[Federal Register Volume 68, Number 108 (Thursday, June 5, 2003)]
[Rules and Regulations]
[Pages 33623-33625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-13414]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 30 and 40


Amendment to Appendix C of Part 40 and Redesignation as Appendix 
D of Part 30

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
revising its guidance specifying the information that a foreign board 
of trade should submit to Commission staff when seeking no-action 
relief to offer and sell to persons located in the United States a 
futures contract on a foreign non-narrow-based security index traded on 
that board of trade. Specifically, the Commission is adding an 
introductory section to provide an explanation of how its staff 
evaluates information submitted by the foreign board of trade, is 
deleting information that it no longer deems necessary, and is adding a 
provision specifying that the foreign board of trade should, if 
applicable, make a request to make the futures contract available for 
trading in accordance with the terms and conditions of its Foreign 
Trading System No-Action letter received from Commission staff and 
certification of its continued compliance with that letter.

DATES: Effective June 5, 2003.

FOR FURTHER INFORMATION CONTACT: Harold L. Hardman, Senior Assistant 
General Counsel (Regulation), (202) 418-5120, electronic mail: 
[email protected]; Julian E. Hammar, Counsel, (202) 418-5118, 
electronic mail: [email protected], Office of General Counsel, or Thomas 
M. Leahy, Jr., Financial Instruments Unit Chief, (202) 418-5278, 
electronic mail: [email protected], Division of Market Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: In June of 1999, the Commission added 
Appendix E to Part 5 of 17 CFR Chapter I, which specified the 
information that a foreign board of trade should submit to Commission 
staff when seeking no-action relief to offer and sell to persons 
located in the United States (``U.S.''), a futures contract on a 
foreign security index traded on that foreign board of trade.\1\ After 
the enactment of the Commodity Futures Modernization Act of 2000 
(``CFMA''),\2\ which extensively amended the Commodity Exchange Act 
(``Act''),\3\ the Commission reorganized its rules, and redesignated 
Appendix E as Appendix C to Part 40 of 17 CFR Chapter I.\4\ The 
Commission later made technical amendments to the Appendix amending 
that guidance to incorporate the changes made by the CFMA to the 
criteria for approving non-narrow-based security index futures 
contracts.\5\
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    \1\ 64 FR 29217 (June 1, 1999).
    \2\ Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000).
    \3\ 7 U.S.C. Sec.  1 et seq. (2000).
    \4\ 66 FR 42255 (Aug. 10, 2001).
    \5\ 67 FR 62873 (Oct. 9, 2002). Generally, foreign exchange-
traded security futures products (futures or options on narrow-based 
security indices or single securities), may not be offered or sold 
in the U.S. until the Commission and the U.S. Securities and 
Exchange Commission (SEC) adopt rules governing such products. See 
Section 2(a)(1)(E) of the Act, 7 U.S.C. Sec.  2(a)(1)(E) and Section 
6(k) of the Securities Exchange Act of 1934, 15 U.S.C. Sec.  78f(k). 
But see Section 2(a)(1)(F) of the Act, 7 U.S.C. Sec.  2(a)(1)(F).

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[[Page 33624]]

    Today, the Commission is further amending the guidance in Appendix 
C to part 40. Specifically, the Commission is adding introductory 
language that explains to the public how its staff uses the information 
requested by the Appendix in evaluating requests for no-action relief 
by foreign boards of trade seeking to offer and sell their futures 
contracts on security indices to persons located in the U.S. The 
Commission also is deleting certain information that it no longer deems 
necessary in evaluating such requests. Further, the Commission is 
adding a provision to the guidance specifying that the foreign board of 
trade should, if applicable, make a request to the staff to make the 
futures contract available for trading in accordance with the terms and 
conditions of its Foreign Trading System No-Action letter received from 
Commission staff and provide a certification of its continued 
compliance with that letter.\6\ This provision will obviate the need 
for the foreign board of trade to seek a separate letter from the 
Division of Market Oversight (``DMO'') in order to allow the offer and 
sale of its approved futures contract on its trading system in the U.S. 
pursuant to no-action relief provided by DMO staff.
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    \6\ See the Commission's Statement of Policy Regarding the 
Listing of New Futures and Option Contracts by Foreign Boards of 
Trade That Have Received Staff No-Action Relief to Place Electronic 
Trading Devices in the U.S., 65 FR 41641-01 (July 6, 2000).
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    In addition, the Commission is redesignating Appendix C of part 40 
as Appendix D of part 30 of 17 CFR, Chapter I. The Commission's rules 
in Part 30 govern foreign futures and options transactions, and 
accordingly it would be more appropriate for the guidance to foreign 
exchanges on foreign exchange-traded products to be placed there.
    Because the information in newly designated Appendix D of part 30 
represents guidance only, this amendment does not constitute a rule 
under the Administrative Procedure Act (``APA''), 5 U.S.C. 551 et seq., 
and accordingly, the provisions of the APA that generally require 
notice of proposed rulemaking and that provide other opportunities for 
public participation are not applicable. For the same reason, the 
provisions of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., 
concerning the impact of rules on small entities, and the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3507(d), concerning rules that contain 
collections of information, are inapplicable.

0
In view of the forgoing, the Commission hereby amends Chapter I of 
Title 17 of the Code of Federal Regulations as follows:

PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES 
TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING 
ORGANIZATIONS

0
1. Appendix C to Part 40 is redesignated as Appendix D to Part 30.

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

0
2. The authority citation for Part 30 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise 
noted.


0
3. In Part 30, newly designated appendix D is revised to read as 
follows:

Appendix D--Information That a Foreign Board of Trade Should Submit 
When Seeking No-Action Relief To Offer and Sell, to Persons Located in 
the United States, a Futures Contract on a Foreign Non-Narrow-Based 
Security Index Traded on That Foreign Board of Trade

    A. Section 2(a)(1)(C)(iv) of the Commodity Exchange Act (``Act'') 
generally prohibits any person from offering or selling a futures 
contract based on a security index in the U.S., except as otherwise 
permitted under the Act, including Section 2(a)(1)(C)(ii) of the Act. 
By its terms, Section 2(a)(1)(C)(iv) of the Act applies to futures 
contracts on security indices traded on both domestic and foreign 
boards of trade. Section 2(a)(1)(C)(ii) of the Act sets forth three 
criteria to govern the trading of futures contracts on a group or index 
of securities on contract markets and derivatives transaction execution 
facilities:
    (1) The contract must provide for cash settlement;
    (2) The contract must not be readily susceptible to manipulation or 
to being used to manipulate any underlying security; and
    (3) The group or index of securities must not constitute a narrow-
based security index.
    B. While Section 2(a)(1)(C)(ii) of the Act provides that no board 
of trade or derivatives transaction execution facility may trade a 
security index futures contract unless it meets the three criteria 
noted above, it does not explicitly address the standards to be applied 
to a foreign security index futures contract traded on a foreign board 
of trade. The Office of General Counsel has applied those same three 
criteria in evaluating requests by foreign boards of trade to allow the 
offer and sale within the United States of their foreign security index 
futures contracts when those foreign boards of trade do not seek 
designation as a contract market or registration as a derivatives 
transaction execution facility to trade those products.\1\
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    \1\ With regard to the third criterion, and CFTC and SEC jointly 
promulgated Rule 41.13 under the Act and Rule 3a55-3 under the 
Securities Exchange Act of 1934 (``Exchange Act''), governing 
security index futures contracts traded on foreign boards of trade. 
These rules provide that ``[w]hen 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.'' 
CFTC Rule 41.13, 17 C.F.R. Sec.  41.13; Exchange Act Rule 3a55-3, 17 
C.F.R. Sec.  240.3a55-3.
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    C. In the analysis of a no-action request for a foreign security 
index futures contract traded on a foreign board of trade, the Office 
of the General Counsel asks the Division of Market Oversight (Division) 
to evaluate the foreign security index futures contract to ensure that 
it complies with the three criteria of Section 2(a)(1)(C)(ii) of the 
Act.
    D. Because security index futures contracts are cash settled, the 
Division also evaluates the contract to ensure that the contract terms 
and conditions relating to cash settlement are consistent with the 
Commission's Guideline No. 1 requirements for cash settled contracts. 
In that regard, Guideline No. 1 requires that the cash price series be 
reliable, acceptable, publicly available and timely; that the cash 
settlement price be reflective of the underlying cash market; and that 
the cash settlement price not be readily susceptible to manipulation. 
In making its determination, the Division considers the design and 
maintenance of the index, the method of index calculation, the nature 
of the component security prices used to calculate the index, the 
breadth and frequency of index dissemination, and any other relevant 
factors.
    E. In considering the susceptibility of an index to manipulation, 
the Division examines several factors, including the structure of the 
primary and secondary markets for the component equities, the liquidity 
of the component stocks, the method of index calculation, the total 
capitalization of stocks underlying he index, the number, weighting and 
capitalization of individual stocks in the index, and the existence of 
surveillance

[[Page 33625]]

sharing agreements between the board of trade and the securities 
exchange(s) on which the underlying securities are traded.
    F. To verify that the index is not narrow based, the Division 
considers the number and weighting of the component securities and the 
value of average daily trading volume of the lowest weighted quartile 
of securities. Under the Act, a security index is narrow-based if it 
meets any one of the following criteria:
    (1) The index is composed of fewer than 10 securities;
    (2) Any single security comprises more than 30% of the total index 
weight
    (3) The five largest securities comprise more than 60% of the total 
index weight; or
    (4) The lowest-weighted securities that together account for 25% of 
the total weight of the index have an aggregate dollar value of average 
daily trading volume of less than US$30 million (or US$50 million if 
the index includes fewer than 15 securities).
    G. Accordingly, a foreign board of trade seeking no-action relief 
to offer and to sell, to persons located in the U.S., a futures 
contract on a non-narrow based foreign security index traded on that 
foreign board of trade should submit to the Office of General Counsel 
the following in English:
    (1) The terms and conditions of the contract and all other relevant 
rules of the exchange and, if applicable, of the exchange on which the 
underlying securities are traded, which have an effect on the over-all 
trading of the contract, including circuit breakers, price limits, 
position limits or other controls on trading;
    (2) Surveillance agreements between the foreign board of trade and 
the exchange(s) on which the underlying securities are traded;
    (3) Assurances from the foreign board of trade of its ability and 
willingness to share information with the Commission, either directly 
or indirectly;
    (4) When applicable, information regarding foreign blocking 
statutes and their impact on the ability of United States government 
agencies to obtain information concerning the trading of such 
contracts;
    (5) Information and data denoted in U.S. dollars (and the 
conversion date and rate used) relating to:
    (i) The method of computation, availability, and timeliness of the 
index;
    (ii) The total capitalization, number of stocks (including the 
number of unaffiliated issuers if different from the number of stocks), 
and weighting of the stocks by capitalization and, if applicable, by 
price in the index as well as the combined weighting of the five 
highest-weighted stocks in the index;
    (iii) Procedures and criteria for selection of individual 
securities for inclusion in, or removal from, the index, how often the 
index is regularly reviewed, and any procedures for changes in the 
index between regularly scheduled reviews;
    (iv) Method of calculation of the case-settlement price and the 
timing of its public release;
    (v) Average daily volume of trading, measured by share turnover and 
dollar value, in each of the underlying securities for a six-month 
period of time and, separately, the dollar value of the average daily 
trading volume of the securities comprising the lowest weighted 25% of 
the index for the past six calendar months, calculated pursuant to 
Commission Rule 41.11; and
    (vi) If applicable, average daily futures trading volume;
    (6) A statement that the index is not a narrow-based security index 
as defined in Section 1a(25) of the Act and the analysis supporting 
that statement; and
    (7) When applicable, a request to make the futures contract 
available for trading in accordance with the terms and conditions of, 
and through the electronic trading devices identified in, the Foreign 
Trading System No-Action letter that the foreign board of trade 
received from Commission staff and a certification from the foreign 
board of trade that it is in compliance with the terms and conditions 
of that no-action letter.

    Issued in Washington, DC on May 21, 2003, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-13414 Filed 6-4-03; 8:45 am]
BILLING CODE 6351-01-M