[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Proposed Rules]
[Pages 65607-65609]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30862]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-36580, International Series Release No. 900, File No.
S7-34-95]
RIN 3235-AG68
Exemption of the Securities of the Federative Republic of Brazil,
the Republic of Argentina, and the Republic of Venezuela Under the
Securities Exchange Act of 1934 for Purposes of Trading Futures
Contracts on Those Securities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule amendment and solicitation of public comments.
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SUMMARY: The Commission proposes for comment an amendment to Rule 3a12-
8 (``Rule'') that would designate debt obligations issued by the
Federative Republic of Brazil (``Brazil''), the Republic of Argentina
(``Argentina''), and the Republic of Venezuela (``Venezuela'')
(collectively the ``Proposed Countries'') as ``exempted securities''
for the purpose of marketing and trading of futures contracts on those
securities in the United States. The amendment is intended to permit
futures trading on the sovereign debt of the Proposed Countries. This
change is not intended to have any substantive effect on the operation
of the Rule.
DATES: Comments should be submitted by January 19, 1996.
ADDRESSES: All comments should be submitted in triplicate and addressed
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. All comments should refer
to File No. S7-34-95, and will be available for public inspection and
copying at the Commission's Public Reference Room, 450 Fifth Street,
N.W., Washington, D.C.
FOR FURTHER INFORMATION CONTACT: James T. McHale, Attorney, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Division''), Securities and Exchange Commission (Mail Stop 5-1), 450
Fifth Street, N.W., Washington, D.C. 20549, at 202/942-0190.
SUPPLEMENTARY INFORMATION:
I. Introduction
Under the Commodity Exchange Act (``CEA''), it is unlawful to trade
a futures contract on any individual security unless the security in
question is an exempted security (other than a municipal security)
under the Securities Act of 1933 (``Securities Act'') or the Securities
Exchange Act of 1934 (``Exchange Act''). Debt obligations of foreign
governments are not exempted securities under either of these statutes.
The Securities and Exchange Commission (``SEC'' or ``Commission''),
however, has adopted Rule 3a12-8 under the Exchange Act to designate
debt obligations issued by certain foreign governments as exempted
securities under the Exchange Act solely for the purpose of marketing
and trading futures contracts on those securities in the United States.
As amended, the foreign governments currently designated in the Rule
are Great Britain, Canada, Japan, Australia, France, New Zealand,
Austria, Denmark, Finland, The Netherlands, Switzerland, Germany, the
Republic of Ireland, Italy, Spain, and Mexico (the ``Designated Foreign
Governments''). As a result, futures contracts on the debt obligations
of these countries may be sold in the United States, as long as the
other terms of the Rule are satisfied.
The Commission today is soliciting comments on a proposal to amend
Rule 3a12-8 (17 CFR 240.3a12-8) to add the debt obligations of Brazil,
Argentina, and Venezuela to the list of Designated Foreign Government
securities that are exempted by Rule 3a12-8. To qualify for the
exemption, futures contracts on debt obligations of the Proposed
Countries would have to meet all the other existing requirements of the
Rule.
II. Background
Rule 3a12-8 was adopted in 1984 1 pursuant to the exemptive
authority in Section 3(a)(12) of the Exchange Act in order to provide a
limited exception from the CEA's prohibition on futures overlying
individual securities.2 As originally adopted, the Rule provided
that the debt obligations of Great Britain and Canada would be deemed
to be exempted securities, solely for the purpose of permitting the
offer, sale, and confirmation of ``qualifying foreign futures
contracts'' on such securities. The securities in question were not
eligible for the exemption if they were registered under the Securities
Act or were the subject of any American depositary receipt so
registered. A futures contract on such a debt obligation is deemed
under the Rule to be a ``qualifying foreign futures contract'' if the
contract is deliverable outside the United States and is traded on a
board of trade.3
\1\ See Securities Exchange Act Release Nos. 20708 (``Original
Adopting Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984) and
19811 (``Original Proposing Release'') (May 25, 1983), 48 FR 24725
(June 2, 1983).
\2\ In approving the Futures Trading Act of 1982, Congress
expressed its understanding that neither the SEC nor the Commodity
Futures Trading Commission (``CFTC'') had intended to bar the sale
of futures on debt obligations of the United Kingdom of Great
Britain and Northern Ireland to U.S. persons, and its expectation
that administrative action would be taken to allow the sale of such
futures contracts in the United States. See Original Proposing
Release, supra note 1, 48 FR at 24725 (citing 128 Cong. Rec. H7492
(daily ed. September 23, 1982) (statements of Representatives
Daschle and Wirth)).
\3\ As originally adopted, the Rule required that the board of
trade be located in the country that issued the underlying
securities. This requirement was eliminated in 1987. See Securities
Exchange Act Release No. 24209 (March 12, 1987), 52 FR 8875 (March
20, 1987).
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The conditions imposed by the Rule were intended to facilitate the
trading of futures contracts on foreign government securities in the
United States while requiring offerings of foreign government
securities to comply with the federal securities laws. Accordingly, the
conditions set forth in the Rule were designed to ensure that, absent
registration, a domestic market in unregistered foreign government
securities would not develop, and that markets for futures on these
instruments would not be used to avoid the securities law registration
requirements. In particular, the Rule was intended to ensure that
futures on exempted sovereign debt did not operate as a surrogate means
of trading the unregistered debt.
Subsequently, the Commission amended the Rule to include the debt
securities issued by Japan, Australia, France, New Zealand, Austria,
Denmark, Finland, the Netherlands, Switzerland, Germany, Ireland,
Italy, Spain, and, most recently, Mexico.4
\4\ As originally adopted, the Rule applied only to British and
Canadian government securities. See Original Adopting Release, supra
note 1. In 1986, the Rule was amended to include Japanese government
securities. See Securities Exchange Act Release No. 23423 (July 11,
1986), 51 FR 25996 (July 18, 1986). In 1987, the Rule was amended to
include debt securities issued by Australia, France and New Zealand.
See Securities Exchange Act Release No. 25072 (October 29, 1987), 52
FR 42277 (November 4, 1987). In 1988, the Rule was amended to
include debt securities issued by Austria, Denmark, Finland, the
Netherlands, Switzerland, and West Germany. See Securities Exchange
Act Release No. 26217 (October 26, 1988), 53 FR 43860 (October 31,
1988). In 1992 the Rule was again amended to (1) include debt
securities offered by the Republic of Ireland and Italy, (2) change
the country designation of ``West Germany'' to the ``Federal
Republic of Germany,'' and (3) replace all references to the
informal names of the countries listed in the Rule with references
to their official names. See Securities Exchange Act Release No.
30166 (January 6, 1992), 57 FR 1375 (January 14, 1992). In 1994, the
Rule was amended to include debt securities issued by the Kingdom of
Spain. See Securities Exchange Act Release No. 34908 (October 27,
1994), 59 FR 54812 (November 2, 1994). Finally, the Rule was amended
to include the debt securities of Mexico. See Securities Exchange
Act Release No. 36530 (November 30, 1995), 60 FR 62323 (December 6,
1995) (``Mexico Adopting Release'').
[[Page 65608]]
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III. Discussion
The Chicago Mercantile Exchange (``CME'') has proposed that the
Commission amend Rule 3a12-8 to include the sovereign debt of the
Proposed Countries.5 The CME intends to develop a futures contract
market in Brady bonds issued by the Proposed Countries.6 Brady
bonds are issued pursuant to the Brady plan which allows developing
countries to restructure their commercial bank debt by issuing long-
term dollar denominated bonds.7 The Commission understands that
Brady bonds issued by the Proposed Countries are currently traded
primarily in the over-the-counter market in the United States.
\5\ See Letter from William J. Brodsky, President and Chief
Executive Officer, CME, to Arthur Levitt, Jr., Chairman, Commission,
dated November 10, 1995 (``CME petition'').
\6\ The marketing and trading of foreign futures contracts is
subject to regulation by the CFTC. In particular, Section 4b of the
CEA authorizes the CFTC to regulate the offer and sale of foreign
futures contracts to U.S. residents, and Rule 9 (17 CFR 30.9),
promulgated under Section 2(a)(1)(A) of the CEA, is intended to
prohibit fraud in connection with the offer and sale of futures
contracts executed on foreign exchanges. Additional rules
promulgated under 2(a)(1)(A) of the CEA govern the domestic offer
and sale of futures and options contracts traded on foreign boards
of trade. These rules require, among other things, that the domestic
offer and sale of foreign futures be effected through the CFTC
registrants or through entities subject to a foreign regulatory
framework comparable to that governing domestic futures trading. See
17 CFR 30.3, 30.4, and 30.5 (1991).
\7\ There are several types of Brady bonds, but ``Par Bradys''
and ``Discount Bradys'' represent the great majority of issues in
the Brady bond market. In general, both Par Bradys and Discount
Bradys are secured as to principal at maturity by U.S. Treasury
zero-coupon bonds. Additionally, usually 12 to 18 months of interest
payments are also secured in the form of a cash collateral account,
which is maintained to pay interest in the event that the sovereign
debtor misses an interest payment.
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Under the proposed amendment, the existing conditions set forth in
the Rule (i.e., that the underlying securities not be registered in the
United States,8 the futures contracts require delivery outside the
United States,9 and the contracts be traded on a board of trade)
would continue to apply.
\8\ The Commission notes that while no Brady bonds of Proposed
Countries have been registered in the United States, certain
sovereign debt issues of Argentina and Venezuela have been so
registered. The trading of futures on U.S-registered debt securities
of Argentina and Venezuela would not be exempted under Rule 3a12-8
from the CEA's general prohibition on futures overlying individual
securities.
\9\ The CME's proposed futures contracts will be cash-settled
(i.e., settlement of the futures contracts will not entail delivery
of the underlying securities). The Commission has recognized that a
cash-settled futures contract is consistent with the requirement of
the Rule that delivery must be made outside the United States. See
Securities Exchange Act Release No. 25072 (October 29, 1987), 52 FR
42277 (November 4, 1987).
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In determining whether to amend the Rule to add new countries, the
Commission has considered whether there is an active and liquid
secondary trading market in the particular sovereign debt. There
appears to be an active and liquid market in the debt instruments of
the Proposed Countries. According to the CME, as of December 31, 1993,
the total public and publicly guaranteed debt 10 of Brazil,
Argentina, and Venezuela was approximately US$86 billion, US$55
billion, and US$74 billion, respectively.11 Moreover, the cash
market for Brady bonds issued by the Proposed Countries evidences
relatively active trading. Based on data provided by the CME, the total
1994 trading volume in the Brady bonds of Brazil, Argentina, and
Venezuela was approximately US$371 billion, US$360 billion, and US$320
billion, respectively.12
\10\ Public debt is an external obligation of a public debtor,
including the national government, a political subdivision (or any
agency of either) and autonomous public bodies. Publicly guaranteed
debt is an external obligation of a private debtor that is
guaranteed for repayment by a public entity.
\11\ See Letter from Carl A. Royal, Senior Vice President and
Special Counsel, CME, to James T. McHale, Attorney, OMS, Division,
Commission, dated November 30, 1995 (citing the World Bank's 1995
World Debt Tables as the source for this information) (``November 30
letter'').
\12\ See November 30 letter, supra note 11. As mentioned
earlier, the Commission recently amended the Rule to include the
debt securities of Mexico. The total 1994 trading volume in Mexican
Brady bonds was approximately US$282.3 billion. See Mexico Adopting
Release, supra note 4.
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In light of the above data, the Commission believes preliminarily
that the debt obligations of the Proposed Countries should be subject
to the same regulatory treatment under the Rule as the debt obligations
of the Designated Foreign Governments. Moreover, the trading of futures
on the sovereign debt of Brazil, Argentina, and Venezuela should
provide U.S. investors with a vehicle for hedging the risks involved in
the trading of the underlying sovereign debt of the Proposed Countries.
In addition, the Commission preliminarily believes that the
proposed amendment offers potential benefits for U.S. investors. If
adopted, the proposed amendment would allow U.S. boards of trade to
offer in the United States, and U.S. investors to trade, a greater
range of futures contracts on foreign government debt obligations. The
Commission does not anticipate that the proposed amendment would result
in any direct cost for U.S. investors or others. The proposed amendment
would impose no recordkeeping or compliance burdens, and merely would
provide a limited purpose exemption under the federal securities laws.
The restrictions imposed under the proposed amendment are identical to
the restrictions currently imposed under the terms of the Rule and are
designed to protect U.S. investors.
Section 23(a)(2) of the Exchange Act requires the Commission in
amending rules to consider potential impact on competition. Because the
proposal is intended to expand the range of financial products
available in the United States, the Commission preliminarily believes
that the proposed amendment to the Rule will not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
IV. Request for Comments
The Commission seeks comments on the desirability of designating
the debt securities of the Proposed Countries as exempted securities
under Rule 3a12-8. Comments should address whether the trading or other
characteristics of the Proposed Countries' debt warrant an exemption
for purposes of futures trading. Commentators may wish to discuss
whether there are any legal or policy reasons for distinguishing
between the Proposed Countries and the Designated Foreign Governments
for purposes of the Rule. The Commission also solicits comments on the
costs and benefits of the proposed amendment to Rule 3a12-8.
Specifically, the Commission requests commentators to address whether
the proposed amendment would generate the anticipated benefits, or
impose any costs on U.S. investors or others. Finally, the Commission
seeks comment on the general application and operation of the Rule
given the increased globalization of the securities markets since the
Rule was adopted.
V. Regulatory Flexibility Act Certification
Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. Sec. 605(b), the Chairman of the Commission has certified that
the amendment proposed herein would not, if adopted, have a significant
economic impact on a substantial number of small entities. This
certification, including the reasons therefor, is attached to this
release as Appendix A.
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VI. Statutory Basis
The amendment to Rule 3a12-8 is being proposed pursuant to 15
U.S.C. Secs. 78a et seq., particularly Sections 3(a)(12) and 23(a), 15
U.S.C. Secs. 78c(a)(12) and 78w(a).
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
VII. Text of the Proposed Amendment
For the reasons set forth in the preamble, the Commission is
proposing to amend Part 240 of Chapter II, Title 17 of the Code of
Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Section 240.3a12-8 is amended by removing the word ``or'' at the
end of paragraph (a)(1)(xv), removing the ``period'' at the end of
paragraph (a)(1)(xvi) and adding ``; or'' in its place, and adding
paragraph (a)(1)(xvii), paragraph (a)(1)(xviii), and paragraph
(a)(1)(xix) to read as follows:
Sec. 240.3a12-8 Exemption for designated foreign government securities
for purposes of futures trading.
(a) * * *
(1) * * *
(xvii) the Federative Republic of Brazil;
(xviii) the Republic of Argentina; or
(xix) the Republic of Venezuela.
* * * * *
By the Commission.
Dated: December 13, 1995.
Jonathan G. Katz,
Secretary.
Note: Appendix A to the Preamble will not appear in the Code of
Federal Regulations.
Appendix A--Regulatory Flexibility Act Certification
I, Arthur Levitt, Jr., Chairman of the Securities and Exchange
Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that the
proposed amendment to Rule 3a12-8 (``Rule'') under the Securities
Exchange Act of 1934 (``Exchange Act'') set forth in Securities
Exchange Act Release No. 36580, which would define government debt
securities of Brazil, Argentina and Venezuela (collectively the
``Proposed Countries'') as exempted securities under the Exchange
Act for the purpose of trading futures on such securities, will not
have a significant economic impact on a substantial number of small
entities for the following reasons. First, the proposed amendment
imposes no record-keeping or compliance burden in itself and merely
allows, in effect, the marketing and trading in the United States of
futures contracts overlying the government debt securities of the
Proposed Countries. Second, because futures contracts on the sixteen
countries whose debt obligations are designated as ``exempted
securities'' under the Rule, which already can be traded and
marketed in the U.S., still will be eligible for trading under the
proposed amendment, the proposal will not affect any entity
currently engaged in trading such futures contracts. Third, because
the level of interest presently evident in this country in the
futures trading covered by the proposed rule amendment is modest and
those primarily interested are large, institutional investors,
neither the availability nor the unavailability of these futures
products will have a significant economic impact on a substantial
number of small entities, as that term is defined for broker-dealers
in 27 CFR 240.0-10 and to the extent that it is defined for futures
market participants in the Commodity Futures Trading Commission's
``Policy Statement and Establishment of Definitions of `Small
Entities' for Purposes of the Regulatory Flexibility Act.'' 1
\1\ 45 FR 18618 (April 30, 1982).
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Dated: December 13, 1995.
Arthur Levitt, Jr.,
Chairman.
[FR Doc. 95-30862 Filed 12-19-95; 8:45 am]
BILLING CODE 8010-01-P
