[Federal Register Volume 63, Number 114 (Monday, June 15, 1998)]
[Proposed Rules]
[Pages 32628-32631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15827]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-40077, International Series Release No. 1139, File No.
S7-15-98]
RIN 3235-AH46
Exemption of the Securities of the Kingdom of Belgium Under the
Securities Exchange Act of 1934 for Purposes of Trading Futures
Contracts on Those Securities
AGENCY:Securities and Exchange Commission.
ACTION:Proposed rule.
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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 Kingdom
of Belgium (``Belgium'') as ``exempted securities'' for the purpose of
marketing and trading of futures contracts on those securities in the
United States. The amendment is intended to permit futures trading on
the sovereign debt of Belgium.
DATES:Comments should be submitted by July 15, 1998.
ADDRESSES: All comments should be submitted in triplicate and addressed
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549. Comments also may be submitted
electronically at the following E-mail address: rule-comments@sec.gov.
All comments should refer to File No. S7-15-98; this file number should
be included on the subject line if e-mail is used. Comment letters will
be available for public inspection and copying at the Commission's
Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549.
Electronically submitted comment letters will also be posted on the
Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Joshua Kans, Attorney, Office of
Market Supervision (``OMS''), Division of Market Regulation
(''Division''), Securities and Exchange Commission (Mail Stop 10-1),
450 Fifth Street, NW., Washington, DC 20549, at 202/942-0079.
SUPPLEMENTARY INFORMATION:
I. Introduction
Under the Commodity Exchange Act (``CEA''), it is unlawful to trade
a futures contract on any individual security unless the security in
question is an exempted security (other than a municipal security)
under the Securities Act of 1933 (``Securities Act'') or the Securities
Exchange Act of 1934 (``Exchange Act''). Debt obligations of foreign
governments are not exempted securities under either of these statutes.
The Securities and Exchange Commission (``SEC'' or ``Commission''),
however, has adopted Rule 3a12-8 (17 CFR 240.3a12-8) (``Rule'') under
the Exchange Act to designate debt obligations issued by certain
foreign governments as exempted securities under the Exchange Act
solely for the purpose of marketing and trading futures contracts on
those securities in the United States. As amended, the foreign
governments currently designated in the Rule are Great Britain, Canada,
Japan, Australia, France, New Zealand, Austria, Denmark, Finland, the
Netherlands, Switzerland, Germany, the Republic of Ireland, Italy,
Spain, Mexico, Brazil, Argentina, and Venezuela (the ``Designated
Foreign Governments''). As a result, futures contracts on the debt
obligations of these countries may be sold in the United States, as
long as the other terms of the Rule are satisfied.
The Commission today is soliciting comments on a proposal to amend
Rule 3a12-8 to add the debt obligations of the Kingdom of Belgium
(``Belgium'') to the list of Designated Foreign Governments whose debt
obligations are exempted by Rule 3a12-8. To qualify for the exemption,
futures contracts on the debt obligations of Belgium would have to
[[Page 32629]]
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 the covered debt obligation under the Rule is deemed to be
a ``qualifying foreign futures contract'' if the contract is
deliverable outside the United States and is traded on a board of
trade.\3\
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\1\ See Securities Act Release No. 20708 (``Original Adopting
Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984); Securities
Exchange Act Release No. 19811 (``Original Proposing Release'') (May
25, 1983), 48 FR 24725 (June 2, 1983).
\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, Mexico and, most recently, Brazil, Argentina, and
Venezuela.\4\
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\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 amendmed
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 8, 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). In 1995, the Rule was amended
to include the debt securities of Mexico. See Securities Exchange
Act Release No. 36530 (November 30, 1995), 60 FR 62323 (December 6,
1995). Finally, in 1996, the Rule was amended to include debt
securities issued by the Federative Republic of Brazil, the Republic
of Argentina, and the Republic of Venezuela. See Securities Exchange
Act Release No. 36940 (March 7, 1996) 61 FR 10271 (March 13, 1996).
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III. Discussion
Belfox c.v./s.c. (``Belfox''), the Belgian company recognized as
the institution to organize and administer the Belgian Futures and
Options Exchange (``BELFOX''), has proposed that the Commission amend
Rule 3a12-8 to include the sovereign debt of Belgium.\5\ BELFOX
currently lists two futures contracts \6\ overlying Belgian public debt
securities, and wishes to market and make trading of those products
available to U.S. investors.
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\5\ See Letters from Jos Schmitt, President and Chief Executive
Officer, Belfox, to Arthur Levitt, Jr., Chairman, Commission, dated
June 27, 1997, to Howard L. Kramer, Senior Associate Director,
Division, Commission, dated February 10, 1998 (collectively ``Belfox
petition'').
\6\ The Belgian long-term government bond future (``BGB
future'') and the Belgian medium-term government bond future (``BMB
future''). Id.
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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, the futures contracts require delivery outside the
United States, and the contracts be traded on a board of trade) would
continue to apply. Belfox has represented that (1) the securities
underlying the futures contracts listed on BELFOX are not registered in
the United States; (2) the two futures contracts overlying Belgian
public debt securities which BELFOX intends to market to U.S. investors
are listed exclusively on BELFOX, located in Brussels, Belgium; and (3)
when the BELFOX listed futures contracts expire, the underlying
securities are delivered against payment through the clearing system of
the National Bank of Belgium.\7\
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\7\ The Belgian public debt securities underlying the two
futures contracts traded on BELFOX are not represented by physical
certificates, but appear as entries in an electronic register held
by the National Bank of Belgium. Id.
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In the most recent determinations to amend the Rule adding Mexico,
Brazil, Argentina, and Venezuela, the Commission considered primarily
whether an active and liquid secondary trading market existed for the
particular sovereign debt of these countries.\8\ Prior to the addition
of those countries to the Rule, the Commission considered principally
whether the particular sovereign debt had been rated in one of the two
highest rating categories \9\ by at least two nationally recognized
statistical rating organizations (``NRSROs'').\10\ The Commission will
continue to consider the existence of a high credit rating in its
evaluation of an application to amend the Rule, because the Commission
believes that a high debt rating provides indirect evidence of
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an active and liquid secondary trading market.\11\ Absent a high debt
rating, the Commission would consider a debt instrument's historical
trading data.
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\8\ See, e.g., Securities Exchange Act Release No. 36530
(November 30, 1995), 60 FR 62323 (December 6, 1995) (amending the
Rule to add Mexico because the Commission believed that as a whole,
the market for Mexican sovereign debt was sufficiently liquid and
deep for the purposes of the Rule); Securities Exchange Act Release
No. 36940 (March 7, 1996), 61 FR 10271 (March 13, 1996) (amending
the Rule to add Brazil, Argentina and Venezuela because the
Commission believed that the market for the sovereign debt of those
countries was sufficiently liquid and deep for the purposes of the
Rule).
\9\ The two highest categories used by Moody's Investor Services
(``Moody's'') for long-term debt are ``Aaa'' and ``Aa.'' See Moody's
Investors Service, Rating Definitions (http://www.moodys.com/
ratings/ratdefs.htm). The two highest categories used by Standard
and Poor's (``S&P'') for long-term debt are ``AAA'' and ``AA.'' See
Standard & Poor's Global Rating Handbook, ``Issue Credit Rating
Definitions'' and ``Issuer Credit Rating Definitions'' (February
1998) (submitted as part of Belfox's petition).
\10\ See, e.g., Securities Exchange Act Release No. 30166
(January 6, 1992) 57 FR 1375 (January 14, 1992) (amending the Rule
to include debt securities issued by Ireland and Italy--Ireland's
long-term sovereign debt was rated Aa3 by Moody's and AA- by S&P,
and Italy's long-term sovereign debt was rated Aaa by Moody's and
AA+ by S&P); and Securities Exchange Act Release No. 34908 (October
27, 1994), 59 FR 54812 (November 2, 1994) (amending the Rule to
include Spain, which had long-term debt ratings of Aa2 from Moody's
and AA from S&P)
\11\ See, e.g., Securities Exchange Act Release No. 36213
(September 11, 1995), 60 FR 48078 (September 18, 1995) (proposal to
add Mexico to list of countries encompassed by rule); Securities
Exchange Act Release No. 24428 (May 5, 1987), 52 FR 18237 (May 14,
1987) (proposed amendment, which was not implemented, that would
have extended the rule to encompass all countries rated in one of
the two highest categories by at least two NRSROs).
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Belgian long-term debt meets the debt rating standard. Moody's
Investors Service (``Moody's'') has assigned an official rating of Aa1
to long-term local currency denominated \12\ Belgian government
securities and to long-term foreign currency denominated Belgian
government securities.\13\ Standard & Poor's (''S&P'') has assigned the
Kingdom of Belgium a long-term local currency issuer credit rating of
AAA and a long-term foreign currency issuer credit rating of AA+.\14\
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\12\ The Belgian public debt is principally denominated in
Belgian francs (``BEF''). The portion of Belgian public debt
denominated in foreign currencies was 7.6% in 1996, 11.4% in 1995
and 14.5% in 1994. The debt instruments that underlie the futures
contracts currently listed on BELFOX are denominated in Belgian
francs. Belfox petition, supra note 5.
\13\ See Moody's Investor Service, Moody's Bond Record at 131-32
(March 1998); see also Letter from Sosi Vartanesyan, Vice President,
Moody's, dated January 15, 1998 (submitted as part of Belfox
petition; confirming Aa1 ratings for Belgian long-term local
currency denominated government securities and long-term foreign
currency denominated government securities).
\14\ See Letter from Konrad Reuss, Director, Standard & Poor's,
to An De Pauw, Senior Legal Advisor, Belfox, dated Feb. 5, 1998
(accompanying Belfox petition). The letter explained that those
``issuer'' credit ratings ``have not been assigned as issue credit
ratings to any outstanding debt issued by the Kingdom.''
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The Commission also observes that there appears to exist an active
and liquid trading market for Belgian issued debt instruments, based on
the representations in Belfox's petition.\15\ The total Belgian public
debt outstanding\16\ was equivalent to approximately US$258.92 billion
as of December 31, 1996, approximately US$256.86 billion in 1995, and
approximately US$251.64 billion in 1994. Linear bonds (``Obligations
Lineaires--Lineaire Obligaties'' or ``OLOs''),\17\ which are the only
type of Belgian public debt instruments underlying the two futures
contracts (BGB and BMB) currently listed on BELFOX, represented 53.6
percent of the total amount of Belgian public debt outstanding in 1996,
50.6 percent in 1995 and 44.6 percent in 1994.\18\ At the end of the
first quarter of 1997, the total amount of outstanding OLOs was
equivalent to approximately US$139.89 billion. The total value traded
in OLOs on an annual basis was equivalent to approximately US$1.86
trillion in 1996, US$1.7 trillion in 1995, and US$1.3 trillion in 1994.
The average value traded in OLOs on a daily basis was equivalent to
approximately US$7.44 billion in 1996, US$6.79 billion in 1995, and
US$5.23 billion in 1994. The average number of trades on a daily basis
involving OLOs was approximately 571, 614, and 636 for 1996, 1995 and
1994, respectively.\19\
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\15\ The market figures set forth here are found in Belfox's
petition. U.S. dollar equivalents are based on a conversion rate of
BEF 37.10 for USD 1.00 (the conversion rate on December 31, 1997).
Belfox petition, supra note 5.
\16\ Belgian public debt is comprised of government bonds,
Treasury bills and various debt instruments of lesser importance,
such as road fund loans, and municipal and provincial loans. Id.
\17\ OLOs, which are issued by means of a price auction system,
have maturities ranging from 1 to 20 years and are available with
fixed or variable interest rate payments. Only those holding a
Linear bond account with the National Bank of Belgium may
participate in the auction for these bonds. The bonds are
denominated in Belgian francs. Id.
\18\ The amount of OLOs outstanding was equivalent to
approximately US$138.79 billion at the end of 1996, US$130.01
billion in 1995, and US$112.27 billion in 1994. Id.
\19\ OLOs are traded on the Brussels Stock Exchange and over the
counter. Id.
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In light of the above data, the Commission preliminarily believes
that the debt obligations of Belgium 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 Belgium should provide U.S. investors with a vehicle
for hedging the risks involved in the trading of the underlying
sovereign debt of Belgium.
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. and foreign 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 \20\ requires the Commission
in amending rules to consider the 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.
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\20\ 15 U.S.C. 78w(a)(2).
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IV. Request for Comments
The Commission seeks comments on the desirability of designating
the debt securities of Belgium as exempted securities under Rule 3a12-
8. Comments should address whether the trading or other characteristics
of Belgium's sovereign 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 Belgium 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. The Commission also requests information regarding the
potential impact of the proposed rule on the economy on an annual
basis. If possible, commenters should provide empirical data to support
their views. Finally, the Commission seeks comments on the general
application and operation of the Rule given the increased globalization
of the securities markets since the Rule was adopted.
V. Administrative Requirements
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 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. We encourage written comments on the
Certification. Commentators are asked to describe the nature of any
impact on small entities and provide empirical data to support the
extent of the impact. The Paperwork Reduction Act does not apply
because the proposed amendment does not impose recordkeeping or
information collection requirements, or other
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collections of information which require the approval of the Office of
Management and Budget under 44 U.S.C. 3501, et seq.
VI. Statutory Basis
The amendment to Rule 3a12-8 is being proposed pursuant to 15
U.S.C. 78a et seq., particularly sections 3(a)(12) and 23(a), 15 U.S.C.
78c(a)(12) and 78w(a).
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of the 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, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
2. Section 240.3a12-8 is amended by removing the word ``or'' at the
end of paragraph (a)(1)(xviii), removing the ``period'' at the end of
paragraph (a)(1)(xix) and adding ``; or'' in its place, and adding
paragraph (a)(1)(xx), to read as follows:
Sec. 240.3a12-8 Exemption for designated foreign government securities
for purposes of futures trading.
(a) * * *
(1) * * *
(xx) The Kingdom of Belgium.
* * * * *
By the Commission.
Dated: June 8, 1998.
Margaret H. McFarland,
Deputy 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. 40077, which would define the government
debt securities of the Kingdom of Belgium (``Belgium'') 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 Belgium. Second, because
futures contracts on the nineteen 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 those primarily interested in trading such
futures contracts 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 17 CFR
240.0-10.
Dated: June 4, 1998.
Arthur Levitt, Jr.,
Chairman.
[FR Doc. 98-15827 Filed 6-14-98; 8:45 am]
BILLING CODE 8010-01-P
