[Federal Register Volume 66, Number 164 (Thursday, August 23, 2001)]
[Rules and Regulations]
[Pages 44491-44516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21391]



[[Page 44489]]

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

Part III





Commodity Futures Trading Commission

Securities and Exchange Commission





17 CFR Parts 41 and 240



Method for Determining Market Capitalization and Dollar Value of 
Average Daily Trading Volume; Application of the Definition of Narrow-
Based Security Index; Joint Fi

[[Page 44490]]

nal Rule

  Federal Register / Vol. 66, No. 164 / Thursday, August 23, 2001 / 
Rules and Regulations  
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038-AB77

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-44724; File No. S7-11-01]
RIN 3235-AI13


Method for Determining Market Capitalization and Dollar Value of 
Average Daily Trading Volume; Application of the Definition of Narrow-
Based Security Index; Joint Final Rule

AGENCIES: Commodity Futures Trading Commission and Securities and 
Exchange Commission.

ACTION: Joint Final Rules.

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

SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and 
Securities and Exchange Commission (``SEC'') (collectively, 
``Commissions'') are adopting joint final rules to implement new 
statutory provisions enacted by the Commodity Futures Modernization Act 
of 2000 (``CFMA''). Specifically, the CFMA directs the Commissions to 
jointly specify by rule or regulation the method to be used to 
determine ``market capitalization'' and ``dollar value of average daily 
trading volume'' for purposes of the new definition of ``narrow-based 
security index,'' including exclusions from that definition, in the 
Commodity Exchange Act (``CEA'') and the Securities Exchange Act of 
1934 (``Exchange Act''). The CFMA also directs the Commissions to 
jointly adopt rules or regulations that set forth the requirements for 
an index underlying a contract of sale for future delivery traded on or 
subject to the rules of a foreign board of trade to be excluded from 
the definition of ``narrow-based security index.''

EFFECTIVE DATE: August 21, 2001.

FOR FURTHER INFORMATION CONTACT:
    CFTC: Elizabeth L.R. Fox, Acting Deputy General Counsel; Richard A. 
Shilts, Acting Director; or Thomas M. Leahy, Jr., Financial Instruments 
Unit Chief, Division of Economic Analysis, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, 
D.C. 20581. Telephone: (202) 418-5000. E-mail: [email protected], 
[email protected], or [email protected].
    SEC: Nancy J. Sanow, Assistant Director, at (202) 942-0771; Ira L. 
Brandriss, Special Counsel, at (202) 942-0148; or Sapna C. Patel, 
Attorney, at (202) 942-0166, Office of Market Supervision, Division of 
Market Regulation, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-1001.

SUPPLEMENTARY INFORMATION: The CFTC is adopting Subparts A and B of 
Part 41 (Rules 41.1 and 41.2, and Rules 41.11 through 41.14) under the 
CEA,\1\ 17 CFR 41.\2\ The SEC is adopting Rules 3a55-1 through 3a55-3 
under the Exchange Act,\3\ 17 CFR 240.3a55-1 through 3a55-3.
---------------------------------------------------------------------------

    \1\ All references to the CEA are to 7 U.S.C. 1 et seq.
    \2\ Subpart A of Part 41 under the CEA consists of general 
provisions for purposes of the rules included in this Part, 
including definitions (Rule 41.1) and recordkeeping requirements 
(Rule 41.2). Subpart B of Rule 41, ``Narrow-Based Security 
Indexes,'' begins with Rule 41.11 on purpose and scope. Rules 41.11, 
41.12, and 41.13 of Subpart V correspond to Rules 3a55-1, 3a55-2, 
and 3a55-3 under the Exchange Act, respectively. Rule 41.14 of 
Subpart B parallels provisions incorporated in the CEA and the 
Exchange Act by the CFMA.
    \3\ All references to the Exchange Act are to 15 U.S.C. 78a et 
seq.
---------------------------------------------------------------------------

Table of Contents

I. Background and Overview of New Rules
    A. Statutory Provisions
    1. Definition of Narrow-Based Security Index
    2. Indexes Excluded from Definition of Narrow-Based Security 
Index
    B. Proposing Release
    C. Final Rules--An Overview
II. Discussion of Joint Final Rules
    A. CEA Rule 41.11 and Exchange Act Rule 3a55-1: Methods for 
Determining Market Capitalization and Dollar Value of Average Daily 
Trading Volume
    1. Determining the Market Capitalization of a Security
    a. Proposed Rules
    b. Comment Letters
    c. Final Rules
2. Determining Dollar Value of Average Daily Trading Volume of a 
Security
    a. Proposed Rules
    b. Comment Letters
    c. Final Rules
    i. Dollar Value of ADTV for Purposes of Section 1a(25)(A) of the 
CEA and Section 3(a)(55)(B) of the Exchange Act
    ii. Dollar Value of ADTV for Purposes of Determining Whether a 
Security is One of the Top 675
    3. Use of the Top 750 and Top 675 Lists
    4. The Lowest Weighted 25% of an Index
    5. Determining ``the Preceding 6 Full Calendar Months''
    6. Depositary Shares
    7. General Guidance in Application of the Rule
    B. CEA Rule 41.12 and Exchange Act Rule 3a55-2: A Future on a 
Broad-Based Security Index that Becomes Narrow-Based During First 30 
Days of Trading
    1. The Relevant Statutory Provision
    2. Proposed Rules
    3. Comment Letters
    4. Final Rules
    5. Other Issues Concerning a Broad-Based Index that Becomes 
Narrow-Based
    C. CEA Rule 41.13 and Exchange Act Rule 3a55-3: A Future Traded 
on or Subject to the Rules of a Foreign Board of Trade
    1. Proposed Rules
    2. Comment Letters
    3. Final Rules
    D. CEA Rule 41.14: A Future on a Narrow-Based Security Index 
that Becomes Broad-Based
    1. The Relevant Statutory Provision
    2. Proposed Rule
    3. Comment Letters
    4. Final Rule
    E. Additional Comments
III. Administrative Procedure Act
    CFTC
    SEC
IV. Paperwork Reduction Act
    CFTC
    SEC
    A. The Use and Disclosure of the Information Collected
    B. Total Annual Reporting and Recordkeeping Burden
    1. Capital Costs
    2. Burden Hours
V. Costs and Benefits of the Final Rules
    CFTC
    SEC
    A. Comments
    B. Benefits
    C. Costs
VI. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation
    SEC
VII. Regulatory Flexibility Act Certification
    CFTC
    SEC
VIII. Text of Rules

I. Background and Overview of New Rules

    A. Statutory Provisions
    The CFMA,\4\ which became law on December 21, 2000, establishes a 
framework for the joint regulation by the CFTC and SEC of the trading 
of futures on single securities and on narrow-based security indexes 
(collectively, ``security futures'').\5\ Previously, these products 
were statutorily prohibited from trading in the United States. Under 
the CFMA, designated contract markets and registered derivatives 
transaction execution facilities (``DTEFs'') may trade security futures 
if they register with the

[[Page 44491]]

SEC and comply with certain other requirements of the Exchange Act. 
Likewise, national securities exchanges and national securities 
associations may trade security futures if they register with the CFTC 
and comply with certain requirements of the CEA.
---------------------------------------------------------------------------

    \4\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
    \5\ No person may execute or trade a security futures product 
until the later of December 21, 2001, or such date that a futures 
association registered under Section 17 of the CEA meets the 
requirements in Section 15A(k)(2) of the Exchange Act, except that 
on the later of August 21, 2001, or such date that a futures 
association registered under Sectionn 17 of the CEA meets the 
requirements in Section 15A(k)(2) of the Exchange Act, eligible 
contract participants may enter into transactions with each other on 
a principal-to-principal basis. Section 2(a)(1)(D)(iii)(II) of the 
CEA and Section 6(h)(6) of the Exchange Act provide that options on 
security futures may not be traded for at least three years after 
the enactment of the CFMA.
---------------------------------------------------------------------------

    To distinguish between security futures on narrow-based security 
indexes, which are jointly regulated by the Commissions, and futures on 
broad-based security indexes, which are under the exclusive 
jurisdiction of the CFTC,\6\ the CFMA also amended the CEA and the 
Exchange Act by adding an objective definition of ``narrow-based 
security index.''
---------------------------------------------------------------------------

    \6\ Prior to the enactment of the CFMA, futures on broad-based 
indexes were subject to the sole jurisdiction of the CFTCC, with the 
SEC having a limited right of review, to ensure compliance with the 
provisions of the Shad-Johnson Accord as implemented in former 
Section 2(a)(1)(B) of the CEA. This 1982 jurisdictional accord 
(signed into law in 1983) permitted futures exchanges to trade 
futures on security indexes if they were cash-settled and were not 
readily susceptible to manipulation and if the indexes traded 
measured and reflected a market segment. See Futures Trading Act of 
1982 Section 101, Pub. L. No. 97-444, 96 Stat. 2294 [codified at 7 
U.S.C. Section 2(a)]. repealed by the Commodity Futures 
Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 
(2000).
---------------------------------------------------------------------------

1. Definition of Narrow-Based Security Index
    Under the CEA and Exchange Act, an index is a ``narrow-based 
security index'' if it has any one of the following four 
characteristics: (1) It has nine or fewer component securities; (2) any 
one of its component securities comprises more than 30% of its 
weighting; (3) the five highest weighted component securities together 
comprise more than 60% of its weighting; or (4) the lowest weighted 
component securities comprising, in the aggregate, 25% of the index's 
weighting (``lowest weighted 25%'') have an aggregate dollar value of 
average daily trading volume (``ADTV'') of less than $50 million (or in 
the case of an index with 15 or more component securities, $30 
million).\7\
---------------------------------------------------------------------------

    \7\ Section 1a(25)(A)(i)-(iv) of the CEA and Section 
3(a)(55)(B)(i)-(iv) of the Exchange Act.
---------------------------------------------------------------------------

    Any security index that does not have any of the four 
characteristics set forth above is, in effect, a broad-based security 
index. Accordingly, any future on such an index would not be a security 
future and thus would be subject to the sole jurisdiction of the 
CFTC.\8\
---------------------------------------------------------------------------

    \8\ See Section 2(a)(1)(C)(ii) of the CEA. A future on a 
security index that is not a narrow-based security index under this 
definition may include component securities that are not registered 
under Section 12 of the Exchange Act.
---------------------------------------------------------------------------

2. Indexes Excluded from Definition of Narrow-Based Security Index
    The definition of narrow-based security index in the CEA and 
Exchange Act also excludes from its scope certain security indexes that 
satisfy specified criteria. A future on an index that meets the 
criteria of any of the six categories of indexes that are so excluded 
from the definition is not a security future under the securities laws, 
and thus is subject solely to the jurisdiction of the CFTC.
    The first and most fundamental exclusion applies to indexes 
comprised wholly of U.S.-registered securities that have high market 
capitalization and dollar value of ADTV, and meet certain other 
criteria. Specifically, a security index is not a narrow-based security 
index under this exclusion if it has all of the following 
characteristics: (1) It has at least nine component securities; (2) no 
component security comprises more than 30% of the index's weighting; 
(3) each of its component securities is registered under Section 12 of 
the Exchange Act; and (4) each component security is one of 750 
securities with the largest market capitalization (``Top 750'') and one 
of 675 securities with the largest dollar value of ADTV (``Top 
675'').\9\
---------------------------------------------------------------------------

    \9\ Section 1a(25)(B)(i) of the CEA and Section 3(a)(55)(C)(i) 
of the Exchange Act.
---------------------------------------------------------------------------

    The second exclusion provides that a security index is not a 
narrow-based security index if a board of trade was designated by the 
CFTC as a contract market in a future on the index before the CFMA was 
enacted.\10\
---------------------------------------------------------------------------

    \10\ Section 1a(25)(B)(ii) of the CEA and Section 
3(a)(55)(C)(ii) of the Exchange Act.
---------------------------------------------------------------------------

    The third exclusion provides that if a future was trading on an 
index that was not a narrow-based security index for at least 30 days, 
the index is excluded from the definition of a ``narrow-based security 
index'' as long as it does not assume the characteristics of narrow-
based security index for more than 45 business days over three calendar 
months.\11\ This exclusion, in effect, creates a tolerance period that 
permits a broad-based security index to retain its broad-based status 
if it becomes narrow-based for 45 or fewer business days in the three-
month period.\12\
---------------------------------------------------------------------------

    \11\ Section 1a(25)(B)(iii) of the CEA and Section 
3(a)(55)(C)(ii) of the Exchange Act.
    \12\ If the index becomes narrow-based for more than 45 days 
over three consecutive calendar months, the statute then provides an 
additional grace period of three months during which the index is 
excluded from the definition of narrow-based security index. See 
Section 1a(25)(D) of the CEA and Section 2(a)(55)(E) of the Exchange 
Act.
---------------------------------------------------------------------------

    The fourth exclusion provides that a security index is not a 
narrow-based security index if it is traded on or subject to the rules 
of a foreign board of trade and meets such requirements as are jointly 
established by rule or regulation by the CFTC and SEC.\13\
---------------------------------------------------------------------------

    \13\ Section 1a(25)(B)(iv) of the CEA and Section 
3(a)(55)(C)(iv) of the Exchange Act.
---------------------------------------------------------------------------

    The fifth exclusion is essentially a temporary ``grandfather'' 
provision that permits the offer and sale in the United States of 
security index futures traded on or subject to the rules of foreign 
boards of trade that were authorized by the CFTC before the CFMA was 
enacted.\14\ Specifically, the exclusion provides that, until June 21, 
2002, a security index is not a narrow-based security index if: (1) A 
future on the index is traded on or subject to the rules of a foreign 
board of trade; (2) the offer and sale of such future in the United 
States was authorized before the date of enactment of the CFMA; and (3) 
the conditions of such authorization continue to apply.\15\
---------------------------------------------------------------------------

    \14\ Certain of these futures are currently offered to U.S. 
customers pursuant to no-action letters issued by the CFTC staff, to 
which the SEC has not objected.
    \15\ Section 1a(25)(B)(v) of the CEA and Section 3(a)(55)(C)(v) 
of the Exchange Act.
---------------------------------------------------------------------------

    The sixth exclusion provides that an index is not a narrow-based 
security index if a future on the index is traded on or subject to the 
rules of a board of trade and meets such requirements as are 
established by rule, regulation, or order jointly by the two 
Commissions.\16\ This exclusion grants the Commissions authority to 
jointly establish further exclusions from the definition of narrow-
based security index.
---------------------------------------------------------------------------

    \16\ Section 1a(25)(B)(vi) of the CEA and Section 
3(a)(55)(C)(vi) of the Exchange Act.
---------------------------------------------------------------------------

B. Proposing Release

    On May 17, 2001, the CFTC and SEC published for comment three 
proposed rules under the CEA and Exchange Act relating to this 
statutory definition of narrow-based security index and the exclusions 
from that definition.\17\ The proposed rules contained methods for 
determining ``market capitalization'' and ``dollar value of average 
daily trading volume,'' in fulfillment of the directive of the CFMA 
that the Commissions, by rule or regulation, jointly specify the 
methods to be used to determine these values.\18\
---------------------------------------------------------------------------

    \17\ Securities Exchange Act Release No. 44288 (May 9, 2001), 66 
FR 27560 (``Proposing Release''). See also Securities Exchange Act 
Release No. 44475 (June 26, 2001), 66 FR 34864 (July 2, 2001), which 
extended the comment period on the proposed rules.
    \18\ See Section 1a(25)(E)(ii) of the CEA and Section 
3(a)(55)(F)(ii) of the Exchange Act.
---------------------------------------------------------------------------

    The proposed rules also set forth an additional exclusion from the 
definition of narrow-based security index with respect to the trading 
of a future on a

[[Page 44492]]

broad-based index during the first 30 days of trading, and added a 
provision concerning security indexes traded on or subject to the rules 
of a foreign board of trade. The CFTC also published for comment an 
additional, related rule under the CEA to accommodate the trading of 
security futures on a narrow-based security index that became a broad-
based index.
    The Commissions received 16 comment letters on the proposals, which 
are discussed more fully below.\19\ In large part, commenters favored 
the proposed rules, but offered various recommendations to refine the 
proposals or add new rules.
---------------------------------------------------------------------------

    \19\ See letters to Jean A. Webb, Secretary, CFTC, and Jonathan 
G. Katz, Secretary, SEC, from, or on behalf of: Philip McBride 
Johnson, dated May 29, 2001 (``Johnson Letter''); Hong Kong Futures 
Exchange Limited, dated June 8, 2001 (``HKFE Letter''); General 
Motors Investment Management Corporation, dated June 11, 2001 
(``GMIMCo Letter''); American Stock Exchange LLC, dated June 14, 
2001 (``Amex Letter''); Bourse de Montreal (The Montreal Exchange, 
Inc.), dated June 14, 2001 (``ME Letter''); Chicago Board Options 
Exchange, Inc., dated June 18, 2001 (``CBOE Letter''); Chicago 
Mercantile Exchange Inc., dated June 18, 2001 (``CME Letter I''); 
SFE Corporation Limited, dated June 18, 2001 (``SFE Letter''); The 
Board of Trade of the City of Chicago, Inc., dated June 25, 2001 
(``CBOT Letter''); Managed Funds Association, dated July 11, 2001 
(``MFA Letter''); Barclays Global Investors, N.A., dated July 17, 
2001 (``Barclays Letter''); Futures Industry Association, Inc., 
dated July 18, 2001 (``FIA Letter''); The Goldman Sachs Group, Inc. 
and its subsidiaries, dated July 18, 2001 (``GS Letter''); U.S. 
Securities Markets Coalition, dated July 18, 2001 (``Securities 
Markets Coalition Letter''); Chicago Mercantile Exchange Inc., dated 
July 30, 2001 (``CME Letter II''); Securities Industry Association, 
dated August 3, 2001 (``SIA Letter'').
---------------------------------------------------------------------------

C. Final Rules--An Overview

    The Commissions have considered the commenters' views and have 
modified the proposed rules in some respects to reflect these comments. 
A summary of the final rules follows.
     Rule 41.11 under the CEA and Rule 3a55-1 under the 
Exchange Act
    Rules 41.11 under the CEA and 3a55-1 under the Exchange Act 
establish a method for determining the dollar value of ADTV of a 
security for purposes of the definition of narrow-based security index 
under the CEA and Exchange Act. This method requires the inclusion of 
reported transactions outside the United States in calculating dollar 
value of ADTV for purposes of Section 1a(25)(A) of the CEA and Section 
3(a)(55)(B) of the Exchange Act.\20\ It also requires aggregating the 
value of trading volume in a depositary share \21\ that represents a 
security with trading volume in its underlying security.
---------------------------------------------------------------------------

    \20\ See supra note 7 and accompanying text.
    \21\ Depositary shares are generally evidenced by American 
Depositary Receipts, or ``ADRs.''
---------------------------------------------------------------------------

    In response to comments, the Commissions have incorporated into 
their rules a provision that allows for the designation by the 
Commissions of a list of the Top 750 securities and Top 675 securities 
for purposes of the first exclusion from the definition of narrow-based 
security index.\22\ If, however, the Commissions do not designate a 
list of such securities, the final rules also establish how national 
securities exchanges, designated contract markets, registered DTEFs, 
and foreign boards of trade themselves are to calculate the market 
capitalization and dollar value of ADTV of securities for purposes of 
determining whether a security is one of the Top 750 securities or Top 
675 securities. Recognizing concerns about the accessibility of foreign 
trading volume data and to assure uniformity among markets, the final 
rules establish that only reported transactions in the United States 
are to be included in a market's calculations to determine whether a 
security is one of the Top 675 securities. The final rules also provide 
that the requirement that each component security of an index be 
registered under Section 12 of the Exchange Act for purposes of the 
first exclusion from the definition of narrow-based security index will 
be satisfied with respect to any security that is a depositary share, 
if the deposited securities underlying the depositary share are 
registered under Section 12, and the depositary shares are registered 
under the Securities Act of 1933 on Form F-6.
---------------------------------------------------------------------------

    \22\ See supra note 9 and accompanying text.
---------------------------------------------------------------------------

    Finally, the rules define certain terms to add clarity to the 
definition of narrow-based security index.
     Rule 41.12 under the CEA and Rule 3a55-2 under the 
Exchange Act
    Rules 41.12 under the CEA and 3a55-2 under the Exchange Act address 
the circumstance when a broad-based security index underlying a future 
becomes narrow-based during the first 30 days of trading. In such case, 
the future does not meet the requirement of having traded for at least 
30 days to qualify for the tolerance period granted by Section 
1a(25)(B)(iii) of the CEA and Section 3(a)(55)(C)(iii) of the Exchange 
Act. The new rules provide that the index will nevertheless be excluded 
from the definition of narrow-based security index throughout that 
first 30 days if the index would not have been a narrow-based security 
index had it been in existence for an uninterrupted period of six 
months prior to the first day of trading. In response to comments, the 
rules as adopted provide additional criteria by which an index will be 
excluded from the definition of a narrow-based security index during 
the first 30 days that a future on such index is trading.
     Rule 41.13 under the CEA and Rule 3a55-3 under the 
Exchange Act 
    Rule 41.13 under the CEA and Rule 3a55-3 under the Exchange Act 
clarify when a security index underlying a future that is traded on or 
subject to the rules of a foreign board of trade will be considered a 
broad-based security index. Specifically, these rules provide that when 
a future on a security index is traded on or subject to the rules of a 
foreign board of trade, it will not be considered a narrow-based 
security index if it would not be a narrow-based security index if a 
future on that same index were traded on a designated contract market 
or registered DTEF.
     Rule 41.14 under the CEA 
    Rule 41.14 under the CEA, which is adopted solely by the CFTC, 
addresses the circumstance where a future on a narrow-based security 
index was trading on a national securities exchange as a security 
future and the index subsequently became broad-based by the terms of 
the statutory definition--a circumstance not addressed by the statute. 
The rule provides that if the index becomes broad-based for no more 
than 45 business days over three consecutive calendar months, it will 
still be considered a narrow-based security index.
    In addition to this 45-day tolerance provision, new Rule 41.14 
under the CEA provides that if the index became broad-based for more 
than 45 days subsequent to the beginning of trading as a narrow-based 
security index, a transition period of three consecutive calendar 
months will be granted in which the index will continue to be a narrow-
based security index. After the transition period is over, the exchange 
will be permitted to continue trading the product only in those months 
in the future that had open interest on the day the transition period 
ended.

II. Discussion of Joint Final Rules

A. CEA Rule 41.11 and Exchange Act Rule 3a55-1: Methods for Determining 
Market Capitalization and Dollar Value of Average Daily Trading Volume

1. Determining the Market Capitalization of a Security
    The market capitalization of a security is relevant only to the 
determination of whether a security is one of the 750 securities with 
the largest market capitalization, permitting the index of which it is 
a component to qualify as broad-based under the first exclusion

[[Page 44493]]

from the definition of narrow-based security index.\23\
---------------------------------------------------------------------------

    \23\ See supra note 9 and accompanying text.
---------------------------------------------------------------------------

a. Proposed Rules

    The proposed rules would have defined the market capitalization of 
a security for these purposes as the product of: (1) the number of 
outstanding shares of the security as reported in the most recent 
quarterly or annual report of the company; and (2) the average price of 
the security over the preceding 6 full calendar months.
    The proposed rules defined outstanding shares as the number of 
outstanding shares as reported in the most recent quarterly or annual 
report of the company--i.e., Form 10-Q, 10-K, 10-QSB, 10-KSB, or 20-F 
\24\--filed with the SEC by the issuer of the security. The proposed 
rules included a method for determining the average price of a security 
over time that took into account the number of shares in each 
transaction over the 6-month period.\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 249.310, 249.308a, 249.310b, 249.308b, or 249.220f.
    \25\ The proposed method, which involved a calculation of the 
security's volume-weighed average price, is discussed below. See 
infra Part II.A.2.
---------------------------------------------------------------------------

    The Commissions requested comment on the use of this method, and 
asked whether another method, such as using a security's daily closing 
price, would be more appropriate. In addition, the Commissions asked 
for comment on whether, in determining the average price of a security, 
the price of American Depositary Receipts (``ADRs'') representing 
shares of such security should be included proportionally. Comment was 
also requested on whether the definition of outstanding shares should 
address corporate events that affect the number of shares outstanding 
of a security and that occur after the annual or quarterly report of 
the issuer, and whether, for example, updated information contained in 
any subsequent Form 8-K \26\ filed by the issuer, or more current 
information submitted to the primary market center for the underlying 
security, should be included.
---------------------------------------------------------------------------

    \26\ 17 CFR 249.308.
---------------------------------------------------------------------------

    The Proposing Release also included a request for comment on 
whether it would be difficult for market participants to determine the 
Top 750 securities, and whether the Commissions should themselves 
undertake to compile, on a regular basis, a Top 750 list.

b. Comment Letters

    Several commenters objected to the use of average price as a factor 
to determine market capitalization.\27\ Most commenters who addressed 
the Commissions' questions on this subject favored using the security's 
daily closing price in lieu of average price.\28\ This method was seen 
as a way to simplify the calculation, to yield more verifiable 
results,\29\ and to conform to common methods used in the industry.\30\ 
Some commenters maintained that generally, in view of the number of 
calculations required to determine market capitalization on an ongoing 
basis, the least burdensome method should be required.\31\ One 
commenter believed that the Commissions should allow flexibility in the 
methodologies used to calculate average price and market 
capitalization,\32\ while another emphasized the importance of 
uniformity.\33\ Several commenters favored the inclusion of transaction 
prices in ADRs in calculating the average price of the underlying 
security.\34\
---------------------------------------------------------------------------

    \27\ See CBOE Letter; CBOT Letter; CME Letter I; GS Letter.
    \28\ See CBOE Letter; CBOT Letter; GS Letter; SIA Letter. See 
also CME Letter I.
    \29\ See GS Letter.
    \30\ See CBOT Letter.
    \31\ See CBOE Letter; CBOT Letter; SIA Letter.
    \32\ See CME Letter I.
    \33\ See CBOE Letter.
    \34\ See CBOE Letter; CBOT Letter; CME Letter I.
---------------------------------------------------------------------------

    Commenters on the definition of outstanding shares favored a rule 
that would permit taking into account corporate events that affect the 
number of shares outstanding at the time they become effective.\35\ One 
commenter expressed the concern that vendors of market information 
routinely adjust the number of shares they use to calculate market 
capitalization between regular reporting periods in the case of 
corporate events that affect the number of shares outstanding.\36\
---------------------------------------------------------------------------

    \35\ See, e.g., SIA Letter.
    \36\ See CBOT Letter. See also CME Letter I.
---------------------------------------------------------------------------

    Several commenters indicated that it would indeed be difficult to 
constantly determine the Top 750 securities and endorsed the suggestion 
that the Commissions publish lists of the Top 750 securities for 
purposes of the statutory provision.\37\ One exchange also argued that 
a list published by the Commissions was necessary so as to eliminate 
uncertainty and assure conformity among markets in determining the 
status of various security indexes.\38\
---------------------------------------------------------------------------

    \37\ See CBOE Letter; CBOT Letter; CME Letter I; SIA Letter.
    \38\ See CBOE Letter.
---------------------------------------------------------------------------

c. Final Rules

    In response to commenters' suggestions, the Commissions are 
adopting two alternative methods for markets to determine whether a 
security is one of the Top 750 securities. The Commissions expect to be 
able at some point in the near future to designate a list of such 
securities and have provided in the final rules for this 
possibility.\39\ However, because a final determination has not been 
made regarding the Commissions' designation of a list, the Commissions 
are adopting rules setting forth the method for markets to use to 
calculate market capitalization and thereby to determine the securities 
that comprise the Top 750.\40\
---------------------------------------------------------------------------

    \39\ Rule 41.11(a)(1) under the CEA and Rule 3a55-1(a)(1) under 
the Exchange Act, 17 CFR 41.11(a)(1) and 17 CFR 240.3a55-1(a)(1). 
See also infra notes 83-84 and accompanying text.
    \40\ Rule 41.11(a)(2) under the CEA and Rule 3a55-1(a)(2) under 
the Exchange Act, 17 CFR 41.11(a)(2) and 17 CFR 240.3a55-1(a)(2).
---------------------------------------------------------------------------

    Specifically, in the absence of a designated list of these 
securities, paragraph (d)(6) of Rule 41.11 under the CEA and Rule 3a55-
1 under the Exchange Act \41\ defines the ``market capitalization,'' on 
a particular day, of a security that is not a depositary share as the 
product of: (1) The number of outstanding shares of the security on 
that day; and (2) the closing price of the security on that day.\42\
---------------------------------------------------------------------------

    \41\ 17 CFR 41.11(d)(6) and 17 CFR 240.3a55-1(d)(6).
    \42\ This definition of market capitalization is for purposes 
only of the Commissions' rules for calculating market capitalization 
of a security to determine whether it is a Top 750 security. The 
sponsor or compiler of an index otherwise categorized as a market 
capitalization-weighted index is not required to use this definition 
to determine the relative weightings of the index's component 
securities.
---------------------------------------------------------------------------

    When a component security of an index is an ADR, market 
capitalization for a particular day is defined as the product of: (1) 
The closing price of the depositary share that day, divided by the 
number of deposited securities represented by the depositary share; and 
(2) the number of outstanding shares of the security represented by the 
depositary share that same day.
    The ``closing price'' of a security is defined in paragraph (d)(2) 
of the rules \43\ as the price at which the last reported transaction 
\44\ in the security

[[Page 44494]]

took place in the regular session of the principal market for the 
security \45\ in the United States. This definition applies when 
reported transactions have taken place in the U.S. If no reported 
transactions in a particular security have taken place in the United 
States, but a depositary share in the security trades in the U.S., the 
closing price of the security is defined as the closing price of the 
depositary share representing the security divided by the number of 
shares of the underlying security that the depositary share represents.
---------------------------------------------------------------------------

    \43\ 17 CFR 41.11(d)(2) and 17 CFR 240.3a55-1(d)(2).
    \44\ As defined in paragraph (d)(10) of the rules, ``reported 
transaction'' means:
    (i) with respect to securities transactions in the United 
States, any transaction for which a transaction report is collected, 
processed, and made available pursuant to an effective transaction 
reporting plan, or for which a transaction report, last sale data, 
or quotation information is disseminated through an automated 
quotation system as described in Section 3(a)(51)(A)(ii) of the Act 
(15 U.S.C. 78c(a)(51)(A)(ii)); and
    (ii) with respect to securities transactions outside the United 
States, any transaction that has been reported to a foreign 
financial regulatory authority in the jurisdiction where such 
transaction has taken place.
    17 CFR 41.11(d)(10) and 17 CFR 240.3a55-1(d)(10). ``Foreign 
financial regulatory authority'' is defined, as in the proposed 
rule, to have the same meaning as in Section 3(a)(52) of the 
Exchange Act, 15 U.S.C. 78c(a)(52). 17 CFR 41.11(d)(4) and 17 CFR 
240.3a55-1(d)(4).
    \45\ The principal market of a security is defined in paragraph 
(d)(9) of the rules as the single securities market with the largest 
reported trading volume for the security during the preceding 6 full 
calendar months. 17 CFR 41.11(d)(9) and 17 CFR 240.3a55-1(d)(9).
---------------------------------------------------------------------------

    If no reported transactions in the security or in a depositary 
share representing the security have taken place in the United States, 
the closing price of the security is defined as the price at which the 
last transaction in such security took place in the regular trading 
session of the principal market for the security. The price, if 
reported in non-U.S. currency, must be converted into U.S. dollars on 
the basis of a spot rate of exchange relevant for the time of the 
transaction obtained from at least one independent entity that provides 
or disseminates foreign exchange quotations in the ordinary course of 
its business.\46\
---------------------------------------------------------------------------

    \46\ See infra note 76 and accompanying text for a more detailed 
discussion of foreign currency conversions under these rules.
---------------------------------------------------------------------------

    The Commissions concur with the commenters that use of a security's 
closing price, rather than its average price as proposed, is reasonable 
in view of the purposes of the rule-determining which securities are 
among the 750 securities with the largest market capitalization. 
Relying on the closing price will also help assure uniformity among 
markets in applying the statutory definition.
    For the same reason, the Commissions have defined closing price in 
the rules generally as the price of the last transaction in the regular 
trading session of the principal market for the security in the United 
States.\47\ Although a security that is registered under Section 12 of 
the Exchange Act, and thereby eligible for inclusion among the 750 
securities with the largest market capitalization, may trade on markets 
outside of the United States, the Commissions believe that, in this 
context, the interests of uniformity are served by defining the closing 
price in U.S. dollars as based on the last transaction for the security 
in the regular trading session of the principal U.S. market. When a 
foreign security that is registered under Section 12 trades in the 
United States only in the form of a depositary share, the rule 
establishes that the closing price of such share must be adjusted to 
reflect the ratio of shares represented by the depositary share to the 
number of outstanding shares in the underlying security. This is 
because the formula for market capitalization of the underlying 
security uses the number of outstanding shares in the underlying 
security as the multiplier with closing price.
---------------------------------------------------------------------------

    \47\ See CBOE Letter and GS Letter, suggesting a similar 
definition.
---------------------------------------------------------------------------

    In addition, following the suggestion of commenters, the 
Commissions have modified the definition of outstanding shares from 
that proposed to include updated information on changes in the number 
of shares outstanding reflecting corporate events that occur after the 
annual or quarterly report, as contained in any Form 8-K filed by the 
issuer.\48\
---------------------------------------------------------------------------

    \48\ See 17 CFR 41.11(d)(7) and 17 CFR 240.3a55-1(d)(7). The 
definition does not include, however, information submitted by the 
issuer to the primary market center for the underlying security, but 
not filed on a Form 8-K. The Commissions believe that a requirement 
to include such information could impose an unreasonable burden on 
markets in terms of monitoring for such changes and could lead to a 
lack of uniformity in the data used by different markets.
---------------------------------------------------------------------------

    The final rules provide that, once the market capitalization of a 
security is calculated for each day of the preceding 6 full calendar 
months, market capitalization of such security as of the preceding 6 
full calendar months must be determined.\49\ This determination 
requires: (1) Summing the values of the market capitalization for each 
trading day in the U.S. during the preceding 6 full calendar months; 
\50\ and (2) dividing this sum by the total number of such trading 
days.\51\
---------------------------------------------------------------------------

    \49\ Rule 41.11(a)(2)(i) under the CEA and Rule 3a55-1(a)(2)(i) 
under the Exchange Act.
    \50\ The definition of ``preceding 6 full calendar months'' is 
in paragraph (d)(8) of CEA Rule 41.11 and Exchange Act Rule 3a55-1 
and is discussed, infra notes 88-92 and accompanying text.
    \51\ Some commenters suggested that the market capitalization of 
a security over the preceding 6 full calendar months be determined 
by first calculating the security's average closing price for the 
entire 6-month period, and then multiplying such average closing 
price by the number of outstanding shares of such security for each 
day in the 6-month period. See, e.g., CBOT Letter. The method 
adopted by the Commissions, however, requires calculating the market 
capitalization of a security for each day in the 6-month period, and 
then averaging those daily market capitalization values over the 6-
month period. This method takes into account any change in the 
number of outstanding shares of the security that may have occurred 
during the 6-month period.
---------------------------------------------------------------------------

    Finally, paragraph (a)(2)(ii) of these rules \52\ provides that the 
750 securities with the largest market capitalization shall be 
identified from the universe of all reported securities as defined in 
Rule 11Ac1-1 under the Exchange Act \53\ that are common stock or 
depositary shares. The Commissions believe that this provision will 
ease the burden on markets in identifying the Top 750, by limiting the 
universe from which these securities must be identified to securities 
listed on a national securities exchange, the trades of which are 
reported to the Consolidated Tape Association (``CTA''), and securities 
that are Nasdaq National Market System (``Nasdaq NMS'') securities.
---------------------------------------------------------------------------

    \52\ 17 CFR 41.11(a)(2)(ii) and 17 CFR 3a55-1(a)(2)(ii).
    \53\ A reported security is a security for which transaction 
reports are collected, processed, and made available pursuant to an 
effective transaction reporting plan. See 17 CFR 240.11Ac1-1(a)(20).
---------------------------------------------------------------------------

2. Determining Dollar Value of Average Daily Trading Volume of a 
Security
    The dollar value of ADTV of a security is relevant for purposes of: 
(1) determining whether an index is a narrow-based security index under 
the statutory definition, which requires an assessment of whether the 
dollar value of the ADTV of the lowest weighted 25% of the index is 
less than $50 million (or $30 million for indexes with 15 or more 
component securities); \54\ and (2) determining whether a security is 
among the 675 securities with the largest dollar value of ADTV, 
permitting the index of which it is a component to qualify as broad-
based under the first exclusion from the definition of narrow-based 
security index.\55\
---------------------------------------------------------------------------

    \54\ See supra note 7 and accompanying text.
    \55\ See supra note 9 and accompanying text.
---------------------------------------------------------------------------

a. Proposed Rules

    The proposed rules would have defined the dollar value of ADTV of a 
security for the purpose of the definition of narrow-based security 
index as the product of: (1) The average daily trading volume of the 
security over the preceding 6 full calendar months; and (2) the average 
price of the security over the preceding 6 full calendar months.
    The definition of average price of a security over the preceding 6 
full calendar months in the proposed rules took into account the number 
of shares

[[Page 44495]]

in each transaction during the period. This method, often termed 
``volume-weighted average price,'' or ``VWAP,'' would require a person 
calculating the average to first establish a value for each transaction 
by multiplying the price per share in U.S. dollars of the transaction 
by the number of shares traded in that transaction. Then, the sum of 
these values for all the transactions in the security during the 6-
month period would be divided by the total number of shares traded 
during that period.
    The proposed rules provided an alternative method for determining 
the dollar value of ADTV of a security using a non-volume-weighted 
average price under certain conditions. Specifically, for purposes of 
determining whether the dollar value of ADTV of the lowest weighted 25% 
of a security index exceeded the statutory thresholds of $50 million 
(or $30 million), national securities exchanges, designated contract 
markets, registered DTEFs, and foreign boards of trade would have been 
permitted to use an average price for each component security defined 
as the average price level at which transactions in the security took 
place over the six-month period, irrespective of the number of shares 
traded in each transaction.
    In addition, the proposed rules permitted data from non-U.S. 
markets to be included in determining the ADTV and average price of a 
security, provided that the information was reported to a foreign 
financial regulatory authority in the jurisdiction where the security 
is traded. To the extent that trades executed on non-U.S. markets were 
included in the calculation of ADTV, the proposed rules required the 
same trades to be included in calculating average price. The proposed 
rules also required that for non-U.S. transactions to be included in 
the calculation of average price, the price of each transaction would 
need to be translated into U.S. dollars at the trading date's noon 
buying rate in New York City as certified for customs purposes by the 
Federal Reserve Bank of New York (``noon buying rate''). Price and 
trading volume data for each security were to be included only for the 
trading days of the principal market for the security.
    The Commissions requested comment on the use of the proposed method 
for determining dollar value of ADTV, and inquired whether another 
method, such as using an average of a security's daily closing price, 
would be more appropriate. In addition, the Proposing Release solicited 
comment on whether, when determining average price of a security, the 
average price, on a proportional basis, of ADRs representing shares of 
such security should be considered. The Proposing Release also included 
a request for comment on whether it would be difficult for market 
participants to determine the Top 675 securities, and whether the 
Commissions should themselves undertake to compile, on a regular basis, 
a Top 675 list.

b. Comment Letters

    Several commenters objected to the use of VWAP as a multiplier in 
determining dollar value of ADTV.\56\ The commenters asserted that the 
calculations required by this method would be too numerous, 
complicated, and overly burdensome in light of the purposes of the 
statute and would not increase the reliability of the results. 
Moreover, they pointed out that, because the methodologies of 
calculating VWAP differ among market data vendors, the results would 
not be as consistent as using a method based on closing price.
---------------------------------------------------------------------------

    \56\ See CBOE Letter; CME Letter 1; GS Letter. See also CBOT 
Letter.
---------------------------------------------------------------------------

    There was a divergence of views, however, with respect to an 
appropriate alternative. One commenter believed that the Commissions 
should allow flexibility in the methodologies used to calculate average 
price and dollar value of ADTV.\57\ Some commenters favored the use of 
the average daily closing price of a security as the multiplier to be 
used with the security's ADTV to determine dollar value of ADTV.\58\ 
Another commenter maintained that while closing price is the standard 
multiplier used (with the number of outstanding shares) in calculating 
market capitalization, using an average closing price to determine 
dollar value of ADTV would be an ``unconventional and less accurate 
measure of average value traded'' than using VWAP as the multiplier, 
which, it argued, is ``standard and intuitive.''\59\ This commenter 
pointed out, however, that the same result reached by using the 
proposed method could be reached by using a method that had been 
suggested as an alternative in the Proposing Release. This method 
involves calculating the actual dollar value of all transactions in a 
security for each trading day during the 6-month period, and then 
arriving at an average for the period by summing the values for each 
trading day and dividing the result by the number of such trading days.
---------------------------------------------------------------------------

    \57\ See CME Letter I.
    \58\ See CBOE Letter; GS Letter, See also CME Letter I.
    \59\ See CBOT Letter.
---------------------------------------------------------------------------

    Several commenters favored including the trading in ADRs in 
calculating the average price of their underlying securities.\60\ With 
respect to the proposed rule permitting the limited use of a non-
volume-weighted average price for purposes of determining whether the 
daily trading value of the lowest weighted 25% of an index exceeded the 
statutory thresholds, two commenters did not believe that it was likely 
to be helpful and one commenter did not favor the conditions imposed 
for use of this alternative.\61\
---------------------------------------------------------------------------

    \60\ See CBOE Letter; CBOT Letter; CME Letter I; SIA Letter.
    \61\ See CBOT CME Letter I; SIA Letter.
---------------------------------------------------------------------------

    Three commenters expressed views on the proposed rules with respect 
to the inclusion of foreign trading data. One commenter generally 
agreed with the proposed rules,\62\ while another believed that, for 
ADTV, only the volume reported on the principal listing exchange in the 
United States should be included.\63\ A third commenter questioned the 
restriction limiting the use of foreign data to data reported to a 
foreign financial regulatory authority, suggesting, instead, that the 
rules permit the use of trading data derived from trading on foreign 
markets subject to surveillance by an appropriate foreign regulatory 
authority.\64\ This commenter also sought clarification as to whether 
the inclusion of data from non-U.S. exchanges is optional or mandatory, 
noting that if the use of foreign data is merely optional, this could 
lead to inconsistent determinations as to whether an index is broad-
based or narrow-based.\65\
---------------------------------------------------------------------------

    \62\ See CME Letter I.
    \63\ See CBOE LEtter.
    \64\ See SIA Letter. The SIA stated that it was not clear that 
all relevant jurisdictions require reporting to a financial 
regulatory authority.
    \65\ Id.
---------------------------------------------------------------------------

    Finally, several commenters indicated that it would indeed be 
difficult to constantly determine the Top 675 securities, and endorsed 
the suggestion that the Commissions should publish lists of the Top 675 
securities for purposes of the statutory provision.\66\ One exchange 
also argued that a list published by the Commissions was necessary to 
eliminate uncertainty and assure conformity among markets in 
determining the status of various security indexes.\67\
---------------------------------------------------------------------------

    \66\ See CBOE Letter; CBOT Letter; CME Letter I; SIA Letter.
    \67\ See CBOE Letter.
---------------------------------------------------------------------------

 c. Final Rules

    The rules, as adopted, establish different methods to be used to 
determine the dollar value of a security's ADTV for purposes of the two 
provisions where this value is relevant,

[[Page 44496]]

as noted above: the statutory definition of narrow-based security index 
(Section 1a(25)(A) of the CEA and Section 3(a)(55)(B) of the Exchange 
Act); and the first exclusion from that definition (Section 
1a(25)(B)(i) of the CEA and Section 3(a)(55)(C)(i) of the Exchange 
Act).
    As discussed further below, the final rules provide for the 
possibility that the Commissions will designate the Top 675 for 
purposes of the exclusion. The Commissions are actively investigating 
the possibility of designating this list with routine periodic updates. 
To the extent feasible, the Commissions are committed to include 
foreign volume data. The Commissions welcome suggestions at any time 
from interested parties regarding this matter.
    In the event that no such list is designated by the Commissions, 
the rules provide a method for markets themselves to determine the Top 
675 securities for this purpose. The Commissions agree with the view 
expressed by some commenters that it is important in such case that all 
markets use the same data. Accordingly, it is critical that the 
information used to determine these 675 securities is easily obtained 
by all markets and is identical. Because of limitations in the 
accessibility and uniformity of trading data from foreign markets, the 
Commissions have determined that, for purposes only of determining the 
Top 675 securities, only U.S. market volume data should be used. At 
this time, the Commissions believe that this simplification will not 
make a significant impact on the final list drawn from the intersection 
of the Top 750 and Top 675.
    For purposes of determining whether the dollar value of the lowest 
weighted 25% of a particular index exceeds the $50 million (or $30 
million) threshold established by the definition of narrow-based 
security index, the Commissions believe that small variations in the 
derived ADTV for component securities are not critical. Therefore, the 
Commissions have determined to require the inclusion of foreign market 
trading data in the calculation of a security's dollar value of ADTV.
    The Commissions are adopting different methodologies for 
calculating the value of ADTV for purposes of the two provisions where 
the value is relevant, i.e., requiring the use of foreign volume data 
for the definition but not for the first exclusion, for a practical 
reason. The Commissions believe that it is important to have a single 
list of the Top 675 securities for ascertaining compliance with the 
first exclusion to enhance certainty regarding eligible securities. In 
contrast, the Commissions believe that small variations in the derived 
ADTV that may result from the use of foreign volume data for component 
securities under the definition would be acceptable and would not 
undermine the statutory requirement that the lowest weighted 25% of an 
index exceed minimum volume thresholds to be a broad-based index.
i. Dollar Value of ADTV for Purposes of Section 1a(25)(A) of the CEA 
and Section 3(a)(55)(B) of the Exchange Act
    First, paragraph (b)(1)(i)(A) of Rule 41.11 under the CEA and Rule 
3a55-1 under the Exchange Act \68\ provides the method to determine the 
dollar value of ADTV of a security for purposes of assessing whether 
the dollar value of ADTV of the lowest weighted 25% of a security index 
exceeds $50 million (or $30 million). The method entails calculating 
the dollar value of ADTV of a security separately for each jurisdiction 
in which it trades, and then summing the values for all 
jurisdictions.\69\ Once the dollar value of ADTV of each component 
security comprising the lowest weighted 25% of an index \70\ is 
calculated, those values are summed to determine the aggregate dollar 
value of ADTV of the lowest weighted 25% of an index.\71\
---------------------------------------------------------------------------

    \68\ 17 CFR 41.11(b)(1)(i)(A) and 17 CFR 240.3a55-1(b)(1)(i)(A).
    \69\ A separate calculation is required for each jurisdiction 
because the value of foreign trading, which is reported in local 
currency, must be converted into U.S. dollars each day on the basis 
of a spot exchange rate valid for that particular day, see infra 
note 76, and then averaged over the 6-month period. Under the rule 
as proposed, the overall VWAP in U.S. dollars for all markets could 
have been calculated together, but that calculation, too, required 
the value of each day's transactions in each foreign market to have 
been originally translated from the local currency into U.S. dollars 
on the basis of a rate valid for that particular day.
    \70\ See infra notes 85-86 and accompanying text for a 
discussion of the definition of ``lowest weighted 25% of an index.''
    \71\ 17 CFR 41.11(b)(1)(iv) and 17 CFR 240.3a55-1(b)(1)(iv).
---------------------------------------------------------------------------

    For trading in a security in the United States, paragraph 
(b)(1)(ii) of Rule 41.11 under the CEA and Rule 3a55-1\72\ under the 
Exchange Act provides that the dollar value of ADTV of a security is 
the sum of the value of all reported transactions in the security for 
each U.S. trading day during the preceding 6 full calendar months, 
divided by the total number of trading days. For trading in a security 
in a jurisdiction other than the United States, paragraph 
(b)(1)(iii)\73\ sets forth the same method for determining the dollar 
value of ADTV of a security in each jurisdiction in which it traded, 
but stipulates that the value of each day's trading must be translated 
into U.S. dollars on the basis of that day's exchange rate, as 
discussed further below.
---------------------------------------------------------------------------

    \72\ 17 CFR 41.11(b)(1)(ii) and 17 CFR 240.3a55-1(b)(1)(ii).
    \73\ 73 17 CFR 41.11(b)(1)(iii) and 17 CFR 240.3a55-
1(b)(1)(iii).
---------------------------------------------------------------------------

    Calculating a security's VWAP will not be necessary.\74\ In 
response to the concerns raised by commenters, the method adopted for 
determining dollar value of ADTV requires a market to first compute the 
dollar value of a security's trading each day, and then to average the 
result over the 6-month period. This calculation yields the same result 
as proposed, without requiring the calculation of a security's 
VWAP.\75\
---------------------------------------------------------------------------

    \74\ Both the volume-weighted average price and non-volume-
weighted average price definitions of ``average price'' in the 
proposed rules have thus been eliminated.
    \75\ This method also does not require the separate calculation 
of ADTV. Thus, the proposed definition of ADTV is not being adopted.
---------------------------------------------------------------------------

    The rule allows flexibility in the choice of an exchange rate.\76\ 
The proposed rule would have required the use of the noon buying rate 
to assure conformity in the determination of whether a security is one 
of the 675 securities with the largest dollar value of ADTV. However, 
because the Commissions are adopting a different methodology for 
determining dollar value of ADTV of the lowest weighted 25% of an index 
than the methodology for determining whether a security is among the 
Top 675, the Commissions believe that permitting markets some 
flexibility in applying an exchange rate is acceptable, as long as the 
exchange rate used is a spot rate of exchange obtained from an 
independent entity that provides or disseminates foreign exchange 
quotations in the ordinary course of its business. Such entity must be 
active in the foreign currency markets as a source that quotes rates 
for the purpose of buying and selling foreign currencies. The Federal 
Reserve Bank, as in the proposed rules, would be an acceptable source.
---------------------------------------------------------------------------

    \76\ See paragraph (b)(1)(iii)(B) of the rules, 17 CFR 
41.11(b)(1)(iii)(B) and 17 CFR 3a55-1(b)(1)(iii)(B) .
---------------------------------------------------------------------------

    As supported by commenters who favored the inclusion of ADR data, 
the rules also establish that the dollar value of ADTV of a security 
includes the value of all reported transactions in any depositary share 
that represents such security; and that the dollar value of ADTV of a 
depositary share includes the value of all reported transactions in its 
underlying security.\77\
---------------------------------------------------------------------------

    \77\ See paragraph 41.11(b)(1)(i)(B)-(C) of the rules, 17 CFR 
41.11(b)(1)(i)(B)-(C) and 17 CFR 240.3a55-1(b)(1)(i)(B)-(C).
---------------------------------------------------------------------------

    The Commissions note that the inclusion of information from non-
U.S.

[[Page 44497]]

markets is mandatory in determining whether the lowest weighted 25% of 
an index is more than $50 million (or $30 million). The final rule 
retains the restriction of the proposed rules limiting data from non-
U.S. markets to transactions reported to a foreign financial regulatory 
authority.\78\ The Commissions believe that there is no way to assure 
that information on transactions that are not so reported is reliable 
or accurate.
---------------------------------------------------------------------------

    \78\ See supra note 44.
---------------------------------------------------------------------------

ii. Dollar Value of ADTV for Purposes of Determining Whether a Security 
is One of the Top 675
    Second, in response to commenters, the Commissions are adopting two 
alternative methods for markets to determine whether a security is one 
of the 675 securities with the largest dollar value of ADTV. The 
Commissions expect to be able at some point in the near future to 
designate a list of such securities and have provided in the final 
rules for such possible designation.\79\ However, because a final 
determination regarding the Commissions' designation of such list has 
not yet been made, the Commissions are adopting rules setting forth the 
method for markets themselves to use to calculate dollar value of ADTV 
and thereby to determine which securities are among the Top 675.
---------------------------------------------------------------------------

    \79\ See infra notes 83-84 and accompanying text.
---------------------------------------------------------------------------

    Specifically, in the absence of a designated list of such 
securities, paragraph (b)(2)(ii)(A) of CEA Rule 41.11 and Exchange Act 
Rule 3a55-1 \80\ defines the dollar value of ADTV of a security as of 
the preceding 6 full calendar months as the sum of the value of all 
reported transactions in such security in the United States for each 
trading day during the preceding 6 full calendar months, divided by 
total number of such trading days.
---------------------------------------------------------------------------

    \80\ 17 CFR 41.11(b)(2)(ii)(A) and 17 CFR 240.3a55-
1(b)(2)(ii)(A).
---------------------------------------------------------------------------

    In considering a method for markets to use in compiling their own 
lists individually, the Commissions faced a concern about the 
variability in the way trading information from foreign markets 
currently may be accessed and compiled. After careful deliberation, the 
Commissions concluded that for the purposes of certainty and 
conformity, while the averaging method for determining dollar value of 
ADTV should remain the same, it is appropriate at this time to limit 
the data that is to be used by markets in identifying the Top 675 to 
U.S. trading information. The Commissions believe that this will help 
ensure that the Top 675 lists compiled individually by various markets, 
which is one of the bases for determining whether a security index is 
broad-based, will be uniform and verifiable.
    Finally, paragraph (b)(2)(ii)(B) of these rules \81\ provides that 
the 675 securities with the largest dollar value of ADTV shall be 
identified from the universe of all reported securities as defined in 
Rule 11Ac1-1 under the Exchange Act \82\ that are common stock or 
depositary shares. The Commissions believe that this provision will 
ease the burden on markets in identifying the Top 675, by limiting the 
universe from which these securities must be identified to securities 
listed on a national securities exchange, the trades of which are 
reported to the CTA, and securities that are Nasdaq NMS securities.
---------------------------------------------------------------------------

    \81\ 17 CFR 41.11(b)(2)(ii)(B) and 17 CFR 3a55-1(b)(2)(ii)(B).
    \82\ A reported security is a security for which transaction 
reports are collected, processed, and made available pursuant to an 
effective transaction reporting plan. See 17 CFR 240.11Ac1-1(a)(20).
---------------------------------------------------------------------------

3. Use of the Top 750 and Top 675 Lists
    As noted above, commenters indicated that it would be difficult to 
constantly determine the Top 750 and Top 675 securities, and endorsed 
the idea that the Commissions publish a list of the Top 750 and Top 675 
securities. The final rules accommodate the possibility of the 
Commissions designating a list of the Top 750 and of the Top 675 
securities. The Commissions may either generate lists of such 
securities themselves, or designate lists compiled by a third party. 
Such designated lists would alleviate the burden on markets of 
calculating the lists, and help ensure uniformity in, and verifiability 
of, the information used by markets to determine that a security index 
is broad-based.
    Specifically, paragraph (a)(1) of Rule 41.11 under the CEA and Rule 
3a55-1 under the Exchange Act provides that a security will be one of 
750 securities with the largest market capitalization on any particular 
day when it is included on a list of such securities designated by the 
SEC and CFTC.\83\ Similarly, paragraph (b)(2)(i) of these rules 
provides that a security will be one of the 675 securities with the 
largest dollar value of ADTV on any particular day when it is included 
on a list of such securities designated by the SEC and CFTC.\84\
---------------------------------------------------------------------------

    \83\ 17 CFR 41.11(a)(1) and 17 CFR 240.3a55-1(a)(1).
    \84\ 17 CFR 41.11(b)(2)(i) and 17 CFR 240.3a55-1(b)(2)(i).
---------------------------------------------------------------------------

    The rules contemplate that the Commissions will prepare a list of 
the Top 750 and a list of the Top 675 that will be the sole source by 
which a market participant may determine whether a component security 
of an index fulfills the statutory requirements. The provision also 
allows for the possibility that the Commissions may choose to designate 
Top 750 and Top 675 lists that have been prepared by a third party.
    The rule providing for the designation of lists is also intended to 
address another issue raised by the Commissions in the Proposing 
Release and remarked on by several commenters: How often must the Top 
750 and Top 675 securities be identified in order to verify that 
component securities of an index still would be included on such lists? 
The final rules provide that a security will be one of 750 securities 
with the largest market capitalization and one of 675 securities with 
the largest dollar value of ADTV on any particular day when it is 
included on a list of such eligible securities designated by the 
Commissions as applicable for that day. Any security on such list 
designated by the Commissions would remain an eligible security until 
the next list is released.
    In addition to easing the burden on exchanges, the Commissions note 
that this provision also has ramifications for the statutory tolerance 
period, which permits a broad-based security index to retain its broad-
based status as long as it does not assume the characteristics of a 
narrow-based security index for more than 45 business days over three 
calendar months. The rule adopts a principle suggested in the 
discussion of the possibility of officially-designated lists in the 
Proposing Release. Any security that appears on both lists will be 
deemed to be one of the Top 750 and Top 675 securities every day during 
the period in which those lists are designated as applicable. 
Conversely, any security that does not appear on the lists will be 
deemed not to satisfy the statutory requirements every day those lists 
are designated as applicable.
4. The Lowest Weighted 25% of an Index
    As discussed above, one of the factors that may render a security 
index narrow-based is if the aggregate dollar value of the ADTV of the 
lowest weighted 25% of its component securities is less than $50 
million (or $30 million for an index of 15 component securities or 
more).
    The Commissions are adopting as proposed a provision that addresses 
the situation when no group of the lowest weighted securities in an 
index equals exactly 25% of the index's weighting.

[[Page 44498]]

Paragraph (d)(5) of CEA Rule 41.11 and Exchange Act Rule 3a55-1 
establishes that the ``lowest weighted 25% of an index'' is comprised 
of those component securities that have the lowest weightings in the 
index such that, when their weightings are summed, they equal no more 
than 25% of the weight of the index.\85\
---------------------------------------------------------------------------

    \85\ 17 CFR 41.11(d)(5) and 17 CFR 240.3a55-1(d)(5). See also 
paragraph (d)(12) of the rule, which clarifies that ``weighting'' of 
a component security of an index means the percentage of the index's 
value represented or accounted for by that component security.
---------------------------------------------------------------------------

    To identify these securities, the following method applies: (1) All 
component securities in an index are ranked from the lowest to highest 
weighting; and (2) beginning with the lowest weighted security and 
proceeding to the next lowest weighted security and continuing in this 
manner, the weightings are added to each other until they reach the sum 
that comes closest to, or equals 25%, but does not exceed 25%. Those 
securities comprise the lowest weighted 25% of the index.
    One commenter acknowledged that any application of the statute must 
account for the situation where no group of securities comprise exactly 
25% of the index's weighting, but argued that the solution includes a 
paradoxical element: in some cases, when a new component security is 
added to an index--theoretically broadening the index--the result can 
be that the number of securities in the ``lowest weighted 25%'' is 
decreased, making it more difficult to clear the $50 million (or $30 
million) hurdle.\86\
---------------------------------------------------------------------------

    \86\ See CME Letter I. For further explanation, see id., at 
pages 4-5.
---------------------------------------------------------------------------

    The Commissions believe that the provision as proposed is 
consistent with the intent of Congress in fashioning the ``lowest 
weighted 25%'' test. The commenter's alternative solution is to prorate 
the dollar value of ADTV of the security that puts the lowest weighted 
group of securities ``over the top'' of the 25% line. In the 
Commissions'' view, a pro rata approach does not accord with the 
concept implicit in the statute that the lowest weighted 25% comprises 
a whole number of component securities.
    Paragraph (d)(5)(ii) of CEA Rule 41.11 and Exchange Act Rule 3a55-
1, which is adopted today as proposed, addresses another issue in the 
calculation of dollar value of ADTV of the lowest weighted 25% of a 
security index. As explained in the Proposing Release, the calculation 
of dollar value of ADTV for any given moment in time must take into 
account trading volume and price data for the relevant securities over 
the preceding 6 months of trading. Yet the securities that comprise the 
lowest weighted 25% of an index may vary from day to day. The rule 
provides instruction as to how the dollar value of ADTV of the lowest 
weighted 25% of an index is to be determined on a particular day.
    Paragraph (d)(5)(ii) of CEA Rule 41.11 and Exchange Act Rule 3a55-1 
establishes that, for any particular day, the ADTV of the lowest 
weighted 25% of the index is calculated based on the price and trading 
data over the preceding 6 months for the securities that comprise the 
lowest weighted 25% of the index for that day. The Commissions believe 
that this method of taking a ``snapshot'' of the current lowest 
weighted 25% and then looking retroactively to determine the aggregate 
dollar value of the ADTV over the preceding 6 months of the securities 
in the snapshot is a reasonable approach for the purposes of the 
statute and will be considerably less burdensome than the alternative 
of requiring a calculation of the data for the lowest weighted 25% of 
the index for each day of the preceding 6 full calendar months.\87\
---------------------------------------------------------------------------

    \87\ See also SIA Letter endorsing this approach.
---------------------------------------------------------------------------

5. Determining ``the Preceding 6 Full Calendar Months''
    As already noted, the CEA and Exchange Act specify that the dollar 
value of ADTV and market capitalization are to be calculated as of the 
``preceding 6 full calendar months.''\88\
---------------------------------------------------------------------------

    \88\ Section 1a(25)(E)(i) of the CEA and Section 3(a)(55)(F)(i) 
of the Exchange Act.
---------------------------------------------------------------------------

    Paragraph (d)(8) of CEA Rule 41.11 and Exchange Act Rule 3a55-1, 
being adopted today as proposed, defines ``preceding 6 full calendar 
months,'' with respect to a particular day, as the period of time 
beginning on the same day of the month 6 months before such day, and 
ending on the day prior to such day.\89\ For example, for August 16 of 
a particular year, the preceding 6 full calendar months means the 
period beginning February 16 and ending August 15. Similarly, for March 
8 of a particular year, the preceding 6 full calendar months begins on 
September 8 of the previous year and ends on March 7.
---------------------------------------------------------------------------

    \89\ 17 CFR 41.11(d)(8) and 17 CFR 240.3a55-1(d)(8).
---------------------------------------------------------------------------

    The Commissions believe that this ``rolling'' 6-month approach is 
appropriate, particularly in light of issues that would arise if 6 full 
calendar months were measured from the first to the last day of each 
month on the calendar. If that approach were used, it would be 
difficult to apply the third exclusion from the definition of narrow-
based security index in the CEA and Exchange Act, which excepts a 
broad-based security index from the definition of narrow-based security 
index if it has assumed narrow-based characteristics for 45 or fewer 
business days in a three-month period.\90\
---------------------------------------------------------------------------

    \90\ Sections 1a(25)(B)(iii) and (D) of the CEA and Sections 
2(a)(55)(C)(iii) and (E) of the Exchange Act. See supra notes 11-12 
and accompanying text.
---------------------------------------------------------------------------

    For example, if a national securities exchange, designated contract 
market, registered DTEF, or foreign board of trade needed to assess the 
dollar value of ADTV of a security for the six months preceding July 
20, and the measuring period were the 6-month period from January 1 
through June 30, the dollar value of ADTV of such security would be 
static for each day in July. In this example, the calculation would not 
take into account any transactions that occurred during July. The 
Commissions believe that the tolerance provision of the third 
exclusion, which specifies 45 days of tolerance within a three-month 
period in which dollar value of ADTV levels may drop below the 
threshold, indicates that a ``rolling month'' approach is most 
appropriate.
    One commenter agreed with this approach.\91\ Another commenter, 
however, took issue, maintaining that Congress likely intended 
``calendar months'' to mean the month-long periods referred to as 
January, February, etc., and that it is possible to read the statute's 
tolerance provisions compatibly with this interpretation.\92\ This 
commenter's main contention in this connection, however, appeared to be 
that it would be advantageous to keep market capitalization values and 
dollar values of ADTV static for a month at a time. According to this 
commenter, a month-by-month compilation of the Top 750 and Top 675 
lists--rather than a required daily compilation--would, among other 
things, ``dramatically reduce the data gathering calculation, and 
paperwork burden on exchanges.''
---------------------------------------------------------------------------

    \91\ See CBOE Letter.
    \92\ See CME Letter I.
---------------------------------------------------------------------------

    The Commissions note that in view of the new facet of the final 
rule providing for the designation of Top 750 and 675 lists that may be 
applicable for periods of some duration, this latter concern may to a 
large extent be alleviated. The Commissions also believe that a month-
long, static dollar value of ADTV would not comport with the purposes 
of the statute's $50 million (or $30 million) hurdle for the lowest 
weighted 25% of an index to achieve broad-based status. Thus, the 
Commissions have adopted the proposed definition of ``preceding 6 full 
calendar months'' in the final rules.

[[Page 44499]]

6. Depositary Shares
    In the Proposing Release, the Commissions requested comment on 
whether an ADR should be considered registered pursuant to Section 12 
of the Exchange Act for purposes of the first exclusion from the 
definition of narrow-based security index, which is available for an 
index comprised solely of Top 750 and Top 675 securities registered 
under Section 12.\93\
---------------------------------------------------------------------------

    \93\ As explained in the Proposing Release, while the security 
of an issuer that underlies an ADR must be registered pursuant to 
Section 12, the ADR itself is deemed to be a separate security and 
is exempt from Section 12 registration.
---------------------------------------------------------------------------

    Commenters responded favorably on this issue.\94\ Because a 
depositary share is a security that represents a common stock, the 
Commissions believe that an instance where a depositary share is a 
component security of an index is fundamentally equivalent to the 
instance where the common stock is the component security. The 
Commissions, therefore, have provided in the final rules \95\ that the 
requirement that each component security of an index be registered 
under Section 12 of the Exchange Act for purposes of the first 
exclusion will be satisfied with respect to any security that is a 
depositary share if the deposited securities underlying the depositary 
share is registered under Section 12. This allowance is granted on 
condition that the depositary share is registered under the Securities 
Act of 1933 on Form F-6.\96\
---------------------------------------------------------------------------

    \94\ See CBOE Letter; CBOT Letter; CME Letter I; SIA Letter.
    \95\ See paragraph (c) of CEA Rule 41-11 and Exchange Act Rule 
3a55-1, 17 CFR 41.11(c) and 17 CFR 240.3a55-1(c).
    \96\ 17 CFR 239.36.
---------------------------------------------------------------------------

7. General Guidance in Application of the Rule
    As a general matter, the Commissions note that any national 
securities exchange, designated contract market, registered DTEF, or 
foreign board of trade that trades a future on a security index will be 
required to determine whether or not the future is a security future to 
assure that the market is in compliance with the CEA and the Exchange 
Act.\97\
---------------------------------------------------------------------------

    \97\ The Commissions further note that national securities 
exchanges, designated contract markets, or registered DTEFs that 
trade security index futures will need to preserve records of all 
their determinations with respect to whether a security index is 
narrow-based or broad-based to comply with their recordkeeping 
requirements under Sections 5(d)(17) and 5a(d)(8) of the CEA and new 
Rule 41.2 under the CEA, 17 CFR 41.2, and Rule 17a-1 under the 
Exchange Act, 17 CFR 240.17a-1.
---------------------------------------------------------------------------

    The Proposing Release asked for comment on whether the Commissions 
should permit a national securities exchange, designated contract 
market, registered DTEF, or foreign board of trade to rely on 
independent calculations by a third party to determine market 
capitalization and dollar value of ADTV for purposes of these rules, 
and if so, whether any conditions should be imposed when a third party 
is used and whether the third party should be required to meet certain 
qualification standards.
    Several commenters believed that markets should be permitted to 
rely on third parties,\98\ and one added that no conditions should be 
imposed and third parties should not be required to meet qualification 
standards.\99\ One commenter believed, however, that the Commissions 
should create or designate one official source for any data used for 
purposes of determining market capitalization and dollar value of ADTV, 
not only for the Top 750 and Top 675, but for all securities registered 
under Section 12.\100\
---------------------------------------------------------------------------

    \98\ See CBOT Letter; CME Letter I; SIA Letter.
    \99\ See CME Letter I. See also SIA Letter, maintaining that 
notification to the CFTC or SEC on the use of third-party data 
should not be required.
    \100\ See CBOE Letter. With respect to components of a security 
index that are not registered under Section 12, the CBOE believed 
that it is the responsibility of the self-regulatory organization on 
which the index is listed to determine and monitor dollar value of 
ADTV.
---------------------------------------------------------------------------

    Upon careful consideration of the question, the Commissions have 
determined not to adopt any rules at this time that prohibit or place 
conditions on the use of third parties or impose qualifications 
standards on such third parties.
    As such, a national securities exchange, designated contract 
market, registered DTEF, or foreign board of trade may contract with an 
outside party to supply the information and data analysis required to 
determine, for example, whether the dollar value of ADTV of the lowest 
weighted 25% of a security index exceeds the $50 million (or $30 
million) threshold, thus demonstrating that the index falls outside the 
basic definition of narrow-based security index; or whether the market 
capitalization and dollar value of ADTV of all the component securities 
in an index are among the Top 750 and Top 675 securities for purposes 
of the first exclusion from that definition. For example, the market 
trading the future may have a contract with a data vendor that supplies 
transaction information through an electronic medium. However, in all 
circumstances the market will be responsible for assuring that the 
calculation by the outside party is consistent with the final rules.
    One commenter maintained that an exchange ``should be able to apply 
logical relationships to minimize the calculation burden.''\101\ The 
commenter supplied an example where the lowest traded price of a 
security over the 6-month period, multiplied by the ADTV of the 
security over the same period, yielded a value of more than $50 
million. Because the dollar value of ADTV based on actual prices would 
necessarily be more than $50 million, the commenter argued, no further 
calculations should be necessary. Based on this example, the commenter 
recommended that flexibility be granted so that an exchange will have 
the ability to choose the least burdensome way of satisfying the 
statutory criteria.
---------------------------------------------------------------------------

    \101\ CME Letter I.
---------------------------------------------------------------------------

    The Commissions note the rules establish the methods by which 
market capitalization and dollar value of ADTV are determined. Any way 
that a market can minimize its calculations, yet still demonstrate with 
mathematical certainty that the statutory thresholds have been met, is 
acceptable.
    One commenter believed that the rules should require only an annual 
determination as to whether an index is narrow-based or broad-based, 
and that if it is determined that an index has changed in status, a 
future on the index should be permitted to continue trading for an 
additional one-year grace period.\102\ As the commenter recognized, 
this approach differs from the grace periods specified in the CEA and 
Exchange Act. At this time the Commissions do not believe such a 
substantial change from the statutory definition is appropriate.
---------------------------------------------------------------------------

    \102\ See SIA Letter.
---------------------------------------------------------------------------

B. CEA Rule 41.12 and Exchange Act Rule 3a55-2: A Future on a Broad-
Based Security Index that Becomes Narrow-Based During First 30 Days of 
Trading

1. The Relevant Statutory Provision
    As discussed above, the CEA and Exchange Act include a tolerance 
provision that allows, under certain conditions, a future on a security 
index to continue to trade as a broad-based index future--even when the 
index temporarily assumes characteristics that would render it a 
narrow-based security index under the statutory definition. An index 
qualifies for this tolerance and therefore is not a narrow-based 
security index if: (i) A future on the index traded for at least 30 
days as an instrument that was not a security future before the index 
assumed the characteristics of a narrow-based security index; and (ii) 
the index does not retain the characteristics of a narrow-based 
security index for

[[Page 44500]]

more than 45 business days over three consecutive calendar months.\103\
---------------------------------------------------------------------------

    \103\ Section 1a(25)(B)(iii) of the CEA and Section 
3(a)(55)(C)(iii) of the Exchange Act.
---------------------------------------------------------------------------

    Under these statutory provisions, if a future began trading on a 
security index that was broad-based, and, within fewer than 30 days, 
the index assumed the characteristics of a narrow-based security index, 
the future would become a security future immediately. A designated 
contract market, registered DTEF, or foreign board of trade that is not 
registered with the SEC would not be permitted to allow trading in the 
instrument to continue on its market, unless it were in compliance with 
relevant provisions of the Exchange Act.
2. Proposed Rules
    To avert any dislocations that could potentially be created by such 
a sudden change in a product's status, the Commissions proposed new 
rules under the CEA and Exchange Act to create a temporary exclusion 
from the definition of narrow-based security index.\104\ As proposed, 
that exclusion would have permitted a future on a broad-based index to 
continue to trade as such even if the index assumed narrow-based 
characteristics during the first 30 days of trading, provided that the 
index would not have been a narrow-based security index, had it been in 
existence, for an uninterrupted period of six months prior to the first 
day of trading. Put in other terms, if a future on an index would not 
have been deemed a security future, had the index been in existence, 
for six months prior to the beginning of trading, it could continue 
trading as a broad-based future even if, during the first 30 days, the 
index temporarily assumed the characteristics of a narrow-based index 
(so long as it did not retain those characteristics for more than 45 
business days in three consecutive calendar months).
---------------------------------------------------------------------------

    \104\ As discussed supra note 16 and accompanying text, Section 
1a(25)(B)(vi) of the CEA and Section 3(a)(55)(C)(vi) of the Exchange 
Act grant the Commissions authority to create additional exclusions 
from the statutory definition of narrow-based security index for 
indexes underlying futures that meet such requirements that they may 
establish.
---------------------------------------------------------------------------

3. Comment Letters
    The two commenters who addressed this subject generally favored the 
aim of the proposed rules, but were concerned about the six months of 
calculations that would be required to satisfy the condition for the 
temporary exclusion.\105\ One of these commenters noted, in particular, 
that to determine that an index was not a narrow-based security index 
as of a date six months before trading begins, as required by the 
proposed rules, a market would actually be required to look at trading 
data from yet another six months prior to that date.\106\ This is 
because the definition of narrow-based security index requires an 
assessment of dollar value of ADTV ``as of the preceding 6 full 
calendar months.'' This commenter supported an approach that would 
require dollar value of ADTV of the lowest weighted 25% of an index to 
meet the $50 million (or $30 million) hurdle separately for each day of 
the six months prior to the beginning of trading to qualify for the 
exclusion.
---------------------------------------------------------------------------

    \105\ See CBOT Letter; CME Letter I. Another comment letter, 
relating to the tax ramifications of these proposed rules, is 
discussed infra note 139 and accompanying text.
    \106\ See CME Letter I.
---------------------------------------------------------------------------

    The other commenter expressed the additional concern that under the 
rules as proposed, an exchange with plans to begin trading a future on 
a broad-based index would have no assurance, until the eve of the 
launch date, that in fact the index had been broad-based for every day 
during the preceding 6 months.\107\ This commenter suggested that an 
exclusion instead should be granted if the index simply was narrow-
based no more than 45 days over three months looking retroactively from 
the launch date.
---------------------------------------------------------------------------

    \107\ See CBOT Letter.
---------------------------------------------------------------------------

4. Final Rules
    After careful consideration of the comments, the Commissions have 
determined to adopt the temporary exclusion with slight modifications 
from the proposal. The final rules exclude from the definition of 
narrow-based security index an index that satisfies one of three 
alternative requirements. In addition, under the final rules, an index 
may qualify for the exclusion on the basis of data compiled as of a 
date up to a month prior to the beginning of trading of a future on the 
index. This provides exchanges with some certainty about the regulatory 
framework under which a product will trade.
    Specifically, Rule 41.12 under the CEA and Rule 3a55-2 under the 
Exchange Act \108\ provide that an index is not a narrow-based security 
index during the first 30 days of trading if:
---------------------------------------------------------------------------

    \108\ 17 CFR 41.12 and 17 CFR 3a55-2.
---------------------------------------------------------------------------

     The index would not have been a narrow-based security 
index on each trading day of the six-month period \109\ preceding a 
date up to 30 days prior to the launch of trading of a future on the 
index. This alternative requires that the index would have been a 
broad-based security index for an uninterrupted six months prior to 
trading to qualify for the exclusion for the first 30 days, as in the 
proposed rules.
---------------------------------------------------------------------------

    \109\ The rules identify this six-month period as the 
``preceding 6 full calendar months with respect to a date no earlier 
than 30 days prior to the commencement of trading'' of a future on 
the index. Id.
---------------------------------------------------------------------------

     On each trading day of the six-month period preceding a 
date up to 30 days prior to the launch of trading of a future on the 
index, (i) the index had more than 9 component securities; (ii) no 
component security in the index comprised more than 30% of the index's 
weighting; (iii) the 5 highest weighted component securities in the 
index did not comprise, in the aggregate, more than 60% of the index's 
weighting; and (iv) the dollar value of the trading volume of the 
lowest weighted 25% of such index was not less than $50 million (or in 
the case of an index with 15 or more component securities, $30 
million). This alternative requires an index not to be a narrow-based 
security index under Section 1a(25)(A) of the CEA and Section 
3(a)(55)(B) of the Exchange Act, but permits a market to determine the 
dollar value of a security's trading volume on a daily basis without 
calculating an average using six months of data for each day.\110\
---------------------------------------------------------------------------

    \110\ The second and third alternative may ease the burden on 
markets, as suggested by one of the commenters, by allowing a market 
to calculate the relevant values for each day separately, without 
averaging in data for the previous 6 full calendar months.
---------------------------------------------------------------------------

     On each trading day of the six-month period preceding a 
date up to 30 days prior to the launch of trading of a future on the 
index, (i) the index had at least 9 component securities; (ii) no 
component security in the index comprised more than 30% of the index's 
weighting; and (iii) each component security in such index was 
registered pursuant to Section 12 of the Act and was one of the Top 750 
and Top 675 securities that day. This alternative requires an index to 
meet the requirements for the exclusion from the definition of narrow-
based security index under Section 1a(25)(B) of the CEA and Section 
3(a)(55)(C) of the Exchange Act, but permits a market to determine 
whether a component security is one of the Top 750 and one of the Top 
675 on a daily basis without calculating an average using six months of 
data for each day.
    The Commissions note that the statute by its own terms requires 30 
days of trading as a broad-based index before changes in an index's 
characteristics may be tolerated. The Commissions believe that an index 
that is broad-based for six uninterrupted months, subject to the 
additional allowances permitted

[[Page 44501]]

under the second and third alternatives noted above, is sufficient 
enough of an indication that a subsequent change in the index's 
character within the first 30 days of actual trading would be an 
anomaly and would warrant a temporary exclusion from the definition of 
narrow-based security index. On the other hand, the Commissions do not 
believe that it is reasonable, as suggested by one commenter, to 
provide an exclusion for an index that was still fluctuating from 
broad-based to narrow-based status (albeit for fewer than 46 days over 
three months) in the months immediately prior to trading.
    Finally, the rules as adopted provide, as in their proposed 
version, that if an index that has qualified under the temporary 
exclusion subsequently assumes narrow-based characteristics for more 
than 45 business days over three consecutive calendar months, it 
becomes a narrow-based security index, and thus the future on it 
becomes a security future following an additional three-month grace 
period.
5. Other Issues Concerning a Broad-Based Index That Becomes Narrow-
Based
    If a security index on which a future is trading became narrow-
based for more than 45 days over three consecutive months, and thus 
pursuant to Section 1a(25)(D) of the CEA and Section 3(a)(55)(E) of the 
Exchange Act becomes narrow-based, the Commissions believe that in 
order for trading to continue to be regulated exclusively by the CFTC, 
the designated contract market, registered DTEF, or foreign board of 
trade trading the contract would be required, before the temporary 
three-month grace period elapses, to change the composition of, or 
weightings of securities in, the index so that the index is not a 
narrow-based security index. Alternatively, the designated contract 
market, registered DTEF, or foreign board of trade trading a future on 
such index could comply with the requirements of the securities laws 
applicable to security futures.
    The Proposing Release requested comment on whether the Commissions 
should expressly specify the extent of changes that would need to be 
made to the index in the event that the market does not wish to comply 
with the requirements of the securities laws. The three commenters who 
addressed this question generally responded in the negative.\111\ The 
Commissions have determined not to undertake the adoption of specific 
rules for this situation at this time.
---------------------------------------------------------------------------

    \111\ See CBOE Letter; CBOT Letter; CME Letter I.
---------------------------------------------------------------------------

    One commenter suggested that even after the grace period has 
elapsed for a broad-based index that has become a narrow-based security 
index, liquidating trades in the future should still be permitted in 
months with open interest.\112\ The Commissions note that the statute 
did not make allowances for such trades. In view of the fact that a 
three-month grace period already exists for such futures, in addition 
to the three-month tolerance period, the Commissions are not adopting 
any additional allowance at this time.
---------------------------------------------------------------------------

    \112\ See CBOT Letter.
---------------------------------------------------------------------------

C. CEA Rule 41.13 and Exchange Act Rule 3a55-3: A Future Traded on or 
Subject to the Rules of a Foreign Board of Trade

1. Proposed Rules
    In the Proposing Release, the Commissions expressed the belief that 
security indexes underlying futures that are traded on or subject to 
the rules of foreign boards of trade should be considered broad-based 
security indexes if they qualify as such in light of the statutory 
definition of a narrow-based index, or the exclusions from that 
definition. The Commissions thus proposed Rule 41.13 under the CEA and 
Rule 3a55-3 under the Exchange Act to clarify and establish that when a 
future on an index is traded on or subject to the rules of a foreign 
board of trade, that index would not be a narrow-based security index 
if it would not be a narrow-based security index if a future on the 
same index were traded on a designated contract market or registered 
DTEF.\113\ The Proposing Release also requested comment on how rules 
relating to foreign security indexes should address issues specific to 
indexes traded on or subject to the rules of a foreign board of trade.
---------------------------------------------------------------------------

    \113\ Section 1a(25)(B)(iv) of the CEA and Section 
3(a)(55)(C)(iv) of the Exchange Act grant the Commissions joint 
authority to exclude an index underlying a futures contract from the 
definition of narrow-based security index when that index is traded 
on or subject to the rules of a foreign board of trade and meets 
such requirements that are established by rule or regulation jointly 
by the Commissions.
---------------------------------------------------------------------------

2. Comment Letters
    Most of the commenters who addressed the subject of indexes traded 
on or subject to the rules of a foreign board of trade did not appear 
to object to the proposed rule, but focused their comments on the 
question of an additional rule to create different standards for 
indexes traded on or subject to the rules of a foreign board of trade 
that would expand the types of indexes that would be considered broad-
based indexes.\114\ One commenter maintained that the public interest 
requires the Commissions to move forward and grant relief with respect 
to foreign security index contracts promptly.\115\
---------------------------------------------------------------------------

    \114\ See Barclays Letter; CBOE Letter; CBOT Letter; CME Letter 
I; FIA Letter; GMIMCo Letter; GS Letter; HFKE Letter; Johnson 
Letter; ME Letter; MFA Letter; SFE Letter; SIA Letter.
    \115\ See FIA Letter. On the other hand, the CME Letter 
suggested that, in view of the controversy surrounding standards for 
foreign indexes, proposed rules in this area be separated from the 
rest of the proposed rules so as not to disrupt and prolong the 
rulemaking process.
---------------------------------------------------------------------------

    Commenters in favor of a different and more expansive standard for 
when a security index future traded on or subject to the rules of a 
foreign board of trade is broad-based made a number of arguments in 
support of their view. For example, commenters contended that Congress 
intended that different criteria be created for such indexes,\116\ and 
that American investors, particularly institutional investors, need to 
be able to trade in futures on foreign indexes for risk management, 
asset allocation, ``view-driven'' strategies, and other purposes, and 
would suffer substantial adverse impact and competitive disadvantage 
with respect to non-U.S. investors if they could not trade such 
futures.\117\
---------------------------------------------------------------------------

    \116\ See Barclays Letter; FIA Letter; GMIMCo Letter; GS Letter.
    \117\ See Barclays Letter; FIA Letter; GMIMCo Letter; GS Letter; 
ME Letter.
---------------------------------------------------------------------------

    In addition, commenters stated that the standards embodied in the 
statutory definition of narrow-based security index are of little value 
in evaluating foreign indexes because they were designed with U.S. 
markets in mind,\118\ that standards for foreign-based indexes should 
be flexible and consistent with the realities of the local stock market 
and economy,\119\ and that futures on foreign-based indexes are 
normally traded only among sophisticated investors and therefore need 
little or no regulation.\120\
---------------------------------------------------------------------------

    \118\ See FIA Letter.
    \119\ See FIA Letter; GS Letter; HKFE Letter; ME Letter; SIA 
Letter.
    \120\ See GMIMCo Letter.
---------------------------------------------------------------------------

    Other arguments from commenters supporting a different standard for 
indexes underlying futures traded on foreign markets were that many 
foreign boards of trade operate under regulatory regimes comparable to 
that in the United States, that principles of international regulatory 
comity support reliance on such regimes, and that local stock market 
regulation should be sufficient to minimize the risk that a foreign 
index future or its underlying

[[Page 44502]]

securities will be manipulated.\121\ Finally, some commenters claimed 
that U.S. interest in the integrity of foreign securities trading is 
less than U.S. interest in the integrity of trading in U.S. 
securities.\122\
---------------------------------------------------------------------------

    \121\ See HKFE Letter; ME Letter; SFE Letter; SIA Letter.
    \122\ See GMIMCo Letter.
---------------------------------------------------------------------------

    Some of these commenters proposed their own, or endorsed an 
alternative set of, criteria for indexes traded on or subject to the 
rules of a foreign board of trade.\123\ Others, while not as specific, 
set forth the general principles by which they believed the Commissions 
should formulate rules for foreign-based indexes.\124\
---------------------------------------------------------------------------

    \123\ See Barclays Letter; FIA Letter; GMIMCo Letter; GS Letter; 
SIA Letter.
    \124\ See HKFE Letter; ME Letter; SFE Letter.
---------------------------------------------------------------------------

    Two commenters, on the other hand, believed that indexes traded on 
or subject to the rules of foreign boards of trade should be held to 
the same standards as indexes traded on U.S. markets.\125\ In 
particular, one commenter argued, the susceptibility of the component 
securities of an index to manipulation-with a view to the depth of the 
market in those component securities, their liquidity, and their 
concentration in the index-should continue to guide the Commissions in 
determining the status of foreign-based indexes.\126\ Another commenter 
argued that a rule that would create a distinction between an index 
future traded on or subject to the rules of a foreign board of trade 
would unfairly place domestic boards of trade at a competitive 
disadvantage and would contradict Congress's explicit intentions in 
enacting the CFMA.\127\
---------------------------------------------------------------------------

    \125\ See CBOE Letter; CME Letter I.
    \126\ See CBOE Letter.
    \127\ See CME Letter II.
---------------------------------------------------------------------------

    In connection with foreign-based indexes, some commenters also 
raised concerns relating to current statutory provisions that govern 
the trading of futures by ``eligible contract participants,'' or 
``ECPs.'' \128\ These commenters observed that ECPs may trade futures 
on securities--including futures on narrow-based security indexes and 
any type of foreign-based security index--in the over-the-counter 
market with little regulatory supervision either by the SEC or CFTC, 
and contended that futures exchanges are disadvantaged as a result.
---------------------------------------------------------------------------

    \128\ See HKFE Letter.
---------------------------------------------------------------------------

    Several of these commenters therefore advocated the adoption of a 
rule that would permit the trading of futures on such indexes on 
futures exchanges at least by ECPs, in the absence of a separately 
crafted standard for foreign based security indexes to qualify as 
broad-based indexes.\129\ Otherwise, they argued, the trading of such 
futures would migrate to an unregulated arena.\130\ Two commenters 
observed, on the other hand, that trading over-the-counter is more 
difficult and substantially more expensive than on an exchange, and 
cited this fact as an argument to permit trading in such indexes on a 
futures exchange.\131\
---------------------------------------------------------------------------

    \129\ See GS Letter; HKFE Letter; ME Letter; MFA Letter.
    \130\ See CBOT Letter; GMIMCo Letter.
    \131\ See FIA Letter; GS Letter. The FIA, however, did not 
suggest limiting the trading of futures on foreign indexes to ECPs.
---------------------------------------------------------------------------

3. Final Rules
    The Commissions are adopting Rule 41.13 under the CEA and Rule 
3a55-3 under the Exchange Act \132\ as proposed. These rules provide 
that when a future on an index is traded on or subject to the rules of 
a foreign board of trade, such index is not a narrow-based security 
index if it would not be a narrow-based security index if a future on 
the same index were traded on a designated contract market or 
registered DTEF. The rules clarify and establish that an index 
underlying a future traded on or subject to the rules of a foreign 
board of trade will be considered broad-based if it qualifies as such 
pursuant to the statutory definition of narrow-based security index.
---------------------------------------------------------------------------

    \132\17 CFR 41.13 and 17 CFR 240.3a55-3.
---------------------------------------------------------------------------

    Because of the strong interest in the Commissions' adopting rules 
implementing the definition of narrow-based security index, as they are 
today doing, the Commissions believe that at this time it is prudent to 
adopt Rule 41.13 under the CEA and Rule 3a55-3 under the Exchange Act 
as proposed. Nevertheless, the Commissions recognize the need to 
address those foreign index futures that are currently trading as 
broad-based index futures under the exclusive jurisdiction of the CFTC 
and that would be considered narrow-based index futures under the rules 
being adopted today.\133\ The Commissions recognize their obligation 
jointly to adopt rules or regulations that set forth the requirements 
that a future on a security index traded on or subject to the rules of 
a foreign board of trade must meet in order for the index to be 
excluded from the definition of narrow-based security index. The 
Commissions also acknowledge the requests of commenters that further 
rulemaking should be considered by the Commissions to address what 
commenters characterize as the unique nature of foreign stocks, foreign 
stock indexes and foreign markets. The Commissions jointly will 
consider further amendments to the rules regarding index futures 
trading on or subject to the rules of a foreign board of trade pursuant 
to their joint statutory rulemaking authority. As part of their 
considerations, the Commissions will weigh the competitive implications 
of treating a future on an index as a broad-based index future when 
traded on or subject to the rules of a foreign board of trade, but 
treating a future on the same index as a security future when it trades 
on a U.S. market.
---------------------------------------------------------------------------

    \133\ See supra note 15 and accompanying text.
---------------------------------------------------------------------------

    The Commissions note at the same time that the CEA and Exchange Act 
grant them joint authority to exclude any security index from the 
definition of narrow-based security index by rule or by order that 
meets such requirements that they jointly establish. Because of ongoing 
business activities, the Commissions will consider using this authority 
in the case of foreign-based security indexes that are currently 
offered to U.S. investors pursuant to CFTC no-action letters, and may 
also consider using this authority as to foreign-based security indexes 
that may be developed in the future.

D. CEA Rule 41.14: A Future on a Narrow-Based Security Index That 
Becomes Broad-Based

1. The Relevant Statutory Provision
    As discussed above, the statutory definition of narrow-based 
security index provides a temporary exclusion under certain conditions 
for a future trading on an index that was not narrow-based and 
subsequently became narrow-based for no more than 45 business days over 
three consecutive calendar months. If the index becomes narrow-based 
for more than 45 days over three consecutive calendar months, the 
statute then provides a grace period of three months during which the 
index is excluded from the definition of narrow-based security 
index.\134\
---------------------------------------------------------------------------

    \134\ See supra note 12 and accompanying text.
---------------------------------------------------------------------------

    The statute provides no such tolerance and grace period for a 
narrow-based security index that subsequently becomes broad-based.
2. Proposed Rule
    Rule 41.14 under the CEA was proposed to fill this gap by providing 
a temporary exclusion and transitional grace period for a security 
futures product that was trading on a narrow-based security index that 
becomes a broad-based index. Paragraph (a) of the rule was proposed to 
establish a temporary exclusion for a security

[[Page 44503]]

future that began trading on an index that was narrow-based and 
subsequently became broad-based for no more than 45 days in a three-
month calendar period. In such case the index would continue to be 
treated for an interim grace period of three months as a narrow-based 
contract.
    Paragraph (b) of the rule was proposed to provide a transition 
period for an index that was a narrow-based security index and became 
broad-based for more than 45 days over three consecutive calendar 
months, permitting it to continue to be a narrow-based security index 
for the three following calendar months.\135\
---------------------------------------------------------------------------

    \135\ Rule 41.1(a) as proposed defined ``broad-based security 
index'' as ``a group or index of securities that does not constitute 
a narrow-based security index.''
---------------------------------------------------------------------------

    To minimize disruption, paragraph (c) of the rule also was proposed 
to provide that a national securities exchange may, following the 
transition period, continue to trade only in those months in which the 
contract had open interest on the date the transition period ended and 
shall limit trading to liquidating positions.
3. Comment Letters
    Two commenters addressed proposed Rule 41.14. One of these 
commenters believed the rule was appropriate, but in regard to a 
narrow-based index that becomes a broad-based index, suggested that a 
designated contract market or registered DTEF be allowed to immediately 
treat the index as a broad-based security index, rather than wait 
through the three-month grace period, and be subject to the sole 
jurisdiction of the CFTC.\136\ This would give the listing market the 
freedom to choose the course that is less disruptive to market 
participants.
---------------------------------------------------------------------------

    \136\ See CME Letter I.
---------------------------------------------------------------------------

    The other commenter suggested that if the underlying index had been 
narrow-based for at least six consecutive months prior to the initial 
trading of the security index futures contract, but later became a 
broad-based index, there should be a presumption that the contract was 
offered as a narrow-based contract in good faith.\137\ As such, the 
rule should allow a grace period of nine months, instead of three, for 
purposes of unwinding the contract, or the rule should allow the 
listing market to seek qualification as a designated contract market in 
order to continue trading the contract. This commenter also suggested 
that the CFTC should have the flexibility to extend the grace period or 
eliminate the ``liquidating only'' limitation, in order to foster 
liquidity and avoid harming traders.
---------------------------------------------------------------------------

    \137\ See Amex Letter.
---------------------------------------------------------------------------

4. Final Rule
    After careful consideration of the comments, the CFTC has 
determined to adopt the rules in large measure as they were proposed, 
with one change resulting from the suggestion of a commenter.
    The CFTC has decided not to allow a designated contract market or 
registered DTEF to immediately treat an index that has switched from 
narrow-based to broad-based as a broad-based index. Instead, all 
markets must continue to treat former narrow-based indexes as narrow-
based indexes during the three-month grace period provided for in 
41.14(b). The CFTC notes that indexes that switch from being narrow-
based to broad-based may still be in a transitioning period. The three-
month grace period, which will continue to treat an index as a narrow-
based index, will provide certainty to the market and investors that 
the index has indeed become broad-based, and is not in the midst of 
more fluctuation.
    Furthermore, when an index underlying a security index futures 
contract switches from being narrow-based to broad-based and does not 
return to narrow-based status during the grace period, the customers 
who trade that contract would need to switch regulatory regimes. A 
three-month grace period will prevent those who trade in such contracts 
from being taken by surprise by the switch in regulatory oversight.
    Regarding the comments of the second commenter, the CFTC agrees 
that only allowing liquidating trades as proposed under Rule 41.14(c) 
will reduce liquidity and may harm traders. As such, markets may 
continue trading security index futures contracts on narrow-based 
indexes that have become broad-based, without limiting trading to 
liquidating trades only. However, the CFTC has decided to keep the 
three-month grace period in Rule 41.14(b), instead of allowing a nine-
month grace period or other extended grace period. The three-month 
grace period mirrors the time frame established by the CFMA governing 
broad-based indexes that become narrow-based. Comparable treatment for 
narrow-based indexes that become broad-based is equitable. Moreover, 
allowing flexible extended grace periods for certain contracts would 
create uncertainty in the market and for traders regarding the status 
of the product and their obligations. Further, allowing for an 
extension of the grace period on a case-by-case basis may be a lengthy 
process, leaving traders uncertain as to when trading in the particular 
contract may come to an end or when the new regulatory scheme becomes 
applicable.
    The Commissions note that a national securities exchange that 
intends to trade an index following the end of the transition period, 
other than as specified in paragraph (b), will be required to take such 
action as may be necessary to trade the index as a broad-based index 
subject to the sole jurisdiction of the CFTC.\138\ The CFTC has 
determined to adopt a ``no-action'' position with respect to a national 
securities exchange trading a contract based on a narrow-based security 
index that becomes a broad-based security index, so long as the 
national securities exchange administers the contract in accordance 
with Rule 41.14. Accordingly, the CFTC will not institute any 
enforcement action for violations of the CEA when a national securities 
exchange is in the midst of the 45-day tolerance provision of paragraph 
(a), the three-month grace period of paragraph (b), or the unwinding 
period of paragraph (c).
---------------------------------------------------------------------------

    \138\ See Section 2(a)(1)(C)(ii) of the CEA.
---------------------------------------------------------------------------

E. Additional Comments

    One comment letter, submitted by the U.S. Securities Markets 
Coalition (``Coalition''),\139\ raised concerns over certain tax 
implications that these markets believe result from the definition of 
narrow-based security index and the rules as proposed. Under new tax 
provisions that were enacted contemporaneously with the CFMA, futures 
and options on broad-based security indexes receive certain favorable 
treatment that futures and options on narrow-based security indexes do 
not. As to the determination of which indexes qualify as broad-based 
and which are treated as narrow-based, the tax laws incorporate by 
reference the definition of narrow-based security index in the Exchange 
Act.
---------------------------------------------------------------------------

    \139\ Securities Markets Coalition Letter.
---------------------------------------------------------------------------

    As discussed above, under the definition of narrow-based security 
index in the Exchange Act and the proposed rules, when a broad-based 
index suddenly becomes narrow-based, the status of the index as broad-
based is preserved unless the index becomes narrow-based for more than 
45 days over a three-month period. When this tolerance is exceeded, the 
index remains broad-based for another three months. These tolerance and 
grace period provisions by their own terms apply, however, only when a 
future is already trading on the index. As a result, if only an option 
(and not a future) is trading on a broad-based index, and the index

[[Page 44504]]

suddenly becomes narrow-based, the option would be considered an option 
on a narrow-based security index immediately. The option would thus 
immediately lose its favorable tax treatment.
    The Coalition further noted that, as a result of this statutory 
framework, if only an option, and not a future, is trading on a 
particular security index, that index may fluctuate back and forth in 
tax status from day to day. This result, the Coalition believes, will 
create uncertainty and confusion for investors, with a resulting 
disruption of the markets. The Coalition recommended that the 
Commissions modify their rules to the extent possible to address this 
issue.
    Specifically, the Coalition observed that Rule 41.14 under the CEA, 
which creates tolerance and grace periods for a narrow-based security 
index that becomes broad-based, defines an index's status without 
regard to whether a future is trading on the index. The Coalition 
recommended, first, that the equivalent of CEA Rule 41.14 be adopted as 
a rule under the Exchange Act, so that it will be incorporated by 
reference by the tax laws. The Coalition further recommended that Rule 
41.12 under the CEA and Rule 3a55-2 under the Exchange Act, which 
provide an exclusion for a broad-based security index that became 
narrow-based during the first 30 days of trading, be worded similarly 
to define such an index's status without regard to whether a future 
traded on the index.
    The Commissions note, in consideration of these comments, that the 
CFMA itself, as incorporated in the CEA and Exchange Act, ties its 
tolerance and grace period provisions to indexes upon which a future 
has traded. The Commissions cannot alter these statutory provisions, 
and believe that their rules providing an additional temporary 
exclusion for a broad-based index that became narrow-based must conform 
to the statutory contours. In addition, the SEC believes that it is not 
empowered to adopt the equivalent of CEA Rule 41.14 under the Exchange 
Act, which provides relief for futures on indexes that become broad-
based, because the SEC has no jurisdiction over broad-based security 
index futures.
    Two commenters raised issues concerning the treatment of futures on 
Exchange Traded Funds.\140\ The Commissions believe that these issues 
fall outside the scope of the current rulemaking and will not address 
them in this context. The Commissions expect to receive in the coming 
months questions about futures on other types of security products, as 
well, and for the foreseeable future will evaluate the status of such 
futures on a case-by-case basis.
---------------------------------------------------------------------------

    \140\ See Amex Letter; CBOT Letter.
---------------------------------------------------------------------------

III. Administrative Procedure Act

CFTC

    The Administrative Procedure Act (the ``APA'') generally requires 
that rules promulgated by an agency not be made effective less than 
thirty days after publication, except for, among other things, 
instances where the agency finds good cause to make a rule effective 
sooner, and has published that finding together with the rule.\141\ 
Pursuant to the CFMA, beginning on August 21, 2001, eligible contract 
participants may trade security futures products on a principal-to-
principal basis. The rules being published today directly affect the 
products that eligible contract participants may trade. The CFTC 
believes good cause exists for the rules to become effective on August 
21, 2001, so that eligible contract participants may begin trading the 
new products as contemplated by the CFMA.
---------------------------------------------------------------------------

    \141\ 5 U.S.C. 553(d)(3).
---------------------------------------------------------------------------

SEC

    Section 553(d) of the Administrative Procedure Act\142\ generally 
provides that, unless an exception applies, a substantive rule may not 
be made effective less than 30 days after notice of the rule has been 
published in the Federal Register. One exception to the 30-day 
requirement is an agency's finding of good cause for providing a 
shorter effective date.
---------------------------------------------------------------------------

    \142\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------

    The CFMA provides that principal-to-principal transactions between 
certain eligible contract participants in security futures products may 
commence on August 21, 2001, or such date that a futures association 
registered under Section 17 of the CEA meets the requirements in 
Section 15A(k)(2) of the Exchange Act.\143\ The CFMA lifted the ban on, 
and permits the trading of, futures contracts on single securities and 
on narrow-based security indexes. Furthermore, the CFMA amended the CEA 
and Exchange Act by adding an objective definition of ``narrow-based 
security index'' to provide guidance for markets to determine whether a 
security index is narrow-based.\144\ Futures contracts on security 
indexes that are narrow-based security indexes will be jointly 
regulated by the CFTC and the SEC under the framework established by 
the CFMA. Futures contracts on indexes that are not narrow-based 
security indexes, on the other hand, will be under the sole 
jurisdiction of the CFTC, and therefore only a designated contract 
market, registered DTEF, or foreign board of trade may trade these 
products.
---------------------------------------------------------------------------

    \143\ See Section 6(g)(5)(B)(ii) of the Exchange Act, 15 U.S.C. 
78f(g)(5)(B)(ii).
    \144\ See Section 1a(25) of the CEA and Section 3(a)(55) of the 
Exchange Act.
---------------------------------------------------------------------------

    The CFMA became law on December 21, 2000. Since the passage of the 
CFMA, the SEC has moved quickly to propose and adopt rules that would 
provide markets with the method for determining market capitalization 
and dollar value of ADTV for purposes of ascertaining whether a 
security index is narrow-based. The SEC proposed these rules on May 17, 
2001. The initial comment period for the rules expired on June 18, 
2001. The comment period, however, was extended by the CFTC and the SEC 
until July 11, 2001. After reviewing and considering the comments 
received, the SEC is adopting the rules, which provide the methods for 
markets to determine whether a security index is narrow-based or broad-
based as required by the Exchange Act, as amended by the CFMA. By 
allowing principal-to-principal transactions between certain eligible 
contract participants in security futures products to commence on 
August 21, 2001, Congress effectively established a statutory deadline 
for the adoption of these rules. If the effective date is delayed for 
30 days, the SEC will not have rules in place for markets to determine 
market capitalization and dollar value of ADTV. Therefore, eligible 
contract participants will be unable to trade futures on security 
indexes on a principal-to-principal basis.
    The primary purpose of the 30-day delayed effectiveness requirement 
is to give affected parties a reasonable period of time to adjust to 
the new rules. Here, the parties that must comply with the rules would 
not be harmed by immediate effectiveness of the rules. The affected 
entities are familiar with the proposed rules, which were published for 
comment, and the adopted rules are substantially similar to those 
proposed rules. Moreover, the 30-day delay in effectiveness could 
interfere with the goals established by Congress in adopting the CFMA. 
For these reasons, the SEC finds that good cause exists for the rules 
to be immediately effective upon publication.

IV. Paperwork Reduction Act

CFTC

    This rulemaking contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995

[[Page 44505]]

(44 U.S.C. 3501 et seq.), the CFTC submitted a copy of these rules to 
the Office of Management and Budget for its review. See 44 U.S.C. 
3507(d)(1).
    Collection of Information: Part 41, Relating to Security Futures 
Products, OMB Control Number 3038-0059.
    The information collection requirements of this rulemaking will 
impact designated contract markets (including notice-registered 
contract markets) and registered DTEFs that wish to trade a futures 
contract on a security index. Designated contract markets and 
registered DTEFs that wish to trade futures contracts on a security 
index would use the methods specified in these rules to determine 
market capitalization and dollar value of ADTV of a security or a group 
of securities comprising the index. These determinations would enable 
these designated contract markets and registered DTEFs to ascertain 
whether a security index on which they propose to trade or are trading 
a futures contract is ``narrow-based,'' and thus subject to the joint 
jurisdiction of the SEC and the CFTC, or is ``broad-based,'' and thus 
subject to the exclusive jurisdiction of the CFTC.
    Furthermore, Rule 41.2 requires designated contract markets and 
registered DTEFs that trade a futures contract on a security index to 
maintain, in accordance with the requirements of Rule 1.31, books and 
records of all activities relating to the trading of such products. 
This rule restates the existing recordkeeping requirements of the 
CEA.\145\ The rule also specifies that, in order to comply with these 
recordkeeping requirements, designated contract markets and registered 
DTEFs that trade futures contracts on security indexes are required to 
preserve records of any calculations used to determine whether an index 
is narrow-based or broad-based.
---------------------------------------------------------------------------

    \145\ See Sections 5(d)(17) and 5a(d)(8) of the CEA.
---------------------------------------------------------------------------

    The CFTC may not conduct or sponsor, and a person is not required 
to respond to an information collection unless it displays a currently 
valid OMB control number. No comments were received in response to the 
CFTC's invitation in the notice of proposed rulemaking to comment on 
any potential paperwork burden associated with these rules. See 44 
U.S.C. 3507(d)(2).

SEC

    Certain provisions of Rules 3a55-1 through 3a55-3 contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA''),\146\ and the SEC submitted 
them to the Office of Management and Budget (``OMB'') for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The SEC proposed, 
and OMB approved, an amendment to the collection of information 
entitled ``Rule 17a-1: Recordkeeping rule for national securities 
exchanges, national securities associations, registered clearing 
agencies, and the Municipal Securities Rulemaking Board'' (OMB Control 
Number 3235-0208). An agency may not conduct or sponsor, and a person 
is not required to respond to, a collection of information, unless it 
displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \146\ 44 U.S.C 3501 et seq.
---------------------------------------------------------------------------

    The Proposing Release solicited comments on this collection of 
information requirement.\147\ Two comments were received implicitly 
addressing the PRA section of the Proposing Release. One commenter 
stated that it would be a heavy administrative burden to preserve the 
records documenting daily calculations of market capitalization and 
dollar value of ADTV of a security or group of securities comprising an 
index.\148\ The same commenter, however, stated that the CFMA's 
statutory framework provides a ``clear implication'' that these 
calculations must be made daily.\149\ The other commenter on PRA issues 
stated that Congress' intention when adopting the CFMA was to require 
monthly, rather than daily, calculations for purposes of the 
determining whether a security index is narrow-based.\150\ According to 
the commenter, if monthly calculations were intended and required by 
the statute, the paperwork burden on the exchanges, as well as the 
paperwork and review burden on the Commissions, would be reduced.\151\
---------------------------------------------------------------------------

    \147\ See Proposing Release, supra note 17.
    \148\ See CBOT Letter.
    \149\ Id.
    \150\ See CME Letter I.
    \151\ Id.
---------------------------------------------------------------------------

    Because the final rules are substantially similar to the proposed 
rules, the SEC continues to believe that the estimates published in the 
Proposing Release regarding the proposed collection of information with 
respect to recordkeeping burdens associated with the final rules, as 
discussed below, are appropriate. The Commissions, however, have 
amended the proposed rules to establish methods for determining the 
market capitalization and dollar value of ADTV for purposes of 
ascertaining whether a security-index is narrow-based that are 
responsive to commenters' suggestions. In this regard, the Commissions 
have incorporated revisions to the proposed rules to reflect what 
commenters view as simpler methods of calculating these values. These 
modifications to the rules change somewhat the methodology used to 
determine whether a security index is narrow-based or broad-based but 
do not, in any way, alter the recordkeeping burden associated with the 
preservation of the records of these calculations, i.e., the collection 
of information required pursuant to Rule 17a-1 under the Exchange 
Act.\152\
---------------------------------------------------------------------------

    \152\ 17 CFR 240.17a-1
---------------------------------------------------------------------------

    Any collection of information pursuant to the new rules is 
mandatory and will need to be retained by the national securities 
exchanges, including national securities exchanges registered pursuant 
to Section 6(g) of the Exchange Act (``notice-registered national 
securities exchanges''), for no less than five years; for the first two 
years, the information must be kept in an easily accessible place, as 
required under Exchange Act Rule 17a-1.

A. The Use and Disclosure of the Information Collected

    The information collected to comply with the methods to determine 
market capitalization and dollar value of ADTV that are set forth in 
the final rules is required by the CFMA. The CFMA lifted the ban on the 
trading of futures on single securities and on narrow-based security 
indexes and established a framework for the joint regulation of these 
products by the CFTC and the SEC. In addition, the CFMA amended the CEA 
and the Exchange Act by adding a definition of ``narrow-based security 
index,'' which establishes an objective test of whether a security 
index is narrow-based.\153\ Futures on security indexes that meet the 
statutory definition of narrow-based security index are jointly 
regulated by the CFTC and the SEC. Futures on indexes that do not meet 
the statutory definition of narrow-based security index remain under 
the sole jurisdiction of the CFTC. To implement the definition of a 
narrow-based security index, the Commissions are required to jointly 
specify by rule or regulation the method to determine market 
capitalization and dollar value of ADTV of securities comprising an 
index.\154\ The rules adopted in this release fulfill this statutory 
directive.
---------------------------------------------------------------------------

    \153\ See Section 1a(25)(A) of the CEA and Section 3(a)(55)(B) 
of the Exchange Act.
    \154\ See Section 1a(25)(E) of the CEA and Section 3(a)(55)(F) 
of the Exchange Act.
---------------------------------------------------------------------------

    In addition, the CFMA amended the Exchange Act by adding new 
Section

[[Page 44506]]

6(g), which requires an exchange that is a designated contract market 
or a registered DTEF that lists or trades security futures products to 
register as a national securities exchange-by filing written notice 
with the SEC-solely for the purpose of trading security futures 
products.\155\
    A national securities exchange, designated contract market, 
registered DTEF, or foreign board of trade that trades or proposes to 
trade futures on a security index must ascertain whether the security 
index falls within or outside of the definition of narrow-based 
security index to determine if the futures contract is jointly 
regulated by the CFTC and SEC or solely by the CFTC. This is necessary 
because, to comply with the applicable laws and carry out their 
regulatory functions, the markets must know which set or sets of 
statutes and rules apply to a particular futures contract. This process 
entails, among other things, a collection of the information necessary 
to make the requisite determination under the provisions of the CEA and 
Exchange Act regarding the market capitalization and dollar value of 
ADTV of component securities comprising a security index.
---------------------------------------------------------------------------

    \155\ See Section 6(g) of the Exchange Act, 15 U.S.C. 78f(g).
---------------------------------------------------------------------------

    Rule 3a55-1 under the Exchange Act specifies the method to 
determine market capitalization and dollar value of ADTV with respect 
to the definition of narrow-based security index. \156\ Thus, the final 
rule provides the methods by which a market trading a futures contract 
on a security index must determine the market capitalization and dollar 
value of ADTV to ascertain whether a security index on which it 
proposes to trade, or is trading, a futures contract is narrow-based, 
and thus is subject to the joint jurisdiction of the CFTC and the SEC. 
If the security index is determined to be broad-based, the trading of 
futures on that index is subject to the sole jurisdiction of the CFTC.
---------------------------------------------------------------------------

    \156\ Rule 41.11 under the CEA parallels Rule 3a55-1.
---------------------------------------------------------------------------

    The SEC will use the collected information to monitor whether the 
calculations are being made in compliance with the rules. The SEC will 
obtain access to the information upon request. Any collection of 
information received by the SEC will not be made public.
    Rule 17a-1, among other things, requires national securities 
exchanges, which by definition include entities registered under the 
new notice registration provisions of the Exchange Act, \157\ to retain 
copies of all documents, including all correspondence, memoranda, 
papers, books, notices, accounts, and other records made or received by 
them in the course of their business and in the conduct of their self-
regulatory activities for a period of not less than five years; for the 
first two years, these documents must be kept in an easily accessible 
place. Any exchange that lists or trades a futures contract on a 
narrow-based security index must be registered with the SEC pursuant to 
Section 6 of the Exchange Act and, as a registered national securities 
exchange, will be subject to the recordkeeping requirements of Rule 
17a-1. Rule 17a-1 thus applies to any notice-registered national 
securities exchange. Accordingly, to comply with these recordkeeping 
requirements, a national securities exchange, including a notice-
registered national securities exchange, that lists or trades futures 
contracts on narrow-based security indexes will be required to preserve 
records of any calculations used to determine whether an index is 
narrow-based.\158\
---------------------------------------------------------------------------

    \157\ See Section 6 of the Exchange Act, 15 U.S.C. 78f.
    \158\ This PRA analysis does not include any collection of 
information and recordkeeping requirements that will apply to 
designated contract markets, registered DTEFs, and foreign boards of 
trade that trade futures contracts on security indexes that are not 
narrow-based because the trading of these products is not subject to 
the SEC's jurisdiction. Therefore, such information and 
recordkeeping will not be subject to Rule 17a-1 under the Exchange 
Act. The CFTC has adopted Rule 41.2, which contains recordkeeping 
requirements for designated contract markets and registered DTEFs.
---------------------------------------------------------------------------

B. Total Annual Reporting and Recordkeeping Burden

1. Capital Costs
    Rule 17a-1 under the Exchange Act requires a national securities 
exchange, including any notice-registered national securities exchange, 
that trades futures contracts on a narrow-based security index to keep 
on file for a period of no less than five years, the first two years in 
an easily accessible place, all records concerning their determinations 
that such indexes were narrow-based. In the Proposing Release, the SEC 
estimated that any additional costs of retaining and storing the 
collected information discussed above would be nominal because national 
securities exchanges, including notice-registered national securities 
exchanges that have been designated as contract markets by, or 
registered as DTEFs with, the CFTC, are currently required to have 
recordkeeping systems in place.\159\
---------------------------------------------------------------------------

    \159\ See Rule 17a-1 under the Exchange Act, 17 CFR 240.17a-1, 
and Sections 5(d)(17) and 5a(d)(8) of the CEA.
---------------------------------------------------------------------------

    The SEC received no direct comments on the costs of data retention 
and storage. Based on information provided by an industry source, the 
SEC anticipates that retaining and storing the determinations made 
under the new rules may require the use of one or two compact discs on 
a daily basis or setting up servers to preserve the information. The 
SEC believes, however, that because exchanges already have data storage 
facilities in place, it will not be burdensome or costly for exchanges 
to modify their existing recordkeeping systems to accommodate the 
storage of the records of calculations made pursuant to the new rules. 
In addition, it should be noted that the new rules simply provide the 
methodologies for determining market capitalization and dollar value of 
ADTV, as mandated by the CFMA. The CFMA requires that the 
determinations as to market capitalization and dollar value of ADTV, 
and thus the status of a securities index as narrow-based or broad-
based, be made, while Exchange Act Rule 17a-1 simply requires that such 
determinations be retained.
2. Burden Hours
    National securities exchanges, including notice-registered national 
securities exchanges, that trade futures contacts on security indexes 
will be required to comply with the recordkeeping requirements under 
Rule 17a-1. National securities exchanges, including notice-registered 
national securities exchanges, will be required to retain and store any 
documents related to determinations made using the definitions in 
Exchange Act Rule 3a55-1 for no less than five years, the first two 
years in an easily accessible place. The current burden hour estimate 
for Rule 17a-1, as of July 20, 1998, is 50 hours per year for each 
exchange.\160\ In the Proposing Release, the SEC estimated that it 
would take each of the 11 national securities exchanges, including 
notice-registered national securities exchanges, expected to trade 
futures contracts on security indexes one hour annually to retain any 
documents made or received by it in determining whether an index is a 
narrow-based security index. No comments were received on this 
particular estimate. The total burden in complying with Rule 17a-1

[[Page 44507]]

for each national securities exchange, including notice registered 
national securities exchanges, under new Rule 3a55-1 is therefore 
estimated to be 11 hours.
---------------------------------------------------------------------------

    \160\ See 63 FR 38865 (July 20, 1998) (SEC File No. 270-244, OMB 
Control No. 3235-0208) (seeking an extension of OMB approval of Rule 
17a-1 under the Exchange Act.
---------------------------------------------------------------------------

V. Costs and Benefits of the Final Rules

CFTC

    Section 15 of the CEA, as amended by section 119 of the CFMA, 
requires the CFTC to consider the costs and benefits of its action 
before issuing a new regulation under the CEA. The CFTC understands 
that, by its terms, section 15 does not require the CFTC to quantify 
the costs and benefits of a new regulation or to determine whether the 
benefits of the proposed regulation outweigh its costs.
    Section 15 further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. Accordingly, the CFTC could in its discretion 
give greater weight to any one of the five enumerated areas of concern 
and could in its discretion determine that, notwithstanding its costs, 
a particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The CFTC considered the costs and benefits of this rule package in 
light of the specific areas of concern identified in section 15 of the 
CEA,\161\ and concluded that these rules would have no effect on the 
financial integrity or price discovery function of the markets, or on 
the risk management practices of trading facilities. The CFTC also 
concluded that these rules would have no material effect on the 
protection of market participants and the public, and should not impact 
the efficiency and competition of the markets. The CFTC solicited 
comments about its consideration of these costs and benefits.\162\ The 
CFTC received no comments.
---------------------------------------------------------------------------

    \161\ 66 FR 27559, 27572 (May 17, 2001).
    \162\ 66 FR at 27571.
---------------------------------------------------------------------------

    The CFTC further notes that the CFMA specifically mandates that the 
CFTC and the SEC jointly adopt rules or regulations specifying the 
method to be used to determine market capitalization and dollar value 
of average daily trading volume.\163\ Accordingly, the CFTC has 
determined to adopt the regulations discussed above.
---------------------------------------------------------------------------

    \163\ Section 1a(25)(E)(ii) of the CEA; 7 U.S.C. 1a(25)(E)(ii).
---------------------------------------------------------------------------

SEC

    New Rule 3a55-1 under the Exchange Act provides the methods of 
determining market capitalization and dollar value of ADTV, 
respectively, for purposes of ascertaining whether a security index is 
narrow-based within the meaning of the Exchange Act. New Rule 3a55-2 
under the Exchange Act excludes from the definition of narrow-based 
security index those security indexes on which futures contracts have 
traded on a designated contract market, a registered DTEF, or foreign 
board of trade for fewer than 30 days and become narrow-based, provided 
that they meet certain criteria. New Rule 3a55-3 under the Exchange Act 
establishes that when a futures contract on a security index is traded 
on or subject to the rules of a foreign board of trade, that index will 
not be considered a narrow-based security index if a futures contract 
on such index were traded on a designated contract market or registered 
DTEF. These rules provide methods of calculation and guidance for 
national securities exchanges, designated contract markets, registered 
DTEFs, and foreign boards of trade in determining whether a security 
index is narrow-based under the Exchange Act.

A. Comments

    In the Proposing Release, the SEC requested comments on all aspects 
of the costs and benefits of the proposed rules, including 
identification of additional costs and benefits of the proposals. None 
of the commenters provided dollar-based estimates regarding the overall 
costs and benefits of the proposed rules. However, several commenters 
discussed certain aspects of the joint CFTC-SEC proposal that addressed 
the costs and benefits of the proposed rules, and one commenter 
provided an estimate regarding staffing needs to comply with the 
proposed rules.\164\
---------------------------------------------------------------------------

    \164\ One commenter raised concerns about certain implications 
that it believed could result from the statutory definition of 
narrow-based security index and certain proposed rules. See 
Securities Markets Coalition Letter. The commenter pointed to the 
differing tax treatment that may result if an option (not a future) 
is traded on a broad-based security index that becomes narrow-based. 
In addition, the commenter suggested that the proposed rules under 
the CEA creating tolerance and grace periods for a narrow-based 
security index that becomes broad-based also be adopted under the 
Exchange Act. The SEC notes that this commenter's concerns result 
from the provisions of the CFMA itself, which the Congress, and not 
the Commissions, is empowered to change. Accordingly, the SEC has 
not incorporated this comment letter into its analysis of the costs 
and benefits of the final rules.
---------------------------------------------------------------------------

    In particular, two commenters stated that the rules as proposed 
would impose a heavy administrative burden and that performing lengthy 
calculations to determine the status of a security index on a daily 
basis would be cumbersome and resource intensive.\165\ One of these 
commenters also stated that calculations would be pointless for indexes 
that were not ``close calls.'' \166\ Both commenters suggested that, to 
ease the computational burden imposed by the proposed rules, markets 
trading these products should be permitted to use and rely on third-
party vendors for information and calculations.\167\
---------------------------------------------------------------------------

    \165\ See CBOT Letter and CME Letter I.
    \166\ See CME Letter I.
    \167\ See CBOT Letter and CME Letter I.
---------------------------------------------------------------------------

    Another commenter specifically remarked about the consistency and 
accuracy of data available through third-party vendors.\168\ The 
commenter stated that there should be one official source that compiles 
the lists of Top 750 and Top 675 securities.\169\ The commenter 
suggested that having an official source for such lists will reduce the 
overall costs to all markets otherwise required to make these 
calculations. This commenter noted that a single compiler of the lists 
will result in consistent treatment of futures on security indexes. 
Furthermore, this commenter indicated that it will need to hire two 
additional staff personnel to calculate market capitalization and 
dollar value of ADTV for securities comprising an index on which future 
contracts trade.
---------------------------------------------------------------------------

    \168\ See CBOE Letter.
    \169\ See Section II.A.3. above for a description of Top 750 and 
Top 675 securities.
---------------------------------------------------------------------------

    The SEC also received several comments regarding potential costs 
that might be incurred unless different criteria for the definition of 
narrow-based security index are adopted to accommodate indexes 
comprised of foreign securities.\170\ The SEC notes that the 
Commissions have adopted Rules 41.13 under the CEA and 3a55-3 under

[[Page 44508]]

the Exchange Act, which establish that when a futures contract on a 
security index is traded on or subject to the rules of a foreign board 
of trade, that index will not be considered a narrow-based security 
index if it would not be a narrow-based security index if a futures 
contract on such index were traded on a designated contract market or 
registered DTEF. The Commissions will continue to consider the views 
and suggestions of the commenters regarding futures contracts on 
security indexes comprised of foreign securities.
---------------------------------------------------------------------------

    \170\ Several commenters supported the adoption of different 
standards for security indexes underlying futures traded on or 
subject to the rules of a foreign board of trade. See ME Letter, 
HKFE Letter, and SFE Letter. Two commenters, however, stated that 
security indexes underlying futures traded on or subject to the 
rules of a foreign board of trade should be held to the same 
standards as security indexes underlying futures traded in U.S. 
markets. See CBOE Letter, CME Letter II. Some of the commenters 
favoring separate criteria for the indexes comprised of foreign 
securities mentioned the perceived costs that could be incurred by 
investors, unless separate standards are adopted. See ME Letter, 
HKFE Letter; SFE Letter. The SEC points out that the definition of 
narrow-based security index as contained in the CEA and Exchange 
Act, and not the rules adopted in this release, set forth the 
criteria regarding whether a security index is narrow-based. 
Consequently, the perceived costs result from the statute's 
provisions and not the final rules.
---------------------------------------------------------------------------

    In response to the commenters' concerns and suggestions, the SEC 
has amended the proposed rules with respect to the methods for 
determining market capitalization and dollar value of ADTV to assess 
whether a security index is narrow-based or broad-based. Where 
possible, estimated costs and benefits are provided below, as well as 
the SEC's response to these comments.

B. Benefits

    In the Proposing Release, the SEC noted that the benefits of Rules 
3a55-1 through 3a55-3 under the Exchange Act are related to the 
benefits that will accrue as a result of the enactment of the CFMA. By 
repealing the ban on the trading of futures on single securities and on 
narrow-based security indexes, the CFMA enables a greater variety of 
financial products to be traded that potentially could facilitate price 
discovery and the ability to hedge. Investors will benefit by having a 
wider choice of financial products to buy and sell, and markets and 
market participants will benefit by having the ability to trade these 
products. The benefits are likely to relate to the volume of trading in 
these new security futures.
    Furthermore, the CFMA clarifies the jurisdiction of the CFTC and 
the SEC over futures contracts on security indexes, and alleviates the 
regulatory burden of dual CFTC and SEC jurisdiction where it is 
appropriate to do so. Under the new provisions of the CEA and Exchange 
Act, the CFTC and SEC will jointly regulate futures contracts on 
narrow-based security indexes. The trading of futures contracts on 
broad-based security indexes will be under the sole jurisdiction of the 
CFTC and may be traded only on designated contract markets, and 
registered DTEFs. The CFMA provides objective criteria for determining 
whether or not a security index is narrow-based, and the newly-adopted 
rules provide assistance in applying those criteria.
    New Rule 3a55-1 under the Exchange Act provides methodologies for 
determining market capitalization and dollar value of ADTV for purposes 
of ascertaining whether or not a security index is narrow-based as 
defined in the Section 3(a)(55) of the Exchange Act. The adopted rule 
provides the benefit of clear, objective standards for determining both 
market capitalization and dollar value of ADTV. In the Proposing 
Release, the proposed rules used ``average price'' to compute market 
capitalization and dollar value of ADTV. Based on the suggestions of 
commenters, the Commissions have amended the methods to determine 
market capitalization and dollar value of ADTV. In particular, the new 
rule uses the ``closing price'' for a security for a particular day for 
purposes of determining its market capitalization. Also, unlike the 
proposed rule, Rule 3a55-1 does not mandate using a volume-weighted 
average price to determine dollar value of ADTV.
    Under the Rule 3a55-1, market capitalization of a security on a 
particular day is defined as the product of the closing price of such 
security on that same day and the number of outstanding shares of such 
security on that same day. Rule 3a55-1 provides an objective definition 
for the ``closing price'' of a security based on whether reported 
transactions in the security have taken place in the United States or 
only in other jurisdictions for purposes of calculating market 
capitalization. Market capitalization is relevant in determining 
whether an index qualifies for an exclusion from the definition of 
narrow-based security index. If each component security is one of 750 
securities with the largest market capitalization and one of 675 
securities with the largest dollar value of ADTV, among other criteria, 
the index is broad-based.
    Market capitalization of a security for purposes of Rule 3a55-1 can 
be determined in the following manner. If, on a particular day, each 
component security of an index is on the list of the Top 750 securities 
with the largest market capitalization that is designated by the CFTC 
and SEC as applicable for that day, then the market capitalization 
criterion is satisfied. If the CFTC and SEC have not designated such a 
list, the method to be used to determine market capitalization for a 
security as of the preceding 6 full calendar months is to sum the 
values of the market capitalization of such security for each U.S. 
trading day of the preceding 6 full calendar months, and then divide 
that sum by the total number of such trading days.
    New Rule 3a55-1 also provides two separate methods for determining 
dollar value of ADTV. For purposes of Section 3(a)(55)(B) of the 
Exchange Act,\171\ dollar value of ADTV of a security is the sum of 
dollar value of ADTV of all reported transactions in such security, in 
each jurisdiction where the security trades, including transactions in 
the United States and transactions in jurisdictions other than the 
United States. In addition, Rule 3a55-1 sets forth the method to 
determine dollar value of ADTV for trading in a security in the United 
States and in jurisdictions other than the United States over a period 
of the preceding 6 full calendar months. The new rule also establishes 
how to calculate dollar value of ADTV for the lowest weighted 25% of an 
index and clarifies that all reported transactions for any depositary 
share that represents a security be included in the calculation of 
dollar value of ADTV of the underlying security, and that all reported 
transactions for a security underlying a depository share be included 
in the calculation of dollar value of ADTV of the depository share.
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78c(a)(55)(B).
---------------------------------------------------------------------------

    For purposes of Section 3(a)(55)(C)(i)(III)(cc) of the Exchange 
Act,\172\ if a component security of the index is on the list of Top 
675 securities with the largest dollar value of ADTV by the SEC and the 
CFTC as applicable for that day, the dollar value of ADTV criterion is 
satisfied. If the Commissions do not designate such a list, then the 
method to be used to determine dollar value of ADTV for a single 
security as of the preceding 6 full calendar months is to sum the value 
of all reported transactions in such security in the United States for 
each U.S. trading day during the preceding 6 full calendar months, and 
then divide the sum by the total number of such trading days.
---------------------------------------------------------------------------

    \172\ 15 U.S.C. 78c(a)(55)(C)(i)(III)(cc).
---------------------------------------------------------------------------

    Under the statutory definition of narrow-based security index, the 
market capitalization and dollar value of ADTV must be calculated ``as 
of the preceding 6 full calendar months.'' Rule 3a55-1 specifies a 
``rolling'' 6 month period, i.e., with respect to a particular day, the 
``preceding 6 full calendar months'' will mean the period of time 
beginning on the same calendar date 6 months before and ending on the 
day prior to that day.
    The SEC believes new Rule 3a55-1 under the Exchange Act provides an 
additional benefit to national securities exchanges, designated 
contract markets, registered DTEFs, and foreign boards of trade by 
permitting use of foreign trading data for the calculation of dollar 
value of ADTV for the lowest weighted 25% of the index when component 
securities of an index are also traded on markets outside of the United 
States.

[[Page 44509]]

The new rule clarifies that such foreign transaction data may be used 
only if it has been reported to a foreign financial regulatory 
authority in the jurisdiction in which the security is traded, and 
that, if the price information is reported in a foreign currency, it 
must be converted into U.S. dollars on the basis of a rate of exchange 
for that day obtained from at least one independent entity that 
provides or disseminates foreign exchange quotations in the ordinary 
course of its business.
    In addition, the SEC adopted Rule 3a55-2 under the Exchange Act. 
The new rule provides a limited exclusion from the definition of 
``narrow-based security index'' for an index underlying a futures 
contract that has traded for less than 30 days, as long as the index 
meets certain specified criteria. This exclusion is beneficial because 
it will allow futures contracts to continue to trade during this 30 day 
period without triggering Exchange Act provisions requiring 
registration by the market trading the futures.
    Finally, new Rule 3a55-3 under the Exchange Act establishes that 
when a futures contract on a security index is traded on or subject to 
the rules of a foreign board of trade, that index will not be 
considered a narrow-based security index if it would not be a narrow-
based security index if a futures contract on such index were traded on 
a designated contract market or registered DTEF. This rule is 
beneficial because it aids markets in assessing whether a futures 
contract trading on a security index comprised of foreign securities 
will be subject to sole CFTC jurisdiction or joint CFTC-SEC 
jurisdiction.

C. Costs

    In complying with new Rules 3a55-1 through 3a55-3 under the 
Exchange Act, a national securities exchange, designated contract 
market, registered DTEF, or foreign board of trade will incur certain 
costs. Under the CFMA, national securities exchanges, designated 
contract markets, registered DTEFs, and foreign boards of trade must 
use the methods provided by the new rules to determine whether or not a 
security index is narrow-based and thus whether the futures contract is 
subject solely to the CFTC's jurisdiction or subject to the joint 
jurisdiction of the CFTC and SEC. Thus, the costs of complying with the 
new rules primarily are attributable to the implementation of the new 
provisions of the Exchange Act pertaining to the definition of narrow-
based security index. National securities exchanges, designated 
contract markets, registered DTEFs, and foreign boards of trade trading 
these products are responsible for assuring their own compliance with 
the newly-adopted rules and thus will incur various costs in 
determining the market capitalization and dollar value of ADTV for 
component securities of a security index.
    The new rules require national securities exchanges, designated 
contract markets, registered DTEFs, and foreign boards of trade to 
gather information to ascertain the market capitalization and dollar 
value of ADTV for component securities of an index with respect to each 
day, in certain cases taking into account data for the preceding 6 full 
calendar months. To compute dollar value of ADTV for a single security 
that is a component of an index, Rule 3a55-1 requires a market in 
certain circumstances to tally the sum of dollar value of ADTV of all 
reported transactions in such security in each jurisdiction where the 
security trades for the preceding 6 full calendar months, using the 
method described in the rule. An additional calculation will be 
required to determine dollar value of ADTV of the lowest weighted 25% 
of an index.
    In addition, an exclusion from the definition of narrow-based 
security index is available when all component securities are among 
both the Top 750 securities (by market capitalization) and Top 675 
securities (by dollar value of ADTV). To compute market capitalization 
in the event the Commissions do not designate a list of the Top 750 
securities, the final rules require a market to determine the number of 
outstanding shares of a security on a particular day as reported on the 
issuer's most recent annual or periodic report filed with the SEC and 
each security's closing price for that same day for a period comprising 
the preceding 6 full calendar months. A designated contract market, 
registered DTEF, or foreign board of trade will be charged with 
identifying these Top 750 and Top 675 securities to determine whether a 
security index qualifies for this exclusion by using the calculations 
specified in the new rules. Rule 3a55-1, however, allows the CFTC and 
the SEC to designate lists providing the Top 750 securities with 
respect to market capitalization and the Top 675 securities with 
respect to dollar value of ADTV.
    A market may incur costs if it contracts with an outside party to 
perform the calculations. In addition, a national securities exchange, 
designated contract market, registered DTEF, or foreign board of trade 
may incur the costs associated with obtaining and accessing appropriate 
data from an independent third party vendor. For example, national 
securities exchanges, designated contract markets, registered DTEFs, 
and foreign boards of trade may be required to pay certain fees to a 
vendor to acquire the necessary information. Furthermore, if the market 
capitalization and dollar value of ADTV calculations require data that 
is not readily available, particularly if foreign data is used, 
national securities exchanges, designated contract markets, registered 
DTEFs, and foreign boards of trade possibly will incur additional costs 
to obtain such data.
    The commenters did not provide the SEC with actual estimates of the 
costs that they would incur to compile the data and make the 
computations with respect to market capitalization and dollar value of 
ADTV. The SEC therefore contacted several exchanges regarding cost 
assessments; however, these exchanges did not provide dollar-based 
estimates. Consequently, the SEC is using estimates provided by third-
party vendors in assessing the start-up and maintenance costs to 
perform and retain the calculations required by the new rules. The SEC 
estimates the cost of obtaining a third-party vendor's terminal to be 
$1,650 per month for the first terminal and $1,300 per month per 
terminal if two or more terminals are used. The SEC estimates a cost of 
$500 per month to maintain communication lines to obtain the data feed. 
In addition, it is anticipated that there will be a one-time 
installation fee of $300 per terminal. The total cost for each of the 
11 exchanges expected to trade futures on security indexes to install 
and maintain one terminal for the first year is estimated to be 
$26,100, which includes the one-time installation fee. The total cost 
for each of the 11 exchanges to maintain one terminal on an annual 
basis thereafter is estimated to be $25,800. The total cost for all of 
the 11 exchanges to install and maintain one terminal for the first 
year is estimated to be $287,100, which includes the one-time 
installation fee. The total cost for all of the 11 exchanges to 
maintain one terminal on an annual basis thereafter is estimated to be 
$283,800. The SEC notes, however, that for those exchanges that already 
have such third-party vendor terminals in place, there should be no 
additional costs associated with obtaining the required data to comply 
with the new rules.
    The calculations required under the new rules for market 
capitalization and dollar value of ADTV may require

[[Page 44510]]

additional data storage.\173\ A national securities exchange, 
designated contract market, or registered DTEF will need to consider 
how to store the data--whether to maintain hard copies or electronic 
copies of all the computations. The national securities exchange, 
designated contract market, or registered DTEF will also have to take 
into consideration the time period for which the data will have to be 
stored and the costs associated with such storage and maintenance. 
Taking into account that exchanges already have recordkeeping systems 
in place, the SEC believes that any new or additional data storage 
costs will be minimal. In addition, the SEC understands that data 
storage may be minimized if markets rely on third-party vendors as a 
source for data because those vendors' terminals generally are linked 
to PC terminals that can readily store the information.
---------------------------------------------------------------------------

    \173\ Under Rule 17a-1 under the Exchange Act, 17 CFR 240.17a-1, 
and Sections 5(d)(17) and 5a(d)(8) of the CEA, and new Rule 41.2 
under CEA, respectively, national securities exchanges, designated 
contract markets, and registered DTEFs will need to preserve records 
of all their determinations with respect to the narrow-based or non-
narrow-based status of security indexes.
---------------------------------------------------------------------------

    A national securities exchange, designated contract market, 
registered DTEF, or foreign board of trade may also incur resource 
costs to carry out the computations required under the new rules. As 
noted above, one commenter indicated that it would need two additional 
staff personnel to comply with the new rules.\174\ While not 
necessarily agreeing with that estimate, using the assessment that two 
full-time staff persons would be required, the SEC estimates that the 
total annual cost of employing a staff person in a clerical position to 
perform the computations based on the new rules will be approximately 
$42,520 plus 35% for overhead costs (i.e., costs of supervision, space 
and administrative support), for a total of approximately $57,600 ($32 
per hour per market).\175\ The SEC estimates that the total annual cost 
of employing a staff person in a supervisory position to oversee the 
clerical staff person will be approximately $135,001 plus 35% for 
overhead costs, for a total of approximately $180,000 ($100 per hour 
per market).\176\ Therefore, the SEC estimates the total cost that each 
of the 11 exchanges expected to trade futures on security indexes will 
incur in engaging staff to make the required computations to be 
$237,600 annually. The total cost that all of the 11 exchanges will 
incur in engaging staff to comply with the final rules is estimated to 
be $2,613,600 annually.
---------------------------------------------------------------------------

    \174\ See CBOE Letter.
    \175\ See Report on Office Salaries In The Securities Industry 
2000, prepared by the Securities Industry Association (September 
2000).
    \176\ See Report on Management & Professional Earnings In The 
Securities Industry 2000, prepared by the Securities Industry 
Association (September 2000).
---------------------------------------------------------------------------

    The SEC therefore anticipates that the total cost that will be 
incurred by each of the 11 exchanges expected to trade futures on 
security indexes to comply with the new rules will be $263,700 for the 
first year with the one-time installation fee. The SEC anticipates that 
the total cost that will be incurred by each of the 11 exchanges 
thereafter will be $263,400 annually. The total cost anticipated for 
all 11 exchanges will therefore be $2,900,700 for the first year and 
$2,897,400 annually thereafter. The SEC anticipates that, in fact, the 
actual costs that will be incurred by the 11 markets expected to trade 
futures on security indexes will be significantly less than this total 
estimated cost because most of these markets currently have access to 
the requisite data. Additionally, costs will be reduced if the 
Commissions disseminate the lists of Top 750 securities (by market 
capitalization) and Top 675 securities (by dollar value of ADTV).

VI. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

SEC

    Section 3(f) of the Exchange Act requires the SEC, when engaged in 
rulemaking that requires it to consider or determine whether an action 
is necessary or appropriate in the public interest, to consider whether 
the action would promote efficiency, competition, and capital 
formation.\177\ Section 23(a)(2) requires the SEC, in adopting rules 
under the Exchange Act, to consider the impact any rule would have on 
competition.\178\ In the Proposing Release, the SEC requested comments 
on these statutory considerations.
---------------------------------------------------------------------------

    \177\ Section 3(f) of the Exchange Act, 15 U.S.C. 78c(f).
    \178\ Section 23(a)(2) of the Exchange Act, 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The SEC believes that new Rule 3a55-1 under the Exchange Act will 
promote efficiency by setting forth clear methods and guidelines for 
national securities exchanges, designated contract markets, registered 
DTEFs, and foreign boards of trade in applying the statutory definition 
of narrow-based security index. The SEC further believes that new Rule 
3a55-2 under the Exchange Act will promote efficiency by providing 
designated contract markets, registered DTEFs, and foreign boards of 
trade a way to ensure that a futures contract trading solely under the 
jurisdiction of the CFTC does not suddenly become a security future 
within the first 30 days of trading and subject, as a result, to a new 
regulatory regime. The SEC also believes that new Rule 3a55-3 under the 
Exchange Act will promote efficiency by clarifying and establishing 
that when a futures contract on an index is traded on or subject to the 
rules of a foreign board of trade, such index will not be a narrow-
based security index if it would not be a narrow-based security index 
if a futures contract on such index were traded on a designated 
contract market or registered DTEF.
    The SEC believes that the final rules may enhance capital 
formation, because the new rules will provide clarity with respect to 
the method for determining whether a particular security index is 
narrow-based or broad-based. In this way, market participants will have 
certainty as to whether a futures contract on a particular index falls 
within the sole jurisdiction of the CFTC or will be under the joint 
jurisdiction of the SEC and CFTC. The benefits to the capital formation 
process, however, principally flow from the CFMA itself, which lifts 
the ban on the trading of futures on single securities and narrow-based 
security indexes.
    The SEC believes that the adopted rules will not impose any 
significant burdens on competition. The statutory definition of narrow-
based security index and the exclusions from that definition contained 
in Section 1a(25)(A) and (B) of the CEA and Section 3(a)(55)(B) and (C) 
of the Exchange Act set forth the criteria that a market trading a 
futures contract on a stock index must use to determine whether the SEC 
and CFTC jointly, or the CFTC alone, will have regulatory authority 
over that futures contract. The statutory definition of a narrow-based 
security index and the exclusions from that definition substantively 
are identical in both the CEA and the Exchange Act, and the joint CFTC-
SEC rules adopted in this release also are substantively identical.
    Several commenters addressed the issue of competition with respect 
to the proposed rules. In particular, the SEC received a few comments 
stating that exchanges will face unregulated competition because 
eligible contract participants trading futures over-the-counter will 
not be subject to these new rules.\179\ The SEC points out that the

[[Page 44511]]

Congress, in adopting the CFMA, provided for a differing scheme of 
regulation for eligible contract participants. The SEC also received 
several comments stating that foreign boards of trade should be subject 
to different criteria with respect to the definition of narrow-based 
security index.\180\ Two other commenters, however, stated that foreign 
boards of trade should be held to the same standards as national 
securities exchanges, designated contract markets, and registered 
DTEFs.\181\ The SEC notes that the new rules are even-handed in their 
application with respect to domestic and foreign markets that propose 
to trade futures on a particular security index and thus should not 
impose any burden on competition with respect to how particular 
security indexes are treated under the final rules.
---------------------------------------------------------------------------

    \179\ See HKFE Letter; SFE Letter; ME Letter.
    \180\ See FIA Letter; GMIMCo Letter; Barclays Letter; ME Letter; 
HKFE Letter; SFE Letter; MFA Letter.
    \181\ See CBOE Letter; CME Letter II.
---------------------------------------------------------------------------

    The CFMA directed the SEC and CFTC to jointly specify the methods 
for determining market capitalization and dollar value of ADTV, as 
those terms are used in the aforementioned statutory definition and 
exclusion. The SEC believes that new Rule 3a55-1, developed jointly 
with the CFTC, sets forth objective methods in fulfillment of the CFMA 
directive and further clarifies the application of the statutory 
provisions. The SEC believes that new Rule 3a55-2 is necessary in the 
public interest to prevent potential dislocations for market 
participants trading a futures contract on an index that becomes 
narrow-based during the first 30 days of trading and should impose no 
burden on competition. This rule is important because, to qualify for 
the statutory tolerance period of 45 days over 3 consecutive calendar 
months, a future on a security index must have been traded on a 
designated contract market or a registered DTEF for at least 30 days. 
In addition, the SEC believes that new Rule 3a55-3 is necessary in the 
public interest and should impose no burden on competition because it 
serves to clarify and establish that when a futures contract on a 
security index is traded on or subject to the rules of a foreign board 
of trade, that index shall not be considered a narrow-based security 
index if it would not be a narrow-based security index if a futures 
contract on such index were traded on a designated contract market or 
registered DTEF. This means that a foreign board of trade can look to 
the same criteria to determine whether a security index is broad-based 
as a designated contract market or registered DTEF.

VII. Regulatory Flexibility Act Certification

CFTC

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires federal agencies, in promulgating rules, to consider the 
impact of those rules on small entities. The rules adopted herein would 
affect contract markets and registered DTEFs. The CFTC previously 
established certain definitions of ``small entities'' to be used by the 
CFTC in evaluating the impact of its rules on small entities in 
accordance with the RFA.\182\ In its previous determinations, the CFTC 
concluded that contract markets are not small entities for the purpose 
of the RFA.\183\ The CFTC recently determined that registered DTEFS are 
also not small entities for the purposes of the RFA.\184\ The CFTC 
invited the public to comment on its proposed determination that 
registered DTEFs would not be small entities for purposes of the RFA 
and on the Chairman's certification that these rules would not have a 
significant economic impact on a substantial number of small 
entities.\185\ The CFTC received no comments on its proposed 
determination or on its certification.
---------------------------------------------------------------------------

    \182\ 47 FR 18618-21 (April 30, 1982).
    \183\ 47 FR 18618, 18619 (discussing contract markets).
    \184\ 66 FR 42256, 42268 (August 10, 2001).
    \185\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

SEC

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\186\ 
the Acting Chairman of the SEC certified that the rules would not have 
a significant economic impact on a substantial number of small 
entities. This certification was attached to the Proposing Release as 
an Appendix.\187\ The SEC solicited comments concerning the impact on 
small entities and the Regulatory Flexibility Act Certification, but 
received no comments.
---------------------------------------------------------------------------

    \186\ See 5 U.S.C. 605(b).
    \187\ See Proposing Release, supra note 17.
---------------------------------------------------------------------------

VIII. Text of Rules

List of Subjects

17 CFR Part 41

    Security futures products, Reporting and recordkeeping 
requirements.

17 CFR Part 240

    Securities.

Chapter I--Commodity Futures Trading Commission

    In accordance with the foregoing, Title 17, chapter I of the Code 
of Federal Regulations is amended by adding part 41 to read as follows:

PART 41--SECURITY FUTURES

Sec.
Subpart A--General Provisions
41.1  Definitions.
41.2  Required records.
41.3-41.9  [Reserved]
Subpart B--Narrow-Based Security Indexes
41.11  Method for determining market capitalization and dollar value 
of average daily trading volume; application of the definition of 
narrow-based security index.
41.12  Indexes underlying futures contracts trading for fewer than 
30 days.
41.13  Futures contracts on security indexes trading on or subject 
to the rules of a foreign board of trade.
41.14  Transition period for indexes that cease being narrow-based 
security indexes.

    Authority: 7 U.S.C. 1a, 2, 6j, 7a-2, 12a.

Subpart A--General Provisions


Sec. 41.1  Definitions.

    For purposes of this part:
* * * * *
    (a)-(b) [Reserved]
    (c) Broad-based security index means a group or index of securities 
that does not constitute a narrow-based security index.
    (d) Foreign board of trade means a board of trade located outside 
of the United States, its territories or possessions, whether 
incorporated or unincorporated, where foreign futures or foreign 
options are entered into.
    (e) Narrow-based security index has the same meaning as in section 
1a(25) of the Commodity Exchange Act.


Sec. 41.2  Required records.

    A designated contract market or registered derivatives transaction 
execution facility that trades a security index or security futures 
product shall maintain in accordance with the requirements of Sec. 1.31 
books and records of all activities related to the trading of such 
products, including: Records related to any determination under subpart 
B of this part whether or not a futures contract on a security index is 
a narrow-based security index or a broad-based security index.

[[Page 44512]]

Secs. 41.3--41.9  [Reserved]

Subpart B--Narrow-Based Security Indexes


Sec. 41.11  Method for determining market capitalization and dollar 
value of average daily trading volume; application of the definition of 
narrow-based security index.

    (a) Market capitalization. For purposes of Section 1a(25)(B) of the 
Act (7 U.S.C. 1a(25)(B)):
    (1) On a particular day, a security shall be 1 of 750 securities 
with the largest market capitalization as of the preceding 6 full 
calendar months when it is included on a list of such securities 
designated by the Commission and the SEC as applicable for that day.
    (2) In the event that the Commission and the SEC have not 
designated a list under paragraph (a)(1) of this section:
    (i) The method to be used to determine market capitalization of a 
security as of the preceding 6 full calendar months is to sum the 
values of the market capitalization of such security for each U.S. 
trading day of the preceding 6 full calendar months, and to divide this 
sum by the total number of such trading days.
    (ii) The 750 securities with the largest market capitalization 
shall be identified from the universe of all reported securities, as 
defined in Sec. 240.11Ac1-1, that are common stock or depositary 
shares.
    (b) Dollar value of ADTV. 
    (1) For purposes of Section 1a(25)(A) and (B) of the Act (7 U.S.C. 
1a(25)(A) and (B)):
    (i) (A) The method to be used to determine the dollar value of ADTV 
of a security is to sum the dollar value of ADTV of all reported 
transactions in such security in each jurisdiction as calculated 
pursuant to paragraphs (b)(1)(ii) and (iii) of this section.
    (B) The dollar value of ADTV of a security shall include the value 
of all reported transactions for such security and for any depositary 
share that represents such security.
    (C) The dollar value of ADTV of a depositary share shall include 
the value of all reported transactions for such depositary share and 
for the security that is represented by such depositary share.
    (ii) For trading in a security in the United States, the method to 
be used to determine the dollar value of ADTV as of the preceding 6 
full calendar months is to sum the value of all reported transactions 
in such security for each U.S. trading day during the preceding 6 full 
calendar months, and to divide this sum by the total number of such 
trading days.
    (iii) (A) For trading in a security in a jurisdiction other than 
the United States, the method to be used to determine the dollar value 
of ADTV as of the preceding 6 full calendar months is to sum the value 
in U.S. dollars of all reported transactions in such security in such 
jurisdiction for each trading day during the preceding 6 full calendar 
months, and to divide this sum by the total number of trading days in 
such jurisdiction during the preceding 6 full calendar months.
    (B) If the value of reported transactions used in calculating the 
ADTV of securities under paragraph (b)(1)(iii)(A) is reported in a 
currency other than U.S. dollars, the total value of each day's 
transactions in such currency shall be converted into U.S. dollars on 
the basis of a spot rate of exchange for that day obtained from at 
least one independent entity that provides or disseminates foreign 
exchange quotations in the ordinary course of its business.
    (iv) The dollar value of ADTV of the lowest weighted 25% of an 
index is the sum of the dollar value of ADTV of each of the component 
securities comprising the lowest weighted 25% of such index.
    (2) For purposes of Section 1a(25)(B)(III)(cc) of the Act (7 U.S.C. 
1a(25)(B)(III)(cc)):
    (i) On a particular day, a security shall be 1 of 675 securities 
with the largest dollar value of ADTV as of the preceding 6 full 
calendar months when it is included on a list of such securities 
designated by the Commission and the SEC as applicable for that day.
    (ii) In the event that the Commission and the SEC have not 
designated a list under paragraph (b)(2)(i) of this section:
    (A) The method to be used to determine the dollar value of ADTV of 
a security as of the preceding 6 full calendar months is to sum the 
value of all reported transactions in such security in the United 
States for each U.S. trading day during the preceding 6 full calendar 
months, and to divide this sum by the total number of such trading 
days.
    (B) The 675 securities with the largest dollar value of ADTV shall 
be identified from the universe of all reported securities as defined 
in Sec. 240.11Ac1-1 that are common stock or depositary shares.
    (c) Depositary Shares and Section 12 Registration. For purposes of 
Section 1a(25)(B)(III)(aa) of the Act (7 U.S.C. 1a(25)(B)(III)(aa)), 
the requirement that each component security of an index be registered 
pursuant to Section 12 of the Securities Exchange Act of 1934 (15 
U.S.C. 78l) shall be satisfied with respect to any security that is a 
depositary share if the deposited securities underlying the depositary 
share are registered pursuant to Section 12 of the Securities Exchange 
Act of 1934 and the depositary share is registered under the Securities 
Act of 1933 (15 U.S.C. 77a et seq.) on Form F-6 (17 CFR 239.36).
    (d) Definitions. For purposes of this section:
    (1) SEC means the Securities and Exchange Commission.
    (2) Closing price of a security means:
    (i) If reported transactions in the security have taken place in 
the United States, the price at which the last transaction in such 
security took place in the regular trading session of the principal 
market for the security in the United States.
    (ii) If no reported transactions in a security have taken place in 
the United States, the closing price of such security shall be the 
closing price of any depositary share representing such security 
divided by the number of shares represented by such depositary share.
    (iii) If no reported transactions in a security or in a depositary 
share representing such security have taken place in the United States, 
the closing price of such security shall be the price at which the last 
transaction in such security took place in the regular trading session 
of the principal market for the security. If such price is reported in 
a currency other than U.S. dollars, such price shall be converted into 
U.S. dollars on the basis of a spot rate of exchange relevant for the 
time of the transaction obtained from at least one independent entity 
that provides or disseminates foreign exchange quotations in the 
ordinary course of its business.
    (3) Depositary share has the same meaning as in Sec. 240.12b-2.
    (4) Foreign financial regulatory authority has the same meaning as 
in Section 3(a)(52) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(52)).
    (5) Lowest weighted 25% of an index. With respect to any particular 
day, the lowest weighted component securities comprising, in the 
aggregate, 25% of an index's weighting for purposes of Section 
1a(25)(A)(iv) of the Act (7 U.S.C. 1a(25)(A)(iv)) (``lowest weighted 
25% of an index'') means those securities:
    (i) That are the lowest weighted securities when all the securities 
in such index are ranked from lowest to highest based on the index's 
weighting methodology; and
    (ii) For which the sum of the weight of such securities is equal 
to, or less than, 25% of the index's total weighting.

[[Page 44513]]

    (6) Market capitalization of a security on a particular day:
    (i) If the security is not a depositary share, is the product of:
    (A) The closing price of such security on that same day; and
    (B) The number of outstanding shares of such security on that same 
day.
    (ii) If the security is a depositary share, is the product of:
    (A) The closing price of the depositary share on that same day 
divided by the number of deposited securities represented by such 
depositary share; and
    (B) The number of outstanding shares of the security represented by 
the depositary share on that same day.
    (7) Outstanding shares of a security means the number of 
outstanding shares of such security as reported on the most recent Form 
10-K, Form 10-Q, Form 10-KSB, Form 10-QSB, or Form 20-F (17 CFR 
249.310, 249.308a, 249.310b, 249.308b, or 249.220f) filed with the 
Securities and Exchange Commission by the issuer of such security, 
including any change to such number of outstanding shares subsequently 
reported by the issuer on a Form 8-K (17 CFR 249.308).
    (8) Preceding 6 full calendar months means, with respect to a 
particular day, the period of time beginning on the same day of the 
month 6 months before and ending on the day prior to such day.
    (9) Principal market for a security means the single securities 
market with the largest reported trading volume for the security during 
the preceding 6 full calendar months.
    (10) Reported transaction means:
    (i) With respect to securities transactions in the United States, 
any transaction for which a transaction report is collected, processed, 
and made available pursuant to an effective transaction reporting plan, 
or for which a transaction report, last sale data, or quotation 
information is disseminated through an automated quotation system as 
described in Section 3(a)(51)(A)(ii) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)(51)(A)(ii)); and
    (ii) With respect to securities transactions outside the United 
States, any transaction that has been reported to a foreign financial 
regulatory authority in the jurisdiction where such transaction has 
taken place.
    (11) U.S. trading day means any day on which a national securities 
exchange is open for trading.
    (12) Weighting of a component security of an index means the 
percentage of such index's value represented, or accounted for, by such 
component security.


Sec. 41.12  Indexes underlying futures contracts trading for fewer than 
30 days.

    (a) An index on which a contract of sale for future delivery is 
trading on a designated contract market, registered derivatives 
transaction execution facility, or foreign board of trade is not a 
narrow-based security index under Section 1a(25) of the Act (7 U.S.C. 
1a(25)) for the first 30 days of trading, if:
    (1) Such index would not have been a narrow-based security index on 
each trading day of the preceding 6 full calendar months with respect 
to a date no earlier than 30 days prior to the commencement of trading 
of such contract;
    (2) On each trading day of the preceding 6 full calendar months 
with respect to a date no earlier than 30 days prior to the 
commencement of trading such contract:
    (i) Such index had more than 9 component securities;
    (ii) No component security in such index comprised more than 30 
percent of the index's weighting;
    (iii) The 5 highest weighted component securities in such index did 
not comprise, in the aggregate, more than 60 percent of the index's 
weighting; and
    (iv) The dollar value of the trading volume of the lowest weighted 
25% of such index was not less than $50 million (or in the case of an 
index with 15 or more component securities, $30 million); or
    (3) On each trading day of the 6 full calendar months preceding a 
date no earlier than 30 days prior to the commencement of trading such 
contract:
    (i) Such index had at least 9 component securities;
    (ii) No component security in such index comprised more than 30 
percent of the index's weighting; and
    (iii) Each component security in such index was:
    (A) Registered pursuant to Section 12 of the Securities Exchange 
Act of 1934 (15 U.S.C. 78) or was a depositary share representing a 
security registered pursuant to Section 12 of the Securities Exchange 
Act of 1934;
    (B) 1 of 750 securities with the largest market capitalization that 
day; and
    (C) 1 of 675 securities with the largest dollar value of trading 
volume that day.
    (b) An index that is not a narrow-based security index for the 
first 30 days of trading pursuant to paragraph (a) of this section, 
shall become a narrow-based security index if such index has been a 
narrow-based security index for more than 45 business days over 3 
consecutive calendar months.
    (c) An index that becomes a narrow-based security index solely 
because it was a narrow-based security index for more than 45 business 
days over 3 consecutive calendar months pursuant to paragraph (b) of 
this section shall not be a narrow-based security index for the 
following 3 calendar months.
    (d) Definitions. For purposes of this section:
    (1) Market capitalization has the same meaning as in 
Sec. 41.11(d)(6) of this chapter.
    (2) Dollar value of trading volume of a security on a particular 
day is the value in U.S. dollars of all reported transactions in such 
security on that day. If the value of reported transactions used in 
calculating dollar value of trading volume is reported in a currency 
other than U.S. dollars, the total value of each day's transactions 
shall be converted into U.S. dollars on the basis of a spot rate of 
exchange for that day obtained from at least one independent entity 
that provides or disseminates foreign exchange quotations in the 
ordinary course of its business.
    (3) Lowest weighted 25% of an index has the same meaning as in 
Sec. 41.11(d)(5) of this chapter.
    (4) Preceding 6 full calendar months has the same meaning as in 
Sec. 41.11(d)(8) of this chapter.
    (5) Reported transaction has the same meaning as in 
Sec. 41.11(d)(10) of this chapter.


Sec. 41.13  Futures contracts on security indexes trading on or subject 
to the rules of a foreign board of trade.

    When a contract of sale for future delivery on a security index is 
traded on or subject to the rules of a foreign board of trade, such 
index shall not be a narrow-based security index if it would not be a 
narrow-based security index if a futures contract on such index were 
traded on a designated contract market or registered derivatives 
transaction execution facility.


Sec. 41.14  Transition period for indexes that cease being narrow-based 
security indexes.

    (a) Forty-five day tolerance provision. An index that is a narrow-
based security index that becomes a broad-based security index for no 
more than 45 business days over 3 consecutive calendar months shall be 
a narrow-based security index.
    (b) Transition period for indexes that cease being narrow-based 
security indexes for more than forty-five days. An index that is a 
narrow-based security index that becomes a broad-based security index 
for more than 45 business days over 3 consecutive calendar months shall 
continue to be a narrow-

[[Page 44514]]

based security index for the following 3 calendar months.
    (c) Trading in months with open interest following transition 
period. After the transition period provided for in paragraph (b) of 
this section ends, a national securities exchange may continue to trade 
only in those months in the security futures product that had open 
interest on the date the transition period ended.
    (d) Definition of calendar month. Calendar month means, with 
respect to a particular day, the period of time beginning on a calendar 
date and ending during another month on a day prior to such date.

Chapter II--Securities and Exchange Commission

Authority

    The Commission is adopting the rules pursuant to its authority 
under Exchange Act Sections 3(a), 3(b), 6, 15A, 17(a), 17(b), 19, 
23(a).
    In accordance with the foregoing, Title 17, chapter II, part 240 of 
the Code of Federal Regulations is amended 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, 77z-3, 
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, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 
and 80b-11, unless otherwise noted.
* * * * *
    2. Sections 240.3a55-1 through 240.3a55-3 are added to read as 
follows:


Sec. 240.3a55-1  Method for determining market capitalization and 
dollar value of average daily trading volume; application of the 
definition of narrow-based security index.

    (a) Market capitalization. For purposes of Section 
3(a)(55)(C)(i)(III)(bb) of the Act (15 U.S.C. 
78c(a)(55)(C)(i)(III)(bb)):
    (1) On a particular day, a security shall be 1 of 750 securities 
with the largest market capitalization as of the preceding 6 full 
calendar months when it is included on a list of such securities 
designated by the Commission and the CFTC as applicable for that day.
    (2) In the event that the Commission and the CFTC have not 
designated a list under paragraph (a)(1) of this section:
    (i) The method to be used to determine market capitalization of a 
security as of the preceding 6 full calendar months is to sum the 
values of the market capitalization of such security for each U.S. 
trading day of the preceding 6 full calendar months, and to divide this 
sum by the total number of such trading days.
    (ii) The 750 securities with the largest market capitalization 
shall be identified from the universe of all reported securities, as 
defined in Sec. 240.11Ac1-1, that are common stock or depositary 
shares.
    (b) Dollar value of ADTV.
    (1) For purposes of Section 3(a)(55)(B) of the Act (15 U.S.C. 
78c(a)(55)(B)):
    (i) (A) The method to be used to determine the dollar value of ADTV 
of a security is to sum the dollar value of ADTV of all reported 
transactions in such security in each jurisdiction as calculated 
pursuant to paragraphs (b)(1)(ii) and (iii).
    (B) The dollar value of ADTV of a security shall include the value 
of all reported transactions for such security and for any depositary 
share that represents such security.
    (C) The dollar value of ADTV of a depositary share shall include 
the value of all reported transactions for such depositary share and 
for the security that is represented by such depositary share.
    (ii) For trading in a security in the United States, the method to 
be used to determine the dollar value of ADTV as of the preceding 6 
full calendar months is to sum the value of all reported transactions 
in such security for each U.S. trading day during the preceding 6 full 
calendar months, and to divide this sum by the total number of such 
trading days.
    (iii) (A) For trading in a security in a jurisdiction other than 
the United States, the method to be used to determine the dollar value 
of ADTV as of the preceding 6 full calendar months is to sum the value 
in U.S. dollars of all reported transactions in such security in such 
jurisdiction for each trading day during the preceding 6 full calendar 
months, and to divide this sum by the total number of trading days in 
such jurisdiction during the preceding 6 full calendar months.
    (B) If the value of reported transactions used in calculating the 
ADTV of securities under paragraph (b)(1)(iii)(A) is reported in a 
currency other than U.S. dollars, the total value of each day's 
transactions in such currency shall be converted into U.S. dollars on 
the basis of a spot rate of exchange for that day obtained from at 
least one independent entity that provides or disseminates foreign 
exchange quotations in the ordinary course of its business.
    (iv) The dollar value of ADTV of the lowest weighted 25% of an 
index is the sum of the dollar value of ADTV of each of the component 
securities comprising the lowest weighted 25% of such index.
    (2) For purposes of Section 3(a)(55)(C)(i)(III)(cc) of the Act (15 
U.S.C. 78c(a)(55)(C)(i)(III)(cc)):
    (i) On a particular day, a security shall be 1 of 675 securities 
with the largest dollar value of ADTV as of the preceding 6 full 
calendar months when it is included on a list of such securities 
designated by the Commission and the CFTC as applicable for that day.
    (ii) In the event that the Commission and the CFTC have not 
designated a list under paragraph (b)(2) of this section:
    (A) The method to be used to determine the dollar value of ADTV of 
a security as of the preceding 6 full calendar months is to sum the 
value of all reported transactions in such security in the United 
States for each U.S. trading day during the preceding 6 full calendar 
months, and to divide this sum by the total number of such trading 
days.
    (B) The 675 securities with the largest dollar value of ADTV shall 
be identified from the universe of all reported securities as defined 
in Sec. 240.11Ac1-1 that are common stock or depositary shares.
    (c) Depositary Shares and Section 12 Registration. For purposes of 
Section 3(a)(55)(C) of the Act (15 U.S.C. 78c(a)(55)(C)), the 
requirement that each component security of an index be registered 
pursuant to Section 12 of the Act (15 U.S.C. 78l) shall be satisfied 
with respect to any security that is a depositary share if the 
deposited securities underlying the depositary share are registered 
pursuant to Section 12 of the Act and the depositary share is 
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.) on 
Form F-6 (17 CFR 239.36).
    (d) Definitions. For purposes of this section:
    (1) CFTC means Commodity Futures Trading Commission.
    (2) Closing price of a security means:
    (i) If reported transactions in the security have taken place in 
the United States, the price at which the last transaction in such 
security took place in the regular trading session of the principal 
market for the security in the United States.
    (ii) If no reported transactions in a security have taken place in 
the United States, the closing price of such security shall be the 
closing price of any depositary share representing such security 
divided by the number of shares represented by such depositary share.

[[Page 44515]]

    (iii) If no reported transactions in a security or in a depositary 
share representing such security have taken place in the United States, 
the closing price of such security shall be the price at which the last 
transaction in such security took place in the regular trading session 
of the principal market for the security. If such price is reported in 
a currency other than U.S. dollars, such price shall be converted into 
U.S. dollars on the basis of a spot rate of exchange relevant for the 
time of the transaction obtained from at least one independent entity 
that provides or disseminates foreign exchange quotations in the 
ordinary course of its business.
    (3) Depositary share has the same meaning as in Sec. 240.12b-2.
    (4) Foreign financial regulatory authority has the same meaning as 
in Section 3(a)(52) of the Act (15 U.S.C. 78c(a)(52)).
    (5) Lowest weighted 25% of an index. With respect to any particular 
day, the lowest weighted component securities comprising, in the 
aggregate, 25% of an index's weighting for purposes of Section 
3(a)(55)(B)(iv) of the Act (15 U.S.C. 78c(a)(55)(B)(iv)) (``lowest 
weighted 25% of an index'') means those securities:
    (i) That are the lowest weighted securities when all the securities 
in such index are ranked from lowest to highest based on the index's 
weighting methodology; and
    (ii) For which the sum of the weight of such securities is equal 
to, or less than, 25% of the index's total weighting.
    (6) Market capitalization of a security on a particular day:
    (i) If the security is not a depositary share, is the product of:
    (A) The closing price of such security on that same day; and
    (B) The number of outstanding shares of such security on that same 
day.
    (ii) If the security is a depositary share, is the product of:
    (A) The closing price of the depositary share on that same day 
divided by the number of deposited securities represented by such 
depositary share; and
    (B) The number of outstanding shares of the security represented by 
the depositary share on that same day.
    (7) Outstanding shares of a security means the number of 
outstanding shares of such security as reported on the most recent Form 
10-K, Form 10-Q, Form 10-KSB, Form 10-QSB, or Form 20-F (17 CFR 
249.310, 249.308a, 249.310b, 249.308b, or 249.220f) filed with the 
Commission by the issuer of such security, including any change to such 
number of outstanding shares subsequently reported by the issuer on a 
Form 8-K (17 CFR 249.308).
    (8) Preceding 6 full calendar months means, with respect to a 
particular day, the period of time beginning on the same day of the 
month 6 months before and ending on the day prior to such day.
    (9) Principal market for a security means the single securities 
market with the largest reported trading volume for the security during 
the preceding 6 full calendar months.
    (10) Reported transaction means:
    (i) With respect to securities transactions in the United States, 
any transaction for which a transaction report is collected, processed, 
and made available pursuant to an effective transaction reporting plan, 
or for which a transaction report, last sale data, or quotation 
information is disseminated through an automated quotation system as 
described in Section 3(a)(51)(A)(ii) of the Act (15 U.S.C. 
78c(a)(51)(A)(ii); and
    (ii) With respect to securities transactions outside the United 
States, any transaction that has been reported to a foreign financial 
regulatory authority in the jurisdiction where such transaction has 
taken place.
    (11) U.S. trading day means any day on which a national securities 
exchange is open for trading.
    (12) Weighting of a component security of an index means the 
percentage of such index's value represented, or accounted for, by such 
component security.


Sec. 240.3a55-2  Indexes underlying futures contracts trading for fewer 
than 30 days.

    (a) An index on which a contract of sale for future delivery is 
trading on a designated contract market, registered derivatives 
transaction execution facility, or foreign board of trade is not a 
narrow-based security index under Section 3(a)(55) of the Act (15 
U.S.C. 78c(a)(55)) for the first 30 days of trading, if:
    (1) Such index would not have been a narrow-based security index on 
each trading day of the preceding 6 full calendar months with respect 
to a date no earlier than 30 days prior to the commencement of trading 
of such contract;
    (2) On each trading day of the preceding 6 full calendar months 
with respect to a date no earlier than 30 days prior to the 
commencement of trading such contract:
    (i) Such index had more than 9 component securities;
    (ii) No component security in such index comprised more than 30 
percent of the index's weighting;
    (iii) The 5 highest weighted component securities in such index did 
not comprise, in the aggregate, more than 60 percent of the index's 
weighting; and
    (iv) The dollar value of the trading volume of the lowest weighted 
25% of such index was not less than $50 million (or in the case of an 
index with 15 or more component securities, $30 million); or
    (3) On each trading day of the preceding 6 full calendar months, 
with respect to a date no earlier than 30 days prior to the 
commencement of trading such contract:
    (i) Such index had at least 9 component securities;
    (ii) No component security in such index comprised more than 30 
percent of the index's weighting; and
    (iii) Each component security in such index was:
    (A) Registered pursuant to Section 12 of the Act (15 U.S.C. 78) or 
was a depositary share representing a security registered pursuant to 
Section 12 of the Act;
    (B) 1 of 750 securities with the largest market capitalization that 
day; and
    (C) 1 of 675 securities with the largest dollar value of trading 
volume that day.
    (b) An index that is not a narrow-based security index for the 
first 30 days of trading pursuant to paragraph (a) of this section, 
shall become a narrow-based security index if such index has been a 
narrow-based security index for more than 45 business days over 3 
consecutive calendar months.
    (c) An index that becomes a narrow-based security index solely 
because it was a narrow-based security index for more than 45 business 
days over 3 consecutive calendar months pursuant to paragraph (b) of 
this section shall not be a narrow-based security index for the 
following 3 calendar months.
    (d) Definitions. For purposes of this section:
    (1) Market capitalization has the same meaning as in Sec. 240.3a55-
1(d)(6).
    (2) Dollar value of trading volume of a security on a particular 
day is the value in U.S. dollars of all reported transactions in such 
security on that day. If the value of reported transactions used in 
calculating dollar value of trading volume is reported in a currency 
other than U.S. dollars, the total value of each day's transactions 
shall be converted into U.S. dollars on the basis of a spot rate of 
exchange for that day obtained from at least one independent entity 
that provides or disseminates foreign exchange quotations in the 
ordinary course of its business.
    (3) Lowest weighted 25% of an index has the same meaning as in 
Sec. 240.3a55-1(d)(5).

[[Page 44516]]

    (4) Preceding 6 full calendar months has the same meaning as in 
Sec. 240.3a55-1(d)(8).
    (5) Reported transaction has the same meaning as in Sec. 240.3a55-
1(d)(10).


Sec. 240.3a55-3  Futures contracts on security indexes trading on or 
subject to the rules of a foreign board of trade.

    When a contract of sale for future delivery on a security index is 
traded on or subject to the rules of a foreign board of trade, such 
index shall not be a narrow-based security index if it would not be a 
narrow-based security index if a futures contract on such index were 
traded on a designated contract market or registered derivatives 
transaction execution facility.

    By the Commodity Futures Trading Commission.
    Dated: August 20, 2001.
Catherine D. Dixon,
Assistant Secretary.

    By the Securities and Exchange Commission.\188\
---------------------------------------------------------------------------

    \188\ Chairman Pitt did not participate in this matter.
---------------------------------------------------------------------------

    Dated: August 20, 2001.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-21391 Filed 8-21-01; 8:45 am]
BILLING CODE 8010-01-P