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Release No. 34-34908 International Series Rel. No. 736 59 Fed. Reg. xxxxx - Nov. 2, 1994
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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 Securities Exchange Act of 1934 (''Exchange Act'').1 Debt obligations of foreign governments are not exempted securities under either of these statutes. The Securities and Exchange Commission (''Commission'' or ''SEC''), however, has the 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 U.S. persons, the Commission 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 or to U.S. persons.3 Currently, the foreign governments listed in the Rule are Great Britain, Canada, Japan, Australia, France, New Zealand, Austria, Denmark, Finland, the Netherlands, Switzerland, Germany, Ireland, and Italy (the ''fourteen designated countries''). As a result, futures contracts on the debt obligations of these countries may be sold to U.S. persons, so long as the other terms of the Rule are satisfied.4
On May 5, 1993, the Commission issued a release proposing to amend Rule 3a12-8 to designate the debt obligations of the Kingdom of Spain (''Spain'') as exempt securities, solely for the purpose of futures trading.5 The Commission received two comment letters concerning the proposal from the same commenter.6
The Commission is adopting this amendment to the Rule, adding Spain 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 Spain would have to meet all the other existing requirements of the Rule.
II. Background
Section 2(a)(1)(B)(v) of the CEA,7 which was adopted as part of the Futures Trading Act of 1982,8 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.9 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 laws.10 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.11 Rule 3a12-8 was adopted in 198412 pursuant to this exemptive authority in order to facilitate the trading of futures contracts on securities of foreign governments by U.S. persons.13 As originally adopted, the Rule provided that debt obligations of Canada and the United Kingdom 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.14
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 unregistered 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.
When the Commission originally proposed Rule 3a12-8, it recognized that the Rule might require amendment in the future to extend its provisions to debt obligations of other foreign governments.15 Subsequently, the Commission amended the Rule to include within its coverage debt obligations issued by Japan, Australia, France, New Zealand, Austria, Denmark, Finland, the Netherlands, Switzerland, Germany, Ireland, and Italy.16
Rule 3a12-8 has not been amended since 1992. Futures overlying Spanish government bonds originally were, and currently are, only traded on the Mercado de Futuros Financieros (''Meff''), a Spanish financial futures exchange located in Barcelona, Spain. For several months in 1993, the London International Financial Futures and Options Exchange (''LIFFE'') traded a futures contract based on Spanish government bonds denominated in Pesetas.17 The Commission has been informed that U.S. citizens may be interested in derivative products based on securities issued by foreign governments, including Spain, and has received a request that Rule 3a12-8 be amended to facilitate such trading.18
The Commission is amending Rule 3a12-8 to add Spain 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 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 Spain does not develop. Therefore, the amendment should pose no risk for investors in the U.S. securities market.
III. Discussion
The Commission received two comment letters from the Finance Ministry of Spain in response to the proposal.19 The first letter objected to the rating of Aa2 by Moody's Investors Service (''Moody's'') and AA by Standard and Poor's (''S&P''), stating that such debt obligations should receive the same rating as two public Spanish companies: Red Nacional de Ferrocarriles Espanoles (''RENFE'') and Instituto Nacional de Industria (''INI'').20 The letter also voiced concerns about the possible effects the rule proposal might have on Spain's debt management and policies, and requested further time to study such effects.21
The second comment letter stated that further study indicated that designating Spain's debt obligations as ''exempted securities'' would be positive for Spain's debt management and policies. However, the letter reasserted the first concern relating to the assigned rating for Spain's debt obligations.22
For the reasons discussed below, and in light of the comment letters received, the Commission has determined that Rule 3a12-8 should be amended to include the debt obligations of Spain. The Commission believes that the debt obligations of Spain should be subject to the same regulatory treatment under the Rule as those of the fourteen designated countries for purposes of trading futures contracts on such debt obligations by U.S. persons. Like the debt obligations of the fourteen designated countries,23 the long-term debt obligations of Spain are rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations.24 For purposes of the Rule, the Commission is aware of no material differences between the debt obligations of Spain and those of the fourteen designated countries. Although the commenter believed the assigned rating for Spain's debt obligations should be in the highest rating category, that issue is not relevant to the Commission's determination to amend the Rule.
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 Spain. Moreover, the availability to U.S. investors of these hedging vehicles will allow such investors to take advantage of the growing globalization of the securities markets.
IV. Regulatory Flexibility Act Consideration
Former Chairman Breeden certified in connection with the Release proposing the amendment to the Rule25 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.
Section 23(a)(2) of the Exchange Act26 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 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 Exchange Act. As stated above, the amendment is designed to assure the lawful availability in this country of Spanish 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 Exchange Act by ensuring that futures trading on Spanish 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,27 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.
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, 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)(xiii), removing the ''period'' at the end of paragraph (a)(1)(xiv) and adding ''; or'' in its place, and adding paragraph (a)(1)(xv) to read as follows:
Sec. 240.3a12-8 Exemption for designated foreign government securities for purposes of futures trading.
(a) * * *
(1) * * *
(xv) the Kingdom of Spain. * * * * *
By the Commission.
Dated: October 27, 1994.
1The 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).
217 CFR 240.3a12-8 (1992).
3Under the Rule, the trading of futures on foreign government securities exempted by the Rule is permitted only on or through a board of trade. 17 CFR 240.3a12-8(a)(2) (1992).
4See 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.
5Securities Exchange Act Release No. 32265 (May 5, 1993), 58 FR 27684 (May 11, 1993).
6Letter from Antonio Garcia Rebollar, Deputy Director, Ministerio de Economia y Hacienda, Direccion General del Tesoro y Politica Financiera to Jonathan G. Katz, Secretary, Commission, dated May 31, 1993; and letter from Antonio Garcia Rebollar to Howard Kramer, Associate Director, Division of Market Regulation, Commission, dated November 24, 1993, described infra notes 19-22 and accompanying text.
77 U.S.C. 2(1)(B)(v) (1991).
8Pub. L. No. 97-444, 96 Stat. 2294, 7 U.S.C. 1 et seq. [codified at 7 U.S.C. 2(a)].
9Section 2(a)(1)(B)(v) of the CEA, 7 U.S.C. 2(1)(B)(v) (1991), 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] * * *.''
10See Exchange Act Section 3(a)(42), 15 U.S.C. 78c(a)(42) (defining the term ''government security'' for purposes of the Exchange Act).
1115 U.S.C. 78c(a)(12).
12Securities 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).
13The marketing and trading of foreign futures contracts to U.S. persons is subject to regulation by the Commodity Futures Trading Commission (''CFTC''). In particular, Section 4b of the CEA, 7 U.S.C. 6b, authorizes the CFTC to regulate the offer and sale of foreign futures contracts to U.S. persons, and Rule 9, 17 CFR 30.9, promulgated under Section 2(a)(1)(A) of the CEA, 7 U.S.C. 2(1)(A), 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 Section 2(a)(1)(A) of the CEA, 7 U.S.C. 2(1)(A), 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 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 Proposing Release, supra note 12, 48 FR at 24725 [citing 128 Cong. Rec. H7492 (daily ed. September 23, 1982) (statements of Representatives Daschle and Wirth)].
14As 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).
15See Proposing Release, supra note 12, 48 FR at 24726-27.
16As noted above, the Rule as originally adopted applied only to debt obligations of Canada and the United Kingdom. Adopting Release, supra note 12. In 1986, the rule was amended to include debt obligations of Japan. 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. Securities Exchange Act Release No. 25072 (October 29, 1987), 52 FR 42277 (November 4, 1987). In 1988, the Rule was amended to include debt obligations of Austria, Denmark, Finland, the Netherlands, Switzerland, and West Germany. 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 obligations of the Republics 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. Securities Exchange Act Release No. 30166 (January 6, 1992), 57 FR 1375.
17See LIFFE Prepares Spanish 10-Year Bond Contract, FINANCIAL TIMES, February 3, 1993; LIFFE Suspends Spanish Bond Contract Delivery, REUTERS, August 4, 1993.
18Letter from Wesley G. Nissen, Katten Muchin & Zavis, to William H. Heyman, Director, Division of Market Regulation, Commission, dated January 14, 1993. Subsequent to the LIFFE request, the Commission published a proposal to amend Rule 3a12-8 to include Spanish sovereign debt. Shortly thereafter, LIFFE ceased to trade futures on Spanish debt. Recently, the Commission has been apprised of continuing interest by market participants in the proposed amendment to Rule 3a12-8 because of the trading on the MEFF of futures on Spanish government debt.
19See supra note 6.
20Letter from Antonio Garcia Rebollar, dated May 31, 1993, supra note 6. According to the commenter, RENFE and INI both received AAA ratings from Moody's and S&P. Id.
21Id.
22Letter from Antonio Garcia Rebollar, dated November 24, 1993, supra note 6.
23In amending the Rule to exempt the debt securities of other countries, the Commission has noted that the long-term sovereign debt of such countries was rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations. See, e.g., Securities Exchange Act Release No. 30166 (January 6, 1992), 57 FR 1375 (amending the Rule to exempt the debt securities of the Republics of Ireland and Italy).
24Spain's long-term sovereign debt is rated Aa2 by Moody's and AA by S&P.
25See supra note 5. V. Effects on Competition and Other Findings
2615 U.S.C. 78w(a)(2) (1988).
2715 U.S.C. 553(d) (1988).
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