| Release No. 34-30166 Release No. IS-357 January 8, 1992
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 Table of Contents
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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 Exchange Act. 1 Debt obligations of foreign governments are not exempted securities under either of these statutes. The Securities and Exchange Commission (SEC or Commission), however, has authority to designate securities as exempted securities for purposes of the Exchange Act.
In order to facilitate the trading of futures contracts on debt securities of certain foreign governments by United States persons, the Commission has adopted Rule 3a12-8 (17 CFR 240.3a12-8) 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 or to U.S. persons. 2 Currently, the foreign governments listed in the Rule are Great Britain, Canada, Japan, Australia, France, New Zealand, Austria, Denmark, Finland, the Netherlands, Switzerland, and West Germany (the twelve designated countries). As a result, futures contracts on the debt obligations of these countries may be sold to U.S. persons, as long as the other terms of the Rule are satisfied. 3
On November 12, 1991, the Commission issued a release proposing to amend Rule 3a12-8 to designate the debt obligations of the Republics of Ireland and Italy as exempt securities, solely for the purpose of futures trading, to change the country designation of West Germany to the Federal Republic of Germany, and to change the names of the other countries designated in the Rule to their formal names. The Commission received no comments in response to this proposal. 4
The Commission today adopts these three amendments to the Rule. First, the amendments add the debt obligations of the Republics of Ireland and Italy (the two newly-designated countries) 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 two newly-designated countries would have to meet all the other existing requirements of the Rule. Second, the amendments change the country designation of West Germany to the Federal Republic of Germany to reflect the re-unification of Germany and the subsequent adoption of the name the Federal Republic of Germany as the official name of the unified country. 5 Third, the amendments replace all references to the informal names of the countries listed in the Rule with references to their official names.
II. Background
Section 2(a)(1)(B)(v) of the CEA, 6 which was adopted as part of the Futures Trading Act of 1982, 7 provides that it is unlawful to trade a futures contract on an individual security unless that security is an exempted security under Section 3 of the Securities Act or Section 3(a)(12) of the Exchange Act. 8 These sections of the Securities Act and the Exchange Act explicitly designate certain securities, including government securities and municipal securities, as exempted securities. Securities issued by foreign governments, however, are not government securities within the meaning of the federal securities statutes. 9 Therefore, securities issued by foreign governments are not deemed to be exempted securities under the statutory language.
Section 3(a)(12) of the Exchange Act, however, provides the Commission with the authority to designate other securities as exempted securities, either unconditionally or for specified purposes. 10 Rule 3a12-8 was adopted in 1984 11 pursuant to this exemptive authority in order to facilitate the trading of futures contracts on securities of foreign governments by United States person. 12 As originally adopted, the Rule provided that debt obligations of Canada and of the United Kingdom of Great Britain and Northern Ireland 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. 13
The conditions imposed by the Rule were intended to facilitate the trading of futures contracts on foreign government securities without sacrificing the longstanding policy under the federal securities laws of requiring foreign government securities to comply with the basic requirements of the federal securities laws in order to be marketed and traded in the United States. Accordingly, the conditions set forth in the Rule were designed to ensure that, absent registration, a domestic market in foreign government securities would not develop, and that markets for futures on these instruments would not be used to avoid the registration requirements and other provisions of the federal securities laws.
At the time the Commission originally proposed Rule 3a12-8, it recognized that the Rule might need to be amended at some later date in order to extend its provision to debt obligations of other foreign governments. 14 Subsequently, the Commission amended the Rule to include debt obligations issued by Japan, Australia, France, New Zealand, Austria, Denmark, Finland, the Netherlands, Switzerland, and West Germany within its coverage. 15
Rule 3a12-8 has not been amended since 1988. Since that time, an Irish Government futures contract has been developed and has begun trading on the Irish Futures and Options Exchange (IFOX). 16 The London International Financial Futures Exchange (LIFFE) also has begun trading a futures contract on Italian government bonds. 17 In addition, the CBOT and the LIFFE have applied to the CFTC for designation as a contract market for trading in futures contracts on European Currency Unit-denominated debt securities (ECU bonds) issued by, among others, certain foreign governments, including the government of Italy. 18 The Commission has been informed that U.S. citizens, especially institutional investors, may be interested in trading these new products, and has received requests that Rule 3a12-8 be amended to facilitate such trading. 19
The Commission today amends Rule 3a12-8 to add the Republics of Italy and Ireland to the list of countries whose debt obligations already 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 the futures contracts require delivery outside the United States, and that the contracts be traded on a board of trade) would continue to apply. This should ensure that a domestic market in the unregistered foreign sovereign debt of the Republics of Ireland or Italy does not develop. Therefore, the amendment should pose no risk for investors in the U.S. securities market.
The Commission also amends Rule 3a12-8 to replace the reference to West Germany in the Rule with a reference to the Federal Republic of Germany, and to replace all references to the informal names of the countries listed in the Rule with references to their official names. Both of these amendments clarify the terms of the Rule, but do not result in a substantive change in the operation of the Rule.
III. Discussion
In the Proposal Release, the Commission solicited comments on whether there are any legal or policy reasons for determining that debt obligations issued by Ireland or Italy should not be accorded the same treatment under the Rule for the purpose of trading futures contracts on these securities in the U.S. or to U.S. persons as debt obligations issued by the twelve designated countries. 20 The Commission received no comment letters in response its request for comment.
For the reasons discussed below, the Commission has determined that Rule 3a12-8 should be amended to include the debt obligations of Ireland and Italy. The Commission also has decided to replace the reference to West Germany in the Rule with a reference to the Federal Republic of Germany, and to replace all references to the informal names of the countries listed in the Rule with references to their official names.
First, the Commission believes that the debt obligations of the two newly-designated countries should be subject to the same regulatory treatment under the Rule as the debt obligations of the twelve designated countries for purposes of trading futures contracts on such debt obligations by United States persons. Like the debt obligations of the twelve designated countries, 21 the long-term debt obligations of each of the two newly-designated countries are rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations. 22 For purposes of the Rule, the Commission is aware of no material differences between the debt obligations of the two newly-designated countries and the debt obligations of the twelve designated countries.
Additionally, the Commission believes that there are no valid legal or policy reasons for denying U.S. investors the ability to trade futures on debt obligations of the two newly-designated sovereign issuers. Moreover, the availability to United States investors of these hedging vehicles will allow such investors to take advantage of the growing globalization of the securities markets.
Second, the Commission believes that amending the Rule to replace the reference to West Germany in the Rule with a reference to the Federal Republic of Germany, and to replace all references to the informal names of the countries listed in the Rule with references to their official names is appropriate to clarify the terms of the Rule. The first amendment reflects the fact that West Germany no longer exists as a separate country as a result of the re-unification of East Germany and West Germany, and codifies the Commissions Division of Market Regulations interpretation that the reference to West Germany in the Rule should be understood to mean the Federal Republic of Germany.
In the same manner, the second amendment further clarifies the provisions of the Rule by replacing all references to the informal names of the countries listed in the Rule with references to their official names. Both of these amendments clarify the terms of the Rule, but do not result in a substantive change in the operation of the Rule.
IV. Regulatory Flexibility Act Consideration
The Chairman of the Commission certified in connection with the Release proposing the amendments to the Rule 23 that these amendments, 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 Act 24 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 amendments to the Rule in light of the standards cited in Section 23(a)(2) and believes that adoption of the amendments will not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. As stated above, the amendment is designed to assure the lawful availability in this country of Irish and Italian government bond futures 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 Act by ensuring that futures trading on Irish and Italian 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.
The Commission finds, in accordance with the Administrative Procedure Act, 25 that the amendments to the Rule are 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 amendments to Rule 3a12-8 are 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.
VII. Text of the Adopted Amendments
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 as follows:
Authority: 15 U.S.C. 77c, 77d, 77s, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 79q, 79t, 80a-29, 80a-37, unless otherwise noted.
2.§240.3a12-8 is amended by revising paragraphs (a)(1)(iv) through (a)(1)(xii), and by adding paragraphs (a)(1)(xiii) through (xiv) as follows:
§240.3a12-8Exemption for designated foreign government securities for purposes of futures trading.
(a)***
(1)***
(iv) the Commonwealth of Australia;
(v) the Republic of France;
(vi) New Zealand;
(vii) the Republic of Austria;
(viii) the Kingdom of Denmark;
(ix) the Republic of Finland;
(x) the Kingdom of the Netherlands;
(xi) Switzerland;
(xii) the Federal Republic of Germany;
(xiii) the Republic of Ireland; or
(xiv) the Republic of Italy.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
1 The term exempted security is defined in Section 3 of the Securities Act, 15 U.S.C. 77c, and Section 3(a)(12) of the Exchange Act, 15 U.S.C. 78c(a)(12).
2 Under the Rule, the trading of futures on government securities exempted by the Rule is permitted only on or through a board of trade.
3 See infra note 14 and accompanying text for a discussion of the other terms of the Rule that must be satisfied in order for these contracts to be marketed or traded in the United States.
4 See Securities Exchange Act Release No. 29929 (Nov. 12, 1991)), 56 FR 58194 (November 18, 1991) (Proposal Release).
5 In an interpretive letter to the Chicago Board of Trade (CBOT) regarding a proposed futures contract on German government bonds, the Commissions Division of Market Regulation has stated that it interprets the reference to West Germany in the Rule to mean the Federal Republic of Germany for purposes of the Rule. See letter from Brandon Becker, Deputy Director, Division of Market Regulation, SEC, to William Cullen, Senior Attorney, CBOT, dated July 23, 1991.
6 7 U.S.C. 2(a).
7 Pub. L. No. 97-444, 96 Stat. 2294, 7 U.S.C. §1 et seq.
8 Section 2(a)(1)(B)(v) of the CEA, 7 U.S.C. §2a(v), provides that [n]o 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]....
9 See Section 3(a)(42) of the Exchange Act, 15 U.S.C. 78c(a)(42) (defining the term government security for purposes of the Exchange Act).
10 Section 3(a)(12) of the Exchange Act 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." 15 U.S.C. §78c(a)(12).
11 See Securities Exchange Act Release Nos. 20708 (Adopting Release) (March 2, 1984), 49 FR 8595 (March 8, 1984) and 19811 (Proposing Release) (May 25, 1983), 48 FR 24725 (June 2, 1983).
12 The marketing and trading of foreign futures contracts to United States persons 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 United States persons, 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 United States 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 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). 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 to United States persons, and its expectation that administrative action would be taken to allow the sale of such futures contracts in the United States. See Proposing Release, supra note 11, 48 FR at 24725 [citing 128 Cong. Rec. H7492 (daily ed. September 23, 1982) (statements of Representatives Daschle and Wirth)].
13 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).
14 See Proposing Release, supra note 11, 48 FR at 24726 - 27.
15 As noted above, the Rule as originally adopted applied only to debt obligations of Canada and of the United Kingdom of Great Britain and Northern Ireland. See Adopting Release, supra note 11. In 1986, the Rule was amended to include debt obligations of Japan. 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 obligations of 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 again amended to include debt obligations of 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).
16 Reuters, Money Report (April 28, 1989).
17 Reuters, Money Report (June 11, 1991).
18 The CBOT ECU bonds futures contract also would include debt obligations of certain supranational organizations in the basket of securities underlying the proposed futures contract. The Commission has under consideration a petition by the CBOT requesting that these securities be deemed exempted securities under Section 3(a)(12) of the Exchange Act for the purpose of trading futures contracts on these securities. See letter from Thomas R. Donovan, President and Chief Executive Officer, CBOT, to Howard Kramer, Assistant Director, Division of Market Regulation, SEC, dated May 29, 1991 (CBOT ECU Bond Letter).
19 See, e.g., letter from Raymond Guan, Vice President, The First Boston Corporation, to Jonathan G. Katz, Secretary, SEC, and Richard G. Ketchum, Director, Division of Market Regulation, SEC, dated June 29, 1989, and CBOT ECU Bond Letter, supra note 18.
20 In addition, the Commission solicited comments on whether the information available in English regarding the newly-eligible futures contracts and the underlying sovereign debt obligations would be adequate to permit U.S. investors to make informed investment decisions. In adopting Rule 3a12-8, the Commission decided not to require, as a condition to the exemption, that such information be available. See Adopting Release, supra note 11, 49 FR at 8597 - 98. At the time Rule 3a12-8 was adopted, both the United Kingdom and Canada had government debt issues registered in the United States. As a result, although those particular issues were not the subject of futures trading, U.S. investors had relevant disclosure material concerning the issuers, i.e., the governments of Canada and the United Kingdom. In addition, Australia, New Zealand, Austria, and Denmark had government debt issues registered in the United States when they were added to the Rule. Japan, France, Finland, the Netherlands, Switzerland, and West Germany did not have government debt issues registered in the United States when they were added to the Rule. Thus, to a large measure the availability of information in English has not been a determinative factor when expanding the list of countries designated in Rule 3a12-8. Currently, Ireland has government debt issues registered in the United States. [These issues are not the subject of futures trading on the IFOX.] Italy does not have government debt issues registered in the United States.
21 In amending the Rule to exempt the debt securities of Austria, Denmark, Finland, the Netherlands, Switzerland, and West Germany, the Commission noted that the long-term sovereign debt of those countries was rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations. See Securities Exchange Act Release No. 26217 (October 26, 1988), 53 FR 43860 (October 31, 1988).
22 Irelands long-term sovereign debt is rated Aa3 by Moodys Investors Service (Moodys) and AA$mi by Standard and Poors (S&P). Italys long-term sovereign debt is rated Aaa by Moodys and AA+ by S&Ps. Under Moodys rating criteria, debt which is rated Aaa is judged to be of the highest quality and debt which is rated Aa is judged to be of high quality by all standards. Aa-rated debt is judged to be of lower quality than Aaa-rated debt because: (1) the margins of protection for debt rated Aa may not be as large as in the highest rated debt (Aaa); (2) the fluctuation of protective elements may be of greater amplitude for Aa-rated instruments; or (3) other elements may be present which make the long-term risk appear somewhat larger than the Aaa securities. Under S&Ps criteria, an issuer of debt which is rated AAA has an extremely strong capacity to pay interest and repay principal and an issuer of debt which is rated AA has a very strong capacity to pay interest and repay principal. A debt issue that is rated AA differs from the highest rated issues (AAA) only to a small degree.
23 See Proposal Release supra note 4.
24 15 U.S.C. 78w(a)(2) (1988).
25 15 U.S.C. 553(d) (1988).
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