[Federal Register Volume 60, Number 234 (Wednesday, December 6, 1995)]
[Rules and Regulations]
[Pages 62323-62326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29618]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-36530, International Series Release No. 893, File No.
S7-26-95]
RIN 3235-AG65
Exemption of the Securities of the United Mexican States Under
the Securities Exchange Act of 1934 for Purposes of Trading Futures
Contracts on Those Securities
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting an amendment to Rule 3a12-8 under the
Securities Exchange Act of 1934 that would designate debt obligations
issued by the United Mexican States (``Mexico'') as ``exempted
securities'' for the purpose of marketing and trading futures contracts
on those securities in the United States. The purpose of this amendment
is solely to permit futures on Mexican Government debt to be traded in
the United States. This change is not intended to have any substantive
effect on the operation of the Rule.
EFFECTIVE DATE: December 6, 1995.
FOR FURTHER INFORMATION CONTACT: James T. McHale, Attorney, Office of
Market Supervision, Division of Market Regulation, Securities and
Exchange Commission (Mail Stop 5-1), 450 Fifth Street, N.W.,
Washington, D.C. 20549, at 202/942-0190.
SUPPLEMENTARY INFORMATION:
I. Introduction
Under the Commodity Exchange Act (``CEA''), it is unlawful to trade
a futures contract on any individual security, unless the security in
question is an exempted security (other than a municipal security) for
the purposes of the Securities Act of 1933 (``Securities Act'') or the
Securities Exchange Act of 1934 (``Exchange Act'').1 Debt
obligations of foreign governments are not exempted securities under
either of these statutes. The Commission, however, has adopted Rule
3a12-8 under the Exchange Act (``Rule'')2 to designate debt
obligations issued by certain foreign governments as exempted
securities under the Exchange Act solely for the purpose of marketing
and trading futures contracts on those securities in the United States.
The foreign governments currently designated in the Rule are Great
Britain, Canada, Japan, Australia, France, New Zealand, Austria,
Denmark, Finland, the Netherlands, Switzerland, Germany, the Republic
of Ireland, Italy, and the Kingdom of Spain (the ``Designated Foreign
Governments''). As a result of being included in the Rule, futures
contracts on the debt obligations of these countries may be sold in the
United States, as long as the other terms of the Rule are satisfied.
\1\The term ``exempted security'' is defined in Section 3 of the
Securities Act, 15 U.S.C. 77c, and Section 3(a)(12) of the Exchange
Act, 15 U.S.C. 78c(a)(12).
\2\17 CFR 240.3a12-8.
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On September 11, 1995, the Commission issued a release proposing to
amend Rule 3a12-8 to designate the debt obligations of Mexico as
exempted securities, solely for the purpose of futures trading.3
Four commentators, the
[[Page 62324]]
Chicago Mercantile Exchange (``CME''), Euro Brokers Investment
Corporation (``Euro Brokers''), Sakura Dellsher, Inc. (``SDI''), and
Centre Financial Products Limited (``Centre Financial''), submitted
letters supporting the proposal.4
\3\See Securities Exchange Act Release No. 36213 (``Proposing
Release'') (September 11, 1995), 60 FR 48078 (September 18, 1995).
\4\See Letter from William J. Brodsky, President and Chief
Executive Officer, CME to Jonathan G. Katz, Secretary, Commission,
dated October 18, 1995; letter from Donald R.A. Marshall, President,
Euro Brokers to Jonathan G. Katz, Secretary, Commission, dated
October 18, 1995; letter from Leo Melamed, Chairman and Chief
Executive Officer, SDI to Jonathan G. Katz, Secretary, Commission,
dated October 18, 1995; and letter from Richard L. Sandor, Ph.D.,
Chairman and Chief Executive Officer, Centre Financial to Jonathan
G. Katz, Secretary, Commission, dated October 19, 1995.
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The Commission is adopting this amendment to the Rule, adding
Mexico to the list of countries whose debt obligations are exempted by
Rule 3a12-8. In order to qualify for the exemption, futures contracts
on debt obligations of Mexico would have to meet all the other
requirements of the Rule.
II. Background
Rule 3a12-8 was adopted in 19845 pursuant to the exemptive
authority in Section 3(a)(12) of the Exchange Act in order to provide
limited relief from the CEA's prohibition on the trading of futures
overlying individual securities.6 As originally adopted, the Rule
provided that debt obligations of the United Kingdom and Canada would
be deemed to be exempted securities, solely for the purpose of
permitting the offer, sale, and confirmation of ``qualifying foreign
futures contracts'' on such securities, so long as the securities in
question were neither registered under the Securities Act nor the
subject of any American depositary receipt so registered. A futures
contract on such a debt obligation is deemed under the Rule to be a
``qualifying foreign futures contract'' if delivery under the contract
is settled outside the United States and is traded on a board of
trade.7
\5\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).
\6\In enacting the Futures Trading Act of 1982, Congress
expressed its understanding that neither the SEC nor the Commodity
Futures Trading Commission (``CFTC'') had intended to bar the sale
of futures contracts on debt obligations of the United Kingdom of
Great Britain and Northern Ireland (``United Kingdom'') to U.S.
persons, and its expectation that administrative action would be
taken to allow the sale of such futures contracts in the United
States. See Original Proposing Release, supra note 5, 48 FR at 24725
[citing 128 Cong. Rec. H7492 (daily ed. September 23, 1982)
(statements of Representatives Daschle and Wirth)].
\7\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 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.
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, and Spain.8
\8\As originally adopted, the Rule applied only to British and
Canadian government debt securities. See Original Adopting Release,
supra note 5. In 1986, the Rule was amended to include Japanese
government debt securities. See Securities Exchange Act Release No.
23423 (July 11, 1986), 51 FR 25996 (July 18, 1986). In 1987, the
Rule was amended to include debt securities issued by Australia,
France and New Zealand. See Securities Exchange Act Release No.
25072 (October 29, 1987), 52 FR 42277 (November 4, 1987). In 1988,
the Rule was amended to include debt securities issued by Austria,
Denmark, Finland, the Netherlands, Switzerland, and West Germany.
See Securities Exchange Act Release No. 26217 (October 26, 1988), 53
FR 43860 (October 31, 1988). In 1992 the Rule was again amended to
(1) include debt securities offered by the Republic of Ireland and
Italy, (2) change the country designation of ``West Germany'' to the
``Federal Republic of Germany,'' and (3) replace all references to
the informal names of the countries listed in the Rule with
references to their official names. See Securities Exchange Act
Release No. 30166 (January 6, 1992), 57 FR 1375 (January 14, 1992).
Finally, 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).
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The CME has informed the Commission that U.S. citizens may be
interested in futures products based on the debt obligations of Mexico,
and has requested that Rule 3a12-8 be amended to facilitate such
trading.9 The CME has represented that it intends to develop a
contract market in Mexican Certificados de la Tesoreria de la
Federacion (``Cetes''), which are short-term Mexican government
securities, and in Mexican Brady bonds, a class of longer term
sovereign Mexican debt issues.10 Mexican Brady bonds were issued
pursuant to the Brady plan, which allows developing countries to
restructure their commercial bank debt by issuing long-term dollar
denominated bonds.11 The Commission understands that Mexican Brady
bonds are currently traded primarily in the over-the-counter market in
the United States.
\9\See Letter from William J. Brodsky, President and Chief
Executive Officer, CME, to Arthur Levitt, Jr., Chairman, Commission,
dated May 3, 1995.
\10\The marketing and trading of foreign futures contracts is
subject to regulation by the CFTC. In particular, Section 4b of the
CEA authorizes the CFTC to regulate the offer and sale of foreign
futures contracts to U.S. residents, and Rule 9 (17 CFR 30.9),
promulgated under Section 2(a)(1)(A) of the CEA, is intended to
prohibit fraud in connection with the offer and sale to U.S. persons
of futures contracts executed on foreign exchanges. Additional rules
promulgated under 2(a)(1)(A) of the CEA govern the domestic offer
and sale of futures and options contracts traded on foreign boards
of trade. These rules require, among other things, that the domestic
offer and sale of foreign futures be effected through the CFTC
registrants or through entities subject to a foreign regulatory
framework comparable to that governing domestic futures trading. See
17 CFR 30.3, 30.4, and 30.5 (1991).
\11\There are several types of Brady bonds, but ``Par Bradys''
and ``Discount Bradys'' represent the great majority of issues in
the Brady bond market. In general, both Par Bradys and Discount
Bradys are secured as to principal at maturity by U.S. Treasury
zero-coupon bonds. Additionally, usually 12 to 18 months of interest
payments are also secured in the form of a cash collateral account,
which is maintained to pay interest in the event that the sovereign
debtor misses an interest payment.
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The Commission is amending Rule 3a12-8 to add Mexico to the list of
countries whose debt obligations are deemed to be ``exempted
securities'' under the terms of the Rule. Under this amendment, the
existing conditions set forth in the Rule (i.e., that the underlying
securities not be registered in the United States,12 that the
futures contracts require delivery outside the United States,13
and that the contracts be traded on a board of trade) would continue to
apply.
\12\The Commission notes that neither Mexican Cetes nor Mexican
Brady bonds are currently registered in the United States. The
Commission is aware, however, that certain Mexican sovereign debt is
registered in the United States and that the trading of futures on
these debt issues would not be exempted under Rule 3a12-8 from the
CEA's prohibition on the trading of futures overlying individual
securities that are not exempted securities.
\13\The CME's proposed futures contracts will be cash-settled
(i.e., settlement of the futures contracts will not entail delivery
of the underlying securities). The Commission has recognized that a
cash-settled futures contract is consistent with the requirement of
the Rule that delivery must be made outside the United States. See
Securities Exchange Act Release No. 25072 (October 29, 1987), 52 FR
42277 (November 4, 1987).
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III. Discussion
A. Comment Letters
As noted above, the Commission received four comment letters, all
in support of the proposal.14 The CME additionally recommended
that the Commission eliminate its practice of granting exemptions under
the Rule on
[[Page 62325]]
a country-by-country basis.15 In support of adding Mexico to the
list of Designated Foreign Governments in the Rule, the CME restated
its belief that futures on Mexican sovereign debt would serve a
valuable economic purpose and would benefit both U.S. investors and the
Mexican economy. The CME asserted that Mexican Brady bonds are actively
traded in the over-the-counter market in the United States, and that
dealers and investors in Mexican Brady bonds could use the CME's
proposed futures contracts to hedge the price risk in holding the
underlying bonds.
\14\See supra note 4.
\15\Instead of the current country-by-country analysis, the CME
suggested that the Commission's approach should be to permit futures
trading on any country's sovereign debt, provided that the futures
contracts do not allow delivery of unregistered foreign government
securities in the United States. See CME comment letter, supra note
4. This approach would require an amendment to Rule 3a12-8 that has
not been proposed at this time.
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Euro Brokers noted that while the underlying cash market for
emerging market debt securities, including Mexico, has experienced
considerable growth, there does not exist a proper hedging vehicle for
positions in emerging market debt. According to Euro Brokers, this lack
of an effective hedging tool limits the growth, liquidity, and
stability of the market. If the CME is permitted to market and trade
futures contracts on Mexican sovereign debt, Euro Brokers asserted,
traders and investors will have the ability to hedge their exposure,
thus generating depth, liquidity, and stability for the emerging
markets as a whole both in the cash and futures markets.
SDI additionally suggested that the Commission be ``flexible'' in
allowing the debt obligations of additional foreign governments to
qualify for such exempt status.
Finally, according to Centre Financial, the fact that Mexico's debt
is not rated in one of the two highest rating categories by at least
two Nationally Recognized Statistical Rating Organizations (``NRSROs'')
is immaterial when considering the obligations as the basis of a
futures or options contract. Moreover, Centre Financial suggested that
the Commission consider an exemption for all sovereign debt, thereby
allowing individual exchanges to determine whether a futures or options
contract on a country's debt is appropriate.
It should be noted that in the Proposing Release, the Commission
sought comment on: the appropriateness of designating Mexican sovereign
debt as exempted securities even though its long-term debt is not rated
in one of the two highest rating categories by at least two NRSROs (a
factor the Commission has traditionally looked to as an indication of
the liquidity of the underlying market); whether debt ratings should
continue to be used in evaluating proposals to add countries to the
Rule, and what alternative criteria, such as volume and depth of
trading or amount of outstanding debt, could be used; whether the
proposed amendment is appropriate in light of the fact that Mexico
would be the first emerging market country to be included as a
Designated Foreign Government; whether the CME's proposal to develop a
contract market in Mexican Brady bonds raises any unique issues; and
the general application and operation of the Rule given the increased
globalization of the securities markets since the Rule was adopted. The
commenters did not address all of these issues, but instead focused on
the economic benefits of including Mexico as a Designated Foreign
Government and adopting a liberal approach for further amendments to
the Rule to include the sovereign debt of other countries.
B. Analysis
For the reasons discussed below, the Commission finds that it is
consistent with the public interest and the protection of investors
that Rule 3a12-8 be amended to include the sovereign debt obligations
of Mexico. The Commission believes that the trading of futures on
Mexican sovereign debt could provide U.S. investors and dealers with a
vehicle for hedging the risks involved in holding Mexican debt
instruments and that the sovereign debt of Mexico should be subject to
the same regulatory treatment under the Rule as that of the Designated
Foreign Governments for purposes of trading futures contracts on such
debt obligations by U.S. persons.
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. The market
for Mexican sovereign debt instruments appears to be active and liquid.
As of March 31, 1995, there was approximately US$87.5 billion face
amount Mexican government debt issued and outstanding of various
classes and maturities.16 According to the CME petition, the cash
market for Cetes evidences active trading. For example, between 1993
and 1994 the monthly trading volume (in principal amount), according to
the CME, of Cetes ranged from a low of approximately US$18.5 billion to
a high of US$1.1 trillion. Moreover, according to a recent survey of
members of the Emerging Markets Traders Association (``EMTA''), Mexican
debt instruments are one of the most actively traded of all emerging
markets instruments. According to the survey, the total annual trading
volume for Mexican Brady bonds amounted to approximately US$282.3
billion.17 As is the case for all sovereign issuers, there are
less actively traded Mexican sovereign debt issues, but the Commission
believes that as a whole the market for Mexican sovereign debt is
sufficiently liquid and deep for purposes of Rule 3a12-8.
\16\See Exhibit D to Form 18-K, Annual Report for Foreign
Governments and Political Subdivisions Thereof, filed by Mexico on
June 30, 1995.
\17\The survey, which was responded to by 80 out of 333 members
of the EMTA, was prepared for the EMTA by Price Waterhouse LLP. See
1994 Debt Trading Volume Survey, Emerging Markets Traders
Association (May 1, 1995).
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In amending the Rule to include the debt obligations of Mexico,
however, the Commission has considered additional factors relating to
Mexican government debt. In connection with some of the prior
amendments to the Rule, the Commission noted that the long-term
sovereign debt of those countries was rated in one of the two highest
rating categories by at least two NRSROs.18 This factor, as
previously stated by the Commission, could be viewed as indirect
evidence of an active and liquid secondary trading market. Mexico's
long-term sovereign debt obligations are not rated in one of the two
highest rating categories.19
\18\See Securities Exchange Act Release No. 26217 (October 26,
1988), 53 FR 43860 (October 31, 1988) (Austria, Denmark, Finland,
the Netherlands, Switzerland, and [West] Germany); Securities
Exchange Act Release No. 30166 (January 6, 1992), 57 FR 1375
(Republic of Ireland and Italy); Securities Exchange Act Release No.
34908 (October 27, 1994), 59 FR 54812 (November 2, 1994) (Kingdom of
Spain).
\19\As of June, 1995, Standard and Poor's Corp. (``S&P'') rated
Mexico's long-term foreign currency debt BB and its long-term local
currency debt BBB+. As of the same date, Mexico's Bonos de
Desarrollo (Bondes) were rated Baa3 by Moody's Investors Service.
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Although the Commission in 1987 proposed to incorporate a rating
standard specifically exempting securities issued by any country with
outstanding long-term sovereign debt rated in one of the two highest
rating categories by at least two NRSROs,20 it ultimately declined
to adopt such a rule.21 At the time of the 1987 Rule
[[Page 62326]]
proposal, the Commission expressed concerns that in the absence of such
a requirement, the Rule might be used as a subterfuge to market or
trade unregistered sovereign foreign debt through futures trading. The
Commission, however, indicated that it did not intend to preclude
futures trading on foreign debt that did not meet this ratings
requirement and indeed subsequently sought comment on the feasibility
of other factors for consideration, such as volume and depth of trading
in a sovereign issuer's debt.
\20\See Securities Exchange Act Release No. 24428 (May 5, 1987),
52 FR 18237 (May 14, 1987).
\21\See Securities Exchange Act Release No. 25072 (October 29,
1987), 52 FR 42277 (November 4, 1987).
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As discussed above, the Commission has independently determined
that it is appropriate to exempt the sovereign debt of Mexico under the
Rule because of the overall depth and liquidity of the existing cash
market for Mexican sovereign debt. The Commission does not believe that
either Mexico's status as an emerging market country with potentially
more volatile debt prices, or its issuance of Brady bonds changes this
conclusion.
In the Proposing Release the Commission solicited comment on
whether there are alternative approaches to the country-by-country
designation process for adding countries to the Rule. The Commission
intends to consider this issue further, but does not believe it should
delay the inclusion of Mexico in the list of Designated Foreign
Governments pending action on a more generic approach. Nevertheless,
the Commission continues to welcome suggestions on an objective means
of including countries within Rule 3a12-8 that are consistent with the
Rule's overall objectives.
IV. Regulatory Flexibility Act Consideration
Chairman Levitt has certified in connection with the Proposing
Release that this amendment, if adopted, would not have a significant
economic impact on a substantial number of small entities. The
Commission received no comments on this certification.
V. Effects on Competition and Other Findings
Section 23(a)(2) of the Exchange Act22 requires the
Commission, in adopting rules under the Exchange Act, to consider the
competitive effects of such rules, if any, and to balance any impact
with the regulatory benefits gained in terms of furthering the purposes
of the Exchange Act. The Commission has considered the amendment to the
Rule in light of the standards cited in section 23(a)(2) and believes
that adoption of the amendment will not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act. As stated above, the amendment is designed to
assure the lawful availability in this country of Mexican government
bond futures that otherwise would not be permitted to be marketed under
the terms of the CEA. The amendment thus serves to expand the range of
financial products available in the United States and enhances
competition in financial markets. Insofar as the Rule contains
limitations, they are designed to promote the purposes of the Exchange
Act by ensuring that futures trading on Mexican government securities
is consistent with the goals and purposes of the Federal securities
laws by minimizing the impact of the Rule on securities trading and
distribution in the United States.
\22\15 U.S.C. 78w(a)(2).
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Because the amendment to the rule is exemptive in nature, the
Commission has determined to make the foregoing action effective
immediately upon publication in the Federal Register.23
\23\15 U.S.C. 553(d).
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VI. Statutory Basis
The amendment to rule 3a12-8 is being adopted pursuant to 15 U.S.C.
78a et seq., particularly sections 3(a)(12) and 23(a), 15 U.S.C.
78c(a)(12) and 78w(a).
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
VII. Text of the Adopted Amendment
For the reasons set forth above, the Commission is amending part
240 of chapter II, title 17 of the Code of Federal Regulations as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Sec. 240.3a12-8 is amended by removing the word ``or'' at the
end of paragraph (a)(1)(xiv), removing the ``period'' at the end of
paragraph (a)(1)(xv) and adding ``; or'' in its place, and adding
paragraph (a)(1)(xvi) to read as follows:
Sec. 240.3a12-8 Exemption for designated foreign government securities
for purposes of futures trading.
(a) * * *
(1) * * *
(xvi) the United Mexican States.
* * * * *
By the Commission.
Dated: November 30, 1995.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29618 Filed 12-5-95; 8:45 am]
BILLING CODE 8010-01-U
