| Release No. 34-23423 July 11, 1986
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 Table of Contents
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I. Introduction
The Securities and Exchange Commission ("SEC") is today adopting amendments to Rule 3a12-8 ("Rule") under the Securities Exchange Act of 1934 ("Exchange Act"). Currently, Rule 3a12-8 designates British and Canadian government debt obligations that meet certain conditions as exempted securities under the Exchange Act only for purposes of marketing, in the United States, futures on those securities. Under the Commodity Exchange Act ("CEA"), futures trading on individual securities is prohibited unless the underlying security is an exempted security under the Securities Act of 1933 ("Securities Act") or the Exchange Act. Hence, the designation of these securities as "exempted securities" effectively removes the CEAs prohibition against marketing futures on these securities in the United States (so long as the other terms of the Rule are satisfied).
The amendment extends the class of securities permitted an exemption under the Rule to Japanese government debt obligations for purposes of permitting the sale of futures contracts on these securities in this country. In addition, to qualify for the exemption, foreign futures contracts on Japanese securities must meet all the other existing requirements of the Rule.
II. Background
The CEA, as amended by the Futures Trading Act of 1982, 1 prohibits the trading of futures contracts on individual securities unless such securities qualify as exempted securities under Section 3 of the Securities Act or Section 3(a)(12) of the Exchange Act. 2 Because foreign government securities such as Japanese government bonds are not exempted securities under either of these sections, the CEA prohibition against trading futures on individual securities prevents marketing futures on these foreign government securities in this country.
Section 3(a)(12) of the Exchange Act, however, provides that the term "exempted security" includes
such other securities... as the Commission may, by such rules and regulations as it deems consistent with the public interest and the protection of investors, either unconditionally or upon specified terms and conditions or for stated periods, exempt from the operation of any one or more provisions of this title which by their terms do not apply to an "exempted security" or to "exempted securities."
In March 1984, pursuant to this authority, the Commission promulgated Rule 3a12-8. 3 The Rule designates British and Canadian government securities that meet certain conditions as "exempted securities" under the Exchange Act. The purpose of the Rule is to permit certain foreign, exchange-traded futures contracts on these securities to be marketed in the United States. 4 Under the Rule, British and Canadian government debt securities are considered exempted securities under the Exchange Act only with respect to futures trading on those securities and provided that: (1) the securities are not registered in the United States, (2) the futures transactions do not involve contracts deliverable in the United States and (3) the futures contracts are traded on a market located in the country whose government issues those securities.
When the Commission originally proposed Rule 3a12-8, it recognized that should the securities of additional governments become subjects of futures contracts, it may become necessary to amend the Rule to include those governments. 5
In October 1985, the Tokyo Stock Exchange began trading futures on long-term Japanese government bonds denominated in yen. Subsequent to the commencement of that market, the Commission staff received indications that United States citizens, particularly institutional investors currently investing in Japanese government securities, were interested in trading these new yen bonds futures. 6 As a result, on January 30, 1986, the Commission proposed for comment an amendment to Rule 3a12-8 that would, in effect, permit futures on the yen bond that currently trade on the Tokyo Stock Exchange to be marketed in this country to United States citizens. 7
III. Discussion
The Commission received seven comment letters in response to the 1986 Proposal Release. Each of the commentators endorsed amending the rule so that the exemption would be extended to Japanese government bonds that are the subject of futures trading on a foreign board of trade. 8
In the 1986 Proposal Release, the Commission specifically solicited comment on whether the type of information available, in English, to U.S. citizens will provide them with sufficient information to trade futures on yen bonds. In response, four commentators provided examples of the type of information that is available to United States citizens on the Japanese government, Japanese government securities, and the markets for those securities. 9 Based on the information provided, the Commission is satisfied that United States citizens have sufficiently ready access to information in English in which to make informed trading decisions on Japanese yen bond futures. 10
After careful consideration, the Commission agrees with these commentators that there are no material differences between Japanese government securities and those of the United Kingdom and Canada to justify a different regulatory response. First, as discussed above, there is ready access to sufficient information in English on the Japanese trading markets, the underlying yen bond market, and, to a lesser extent, the yen bond futures traded on the Tokyo Stock Exchange. Second, the Japanese government securities and futures contracts will have to meet the existing conditions set forth in the Rule. This should ensure that the federal securities laws will not be subverted by the marketing of futures on such government securities in this country. Finally, as noted above, in the original proposal to adopt Rule 3a12-8, the Commission recognized that should the securities of additional governments become subject to futures trading it may become necessary to amend the Rule to include those governments. 11 After evaluating these factors the Commission is satisfied that the Rule should be extended to include the debt obligations of Japan.
For the reasons stated above, the Commission adopts amendments to Rule 3a12-8 as set forth below.
IV. Regulatory Flexibility Act Consideration
The Chairman of the Commission certified in connection with the Proposal Release that the amendments to Rule 3a12-8, if adopted, would not have a significant economic impact on a substantial number of small entities. None of the comments addressed this certification.
V. Effects on Competition and Other Findings
Section 23(a)(2) of the Act 12 requires the Commission in adopting rules under the Act, to consider the competitive effects of such rules, if any, and to balance any impact against the regulatory benefits gained in terms of furthering the purposes of the Act. The Commission has considered the amendment to Rule 3a12-8 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 Act. As stated above, the amendment is designed to assure the lawful availability in this country of Japanese government bond futures that otherwise could 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 Act by ensuring that futures trading on Japanese government securities 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. 13
The Commission finds, in accordance with the Administrative Procedure Act, 14 that the amendment to Rule 3a12-8 is exemptive in nature. Accordingly, the Commission has determined to make the foregoing action effective immediately upon publication in the Federal Register.
VI. 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), 15 U.S.C. §78c(a)(12) and §23(a), 15 U.S.C. §78w(a).
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of the Adopted Amendment
On the basis of the above discussion, 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 as follows:
Authority: Sec. 23, 48 Stat. 901, as amended; 15 U.S.C. §78w. §240.3a12-8 also is issued under 15 U.S.C. §78a et seq., particularly secs. 3(a)(12), 15 U.S.C. §78c(a)(12) and 23(a), 15 U.S.C. §78w(a).
2. §240.3a12-8 is a amended by removing the word "or" from (a)(1)(i), adding a semi-colon and the word "or" to (a)(1)(ii), and adding paragraph (a)(1)(iii) as follows:
§240.3a12-8 Exemption for designated foreign government securities for purposes of futures trading.
(a) * * *
(1) * * *
(iii) Japan.
* * * * *
By the Commission.
1 Pub. L. 97-444,--Stat. 2294, 7 U.S.C. §1 et seq.
2 Section 2(a)(1)(B)(v) of the CEA provides that "no person shall offer to enter into, enter into, or confirm the execution of any contract of sale (or option on such contract) for future delivery of any security, or interest therein or based on the value thereof, except an exempted security under Section 3 of the Securities Act... or Section 3(a)(12) of the... Exchange Act...."
3 See Securities Exchange Act Release Nos. 20708 ("1984 Adoption Release"), March 2, 1984, 49 FR 8595 and 19811 ("1983 Proposal Release"), May 25, 1983, 48 FR 24725.
4 As discussed above, without this designation the trading of futures on these securities in the United States would be prohibited by Section 2(a)(1)(B)(v) of the CEA.
5 See 1983 Proposal Release, supra note 3, 48 FR at 24726-27.
6 See letter from John T. Shinkle, General Counsel, Salomon Brothers Inc., to Richard T. Chase, Associate Director, Division of Market Regulation, SEC, dated October 23, 1985.
7 See Securities Exchange Act Release No. 22849 (January 30, 1986), 51 FR 4612 ("1986 Proposal Release"). Under the proposal, subsection (a)(1) of Rule 3a12-8 would be amended by adding to the list of designated foreign government securities the debt obligations of the government of Japan. The underlying yen bonds and futures contracts would, of course, have to meet the other conditions of the Rule in order for the underlying yen bonds to qualify as exempted securities under the Exchange Act. Accordingly, the yen bonds could not be registered in the U.S. and the futures would have to require delivery outside the U.S. and be traded on a board of trade located within Japan. It appears that the yen bond futures contracts currently being traded on the Tokyo Stock Exchange would meet these requirements. In this connection, the Commission notes that it has published for comment today proposed amendments to the Rule that would eliminate this latter restriction so that designated foreign government securities could be traded on domestic boards of trade and foreign boards of trade outside the country of issuance. See Securities Exchange Act Release No. 34-23422.
8 These letters were from the following:
Thomas R. Donovan, President, Chicago Board of Trade ("CBT"), dated February 3, 1986; John M. Damgard, President, Futures Industry Association ("FIA"), dated February 26, 1986; Neil H. Sherman, Vice President and Associate General Counsel, Shearson Lehman Brothers, dated March 4, 1986; Hillel T. Cohn, Attorney, Graham & James, dated March 4, 1986 ("Graham & James Letter"); Takoro Isoda, Chairman of the Board, Daiwa Securities America, Inc., dated March 7, 1986; Peter J. Chepucavage, General Counsel, Nomura Securities International, Inc., dated April 10, 1986 and Brooksley Born, Arnold & Porter, on behalf of the London International Financial Futures Exchange ("LIFFE"), dated June 20, 1986. Although the CBT letter did not specifically refer to the 1986 Proposal Release, it did request that, among other things, we amend the Rule to exempt Japanese government bonds so that the marketing of Japanese yen bond futures contracts would be permitted. In addition, the CBT and FIA requested the amendment of the Rules requirement that futures must be traded on a board of trade located within the country issuing the underlying foreign government security to permit futures on such securities to be traded on domestic boards of trade. LIFFE has also requested that this requirement be removed to permit futures on foreign government securities traded on foreign boards of trade outside the country of issuance to be marketed to U.S. investors. As noted above, supra note 7, the Commission is publishing for comment further amendments to the Rule that would eliminate the country of issuance requirement.
9 For example, Daiwa Securities indicated that information from the Japan Economic Daily is transmitted daily from Tokyo to Kyodo News International, Inc. in New York and is available to subscribers through Dow Jones News Retrieval. Specific market information, in addition to articles on the Japanese markets, economy and business is available through this service. In addition, Japanese bond market information is available daily through International Bond Markets of Telerate Systems (although not all bonds are included). Commentators also indicated that information is available, in English, on the Japanese economy and securities markets through weekly newspapers, e.g., the published Japan Economic Journal and the Asian Wall Street Journal. See, e.g., Grahman & James Letter, supra, note.
10 In addition, in response to a specific inquiry in the 1986 Proposal Release, four commentators stated their belief that there is no legal or policy reason for determining that Japanese government securities should not be accorded the same treatment in the United States as British and Canadian securities under the Rule.
11 See 1983 Proposal Release, supra note 3, 48 FR at 24726-27.
12 15 U.S.C. §78w(a)(2) (1982).
13 As noted above, the CBT, FIA and LIFFE separately have requested that the Rule be further amended to remove the current restriction that the futures contract trade on a board of trade located in the country which issues the underlying debt securities. While the Commission recognizes the competitive implications of such a restriction, that restriction has been viewed as necessary to ensure that such trading would not subvert the purposes of the securities laws and, in any event, is the subject of a separate rulemaking proceeding. See note 7, supra.
14 15 U.S.C. §553(d) (1982).
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