[Federal Register Volume 61, Number 50 (Wednesday, March 13, 1996)]
[Rules and Regulations]
[Pages 10271-10274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5968]



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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-36940, International Series Release No. 948, 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: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting an amendment to Rule 3a12-8 under the 
Securities Exchange Act of 1934 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 ``Additional Countries'') as 
``exempted securities'' for the purpose of marketing and trading 
futures contracts on those securities in the United States. The purpose 
of this amendment is solely to permit futures on the sovereign debt of 
the Additional Countries to be traded in the United States. This change 
is not intended to have any substantive effect on the operation of the 
Rule.

EFFECTIVE DATE: March 13, 1996.


[[Page 10272]]

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) 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 Commission, however, 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. 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, the 
Kingdom of Spain, and Mexico (the ``Designated Foreign Governments''). 
As a result of being included in the Rule, 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.

    \1\ The term ``exempted security'' is defined in Section 3 of 
the Securities Act, 15 U.S.C. Sec. 77c, and Section 3(a)(12) of the 
Exchange Act, 15 U.S.C. Sec. 78c(a)(12).
    \2\ 17 CFR 240.3a12-8
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    On December 13, 1995, the Commission issued a release proposing to 
amend Rule 3a12-8 to designate the debt obligations of the Additional 
Countries as exempted securities, solely for the purpose of futures 
trading.\3\ No comment letters were received in response to the 
proposal.

    \3\ See Securities Exchange Act Release No. 36580 (``Proposing 
Release'') (December 13, 1995), 60 FR 65607 (December 20, 1995).
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    The Commission is adopting this amendment to the Rule, adding 
Brazil, Argentina and Venezuela 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 Additional 
Countries would have to meet all the other requirements of the Rule.

II. Background

    Rule 3a12-8 was adopted in 1984 \4\ pursuant to the exemptive 
authority in Section 3(a)(12) of the Exchange Act in order to provide a 
limited exception to the CEA's prohibition on the trading of futures 
overlying individual securities.\5\ As originally adopted, the Rule 
provided that debt obligations of the United Kingdom 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, 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.\6\

    \4\ 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).
    \5\ 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 (``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 Original Proposing Release, supra note 4, 48 FR at 24725 
[citing 128 Cong. Rec. H7492 (daily ed. September 23, 1982) 
(statements of Representatives Daschle and Wirth)].
    \6\ 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 markets 
for futures on these instruments would not be used to avoid the 
securities law registration requirements.
    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.7

    \7\ As originally adopted, the Rule applied only to British and 
Canadian government debt securities. See Original Adopting Release, 
supra note 4. In 1986, the Rule was amended to include Japanese 
government debt 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, in 1995 
the Rule was amended to include Mexican sovereign debt. See 
Securities Exchange Act Release No. 36530 (November 30, 1995) 60 FR 
62323 (December 6, 1995) (``Mexico Adopting Release'').
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    The Chicago Mercantile Exchange (``CME'') has informed the 
Commission that U.S. citizens may be interested in futures products 
based on the debt obligations of the Additional Countries, and has 
requested that Rule 3a12-8 be amended to facilitate such trading.8 
The CME has represented that it intends to develop a futures contract 
market in Brady bonds issued by the Additional Countries.9 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.10 The Commission

[[Page 10273]]
understands that Brady bonds issued by the Additional Countries are 
currently traded primarily in the over-the-counter market in the United 
States.

    \8\ See Letter from William J. Brodsky, President and Chief 
Executive Officer, CME, to Arthur Levitt, Jr., Chairman, Commission, 
dated November 10, 1995 (``CME Petition''). The Commission 
subsequently received a request from the New York Cotton Exchange 
(``NYCE'') to amend the Rule to include the same Additional 
Countries. See Letter from Philip McBride Johnson, Esq., Skadden, 
Arps, Slate, Meagher & Flom, to Jonathan G. Katz, Secretary, 
Commission, dated November 30, 1995.
    \9\ 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 to U.S. 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 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).
    \10\ 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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    The Commission is amending Rule 3a12-8 to add Brazil, Argentina, 
and Venezuela 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,11 that the futures contracts require delivery outside the 
United States,12 and that the contracts be traded on a board of 
trade) would continue to apply.

    \11\ The Commission notes that while no Brady bonds issued by 
the Additional Countries are currently registered in the United 
States, certain sovereign debt issues of Argentina and Venezuela 
have been so registered. Futures on U.S.-registered debt securities 
of Argentina and Venezuela (or any sovereign debt which in the 
future becomes so registered) would not be deemed exempt securities 
under Rule 3a12-8.
    \12\ 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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III. Discussion

    For the reasons discussed below, the Commission finds that it is 
consistent with the public interest and the protection of investors 
that Rule 3a12-8 be amended to include the sovereign debt obligations 
of the Additional Countries. The Commission believes that the trading 
of futures contracts on the sovereign debt of the Additional Countries 
could provide U.S. investors and dealers with a vehicle for hedging the 
risks involved in holding debt instruments of the Additional Countries 
and that the sovereign debt of the Additional Countries should be 
subject to the same regulatory treatment under the Rule as that of the 
Designated Foreign Governments.
    In determining whether to amend the Rule to add proposed countries, 
the Commission has considered whether there is an active and liquid 
secondary trading market in the particular sovereign debt. In this 
regard, the amount of outstanding sovereign debt of Brazil, Argentina, 
and Venezuela is large and secondary trading appears to be active and 
liquid. According to the CME, as of December 31, 1993, the total public 
and publicly guaranteed debt 13 of Brazil, Argentina, and 
Venezuela was approximately US$86 billion, US$55 billion, and US$74 
billion, respectively.14 Moreover, the cash market for Brady bonds 
issued by the Additional 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.15 As is the case for all sovereign issuers, there 
are less actively traded sovereign debt instruments issued by the 
Additional Countries, but the Commission believes that as a whole the 
sovereign debt market for the Additional Countries is sufficiently 
liquid and deep for purposes of Rule 3a12-8. Accordingly, the 
Commission believes that it is appropriate to exempt the sovereign debt 
of Brazil, Argentina, and Venezuela because of the overall depth and 
liquidity of the existing cash market in the Additional Countries 
sovereign debt.

    \13\ 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.
    \14\ 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''). As mentioned earlier, the Commission recently amended the 
Rule to include the debt securities of Mexico. As of March 31, 1995 
there was approximately US$87.5 billion face amount Mexican 
government debt issued and outstanding of various classes and 
maturities. See Mexico Adopting Release, supra note 7.
    \15\ See November 30 letter, supra note 14. The total 1994 
dollar-based trading volume in Mexican Brady bonds was approximately 
US$282.3 billion. See Mexico Adopting Release, supra note 7.
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    The Commission also believes that the amendment offers potential 
benefits for U.S. investors. As stated above, the amendment will 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. Specifically, 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 holding positions in 
the underlying sovereign debt of the Additional Countries. The 
Commission does not anticipate that the amendment will result in any 
direct cost for U.S. investors or others. The amendment will impose no 
recordkeeping or compliance burdens, and merely would provide a limited 
purpose exemption under the federal securities laws. The restrictions 
imposed under the amendment are identical to the restrictions currently 
imposed under the terms of the Rule and are designed to protect U.S. 
investors.
    In the Proposing Release the Commission solicited comment on the 
general application and operation of the Rule given the increased 
globalization of the securities markets since the Rule was adopted. The 
Commission intends to consider this issue further, but does not believe 
it should delay the inclusion of the Additional Countries in the list 
of countries whose debt obligations are exempted under Rule 3a12-8. 
Nevertheless, the Commission continues to welcome suggestions on 
potential restructuring of Rule 3a12-8 to adapt to the ever-increasing 
internationalization of the securities markets.

IV. Regulatory Flexibility Act Consideration

    Chairman Levitt has certified in connection with the Proposing 
Release 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.

V. Effects on Competition and Other Findings

    Section 23(a)(2) of the Exchange Act 16 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 amendment to the 
Rule 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 purposes 
of the Exchange Act. As stated above, the amendment is designed to 
assure the lawful availability in this country of futures contracts on 
the government debt of the Additional Countries 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 government securities of the Additional Countries is 
consistent with the goals and purposes of the federal securities

[[Page 10274]]
laws by minimizing the impact of the Rule on securities trading and 
distribution in the United States.

    \16\ 15 U.S.C Sec. 78w(a)(2).
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    Because the amendment to the Rule is exemptive in nature, the 
Commission has determined to make the foregoing action effective 
immediately upon publication in the Federal Register.17

    \17\ 15 U.S.C. Sec. 553(d).
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VI. Statutory Basis

    The amendment to Rule 3a12-8 is being adopted 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.

Text of the Adopted Amendment

    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, 
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 ``;'' 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.
* * * * *
    Dated: March 7, 1996.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5968 Filed 3-12-96; 8:45 am]
BILLING CODE 8010-01-P