[Federal Register: November 24, 2009 (Volume 74, Number 225)]
[Notices]
[Page 61380-61383]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no09-82]
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COMMODITY FUTURES TRADING COMMISSION
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61027]
Joint Order Modifying the Listing Standards Requirements Under
Section 6(h) of the Securities Exchange Act of 1934 and the Criteria
Under Section 2(a)(1) of the Commodity Exchange Act
The Securities Exchange Act of 1934 (``Exchange Act'') and the
Commodity Exchange Act (``CEA'') set forth the types of securities on
which security futures \1\ can be based. The Exchange Act provides that
it is unlawful for any person to effect transactions in security
futures that are not listed on a national securities exchange or a
national securities association registered pursuant to Section 15A of
the Exchange Act.\2\ The Exchange Act further provides that such
exchange or association is permitted to trade only security futures
that conform with listing standards filed with the Securities and
Exchange Commission (``SEC'') and that meet the criteria specified in
Section 2(a)(1)(D)(i) of the CEA.\3\ Section 2(a)(1)(D)(i) of the CEA
permits the Commodity Futures Trading Commission (``CFTC'') to
designate a board of trade as a contract market with respect to, or to
register as a derivatives transaction execution facility to list or
execute, transactions in security futures if the board of trade and the
applicable contract meet the criteria specified in that section.
Similarly, the Exchange Act requires that the listing standards filed
with the SEC by an exchange or
[[Page 61381]]
association meet specified requirements.\4\
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\1\ Security futures are futures contracts on single securities
and narrow-based security indexes. See Section 3(a)(55)(A) of the
Exchange Act, 15 U.S.C. 3(a)(55)(A), and Section 1a(31) of the CEA,
7 U.S.C. 1a(31).
\2\ Section 6(h)(1) of the Exchange Act, 15 U.S.C. 78f(h)(1).
\3\ Section 6(h)(2) of the Exchange Act, 15 U.S.C. 78f(h)(2).
See also 7 U.S.C. 2(a)(1)(D)(i).
\4\ Section 6(h)(3) of the Exchange Act, 15 U.S.C. 78f(h)(3).
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Among other things, the Exchange Act and the CEA require that any
security underlying a security future, including each component
security of a narrow-based security index, except as otherwise provided
in a rule, regulation, or order, be registered pursuant to Section 12
of the Exchange Act.\5\ In 2006, the SEC and CFTC (together, the
``Commissions'') adopted SEC Rule 6h-2 \6\ and an amendment to CEA Rule
41.21,\7\ respectively, to permit security futures to be based on
individual debt securities or narrow-based indexes composed of such
securities.\8\ However, because most debt securities are not registered
under Section 12 of the Exchange Act,\9\ few security futures based on
debt securities can be listed.
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\5\ Section 6(h)(3)(A) of the Exchange Act, 15 U.S.C.
78f(h)(3)(A), and Section 2(a)(1)(D)(i)(I) of the CEA, 7 U.S.C.
2(a)(1)(D)(i)(I).
\6\ 17 CFR 240.6h-2.
\7\ 17 CFR 41.21.
\8\ See Securities Exchange Act Release No. 54106 (July 6, 2006)
71 FR 39534 (July 13, 2006) (``2006 Rulemaking'').
\9\ In this regard, the Commissions note that, in a 2005 request
for exemptive relief to permit its members, brokers, and dealers to
trade certain unregistered debt securities, the New York Stock
Exchange (``NYSE'') estimated that, out of over 22,000 publicly
offered corporate bond issues having a par value in excess of $3
trillion, only 8% of the $3 trillion par value of these debt
securities was registered under the Exchange Act. See Securities
Exchange Act Release No. 51998 (July 8, 2005), 70 FR 40748 (July 14,
2005). The SEC granted the NYSE's request for exemptive relief,
subject to certain conditions. See Securities Exchange Act Release
No. 54766 (November 16, 2006), 71 FR 67657 (November 22, 2006) (File
No. S7-06-05) (``NYSE Exemption'').
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In addition, the Exchange Act \10\ and the CEA \11\ require that
security futures be based upon common stock and such other equity
securities as the Commissions may jointly determine to be appropriate.
Pursuant to this authority, the Commissions previously issued joint
orders to permit depository shares \12\ and shares of Exchange-Traded
Funds, Trust Issued Receipts, and shares of registered closed-end
management investment companies \13\ to underlie security futures
(together, the ``Prior Joint Orders''). There are, however, other types
of securities that underlie listed options that are neither common
stock nor covered by the Prior Joint Orders.
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\10\ 15 U.S.C. 78f(h)(3)(D).
\11\ 7 U.S.C. 2(a)(1)(D)(i)(III).
\12\ See Securities Exchange Act Release No. 44725 (August 20,
2001).
\13\ See Securities Exchange Act Release No. 46090 (June 19,
2002), 67 FR 42760 (June 25, 2002).
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Section 6(h)(4)(A) of the Exchange Act \14\ and Section
2(a)(1)(D)(v)(I) of the CEA \15\ provide that the Commissions, by rule,
regulation, or order, may jointly modify the listing standard
requirements specified in Sections 6(h)(3)(A) and (D) of the Exchange
Act \16\ and the criteria specified in Sections 2(a)(1)(D)(i)(I) and
(III) of the CEA \17\ to the extent that such modification fosters the
development of fair and orderly markets in security futures products,
is necessary or appropriate in the public interest, and is consistent
with the protection of investors. For the reasons and subject to the
conditions discussed below, the Commissions believe that jointly
modifying these requirements to permit any security that is eligible to
underlie options traded on a national securities exchange to also
underlie security futures, and to permit debt securities that are not
registered under Section 12 of the Exchange Act (``unregistered debt
securities'') to underlie security futures, will foster the development
of fair and orderly markets, is necessary or appropriate in the public
interest, and is consistent with the protection of investors.
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\14\ 15 U.S.C. 78f(h)(4)(A).
\15\ 7 U.S.C. 2(a)(1)(D)(v)(I).
\16\ 15 U.S.C. 78f(h)(3)(A) and (D).
\17\ 7 U.S.C. 2(a)(1)(D)(i)(I) and (III).
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I. Discussion
A. Security Futures Based on Securities Eligible To Underlie Options
Traded on a National Securities Exchange
Section 6(h)(3)(D) of the Exchange Act \18\ and Section
2(a)(1)(D)(i)(III) of the CEA \19\ require that security futures be
based upon common stock and such other equity securities as the
Commissions jointly determine appropriate. Section 6(h)(4)(A) of the
Exchange Act \20\ and Section 2(a)(1)(D)(v)(I) of the CEA \21\ provide
that the Commissions, by rule, regulation, or order, may jointly modify
this requirement to the extent that such modification fosters the
development of fair and orderly markets in security futures products,
is necessary or appropriate in the public interest, and is consistent
with the protection of investors.
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\18\ 15 U.S.C. 78f(h)(3)(D).
\19\ 7 U.S.C. 2(a)(1)(D)(i)(III).
\20\ 15 U.S.C. 78f(h)(4)(A).
\21\ 7 U.S.C. 2(a)(1)(D)(v)(I).
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The Commissions now believe that modifying the requirement in
Section 6(h)(3)(D) of the Exchange Act and Section 2(a)(1)(D)(i)(III)
of the CEA to permit any security that is eligible to underlie options
traded on a national securities exchange to also underlie security
futures will foster the development of fair and orderly markets in
security futures products, is appropriate in the public interest, and
is consistent with the protection of investors.
To be eligible to underlie options traded on a national securities
exchange, and, pursuant to this order, eligible to underlie security
futures, a security must meet securities options listing standards of a
national securities exchange. Options listing standards of a national
securities exchange are rules of an exchange, and, as such, must be
filed with the SEC pursuant to Section 19(b) of the Exchange Act,\22\
and comply with Section 6(b) of the Exchange Act.\23\ Section 6(b)(5)
of the Exchange Act,\24\ in particular, requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest. The SEC may
not approve an options exchange's proposed rule, including a proposed
options listing standard, unless the SEC finds that it is consistent
with the requirements of the Exchange Act, including Section 6(b),\25\
and the rules and regulations under the Exchange Act. Accordingly, the
Commissions believe that it is appropriate in the public interest and
consistent with the protection of investors to modify the listing
standard requirements in Section 6(h)(3)(D) of the Exchange Act and
Section 2(a)(1)(D)(i)(III) of the CEA to permit any security that is
eligible to underlie options traded on a national securities exchange
to also underlie security futures. In addition, the Commissions believe
that this modification of the listing standard requirements in the
Exchange Act and the CEA will reduce impediments to the listing of
security futures by allowing the creation of potentially useful new
financial instruments, thereby fostering the development of fair and
orderly markets in security futures. The Commissions believe, further,
that it is appropriate, in the public interest, and consistent with the
protection of investors to permit the listing and trading of security
futures based on any security that is eligible to underlie an exchange-
listed option because such security futures may facilitate price
discovery in, and be a useful hedge for, the underlying securities,
including
[[Page 61382]]
certain unregistered debt securities.\26\ Finally, the Commissions note
that all security futures will continue to be required to meet the
requirements of Sections 6(h)(3)(B), (C), and (E)-(L) of the Exchange
Act \27\ and Sections 2(a)(1)(D)(i)(II) and (IV)-(XI) of the CEA.\28\
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\22\ 15 U.S.C. 78s(b).
\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
\25\ 15 U.S.C. 78s(b).
\26\ The listing standards applicable to options generally
require, among other things, that the underlying security be
registered under Section 12 of the Exchange Act, be an NMS Stock, as
defined in Regulation NMS under the Exchange Act, 17 CFR
242.600(b)(47), and have a substantial number of outstanding shares
that are widely held and actively traded. See, e.g., CBOE Rule 5.3
(Criteria for Underlying Securities). To date, the only securities
not registered under Section 12 of the Exchange Act (other than U.S.
government securities) that the SEC has approved to underlie
exchange-listed options are certain corporate debt securities. See
Securities Exchange Act Release No. 55976 (June 28, 2007), 72 FR
37551 (July 10, 2007) (order approving a proposal by the CBOE to
list options on certain unregistered corporate debt securities).
Among other things, these corporate debt securities must have
substantial trading volume, initial principal amount, and
outstanding float; the issuer of the corporate debt security must
have at least one class of equity security registered under Section
12(b) of the Exchange Act; and the issuer's equity securities must
satisfy the exchange's criteria to underlie options. See CBOE Rule
5.3.12.
\27\ 15 U.S.C. 78f(h)(3)(B), (C) and (E)-(L).
\28\ 7 U.S.C. 2(a)(1)(D)(i)(II) and (IV)-(XI).
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Unless the Commissions jointly determine otherwise, some securities
eligible to underlie options traded on a national securities exchange
currently may not be eligible to underlie security futures because such
securities may not be common stock or covered by the Prior Joint
Orders. By permitting any security eligible to underlie options to also
underlie security futures, the Commissions are modifying the listing
standard requirements in the Exchange Act and the criteria in the CEA
to eliminate the requirement that any security underlying security
futures, including each component security of a narrow-based security
index, be common stock or such other equity securities as the
Commissions may jointly determine. Instead, as long as a security may
underlie options traded on a national securities exchange and the
listing standards and the criteria for futures on such security meet
the requirements of Sections 6(h)(3)(B), (C), and (E)-(L) of the
Exchange Act and Sections 2(a)(1)(D)(i)(II) and (IV)-(XI) of the CEA,
such security may underlie security futures.\29\
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\29\ The Commissions note that Section 6(h)(3)(C) of the
Exchange Act, 15 U.S.C. 78f(h)(3)(C), which will continue to apply,
requires that listing standards for security futures be no less
restrictive than comparable listing standards for options traded on
a national securities exchange or national securities association.
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Further, Section 6(h)(2) of the Exchange Act \30\ provides that a
national securities exchange or a national securities association is
permitted to trade only security futures that (A) conform with listing
standards that the exchange or association files with the SEC under
Section 19(b) of the Exchange Act, and (B) meet the criteria specified
in Section 2(a)(1)(D)(i) of the CEA.\31\ Such security futures listing
standards must also meet the requirements specified in Section 6(h)(3)
of the Exchange Act,\32\ including the requirement that the listing
standards for security futures be no less restrictive than comparable
listing standards for options traded on a national securities exchange
or a national securities association.\33\ Before listing and trading
security futures on any security eligible to underlie options traded on
a national securities exchange, a national securities exchange or a
national securities association must file with the SEC, pursuant to
Section 19(b)(7) of the Exchange Act \34\ and Rule 19b-7
thereunder,\35\ a proposed rule change relating to its listing
standards. An exchange or an association also must concurrently file
its proposed listing standards with the CFTC pursuant to Section
19(b)(7)(B) of the Exchange Act.\36\
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\30\ 15 U.S.C. 78f(h)(2).
\31\ 7 U.S.C. 2(a)(1)(D)(i).
\32\ 15 U.S.C. 78f(h)(3).
\33\ See Section 6(h)(3)(C) of the Exchange Act, 15 U.S.C.
78f(h)(3)(C).
\34\ 15 U.S.C. 78s(b)(7).
\35\ 17 CFR 240.19b-7.
\36\ 15 U.S.C. 78s(b)(7)(B).
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B. Security Futures Based on Unregistered Debt Securities
Section 6(h)(3)(A) of the Exchange Act \37\ and Section
2(a)(1)(D)(i)(I) of the CEA \38\ require that any security underlying
security futures, including each component security of a narrow-based
security index, be registered pursuant to Section 12 of the Exchange
Act. Thus, although options are permitted to be listed on unregistered
debt securities under exchange listing standards,\39\ such securities
would not be permitted to underlie security futures without modifying
this requirement. As stated above, Section 6(h)(4)(A) of the Exchange
Act and Section 2(a)(1)(D)(v)(I) of the CEA provide that the
Commissions by rule, regulation, or order, may jointly modify this
requirement to the extent that the modification fosters the development
of fair and orderly markets in security futures products, is necessary
or appropriate in the public interest, and is consistent with the
protection of investors.
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\37\ 15 U.S.C. 78f(h)(3)(A).
\38\ 7 U.S.C. 2(a)(1)(D)(i)(I).
\39\ See supra note 26.
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Pursuant to this authority, the Commissions previously adopted SEC
Rule 6h-2 \40\ and amended CEA Rule 41.21 \41\ to modify the statutory
listing standards for security futures to permit the trading of
security futures based on debt securities and indexes composed of
certain debt securities.\42\ These rules permit the listing and trading
of new and potentially useful financial products. The Commissions
similarly believe that modifying the statutory listing standards for
security futures to permit, under certain conditions, the trading of
security futures based on certain unregistered debt securities, and
narrow-based indexes composed of such securities, will reduce
impediments to the listing of security futures based on debt securities
and serve the public interest by allowing the creation of potentially
useful new financial instruments, thereby fostering the development of
fair and orderly markets in security futures. The Commissions also
believe it is appropriate, in the public interest, and consistent with
the protection of investors to permit, subject to the conditions
discussed below, the listing of such security futures because they may
facilitate price discovery in, and be a useful hedge for, debt
securities.
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\40\ 17 CFR 240.6h-2.
\41\ 17 CFR 41.21.
\42\ See 2006 Rulemaking, supra note 8.
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An issuer of debt securities that are registered under Section 12
of the Exchange Act must provide comprehensive public information. This
joint order may permit the listing and trading of security futures on
debt securities that are not registered under Section 12 of the
Exchange Act. However, because the Commissions believe that the public
interest and the protection of investors is served by having
information about the underlying debt securities and their issuers
available, the Commissions are placing certain conditions on this
order. In particular, as discussed below, this order is conditioned on
an issuer of unregistered debt securities that underlie security
futures being subject to the periodic reporting requirements of the
Exchange Act. This condition is designed to ensure that information
about the issuers and their securities is available to investors and
futures traders.
More specifically, the listing and trading of security futures on
unregistered debt would be permissible so long as the following four
conditions
[[Page 61383]]
are satisfied.\43\ First, the offer and sale of the underlying debt
securities must have been registered under the Securities Act of 1933
(``Securities Act'').\44\ This condition is designed so that
participants in the security futures market have access to the detailed
disclosure in the Securities Act registration statement for the debt
securities underlying these security futures.
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\43\ These four conditions are consistent with the conditions in
the NYSE Exemption, supra note 9.
\44\ 15 U.S.C. 77a et seq.
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Second, the issuer of such securities must have at least one class
of equity securities registered under Section 12(b) of the Exchange
Act.\45\ The debt securities of a wholly-owned subsidiary of a parent
company with at least one class of equity securities registered under
Section 12(b) of the Exchange Act may also underlie a security
future.\46\ This condition is designed so that there is public
availability of information about the issuer and the securities, even
though the particular debt securities underlying the security future
are not registered under Section 12 of the Exchange Act. Because any
security registered under Section 12(b) is listed on a national
securities exchange, this condition assures that a national securities
exchange is responsible for monitoring the listed securities of the
issuer of the debt securities underlying a security future and
enforcing compliance by that issuer with comprehensive listing
standards of the applicable national securities exchange.
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\45\ 15 U.S.C. 78l(b).
\46\ The terms ``parent'' and ``wholly-owned'' have the same
meanings as in Rule 1-02 of SEC Regulation S-X, 17 CFR 210.1-02.
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Third, the transfer agent for the debt securities underlying the
security future must be registered under Section 17A of the Exchange
Act.\47\ This condition is designed so that the transfer agents
providing services to issuers of debt securities underlying security
futures are subject to SEC oversight and the requirements of the
Exchange Act, including Section 17A, and the rules thereunder. Fourth,
the indenture for the unregistered debt securities underlying the
security future must be qualified under the Trust Indenture Act of 1939
(``Trust Indenture Act'').\48\ This condition is designed so that the
specific protections afforded to debt holders under the Trust Indenture
Act apply to debt securities that underlie security futures. The trust
indenture for underlying debt securities registered under the
Securities Act is qualified under the Trust Indenture Act at the time
of registration of those underlying debt securities.
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\47\ 15 U.S.C. 78q-1.
\48\ 15 U.S.C. 77aaa-77bbbb.
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As a result, by modifying the listing standard requirements such
that the debt securities need not be registered under Section 12 of the
Exchange Act, provided that the conditions set forth above are
satisfied, the Commissions are increasing the types of debt securities
on which security futures may be based while preserving the requirement
that information important in making investment and trading decisions
is available.
II. Conclusion
For the reasons discussed above, the Commissions by order are
jointly modifying the requirement in Section 6(h)(3)(D) of the Exchange
Act \49\ and the criteria specified in Section 2(a)(1)(D)(i)(III) of
the CEA \50\ to permit any security to underlie a security future,
provided such security is eligible to underlie options traded on a
national securities exchange.
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\49\ 15 U.S.C. 78f(h)(3)(D).
\50\ 7 U.S.C. 2(a)(1)(D)(i)(III).
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In addition, for the reasons discussed above, the Commissions by
order are jointly modifying the requirement specified in Section
6(h)(3)(A) of the Exchange Act \51\ and the criterion specified in
Section 2(a)(1)(D)(i)(I) of the CEA \52\ to permit an unregistered debt
security, or a narrow-based index composed of unregistered debt
securities, to underlie a security future if the following conditions
are met:
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\51\ 15 U.S.C. 78f(h)(3)(A).
\52\ 7 U.S.C. 2(a)(1)(D)(i)(I).
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(1) Each such security is a note, bond, debenture, or evidence of
indebtedness that is not an equity security as defined in Section
3(a)(11) of the Exchange Act; \53\
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\53\ 15 U.S.C. 78c(a)(11).
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(2) The issuer of each such security has registered the offer and
sale of the security under the Securities Act;
(3) The issuer of each such security, or the issuer's parent if the
issuer is a wholly-owned subsidiary (as such terms are defined in Rule
1-02 of SEC Regulation S-X),\54\ has at least one class of common or
preferred equity security registered under Section 12(b) of the
Exchange Act \55\ and listed on a national securities exchange;
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\54\ 17 CFR 210.1-02.
\55\ 15 U.S.C. 78l(b).
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(4) The transfer agent of each such security is registered under
Section 17A of the Exchange Act; \56\ and
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\56\ 15 U.S.C. 78q-1.
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(5) The trust indenture for each such security has been qualified
under the Trust Indenture Act of 1939.\57\
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\57\ 15 U.S.C. 77aaa-77bbbb.
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Accordingly,
It is ordered, pursuant to Section 6(h)(4) of the Exchange Act and
Section 2(a)(1)(D)(v)(I) of the CEA, that the requirements in Sections
6(h)(3)(A) and 6(h)(3)(D) of the Exchange Act and the criteria in
Sections 2(a)(1)(D)(i)(I) and 2(a)(1)(D)(i)(III) of the CEA are
modified, subject to the conditions set forth above, provided however,
this order does not affect the CFTC's exclusive jurisdiction under
Section 2(a)(1)(C) of the CEA over any futures contract based on an
index that is not a ``narrow-based security index,'' as defined in
section 3(a)(55) of the Exchange Act and Section 1a(25) of the CEA.
Accordingly, nothing in this order shall affect or limit the exclusive
authority and jurisdiction of the CFTC with respect to any futures
contract, now or in the future, including the CFTC's authority to
approve any futures contract that is based upon an index that is not a
``narrow-based security index.''
Dated: November 19, 2009.
By the Commodity Futures Trading Commission.\58\
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\58\ Because the Commissions are jointly modifying the listing
requirements to permit security futures on any security that is
eligible to underlie options contracts traded on a national
securities exchange, this order supersedes and replaces the Prior
Joint Orders. See supra notes 12 and 13.
David A. Stawick,
Secretary.
By the Securities and Exchange Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28164 Filed 11-23-09; 8:45 am]
BILLING CODE 6351-01-P