[Federal Register Volume 64, Number 43 (Friday, March 5, 1999)]
[Rules and Regulations]
[Pages 10564-10567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5445]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-41116, International Series Release No. 1186, File No. 
S7-15-98]
RIN 3235-AH46


Exemption of the Securities of the Kingdom of Belgium 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 is adopting an 
amendment to Rule 3a12-8 that would designate debt obligations issued 
by the Kingdom of Belgium 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 Belgium.

EFFECTIVE DATE: March 5, 1999.

FOR FURTHER INFORMATION CONTACT: Joshua Kans, Attorney, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(``Division''), Securities and Exchange Commission (Mail Stop 10-1), 
450 Fifth Street, NW, Washington, DC 20549, at 202/942-0079.

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 \1\ (``Rule'') 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, Mexico, Brazil, 
Argentina, and Venezuela (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.
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    \1\ 17 CFR 240.3a12-8.
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    On June 8, 1998, the Commission issued a release proposing to amend 
Rule 3a12-8 to designate the debt obligations of the Kingdom of Belgium 
(``Belgium'') as exempted securities, solely for the purpose of futures 
trading.\2\ No comment letters were received in response to the 
proposal.
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    \2\ See Securities Exchange Act Release No. 40077 (``Proposing 
Release'') (June 8, 1998), 63 FR 32628 (June 15, 1998).
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    The Commission today is adopting this amendment to the Rule, adding 
Belgium to the list of countries whose debt obligations are exempted by 
Rule 3a12-8. In order to qualify for the exemption, futures contracts 
on the debt obligations of Belgium would have to meet all the other 
existing requirements of the Rule.

II. Background

    Rule 3a12-8 was adopted in 1984 \3\ 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.\4\ 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

[[Page 10565]]

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 the covered debt obligation under 
the Rule is deemed to be a ``qualifying foreign futures contract'' if 
the contract is deliverable outside the United States and is traded on 
a board of trade.\5\
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    \3\ See Securities Exchange Act Release No. 20708 (``Original 
Adopting Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984); 
Securities Exchange Act Release No. 19811 (``Original Proposing 
Release'') (May 25, 1983), 48 FR 24725 (June 2, 1983).
    \4\ 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 3, 48 FR at 24725 (citing 128 Cong. Rec. H7492 
(daily ed. September 23, 1982) (statements of Representatives 
Daschle and Wirth)).
    \5\ 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, Mexico and, most recently, Brazil, Argentina, and 
Venezuela.\6\
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    \6\ As originally adopted, the Rule applied only to British and 
Canadian government securities. See Original Adopting Release, supra 
note 3. 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 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 8, 1992), 57 FR 1375 (January 14, 1992). In 1994, the 
Rule was amended to include debt securities issued by Spain. See 
Securities Exchange Act Release No. 34908 (October 27, 1994), 59 FR 
54812 (November 2, 1994). In 1995, 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). 
Finally, in 1996, the Rule was amended to include debt securities 
issued by Brazil, Argentina, and Venezuela. See Securities Exchange 
Act Release No. 36940 (March 7, 1996), 61 FR 10271 (March 13, 1996).
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    In 1997, Belfox c.v./s.c. (``Belfox''), the Belgian company 
recognized as the institution to organize and administer the Belgian 
Futures and Options Exchange (``BELFOX''), proposed that the Commission 
amend Rule 3a12-8 to facilitate such trading in futures products based 
on the sovereign debt of Belgium.\7\ At the time, BELFOX listed two 
futures contracts overlying Belgian public debt securities, and stated 
that it wished to market and make trading of those products available 
to U.S. investors.\8\
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    \7\ See Letters from Jos Schmitt, President and Chief Executive 
Officer, Belfox, to Arthur Levitt, Jr., Chairman, Commission, dated 
June 27, 1997, to Howard L. Kramer, Senior Associate Director, 
Division, Commission, dated August 29, 1997, and to Howard L. 
Kramer, Division of Commission, dated February 10, 1998 
(collectively ``Belfox petition'').
    \8\ The marketing and trading of foreign futures contracts is 
subject to regulation by the CFTC.
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    Belfox subsequently delisted its futures contracts on Belgian 
sovereign debt, and has stated that it does not presently intend to 
list any additional futures contracts on Belgian sovereign debt.\9\ 
Belfox has not withdrawn its request, however, and the Belgian Ministry 
of Finance has expressed the hope that Belgium will be added to the 
Rule so that Belgian debt securities may form part of the pool of 
securities that underlie multi-issuer futures contracts traded in Paris 
on the March a Terme International de France SA (``MATIF'').\10\
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    \9\ See Conversation between Jos Schmitt, Belfox, and Joshua 
Kans, Attorney, Division, Commission, September 28, 1998.
    \10\ See Conversation between Louis de Montpellier, General 
Advisor, Treasury, Ministry of Finance, Kingdom of Belgium, and 
Joshua Kans, Attorney, Division, Commission, September 28, 1998.
    Each of the multi-issuer sovereign debt futures contracts 
currently traded on the MATIF has a pool of deliverable securities 
that contains only the sovereign debt securities of countries 
designated under the Rule. Should the delivery pool for any 
sovereign debt futures contract include sovereign debt securities of 
countries not designated under the Rule, then that contract would 
not be eligible for marketing or sales to U.S. persons pursuant to 
the Rule. See Letter from Howard Kramer, Senior Special Counsel, 
Division, Commission, to Philip Bruce, Head of Fixed Income and 
Money Market Instruments, London International Financial Futures 
Exchange, dated July 21, 1992.
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    The Commission is amending Rule 3a12-8 to add Belgium 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 futures 
contracts require delivery outside the United States, and that 
contracts be traded on a board of trade) would continue to apply.

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 Belgium. The Commission believes that the trading of futures 
contracts on the sovereign debt of Belgium could provide U.S. investors 
and dealers with a vehicle for hedging the risks involved in holding 
debt instruments of Belgium, and that the sovereign debt of Belgium 
should be subject to the same regulatory treatment under the Rule as 
that of the Designated Foreign Governments.
    In the most recent determinations to amend the Rule to include 
Mexico, Brazil, Argentina, and Venezuela, the Commission considered 
primarily whether market evidence indicated that an active and liquid 
secondary trading market exists for the sovereign debt of those 
countries.11 Prior to the addition of those countries to the 
Rule, the Commission considered principally whether the particular 
sovereign debt had been rated in one of the two highest rating 
categories 12 by at least two nationally recognized 
statistical rating organizations (``NRSROs'').13 The 
Commission continues to consider the existence of a high credit rating 
as indirect evidence of an active and liquid

[[Page 10566]]

secondary trading market,14 as well as considering trading 
data as evidence of an active and liquid secondary trading market for 
the security, when determining whether to include a sovereign issuer in 
the list of Designated Foreign Governments.
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    \11\ See, e.g., Securities Exchange Act Release No. 36530 
(November 30, 1995), 60 FR 62323 (December 6, 1995) (amending the 
Rule to add Mexico because the Commission believed that as a whole, 
the market for Mexican sovereign debt was sufficiently liquid and 
deep for the purposes of the Rule); Securities Exchange Act Release 
No. 36940 (March 7, 1996), 61 FR 10271 (March 13, 1996) (amending 
the Rule to add Brazil, Argentina and Venezuela because the 
Commission believed that the market for the sovereign debt of those 
countries was sufficiently liquid and deep for the purposes of the 
Rule).
    \12\ The two highest categories used by Moody's Investor 
Services (``Moody's'') for long-term debt are ``Aaa'' and ``Aa.'' 
The two highest categories used by Standard and Poor's (``S&P'') for 
long-term debt are ``AAA'' and ``AA.''
    \13\ See, e.g., Securities Exchange Act Release No. 30166 
(January 6, 1992) 57 FR 1375 (January 14, 1992) (amending the Rule 
to include debt securities issued by Ireland and Italy--Ireland's 
long-term sovereign debt was rated Aa3 by Moody's and AA- by S&P, 
and Italy's long-term sovereign debt was rated Aaa by Moody's and 
AA+ by S&P); and Securities Exchange Act Release No. 34908 (October 
27, 1994), 59 FR 54812 (November 2, 1994) (amending the Rule to 
include Spain, which had long-term debt ratings of Aa2 from Moody's 
and AA from S&P).
    \14\ See, e.g., Securities Exchange Act Release No. 36213 
(September 11, 1995), 60 FR 48078 (September 18, 1995) (proposal to 
add Mexico to list of countries encompassed by rule); Securities 
Exchange Act Release No. 24428 (May 5, 1987), 52 FR 18237 (May 14, 
1987) (proposed amendment, which was not implemented, that would 
have extended the rule to encompass all countries rated in one of 
the two highest categories by at least two NRSROs).
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    Belgium meets the debt rating standard, by being rated in one of 
the two highest rating categories by two NRSROs.15 Moreover, 
trading data also indicates that an active and liquid trading market 
for Belgian issued debt instruments exists. Belfox and the Ministry of 
Finance have provided data about the Belgian public debt 16 
and the market for Linear bonds (``Obligations Lineaires--Lineaire 
Obligaties'' or ``OLOs''), which comprise a major portion of the 
Belgian public debt.17 That data demonstrates active trading 
in the market for Belgian OLOs. The total value traded in OLOs on an 
annual basis was equivalent to approximately US$1.89 trillion in 1997, 
US$1.86 trillion in 1996, US$1.70 trillion in 1995, and US$1.30 
trillion in 1994. The average value traded in OLOs on a daily basis was 
equivalent to approximately US$7.60 billion in 1997, US$7.44 billion in 
1996, US$6.79 billion in 1995, and US$5.23 billion in 1994. The average 
number of trades on a daily basis involving OLOs was approximately 472, 
571, 614, and 636 for 1997, 1996, 1995 and 1994, 
respectively.18 The Commission finds that this trading data, 
coupled with a high debt rating, provides sufficient evidence that 
there exists an active and liquid market for Belgian sovereign debt.
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    \15\ Moody's has assigned Belgium long-term local currency and 
long-term foreign currency credit ratings of Aa1. S&P has assigned 
Belgium long-term local currency and long-term foreign-currency 
credit ratings of AA+.
    The Belgian public debt is principally denominated in Belgian 
francs (``BEF''). The portion of Belgian public debt denominated in 
foreign currencies was 8.0% in 1997, 7.6% in 1996, 11.4% in 1995 and 
14.5% in 1994. See Public Debt: Annual Report 1997, Ministry of 
Finance, Kingdom of Belgium, April 1998, at 13 (``Public Debt 
1997''); Public Debt: Annual Report 1996, Ministry of Finance, 
Kingdom of Belgium, April 1997, at 13 (``Public Debt 1996''); Public 
Debt: Annual Report 1995, Ministry of Finance, Kingdom of Belgium, 
May 1996, at 13 (``Public Debt 1995'').
    The Belgian Ministry of Finance has stated that all 
``dematerialized'' Belgian public debt (i.e., debt that is not held 
in a tangible form) denominated in Belgian francs would be 
redenominated into euros on January 1, 1999. See Public Debt 1997 at 
26.
    \16\ Belgian public debt is comprised of government bonds, 
Treasury bills and various debt instruments of lesser importance, 
such as road fund loans, and municipal and provincial loans. See 
Belfox petition, supra note 7.
    The amount of Belgian public debt outstanding was equivalent to 
approximately US$264.31 billion as of December 31, 1997, 
approximately US$258.92 billion at the end of 1996, approximately 
US$256.86 billion at the end of 1995, and approximately US$251.64 
billion at the end of 1994. See Public Debt 1997 at 12; Public Debt 
1996 at 12; Public Debt 1995 at 12. All U.S. dollar equivalents set 
forth here are based on the conversion rate of BEF 37.10 for US$1.00 
in effect as of December 31, 1997.
    By comparison, the last four countries to be added to the list 
of Designated Foreign Governments--Mexico, Brazil, Argentina and 
Venezuela--had lower amounts of public debt. See Securities Exchange 
Act Release No. 36530 (December 6, 1995), 60 FR 62323 (December 6, 
1995) (outstanding Mexican government debt amounted to approximately 
US$87.5 billion face value as of March 31, 1995); Securities 
Exchange Act Release No. 36940 (March 7, 1996), 61 FR 10271 (March 
13, 1996) (public and publicly guaranteed debt of Brazil, Argentina 
and Venezuela amounted to approximately US$86 billion, US$55 billion 
and US$74 billion, respectively, as of December 31, 1993).
    \17\ OLOs, which are issued by means of a price auction system, 
have maturities ranging from 1 to 30 years and are available with 
fixed or variable interest rate payments. Only those holding a 
Linear bond account with the National Bank of Belgium may 
participate in the auction for these bonds. OLOs are traded on the 
Brussels Stock Exchange and over the counter. OLOs do not exist 
physically, but appear as entries in an electronic register held by 
the National Bank of Belgium. See The Financial Products of the 
Belgian Treasury, The Treasury, Kingdom of Belgium, September 1998, 
at 12-17; Belfox petition, supra note 7.
    OLOs represented 54.3% percent of the total amount of Belgian 
public debt outstanding in 1997, 53.6% in 1996, 50.6% in 1995 and 
44.6% in 1994. The amount of OLOs outstanding was equivalent to 
approximately US$143.50 billion at the end of 1997, US$138.79 
billion at the end of 1996, US$130.01 billion at the end of 1995, 
and US$112.27 billion at the end of 1994. See Public Debt 1997 at 
12; Public Debt 1996 at 12; Public Debt 1995 at 12.
    The majority of OLOs are denominated in Belgian francs, with 
some OLOs issued in the past year denominated in French francs and 
German marks. All existing OLOs were to be redenominated into euros 
at the start of 1999. See Public Debt 1997 at 25-26.
    \18\ See Public Debt 1997 at 41; Public Debt 1996 at 41; Public 
Debt 1995 at 41; Belfox petition, supra note 7.
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IV. Costs and Benefits of the Proposed Amendments

    The Commission believes that the amendment offers potential 
benefits for U.S. investors, with no direct costs. As stated above, the 
amendment will allow U.S. and foreign boards of trade to offer in the 
United States, and U.S. investors to trade, futures contracts on the 
debt obligations of Belgium. The trading of futures on the sovereign 
debt of Belgium should provide U.S. investors with a vehicle for 
hedging the risks involved in the trading of the underlying sovereign 
debt of Belgium.19 The Commission does not anticipate that 
the amendment will result in any direct cost for U.S. investors or 
others because 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.
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    \19\ There may be significant interest in such futures. For 
example, the MATIF has estimated that the Euro All Sovereign futures 
contract, which is one of the multi-issuer futures contracts that 
would likely include Belgian sovereign debt within the pool of 
deliverable securities, will have a total trading volume of at least 
10,000 lots per day.
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V. Effects of the Proposed Amendment on Competition, Efficiency and 
Capital Formation, and Other Findings

    Section 23(a)(2) of the Exchange Act 20 requires the 
Commission, in adopting rules under the Exchange Act, to consider the 
competitive effects of such rules, if any, and to refrain from adopting 
a rule that would impose a burden on competition not necessary or 
appropriate in furthering the purposes of the Exchange Act. Moreover, 
Section 3 of the Exchange Act 21 as amended by the National 
Securities Markets Improvement Act of 1996 22 provides that 
whenever the Commission is engaged in a rulemaking and is required to 
consider or determine whether an action is necessary or appropriate in 
the public interest, the Commission shall consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation.
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    \20\ 15 U.S.C. 78w(a)(2).
    \21\ 15 U.S.C. 78c.
    \22\ Pub. L. 104-290, 110 Stat. 3416 (1996).
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    The Commission has considered the amendment to the Rule in light of 
the standards cited in Sections 3 and 23(a)(2), and the Commission 
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 Belgium 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. The Commission has 
considered the amendment's impact on

[[Page 10567]]

efficiency, competition, and capital formation and concludes that it 
would promote these three objectives, by making available to U.S. 
investors an additional product to use to hedge the risks associated 
with the trading of the underlying sovereign debt of 
Belgium.23 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 Belgium 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.
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    \23\ 15 U.S.C. 78f(b).
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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.24
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    \24\ 5 U.S.C. 553(d).
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VI. Administrative Requirements

    Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(h), the Chairman of the Commission 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.
    The Paperwork Reduction Act does not apply because the amendment 
does not impose recordkeeping or information collection requirements, 
or other collections of information which require the approval of the 
Office of Management and Budget under 44 U.S.C. 3501, et seq.

VII. Statutory Basis

    The amendment to Rule 3a12-8 is 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.

Text of the Amendment

    For the reasons set forth in the preamble, the Commission amends 
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, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 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)(xviii), removing the period at the end of 
paragraph (a)(1)(xix) and adding ``; or'' in its place, and adding 
paragraph (a)(1)(xx), to read as follows:


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

    (a) * * *
    (1) * * *
    (xx) The Kingdom of Belgium.
* * * * *
    Dated: February 26, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5445 Filed 3-4-99; 8:45 am]
BILLING CODE 8010-01-P