[Federal Register Volume 59, Number 211 (Wednesday, November 2, 1994)]
[Rules and Regulations]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27161]


[[Page Unknown]]

[Federal Register: November 2, 1994]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-34908, International Series Release No. 736, File No. 
S7-18-93]
RIN 3235-AF88

 

Exemption of the Securities of the Kingdom of Spain Under the 
Securities Exchange Act of 1934 for Purposes of Trading Futures 
Contracts on Those Securities

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission adopts an amendment to 
Rule 3a12-8 [17 CFR 240.3a12-8] under the Securities Exchange Act of 
1934 that would designate debt obligations issued by the Kingdom of 
Spain as ``exempted securities.'' The purpose of this amendment is to 
permit the marketing and trading of futures contracts on those 
securities in the United States or to U.S. persons. This change is not 
intended to have any substantive effect on the operation of the Rule.

EFFECTIVE DATE: November 2, 1994.

FOR FURTHER INFORMATION CONTACT: Francois-Ihor Mazur, Attorney, Office 
of Market Supervision, Division of Market Regulation, Securities and 
Exchange Commission (Mail Stop 5-1), 450 Fifth Street, N.W., 
Washington, D.C. 20549, at 202/942-0184.

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 Securities and Exchange Commission (``Commission'' 
or ``SEC''), however, has the authority to designate securities as 
exempted securities for purposes of the Exchange Act.

    \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).
---------------------------------------------------------------------------

    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

    \2\17 CFR 240.3a12-8 (1992).
    \3\Under 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).
    \4\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.
---------------------------------------------------------------------------

    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

    \5\Securities Exchange Act Release No. 32265 (May 5, 1993), 58 
FR 27684 (May 11, 1993).
    \6\Letter 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.
---------------------------------------------------------------------------

    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.

    \7\7 U.S.C. 2(1)(B)(v) (1991).
    \8\Pub. L. No. 97-444, 96 Stat. 2294, 7 U.S.C. 1 et seq. 
[codified at 7 U.S.C. 2(a)].
    \9\Section 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] * * *.''
    \10\See Exchange Act Section 3(a)(42), 15 U.S.C. 78c(a)(42) 
(defining the term ``government security'' for purposes of the 
Exchange Act).
---------------------------------------------------------------------------

    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

    \11\15 U.S.C. 78c(a)(12).
    \12\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).
    \13\The 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)].
    \14\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).
---------------------------------------------------------------------------

    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

    \15\See Proposing Release, supra note 12, 48 FR at 24726-27.
    \16\As 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.
---------------------------------------------------------------------------

    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

    \17\See LIFFE Prepares Spanish 10-Year Bond Contract, FINANCIAL 
TIMES, February 3, 1993; LIFFE Suspends Spanish Bond Contract 
Delivery, REUTERS, August 4, 1993.
    \18\Letter 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.
---------------------------------------------------------------------------

    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

    \19\See supra note 6.
    \20\Letter 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.
    \21\Id.
    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

    \22\Letter from Antonio Garcia Rebollar, dated November 24, 
1993, supra note 6.
---------------------------------------------------------------------------

    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.

    \23\In 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).
    \24\Spain's long-term sovereign debt is rated Aa2 by Moody's and 
AA by S&P.
---------------------------------------------------------------------------

    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.

    \25\See supra note 5.
V. Effects on Competition and Other Findings

    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.

    \26\15 U.S.C. 78w(a)(2) (1988).
---------------------------------------------------------------------------

    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.

    \27\15 U.S.C. 553(d) (1988).
---------------------------------------------------------------------------

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.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27161 Filed 11-1-94; 8:45 am]
BILLING CODE 8010-01-P