[Federal Register Volume 60, Number 180 (Monday, September 18, 1995)]
[Proposed Rules]
[Pages 48078-48081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23019]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-36213, International Series Release No. 852, 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: Proposed rule amendment and solicitation of public comments.
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SUMMARY: The Commission proposes for comment an amendment to Rule 3a12-
8 that would designate debt obligations issued by the United Mexican
States (``Mexico'') 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 on Mexican
government debt to be traded in the U.S. This change is not intended to
have any substantive effect on the operation of the Rule.
DATES: Comments should be submitted by October 18, 1995.
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. All comments should refer to
File No. S7-26-95, and will be available for public inspection and
copying at the Commission's Public Reference Room, 450 Fifth Street,
NW., Washington, DC.
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, NW., Washington,
DC 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, and the Kingdom of Spain (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 Mexico
to the list of Designated Foreign Government securities that are
exempted by Rule 3a12-8. To qualify for the exemption,
[[Page 48079]]
futures contracts on debt obligations of Mexico 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
limited relief 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, 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 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 (``Adopting
Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984) and 19811
(``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 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.
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, the Republic
of Ireland, Italy, and the Kingdom of Spain.4
\4\ As originally adopted, the Rule applied only to British and
Canadian government securities. See 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). 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).
III. Discussion
The Chicago Mercantile Exchange (``CME'') has proposed that the
Commission amend Rule 3a12-8 to include the sovereign debt of
Mexico.5 The CME 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.6 Brady bonds
are issued pursuant to the Brady plan which allowed developing
countries to restructure their commercial bank debt by issuing long-
term dollar denominated bonds.7 The Commission understands that
Mexican Brady bonds 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 May 3, 1995.
\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 Mexican Cetes are not 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
futures overlying individual securities that are not exempted
securities. With respect to Brady bonds, the Commission notes that
its Division of Corporation Finance issued a no-action letter
relating to the offer and sale of Mexican Brady bonds in the United
States without registration under the Securities Act. See Letter
from Anita T. Klein, Attorney, Office of International Corporate
Finance, Division of Corporation Finance, to Alan L. Beller, Esq.,
Cleary, Gottlieb, Steen & Hamilton, dated March 28, 1990.
\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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There appears to be an active and liquid market in Mexican debt
instruments. As of March 31, 1995, there was approximately US $87.5
billion face amount Mexican government debt issued and
outstanding.10 There are numerous classes of debt instruments with
varying maturities. According to the CME petition, the cash market for
Cetes evidences active trading; between 1993 and 1994, the monthly
trading volume (in principal amount) of Cetes ranged from a low of
approximately US $18.5 billion to a high of US $1.1 trillion.11
There are, of course, less actively traded Mexican debt issues.
\10\ See Exhibit D to Form 18-K, Annual Report for Foreign
Governments and Political Subdivisions Thereof, 17 CFR 249.218,
filed by Mexico.
\11\ Moreover, according to a recent survey of members of the
Emerging Markets Traders Association (``EMTA''), Mexican debt
instruments are the most popularly traded of all emerging markets
instruments. According to the survey, the total annual 1994 trading
volume for Mexican Cetes amounted to approximately US $27.2 billion,
and approximately US $282.3 billion for Mexican Brady bonds. The
survey, which was responded to by 80 out of the 333 members of the
EMTA, was prepared for the EMTA by Price Waterhouse LLP. See 1994
Debt Trading Volume Survey, Emerging Market Traders Association (May
1, 1995).
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The Commission preliminarily believes that the trading of futures
on Mexican sovereign debt would provide U.S. investors with a vehicle
for hedging the risks involved in the trading of
[[Page 48080]]
Mexican Cetes and Mexican Brady bonds. The Commission notes, however,
that there are certain differences between the sovereign debt
securities of Mexico and the debt securities of the Designated Foreign
Governments. 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 nationally recognized statistical rating organizations
(``NRSROs'').12 This factor, according to the Commission, could be
viewed as indirect evidence of an active and liquid secondary trading
market.
\12\ 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).
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Mexico's long-term sovereign debt obligations are not rated in one
of the two highest rating categories.13 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,14 it ultimately declined to adopt such a rule.15 At
the time of the 1987 Rule 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.
\13\ 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.
\14\ See Securities Exchange Act Release No. 24428 (May 5,
1987), 52 FR 18237 (May 14, 1987).
\15\ See Securities Exchange Act Release No. 25072 (October 29,
1987), 52 FR 42277 (November 4, 1987).
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IV. Request for Comments
The Commission seeks comments on designating the debt securities of
Mexico as exempted securities under Rule 3a12-8. The Commission is
particularly interested in receiving comments to the proposed amendment
in light of the fact that Mexico would be the first emerging market
country to be included as a Designated Foreign Government. Comments
should address whether the trading or other characteristics of Mexican
debt warrant an exemption for purposes of futures trading.
In addition, 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. Comment also is
sought 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. The
Commission seeks additional comment on 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.16
\16\ See supra notes 14 and 15 and accompanying text.
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The Commission further seeks comment on the CME's proposal to
develop a contract market for Mexican Brady bonds, in light of the
domestic trading activity in the over-the-counter market for these
bonds. Commentators also are invited to discuss any unique issues
associated with Brady bonds.
V. Cost-Benefit Analysis
Preliminarily, the Commission 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.17
\17\ The proposal represents the first time an emerging market
sovereign debt would be added to the Rule. Additionally, the
amendment would permit the trading of futures on Brady bonds. As
noted above, the Commission is interested in the impact of this
proposal on the objectives of the Rule.
The Commission 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.
VI. Regulatory Flexibility Act Certification
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.
VII. 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.
VIII. 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. 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.
* * * * *
[[Page 48081]]
By the Commission.
Dated: September 11, 1995.
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. 36213, which would define government
securities of Mexico 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 securities of Mexico.
Second, because futures contracts on the fifteen 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.'' 18
\18\ 45 FR 18618 (April 30, 1982).
Dated: September 8, 1995.
Arthur Levitt, Jr.,
Chairman.
[FR Doc. 95-23019 Filed 9-15-95; 8:45 am]
BILLING CODE 8010-01-P
