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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
Release No. 34-36940, International Series Release No. 948, File
No. S7-34-95
RIN 3235-AG68
Exemption of the Securities of the Federative Republic of Brazil,
the Republic of Argentina, and the Republic of Venezuela Under
the Securities Exchange Act of 1934 for Purposes of Trading
Futures Contracts on those Securities
AGENCY: Securities and Exchange Commission
ACTION: Final Rule
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 Federative Republic of Brazil
("Brazil"), the Republic of Argentina ("Argentina"), and the
Republic of Venezuela ("Venezuela") (collectively the "Additional
Countries") 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 the sovereign debt of the Additional Countries 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: [Insert date of publication in the Federal
Register]
FOR FURTHER INFORMATION CONTACT: James T. McHale, Attorney,
Office of Market Supervision ("OMS"), Division of Market
Regulation ("Division"), Securities and Exchange Commission (Mail
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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, the Kingdom of Spain, and Mexico
(the "Designated Foreign Governments"). As a result of being
included in the Rule, futures contracts on the debt obligations
---------FOOTNOTES----------
-[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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of these countries may be sold in the United States, as long as
the other terms of the Rule are satisfied.
On December 13, 1995, the Commission issued a release
proposing to amend Rule 3a12-8 to designate the debt obligations
of the Additional Countries as exempted securities, solely for
the purpose of futures trading.-[3]- No comment letters
were received in response to the proposal.
The Commission is adopting this amendment to the Rule,
adding Brazil, Argentina and Venezuela 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 the Additional Countries would have to meet all the other
requirements of the Rule.
II. Background
Rule 3a12-8 was adopted in 1984-[4]- pursuant to the
exemptive authority in Section 3(a)(12) of the Exchange Act in
order to provide a limited exception to the CEA's prohibition on
the trading of futures overlying individual securities.-[5]-
---------FOOTNOTES----------
-[3]- See Securities Exchange Act Release No. 36580
("Proposing Release") (December 13, 1995), 60 FR
65607 (December 20, 1995).
-[4]- See Securities Exchange Act Release Nos. 20708
("Original Adopting Release") (March 2, 1984), 49
FR 8595 (March 8, 1984) and 19811 ("Original
Proposing Release") (May 25, 1983), 48 FR 24725
(June 2, 1983).
-[5]- 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
(continued...)
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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.-[6]-
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
---------FOOTNOTES----------
-[5]-(...continued)
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 4, 48 FR at 24725
[citing 128 Cong. Rec. H7492 (daily ed. September
23, 1982) (statements of Representatives Daschle
and Wirth)].
-[6]- 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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Rule were designed to ensure 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, Spain, and, most recently, Mexico.-[7]-
The Chicago Mercantile Exchange ("CME") has informed the
Commission that U.S. citizens may be interested in futures
---------FOOTNOTES----------
-[7]- As originally adopted, the Rule applied only to
British and Canadian government debt securities.
See Original Adopting Release, supra note 4. 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). In 1994, the Rule was
amended to include debt securities issued by the
Kingdom of Spain. See Securities Exchange Act
Release No. 34908 (October 27, 1994), 59 FR 54812
(November 2, 1994). Finally, in 1995 the Rule was
amended to include Mexican sovereign debt. See
Securities Exchange Act Release No. 36530
(November 30, 1995) 60 FR 62323 (December 6, 1995)
("Mexico Adopting Release").
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products based on the debt obligations of the Additional
Countries, and has requested that Rule 3a12-8 be amended to
facilitate such trading.-[8]- The CME has represented that
it intends to develop a futures contract market in Brady bonds
issued by the Additional Countries.-[9]- Brady bonds are
issued pursuant to the Brady plan, which allows developing
countries to restructure their commercial bank debt by issuing
long-term dollar denominated bonds.-[10]- The Commission
---------FOOTNOTES----------
-[8]- See Letter from William J. Brodsky, President and
Chief Executive Officer, CME, to Arthur Levitt,
Jr., Chairman, Commission, dated November 10, 1995
("CME Petition"). The Commission subsequently
received a request from the New York Cotton
Exchange ("NYCE") to amend the Rule to include the
same Additional Countries. See Letter from Philip
McBride Johnson, Esq., Skadden, Arps, Slate,
Meagher & Flom, to Jonathan G. Katz, Secretary,
Commission, dated November 30, 1995.
-[9]- 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).
-[10]- 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
(continued...)
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understands that Brady bonds issued by the Additional Countries
are currently traded primarily in the over-the-counter market in
the United States.
The Commission is amending Rule 3a12-8 to add Brazil,
Argentina, and Venezuela 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,-[11]- that the futures
contracts require delivery outside the United States,-[12]-
---------FOOTNOTES----------
-[10]-(...continued)
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.
-[11]- The Commission notes that while no Brady bonds
issued by the Additional Countries are currently
registered in the United States, certain sovereign
debt issues of Argentina and Venezuela have been
so registered. Futures on U.S.-registered debt
securities of Argentina and Venezuela (or any
sovereign debt which in the future becomes so
registered) would not be deemed exempt securities
under Rule 3a12-8.
-[12]- 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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and that the contracts be traded on a board of trade) would
continue to apply. III. Discussion
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 the Additional Countries. The Commission
believes that the trading of futures contracts on the sovereign
debt of the Additional Countries could provide U.S. investors and
dealers with a vehicle for hedging the risks involved in holding
debt instruments of the Additional Countries and that the
sovereign debt of the Additional Countries should be subject to
the same regulatory treatment under the Rule as that of the
Designated Foreign Governments.
In determining whether to amend the Rule to add proposed
countries, the Commission has considered whether there is an
active and liquid secondary trading market in the particular
sovereign debt. In this regard, the amount of outstanding
sovereign debt of Brazil, Argentina, and Venezuela is large and
secondary trading appears to be active and liquid. According to
the CME, as of December 31, 1993, the total public and publicly
guaranteed debt-[13]- of Brazil, Argentina, and Venezuela
was approximately US$86 billion, US$55 billion, and US$74
---------FOOTNOTES----------
-[13]- Public debt is an external obligation of a public
debtor, including the national government, a
political subdivision (or any agency of either)
and autonomous public bodies. Publicly guaranteed
debt is an external obligation of a private debtor
that is guaranteed for repayment by a public
entity.
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billion, respectively.-[14]- Moreover, the cash market for
Brady bonds issued by the Additional Countries evidences
relatively active trading. Based on data provided by the CME,
the total 1994 trading volume in the Brady bonds of Brazil,
Argentina, and Venezuela was approximately US$371 billion, US$360
billion, and US$320 billion, respectively.-[15]- As is the
case for all sovereign issuers, there are less actively traded
sovereign debt instruments issued by the Additional Countries,
but the Commission believes that as a whole the sovereign debt
market for the Additional Countries is sufficiently liquid and
deep for purposes of Rule 3a12-8. Accordingly, the Commission
believes that it is appropriate to exempt the sovereign debt of
Brazil, Argentina, and Venezuela because of the overall depth and
liquidity of the existing cash market in the Additional Countries
sovereign debt.
The Commission also believes that the amendment offers
potential benefits for U.S. investors. As stated above, the
---------FOOTNOTES----------
-[14]- See Letter from Carl A. Royal, Senior Vice
President and Special Counsel, CME, to James T.
McHale, Attorney, OMS, Division, Commission, dated
November 30, 1995 (citing the World Bank's 1995
World Debt Tables as the source for this
information) ("November 30 letter"). As mentioned
earlier, the Commission recently amended the Rule
to include the debt securities of Mexico. 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.
See Mexico Adopting Release, supra note 7.
-[15]- See November 30 letter, supra note 14. The total
1994 dollar-based trading volume in Mexican Brady
bonds was approximately US$282.3 billion. See
Mexico Adopting Release, supra note 7.
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amendment will 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. Specifically,
the trading of futures on the sovereign debt of Brazil,
Argentina, and Venezuela should provide U.S. investors with a
vehicle for hedging the risks involved in holding positions in
the underlying sovereign debt of the Additional Countries. The
Commission does not anticipate that the amendment will result in
any direct cost for U.S. investors or others. The amendment will
impose no recordkeeping or compliance burdens, and merely would
provide a limited purpose exemption under the federal securities
laws. The restrictions imposed under the amendment are identical
to the restrictions currently imposed under the terms of the Rule
and are designed to protect U.S. investors.
In the Proposing Release the Commission solicited comment on
the general application and operation of the Rule given the
increased globalization of the securities markets since the Rule
was adopted. The Commission intends to consider this issue
further, but does not believe it should delay the inclusion of
the Additional Countries in the list of countries whose debt
obligations are exempted under Rule 3a12-8. Nevertheless, the
Commission continues to welcome suggestions on potential
restructuring of Rule 3a12-8 to adapt to the ever-increasing
internationalization of the securities markets.
IV. Regulatory Flexibility Act Consideration
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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.
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V. Effects on Competition and Other Findings
Section 23(a)(2) of the Exchange Act-[16]- 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 futures
contracts on the government debt of the Additional Countries 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 government
securities of the Additional Countries 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.
Because the amendment to the Rule is exemptive in nature,
the Commission has determined to make the foregoing action
---------FOOTNOTES----------
-[16]- 15 U.S.C. 78w(a)(2).
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effective immediately upon publication in the Federal
Register.-[17]-
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.
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. Section 240.3a12-8 is amended by removing the word "or"
at the end of paragraph (a)(1)(xv), removing the "period" at the
end of paragraph (a)(1)(xvi) and adding ";" in its place, and
---------FOOTNOTES----------
-[17]- 15 U.S.C. 553(d).
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adding paragraph (a)(1)(xvii), paragraph (a)(1)(xviii), and
paragraph (a)(1)(xix) to read as follows:
240.3a12-8 Exemption for designated foreign government
securities for purposes of futures trading.
(a) * * *
(1) * * *
(xvii) the Federative Republic of Brazil;
(xviii) the Republic of Argentina; or
(xix) the Republic of Venezuela.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
Dated: March 7, 1996