[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Proposed Rules]
[Pages 65607-65609]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30862]



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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-36580, International Series Release No. 900, File No. 
S7-34-95]
RIN 3235-AG68


Exemption of the Securities of the Federative Republic of Brazil, 
the Republic of Argentina, and the Republic of Venezuela Under the 
Securities Exchange Act of 1934 for Purposes of Trading Futures 
Contracts on Those Securities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule amendment and solicitation of public comments.

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SUMMARY: The Commission proposes for comment an amendment to Rule 3a12-
8 (``Rule'') that would designate debt obligations issued by the 
Federative Republic of Brazil (``Brazil''), the Republic of Argentina 
(``Argentina''), and the Republic of Venezuela (``Venezuela'') 
(collectively the ``Proposed Countries'') 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 the Proposed Countries. This 
change is not intended to have any substantive effect on the operation 
of the Rule.

DATES: Comments should be submitted by January 19, 1996.

ADDRESSES: All comments should be submitted in triplicate and addressed 
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 20549. All comments should refer 
to File No. S7-34-95, and will be available for public inspection and 
copying at the Commission's Public Reference Room, 450 Fifth Street, 
N.W., Washington, D.C.

FOR FURTHER INFORMATION CONTACT: James T. McHale, Attorney, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(``Division''), Securities and Exchange Commission (Mail Stop 5-1), 450 
Fifth Street, N.W., Washington, D.C. 20549, at 202/942-0190.

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 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, and Mexico (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.
    The Commission today is soliciting comments on a proposal to amend 
Rule 3a12-8 (17 CFR 240.3a12-8) to add the debt obligations of Brazil, 
Argentina, and Venezuela to the list of Designated Foreign Government 
securities that are exempted by Rule 3a12-8. To qualify for the 
exemption, futures contracts on debt obligations of the Proposed 
Countries would have to meet all the other existing requirements of the 
Rule.

II. Background

    Rule 3a12-8 was adopted in 1984 1 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.2 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 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 such a debt obligation is deemed 
under the Rule to be a ``qualifying foreign futures contract'' if the 
contract is deliverable outside the United States and is traded on a 
board of trade.3

    \1\ See Securities Exchange Act Release Nos. 20708 (``Original 
Adopting Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984) and 
19811 (``Original Proposing Release'') (May 25, 1983), 48 FR 24725 
(June 2, 1983).
    \2\ 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 1, 48 FR at 24725 (citing 128 Cong. Rec. H7492 
(daily ed. September 23, 1982) (statements of Representatives 
Daschle and Wirth)).
    \3\ 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, and, most recently, Mexico.4

    \4\ As originally adopted, the Rule applied only to British and 
Canadian government securities. See Original Adopting Release, supra 
note 1. 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 issued 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 6, 1992), 57 FR 1375 (January 14, 1992). In 1994, the 
Rule was amended to include debt securities issued by the Kingdom of 
Spain. See Securities Exchange Act Release No. 34908 (October 27, 
1994), 59 FR 54812 (November 2, 1994). Finally, 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) (``Mexico Adopting Release''). 

[[Page 65608]]

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III. Discussion

    The Chicago Mercantile Exchange (``CME'') has proposed that the 
Commission amend Rule 3a12-8 to include the sovereign debt of the 
Proposed Countries.5 The CME intends to develop a futures contract 
market in Brady bonds issued by the Proposed Countries.6 Brady 
bonds are issued pursuant to the Brady plan which allows developing 
countries to restructure their commercial bank debt by issuing long-
term dollar denominated bonds.7 The Commission understands that 
Brady bonds issued by the Proposed Countries are currently traded 
primarily in the over-the-counter market in the United States.

    \5\ See Letter from William J. Brodsky, President and Chief 
Executive Officer, CME, to Arthur Levitt, Jr., Chairman, Commission, 
dated November 10, 1995 (``CME petition'').
    \6\ The marketing and trading of foreign futures contracts 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 U.S. residents, 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 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 the 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).
    \7\ There are several types of Brady bonds, but ``Par Bradys'' 
and ``Discount Bradys'' represent the great majority of issues in 
the Brady bond market. In general, both Par Bradys and Discount 
Bradys are secured as to principal at maturity by U.S. Treasury 
zero-coupon bonds. Additionally, usually 12 to 18 months of interest 
payments are also secured in the form of a cash collateral account, 
which is maintained to pay interest in the event that the sovereign 
debtor misses an interest payment.
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    Under the proposed amendment, the existing conditions set forth in 
the Rule (i.e., that the underlying securities not be registered in the 
United States,8 the futures contracts require delivery outside the 
United States,9 and the contracts be traded on a board of trade) 
would continue to apply.

    \8\ The Commission notes that while no Brady bonds of Proposed 
Countries have been registered in the United States, certain 
sovereign debt issues of Argentina and Venezuela have been so 
registered. The trading of futures on U.S-registered debt securities 
of Argentina and Venezuela would not be exempted under Rule 3a12-8 
from the CEA's general prohibition on futures overlying individual 
securities.
    \9\ The CME's proposed futures contracts will be cash-settled 
(i.e., settlement of the futures contracts will not entail delivery 
of the underlying securities). The Commission has recognized that a 
cash-settled futures contract is consistent with the requirement of 
the Rule that delivery must be made outside the United States. See 
Securities Exchange Act Release No. 25072 (October 29, 1987), 52 FR 
42277 (November 4, 1987).
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    In determining whether to amend the Rule to add new countries, the 
Commission has considered whether there is an active and liquid 
secondary trading market in the particular sovereign debt. There 
appears to be an active and liquid market in the debt instruments of 
the Proposed Countries. According to the CME, as of December 31, 1993, 
the total public and publicly guaranteed debt 10 of Brazil, 
Argentina, and Venezuela was approximately US$86 billion, US$55 
billion, and US$74 billion, respectively.11 Moreover, the cash 
market for Brady bonds issued by the Proposed Countries evidences 
relatively active trading. Based on data provided by the CME, the total 
1994 trading volume in the Brady bonds of Brazil, Argentina, and 
Venezuela was approximately US$371 billion, US$360 billion, and US$320 
billion, respectively.12

    \10\ Public debt is an external obligation of a public debtor, 
including the national government, a political subdivision (or any 
agency of either) and autonomous public bodies. Publicly guaranteed 
debt is an external obligation of a private debtor that is 
guaranteed for repayment by a public entity.
    \11\ See Letter from Carl A. Royal, Senior Vice President and 
Special Counsel, CME, to James T. McHale, Attorney, OMS, Division, 
Commission, dated November 30, 1995 (citing the World Bank's 1995 
World Debt Tables as the source for this information) (``November 30 
letter'').
    \12\ See November 30 letter, supra note 11. As mentioned 
earlier, the Commission recently amended the Rule to include the 
debt securities of Mexico. The total 1994 trading volume in Mexican 
Brady bonds was approximately US$282.3 billion. See Mexico Adopting 
Release, supra note 4.
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    In light of the above data, the Commission believes preliminarily 
that the debt obligations of the Proposed Countries should be subject 
to the same regulatory treatment under the Rule as the debt obligations 
of the Designated Foreign Governments. Moreover, the trading of futures 
on the sovereign debt of Brazil, Argentina, and Venezuela should 
provide U.S. investors with a vehicle for hedging the risks involved in 
the trading of the underlying sovereign debt of the Proposed Countries.
    In addition, the Commission preliminarily believes that the 
proposed amendment offers potential benefits for U.S. investors. If 
adopted, the proposed amendment would allow U.S. boards of trade to 
offer in the United States, and U.S. investors to trade, a greater 
range of futures contracts on foreign government debt obligations. The 
Commission does not anticipate that the proposed amendment would result 
in any direct cost for U.S. investors or others. The proposed amendment 
would impose no recordkeeping or compliance burdens, and merely would 
provide a limited purpose exemption under the federal securities laws. 
The restrictions imposed under the proposed amendment are identical to 
the restrictions currently imposed under the terms of the Rule and are 
designed to protect U.S. investors.
    Section 23(a)(2) of the Exchange Act requires the Commission in 
amending rules to consider potential impact on competition. Because the 
proposal is intended to expand the range of financial products 
available in the United States, the Commission preliminarily believes 
that the proposed amendment to the Rule will not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.

IV. Request for Comments

    The Commission seeks comments on the desirability of designating 
the debt securities of the Proposed Countries as exempted securities 
under Rule 3a12-8. Comments should address whether the trading or other 
characteristics of the Proposed Countries' debt warrant an exemption 
for purposes of futures trading. Commentators may wish to discuss 
whether there are any legal or policy reasons for distinguishing 
between the Proposed Countries and the Designated Foreign Governments 
for purposes of the Rule. The Commission also solicits comments on the 
costs and benefits of the proposed amendment to Rule 3a12-8. 
Specifically, the Commission requests commentators to address whether 
the proposed amendment would generate the anticipated benefits, or 
impose any costs on U.S. investors or others. Finally, the Commission 
seeks comment on the general application and operation of the Rule 
given the increased globalization of the securities markets since the 
Rule was adopted.

V. Regulatory Flexibility Act Certification

    Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. Sec. 605(b), the Chairman of the Commission has certified that 
the amendment proposed herein would not, if adopted, have a significant 
economic impact on a substantial number of small entities. This 
certification, including the reasons therefor, is attached to this 
release as Appendix A. 

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VI. Statutory Basis

    The amendment to Rule 3a12-8 is being proposed pursuant to 15 
U.S.C. Secs. 78a et seq., particularly Sections 3(a)(12) and 23(a), 15 
U.S.C. Secs. 78c(a)(12) and 78w(a).

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

VII. Text of the Proposed Amendment

    For the reasons set forth in the preamble, the Commission is 
proposing to amend 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, 
78q, 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)(xv), removing the ``period'' at the end of 
paragraph (a)(1)(xvi) and adding ``; or'' in its place, and adding 
paragraph (a)(1)(xvii), paragraph (a)(1)(xviii), and paragraph 
(a)(1)(xix) to read as follows:


Sec. 240.3a12-8 Exemption for designated foreign government securities 
for purposes of futures trading.

    (a) * * *
    (1) * * *
    (xvii) the Federative Republic of Brazil;
    (xviii) the Republic of Argentina; or
    (xix) the Republic of Venezuela.
* * * * *
    By the Commission.

    Dated: December 13, 1995.
Jonathan G. Katz,
Secretary.
    Note: Appendix A to the Preamble will not appear in the Code of 
Federal Regulations.

Appendix A--Regulatory Flexibility Act Certification

    I, Arthur Levitt, Jr., Chairman of the Securities and Exchange 
Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that the 
proposed amendment to Rule 3a12-8 (``Rule'') under the Securities 
Exchange Act of 1934 (``Exchange Act'') set forth in Securities 
Exchange Act Release No. 36580, which would define government debt 
securities of Brazil, Argentina and Venezuela (collectively the 
``Proposed Countries'') as exempted securities under the Exchange 
Act for the purpose of trading futures on such securities, will not 
have a significant economic impact on a substantial number of small 
entities for the following reasons. First, the proposed amendment 
imposes no record-keeping or compliance burden in itself and merely 
allows, in effect, the marketing and trading in the United States of 
futures contracts overlying the government debt securities of the 
Proposed Countries. Second, because futures contracts on the sixteen 
countries whose debt obligations are designated as ``exempted 
securities'' under the Rule, which already can be traded and 
marketed in the U.S., still will be eligible for trading under the 
proposed amendment, the proposal will not affect any entity 
currently engaged in trading such futures contracts. Third, because 
the level of interest presently evident in this country in the 
futures trading covered by the proposed rule amendment is modest and 
those primarily interested are large, institutional investors, 
neither the availability nor the unavailability of these futures 
products will have a significant economic impact on a substantial 
number of small entities, as that term is defined for broker-dealers 
in 27 CFR 240.0-10 and to the extent that it is defined for futures 
market participants in the Commodity Futures Trading Commission's 
``Policy Statement and Establishment of Definitions of `Small 
Entities' for Purposes of the Regulatory Flexibility Act.'' 1

    \1\ 45 FR 18618 (April 30, 1982).
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    Dated: December 13, 1995.
Arthur Levitt, Jr.,
Chairman.
[FR Doc. 95-30862 Filed 12-19-95; 8:45 am]
BILLING CODE 8010-01-P