the Rule.
II. Background
Rule 3a12-8 was adopted in 1984 \3\ pursuant to the exemptive
authority in Section 3(a)(12) of the Exchange Act in order to provide a
limited exception from the CEA's prohibition on futures overlying
individual securities.\4\ As originally adopted, the Rule provided that
the debt obligations of Great Britain and Canada would be deemed to be
exempted securities, solely for the purpose of permitting the offer,
sale, and confirmation of ``qualifying foreign
[[Page 10565]]
futures contracts'' on such securities. The securities in question were
not eligible for the exemption if they were registered under the
Securities Act or were the subject of any American depositary receipt
so registered. A futures contract on the covered debt obligation under
the Rule is deemed to be a ``qualifying foreign futures contract'' if
the contract is deliverable outside the United States and is traded on
a board of trade.\5\
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\3\ See Securities Exchange Act Release No. 20708 (``Original
Adopting Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984);
Securities Exchange Act Release No. 19811 (``Original Proposing
Release'') (May 25, 1983), 48 FR 24725 (June 2, 1983).
\4\ In approving 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 on debt obligations of the United Kingdom of Great
Britain and Northern Ireland 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 3, 48 FR at 24725 (citing 128 Cong. Rec. H7492
(daily ed. September 23, 1982) (statements of Representatives
Daschle and Wirth)).
\5\ 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, absent
registration, a domestic market in unregistered foreign government
securities would not develop, and that markets for futures on these
instruments would not be used to avoid the securities law registration
requirements. In particular, the Rule was intended to ensure that
futures on exempted sovereign debt did not operate as a surrogate means
of trading the unregistered debt.
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, Mexico and, most recently, Brazil, Argentina, and
Venezuela.\6\
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\6\ As originally adopted, the Rule applied only to British and
Canadian government securities. See Original Adopting Release, supra
note 3. In 1986, the Rule was amended to include Japanese government
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 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 8, 1992), 57 FR 1375 (January 14, 1992). In 1994, the
Rule was amended to include debt securities issued by Spain. See
Securities Exchange Act Release No. 34908 (October 27, 1994), 59 FR
54812 (November 2, 1994). In 1995, the Rule was amended to include
the debt securities of Mexico. See Securities Exchange Act Release
No. 36530 (November 30, 1995), 60 FR 62323 (December 6, 1995).
Finally, in 1996, the Rule was amended to include debt securities
issued by Brazil, Argentina, and Venezuela. See Securities Exchange
Act Release No. 36940 (March 7, 1996), 61 FR 10271 (March 13, 1996).
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In 1997, Belfox c.v./s.c. (``Belfox''), the Belgian company
recognized as the institution to organize and administer the Belgian
Futures and Options Exchange (``BELFOX''), proposed that the Commission
amend Rule 3a12-8 to facilitate such trading in futures products based
on the sovereign debt of Belgium.\7\ At the time, BELFOX listed two
futures contracts overlying Belgian public debt securities, and stated
that it wished to market and make trading of those products available
to U.S. investors.\8\
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\7\ See Letters from Jos Schmitt, President and Chief Executive
Officer, Belfox, to Arthur Levitt, Jr., Chairman, Commission, dated
June 27, 1997, to Howard L. Kramer, Senior Associate Director,
Division, Commission, dated August 29, 1997, and to Howard L.
Kramer, Division of Commission, dated February 10, 1998
(collectively ``Belfox petition'').
\8\ The marketing and trading of foreign futures contracts is
subject to regulation by the CFTC.
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Belfox subsequently delisted its futures contracts on Belgian
sovereign debt, and has stated that it does not presently intend to
list any additional futures contracts on Belgian sovereign debt.\9\
Belfox has not withdrawn its request, however, and the Belgian Ministry
of Finance has expressed the hope that Belgium will be added to the
Rule so that Belgian debt securities may form part of the pool of
securities that underlie multi-issuer futures contracts traded in Paris
on the March a Terme International de France SA (``MATIF'').\10\
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\9\ See Conversation between Jos Schmitt, Belfox, and Joshua
Kans, Attorney, Division, Commission, September 28, 1998.
\10\ See Conversation between Louis de Montpellier, General
Advisor, Treasury, Ministry of Finance, Kingdom of Belgium, and
Joshua Kans, Attorney, Division, Commission, September 28, 1998.
Each of the multi-issuer sovereign debt futures contracts
currently traded on the MATIF has a pool of deliverable securities
that contains only the sovereign debt securities of countries
designated under the Rule. Should the delivery pool for any
sovereign debt futures contract include sovereign debt securities of
countries not designated under the Rule, then that contract would
not be eligible for marketing or sales to U.S. persons pursuant to
the Rule. See Letter from Howard Kramer, Senior Special Counsel,
Division, Commission, to Philip Bruce, Head of Fixed Income and
Money Market Instruments, London International Financial Futures
Exchange, dated July 21, 1992.
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The Commission is amending Rule 3a12-8 to add Belgium 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, that futures
contracts require delivery outside the United States, and that
contracts be traded on a board of trade) would continue to apply.
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 Belgium. The Commission believes that the trading of futures
contracts on the sovereign debt of Belgium could provide U.S. investors
and dealers with a vehicle for hedging the risks involved in holding
debt instruments of Belgium, and that the sovereign debt of Belgium
should be subject to the same regulatory treatment under the Rule as
that of the Designated Foreign Governments.
In the most recent determinations to amend the Rule to include
Mexico, Brazil, Argentina, and Venezuela, the Commission considered
primarily whether market evidence indicated that an active and liquid
secondary trading market exists for the sovereign debt of those
countries.11 Prior to the addition of those countries to the
Rule, the Commission considered principally whether the particular
sovereign debt had been rated in one of the two highest rating
categories 12 by at least two nationally recognized
statistical rating organizations (``NRSROs'').13 The
Commission continues to consider the existence of a high credit rating
as indirect evidence of an active and liquid
[[Page 10566]]
secondary trading market,14 as well as considering trading
data as evidence of an active and liquid secondary trading market for
the security, when determining whether to include a sovereign issuer in
the list of Designated Foreign Governments.
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\11\ See, e.g., Securities Exchange Act Release No. 36530
(November 30, 1995), 60 FR 62323 (December 6, 1995) (amending the
Rule to add Mexico because the Commission believed that as a whole,
the market for Mexican sovereign debt was sufficiently liquid and
deep for the purposes of the Rule); Securities Exchange Act Release
No. 36940 (March 7, 1996), 61 FR 10271 (March 13, 1996) (amending
the Rule to add Brazil, Argentina and Venezuela because the
Commission believed that the market for the sovereign debt of those
countries was sufficiently liquid and deep for the purposes of the
Rule).
\12\ The two highest categories used by Moody's Investor
Services (``Moody's'') for long-term debt are ``Aaa'' and ``Aa.''
The two highest categories used by Standard and Poor's (``S&P'') for
long-term debt are ``AAA'' and ``AA.''
\13\ See, e.g., Securities Exchange Act Release No. 30166
(January 6, 1992) 57 FR 1375 (January 14, 1992) (amending the Rule
to include debt securities issued by Ireland and Italy--Ireland's
long-term sovereign debt was rated Aa3 by Moody's and AA- by S&P,
and Italy's long-term sovereign debt was rated Aaa by Moody's and
AA+ by S&P); and Securities Exchange Act Release No. 34908 (October
27, 1994), 59 FR 54812 (November 2, 1994) (amending the Rule to
include Spain, which had long-term debt ratings of Aa2 from Moody's
and AA from S&P).
\14\ See, e.g., Securities Exchange Act Release No. 36213
(September 11, 1995), 60 FR 48078 (September 18, 1995) (proposal to
add Mexico to list of countries encompassed by rule); Securities
Exchange Act Release No. 24428 (May 5, 1987), 52 FR 18237 (May 14,
1987) (proposed amendment, which was not implemented, that would
have extended the rule to encompass all countries rated in one of
the two highest categories by at least two NRSROs).
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Belgium meets the debt rating standard, by being rated in one of
the two highest rating categories by two NRSROs.15 Moreover,
trading data also indicates that an active and liquid trading market
for Belgian issued debt instruments exists. Belfox and the Ministry of
Finance have provided data about the Belgian public debt 16
and the market for Linear bonds (``Obligations Lineaires--Lineaire
Obligaties'' or ``OLOs''), which comprise a major portion of the
Belgian public debt.17 That data demonstrates active trading
in the market for Belgian OLOs. The total value traded in OLOs on an
annual basis was equivalent to approximately US$1.89 trillion in 1997,
US$1.86 trillion in 1996, US$1.70 trillion in 1995, and US$1.30
trillion in 1994. The average value traded in OLOs on a daily basis was
equivalent to approximately US$7.60 billion in 1997, US$7.44 billion in
1996, US$6.79 billion in 1995, and US$5.23 billion in 1994. The average
number of trades on a daily basis involving OLOs was approximately 472,
571, 614, and 636 for 1997, 1996, 1995 and 1994,
respectively.18 The Commission finds that this trading data,
coupled with a high debt rating, provides sufficient evidence that
there exists an active and liquid market for Belgian sovereign debt.
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\15\ Moody's has assigned Belgium long-term local currency and
long-term foreign currency credit ratings of Aa1. S&P has assigned
Belgium long-term local currency and long-term foreign-currency
credit ratings of AA+.
The Belgian public debt is principally denominated in Belgian
francs (``BEF''). The portion of Belgian public debt denominated in
foreign currencies was 8.0% in 1997, 7.6% in 1996, 11.4% in 1995 and
14.5% in 1994. See Public Debt: Annual Report 1997, Ministry of
Finance, Kingdom of Belgium, April 1998, at 13 (``Public Debt
1997''); Public Debt: Annual Report 1996, Ministry of Finance,
Kingdom of Belgium, April 1997, at 13 (``Public Debt 1996''); Public
Debt: Annual Report 1995, Ministry of Finance, Kingdom of Belgium,
May 1996, at 13 (``Public Debt 1995'').
The Belgian Ministry of Finance has stated that all
``dematerialized'' Belgian public debt (i.e., debt that is not held
in a tangible form) denominated in Belgian francs would be
redenominated into euros on January 1, 1999. See Public Debt 1997 at
26.
\16\ Belgian public debt is comprised of government bonds,
Treasury bills and various debt instruments of lesser importance,
such as road fund loans, and municipal and provincial loans. See
Belfox petition, supra note 7.
The amount of Belgian public debt outstanding was equivalent to
approximately US$264.31 billion as of December 31, 1997,
approximately US$258.92 billion at the end of 1996, approximately
US$256.86 billion at the end of 1995, and approximately US$251.64
billion at the end of 1994. See Public Debt 1997 at 12; Public Debt
1996 at 12; Public Debt 1995 at 12. All U.S. dollar equivalents set
forth here are based on the conversion rate of BEF 37.10 for US$1.00
in effect as of December 31, 1997.
By comparison, the last four countries to be added to the list
of Designated Foreign Governments--Mexico, Brazil, Argentina and
Venezuela--had lower amounts of public debt. See Securities Exchange
Act Release No. 36530 (December 6, 1995), 60 FR 62323 (December 6,
1995) (outstanding Mexican government debt amounted to approximately
US$87.5 billion face value as of March 31, 1995); Securities
Exchange Act Release No. 36940 (March 7, 1996), 61 FR 10271 (March
13, 1996) (public and publicly guaranteed debt of Brazil, Argentina
and Venezuela amounted to approximately US$86 billion, US$55 billion
and US$74 billion, respectively, as of December 31, 1993).
\17\ OLOs, which are issued by means of a price auction system,
have maturities ranging from 1 to 30 years and are available with
fixed or variable interest rate payments. Only those holding a
Linear bond account with the National Bank of Belgium may
participate in the auction for these bonds. OLOs are traded on the
Brussels Stock Exchange and over the counter. OLOs do not exist
physically, but appear as entries in an electronic register held by
the National Bank of Belgium. See The Financial Products of the
Belgian Treasury, The Treasury, Kingdom of Belgium, September 1998,
at 12-17; Belfox petition, supra note 7.
OLOs represented 54.3% percent of the total amount of Belgian
public debt outstanding in 1997, 53.6% in 1996, 50.6% in 1995 and
44.6% in 1994. The amount of OLOs outstanding was equivalent to
approximately US$143.50 billion at the end of 1997, US$138.79
billion at the end of 1996, US$130.01 billion at the end of 1995,
and US$112.27 billion at the end of 1994. See Public Debt 1997 at
12; Public Debt 1996 at 12; Public Debt 1995 at 12.
The majority of OLOs are denominated in Belgian francs, with
some OLOs issued in the past year denominated in French francs and
German marks. All existing OLOs were to be redenominated into euros
at the start of 1999. See Public Debt 1997 at 25-26.
\18\ See Public Debt 1997 at 41; Public Debt 1996 at 41; Public
Debt 1995 at 41; Belfox petition, supra note 7.
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IV. Costs and Benefits of the Proposed Amendments
The Commission believes that the amendment offers potential
benefits for U.S. investors, with no direct costs. As stated above, the
amendment will allow U.S. and foreign boards of trade to offer in the
United States, and U.S. investors to trade, futures contracts on the
debt obligations of Belgium. The trading of futures on the sovereign
debt of Belgium should provide U.S. investors with a vehicle for
hedging the risks involved in the trading of the underlying sovereign
debt of Belgium.19 The Commission does not anticipate that
the amendment will result in any direct cost for U.S. investors or
others because 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.
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\19\ There may be significant interest in such futures. For
example, the MATIF has estimated that the Euro All Sovereign futures
contract, which is one of the multi-issuer futures contracts that
would likely include Belgian sovereign debt within the pool of
deliverable securities, will have a total trading volume of at least
10,000 lots per day.
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V. Effects of the Proposed Amendment on Competition, Efficiency and
Capital Formation, and Other Findings
Section 23(a)(2) of the Exchange Act 20 requires the
Commission, in adopting rules under the Exchange Act, to consider the
competitive effects of such rules, if any, and to refrain from adopting
a rule that would impose a burden on competition not necessary or
appropriate in furthering the purposes of the Exchange Act. Moreover,
Section 3 of the Exchange Act 21 as amended by the National
Securities Markets Improvement Act of 1996 22 provides that
whenever the Commission is engaged in a rulemaking and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, the Commission shall consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition and capital formation.
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\20\ 15 U.S.C. 78w(a)(2).
\21\ 15 U.S.C. 78c.
\22\ Pub. L. 104-290, 110 Stat. 3416 (1996).
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The Commission has considered the amendment to the Rule in light of
the standards cited in Sections 3 and 23(a)(2), and the Commission
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 Belgium 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. The Commission has
considered the amendment's impact on
[[Page 10567]]
efficiency, competition, and capital formation and concludes that it
would promote these three objectives, by making available to U.S.
investors an additional product to use to hedge the risks associated
with the trading of the underlying sovereign debt of
Belgium.23 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 Belgium is consistent
with the goals and purposes of the federal securities laws by
minimizing the impact of the Rule on securities trading and
distribution in the United States.
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\23\ 15 U.S.C. 78f(b).
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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.24
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\24\ 5 U.S.C. 553(d).
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VI. Administrative Requirements
Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(h), the Chairman of the Commission 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.
The Paperwork Reduction Act does not apply because the amendment
does not impose recordkeeping or information collection requirements,
or other collections of information which require the approval of the
Office of Management and Budget under 44 U.S.C. 3501, et seq.
VII. Statutory Basis
The amendment to Rule 3a12-8 is being adopted pursuant to 15 U.S.C.
78a et seq., particularly Sections 3(a)(12) and 23(a), 15 U.S.C.
78c(a)(12) and 78w(a).
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of the Amendment
For the reasons set forth in the preamble, the Commission amends
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, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 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)(xviii), removing the period at the end of
paragraph (a)(1)(xix) and adding ``; or'' in its place, and adding
paragraph (a)(1)(xx), to read as follows:
Sec. 240.3a12-8 Exemption for designated foreign government securities
for purposes of futures trading.
(a) * * *
(1) * * *
(xx) The Kingdom of Belgium.
* * * * *
Dated: February 26, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5445 Filed 3-4-99; 8:45 am]
BILLING CODE 8010-01-P