Mr. Jonathan G. Katz


Securities and Exchange Commission

Mail Stop 6-9

450 Fifth Street, N.W.

Washington D.C. 20549

Re: File No. S7-30-97: OTC Derivatives Dealers

Dear Mr. Katz:

The Commodity Futures Trading Commission ("CFTC") appreciates the opportunity to comment on the Securities and Exchange Commission's ("SEC") proposed regulatory requirements for certain dealers active in the over-the-counter ("OTC") derivatives market. 1 The SEC's proposal would establish a form of limited broker-dealer regulation for these "OTC derivatives dealers." Registered OTC derivatives dealers would be permitted to engage in certain defined OTC derivatives transactions with specified categories of permissible counterparties, subject to a lesser degree of regulation than that currently applicable to fully-regulated broker-dealers.

I. Overview

As detailed below, the SEC proposal extends beyond the SEC's authority to regulate securities. If adopted, it would create the potential for conflict with the requirements of the Commodity Exchange Act ("CEA") 2 and would create gaps and inconsistencies in the proposed regulatory treatment of instruments traded by OTC derivatives dealers. OTC derivatives instruments that are subject to SEC authority (such as options on securities and options on stock indexes) are a small percentage of the overall volume of the OTC derivatives market -- approximately 1.4 percent of the notional value of total derivatives contracts outstanding in early 1995, according to the General Accounting Office ("GAO"). 3 Nonetheless, the SEC's proposal would attempt to regulate the large number of OTC derivatives transactions beyond its jurisdiction, many of which are subject to the exclusive statutory authority of the CFTC. The SEC's proposal thus would create the potential for conflict with CFTC regulations both as currently set forth and as modified in the future in response to developments in the rapidly changing OTC market. As a result, transactions entered into in reliance on the SEC's standards for OTC derivatives dealers might be illegal if not within an exemption from the CEA.

OTC derivatives instruments, like exchange-traded futures contracts, are primarily used for risk management, not capital formation or investment. 4 The CFTC has the statutory mandate to oversee the markets for instruments designed primarily to shift risk among parties. Congress recognized this in 1982 when it enacted the Johnson-Shad accord establishing the respective jurisdictions of the CFTC and the SEC:

The committee has long recognized and accepted the inherent differences between the futures industry and the securities industry and endorses the concept of separate regulation. Basically, the CFTC will retain its traditional role of regulating markets and instruments that serve a hedging and price discovery function while the SEC will regulate markets and instruments with an underlying investment purpose. 5

Congress reaffirmed this point in 1992 when it granted the CFTC authority to exempt certain instruments, including OTC derivatives, from specific provisions of the CEA, thus giving the CFTC the power to tailor its regulations to balance the need to facilitate innovation in the marketplace against the need to protect OTC derivatives end-users and the public. 6

As part of its current regulatory reform agenda, 7 the CFTC is currently evaluating its approach to the oversight of OTC derivatives in light of the tremendous growth and new developments in this market over the past several years. Among the many issues requiring resolution by the CFTC are how to address: (1) the development of swaps clearing facilities; (2) the increased use of electronic facilities to trade OTC instruments; and (3) sales practices and customer protection questions raised by recent events in the OTC markets and noted by commentators such as the GAO.

The CFTC will issue a concept release shortly to address these and other topics relating to the OTC derivatives market. In preparing this concept release, the CFTC will reach out to the public and consult with representatives of entities across the spectrum of interested parties. In particular, OTC derivatives dealers, end users of derivatives, and other federal regulators will be given ample opportunity to provide input. Careful consideration will be given to the views of all interested parties before regulatory reforms, if any, are proposed. The CFTC's approach explicitly will recognize that other regulators also have authority over aspects of these markets and will be designed to avoid conflicts or overlap with federal securities laws and banking laws. Finally, the CFTC will seek to ensure the continued growth and innovation in the OTC derivatives market as well as to protect customer interests and market integrity.

The CFTC shares many of the goals expressed by the SEC in its release. However, we urge the SEC to limit its regulatory initiatives in this area to those instruments over which it has statutory authority and to work with the CFTC to craft a coordinated and comprehensive approach to the OTC market that avoids duplicative, inconsistent regulation.

II. Background

A. OTC Derivatives Products and Markets

OTC derivatives are contracts executed off of regulated exchanges whose value depends on (or derives from) the value of an underlying asset, reference rate, or index. 8 The classes of underlying assets from which a derivative instrument may derive its value consist of physical commodities (e.g., agricultural products, metals, or petroleum), financial instruments (e.g., debt and interest rate instruments or equity securities), indexes (e.g., based on interest rates or securities prices), foreign currencies, or spreads between the value of such assets. OTC products include instruments that are forward contracts, futures contracts, option contracts, and swaps (many of which constitute futures or options). They also include hybrids combining characteristics of these instruments with characteristics of securities or deposits.

While the CEA exempts forward contracts -- that is, contracts for future delivery where delivery of the underlying assets is actually intended -- it explicitly grants to the CFTC exclusive authority over most futures and option contracts (except options on securities and options on securities indexes). 9 As previously mentioned, OTC derivatives instruments that are subject to the SEC's statutory authority represent only a very small percentage of outstanding OTC derivatives contracts. 10 The GAO, citing figures from the Bank for International Settlements ("BIS"), reported that as of the end of March 1995 products that had been previously determined or were likely to be determined to be securities accounted for about 1.4 percent of the notional value of total OTC derivatives contracts outstanding worldwide. 11 The GAO also reported that the SEC confirmed to GAO that the percentage of total OTC derivatives marketed by U.S. broker-dealers that were securities was likely to be similar.

Like exchange-traded futures contracts, OTC derivatives instruments are used to perform a wide variety of important risk management functions. In this respect, OTC derivatives are very different from most securities instruments, which primarily serve capital formation and investment functions. End-users employ OTC derivatives to address risks from volatility in interest rates, foreign exchange rates, commodity prices, and equity prices, among other things. OTC derivatives instruments also can be used to assume price risk in order to increase investment yields. Participants in the OTC derivatives markets include banks, other financial service providers, commercial corporations, insurance companies, pension funds, colleges and universities, and governmental entities.

Use of OTC derivatives has grown at very substantial rates over the past few years. According to the most recent market survey by the International Swaps and Derivatives Association ("ISDA"), the notional value of new transactions reported by ISDA members in interest rate swaps, currency swaps, and interest rate options during the first half of 1997 increased 46% over the previous six month period. 12 The new activity increased the notional value of outstanding contracts in these instruments to $28.733 trillion, up 12.9% from year-end 1996, 62.2% from year-end 1995, and 154.2% from year-end 1994. 13 ISDA's 1996 market survey noted that there were 633,316 outstanding contracts in these instruments as of year-end 1996, up 47% from year-end 1995, which in turn represented a 40.7% increase over year-end 1994. 14 The 1997 GAO Report suggests that the amount at risk in OTC derivatives represents "about 3 percent" of the notional amount. 15 Applying 3 percent to the most recent ISDA numbers for contracts outstanding for the first half of 1997 suggests that over $860 billion is at risk in these OTC derivatives transactions.

While OTC derivatives serve important risk management and other economic functions, these products can present significant dangers if misused or misunderstood by market participants. A number of large, well-publicized financial losses over the last few years has focused the attention of the financial services industry, its regulators, derivatives end-users, and the general public on potential problems and abuses in the OTC markets. Although it is difficult to quantify the total losses attributable to OTC derivatives, the 1997 GAO Report identified 360 end-user losses between April 1987 and March 1997 totaling an estimated $11.4 billion. 16

As the explosive growth of the derivatives marketplace continues, the potential dangers for even highly sophisticated participants multiply. Major derivatives losses by sophisticated traders have been a regular occurrence and widely reported during the past several years. 17 In March 1997 alone, the following derivatives losses were disclosed: Nomura Capital Services, Inc., $20 million in swaps; Bank of Tokyo - Mitsubishi Ltd., $50 million in interest rate swaps; National Westminster Bank, $142.8 million in interest rate options; and the Government of Belgium, $1.2 billion in currency options. 18

Most recently, turmoil in the Asian financial markets has led to a new wave of derivatives losses. For example, Union Bank of Switzerland has experienced an undisclosed amount of derivatives losses, attributed to trades in Asia, that some estimates put as high as $689 million. During the fourth quarter of 1997, in addition to J.P. Morgan's writing off $24 million of "Asian derivatives deals" and designating $587 million of Asian derivatives contracts as "nonperforming," Citicorp disclosed that "earnings were reduced by $250 million...because of trading problems related to the Asian turmoil," and Chase Manhattan Corp. reported "a $78 million pretax trading loss related to Asia." 19

The growth and maturation of the OTC derivatives market, the magnitude of the losses suffered by derivatives users and dealers, and new developments in the market such as the growing desire for clearing operations have resulted in the Commission's decision to examine its approach to the market. The SEC's proposal to regulate the market underscores the appropriateness of the Commission's decision and the need for coordination and cooperation between the two agencies.

B. The SEC Proposal

As noted above, the SEC proposal would create a new class of SEC registrant. Essentially, an OTC derivatives dealer would be a firm that otherwise would be required to register as a securities broker-dealer and that would engage primarily in transactions in "Eligible OTC Derivative Instruments" with "Permissible Derivatives Counterparties." 20 Qualifying firms would be subject to less stringent capital, margin, and regulatory requirements than other broker-dealers. 21 Transactions in "securities OTC derivatives," a term that is not defined by the SEC in its proposal, would have to be effected through a fully regulated broker-dealer, and all applicable self-regulatory organization ("SRO") sales practice requirements would apply to those transactions. 22

The SEC states that the proposal is intended to allow securities firms to establish affiliates that would be able to compete more effectively against banks and foreign dealers in OTC derivatives markets. 23 The SEC asserts that, to the extent a non-bank dealer's transactions currently include "securities OTC derivatives," U.S. securities laws require that entity to be a registered broker-

dealer. 24 The SEC further notes that the capital and margin requirements applicable to registered broker-dealers impose substantial costs. 25 Although the impetus for the proposal thus arises out of the regulatory requirements applicable to securities transactions, the proposal's effects would extend well beyond the securities sphere. The term "Eligible OTC Derivative Instruments" is defined broadly to include any transaction that is based, in whole or in part, on the value or other measure of any asset (including commodities or currencies) or rate or index (such as interest rates), so long as the transaction is not part of a fungible class and is not exchange-traded. 26 The SEC explicitly states that this definition is meant to include "options on physical commodities," "swaps involving physical commodities" and "interest rate swaps." 27 The SEC release does not contain any discussion of the applicability of the CEA to these types of instruments and transactions.

C. Applicable Provisions of the CEA

Subject to certain exceptions, the CEA provides the CFTC with the exclusive statutory authority to regulate options (except options on securities and options on securities indexes) and "contracts of sale of a commodity for future delivery." 28 The term "commodity" is not limited to tangible products, but rather has been defined broadly to include "all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in." 29 Thus, the CFTC's exclusive jurisdiction extends to futures and options contracts based upon such intangible commodities as interest rates and price indexes.

Because a substantial portion of OTC derivatives instruments falls within the ambit of the CEA, the CFTC has closely monitored developments in this market over the last twenty years and has issued guidance concerning its regulatory approach to new classes of instruments and transactions. From the mid-1970's through the mid-1980's this took the form of staff Interpretative Letters, published in response to requests from individual market participants, 30 and more generalized guidance published in the Federal Register. 31 In the late 1980's and early 1990's, the CFTC also issued policy statements and statutory interpretations that addressed the obligations of dealers of certain OTC derivatives and that attempted to tailor the CFTC's regulatory program to the evolving OTC market. 32

In 1992, Congress added Section 4(c) to the CEA authorizing the CFTC to exempt certain transactions from some of the provisions of the Act. 33 Section 4(c) provides the CFTC with authority to grant an exemption under this provision subject to any terms and conditions that it believes necessary to protect the public interest and to serve the purposes of the CEA. 34

In enacting Section 4(c), Congress gave the CFTC great flexibility to modify its regulatory approach to classes of OTC instruments, or to individual instruments, based upon the needs and realities of the marketplace. In this regard Congress stated:

. . . the Conferees intend for the general exemptive authority . . . to allow the (CFTC) to respond to future developments in the marketplace to avoid disruption and promote responsible economic and financial innovations, with due regard for the continued viability of the marketplace and considerations related to systemic risk in financial markets. 35

Following the enactment of Section 4(c), the CFTC adopted in January 1993 Part 34 of its regulations relating to hybrid instruments 36 and Part 35 of its regulations relating to swaps. 37 These exemptions were adopted in light of the market conditions existing at that time and with the express intention of reevaluating the terms and conditions of the exemptions as circumstances changed and new issues arose. As explained below, the SEC proposal, by creating separate, duplicative regulations for OTC derivatives, could create conflict with the CEA and present or future regulations promulgated thereunder.

III. Problems with the SEC Proposal

A. Potential Conflicts with the CEA

The SEC's proposal to regulate OTC derivatives dealers uses its statutory authority over the small amount of securities trading that such dealers conduct to set standards for instruments and activities governed by the CEA and therefore under the exclusive statutory authority of the CFTC. By ignoring the applicability of the CEA and placing another regulatory overlay (albeit one that the SEC characterizes as "optional") on all OTC derivatives transactions, the SEC proposal creates the possibility that market participants could be in full compliance with SEC regulations but in violation of the CEA and CFTC regulations, or vice versa. This fundamental problem is not solved by the fact that the definitions set forth in the SEC's proposal are similar to current CFTC exemptive provisions. The CFTC has both the power and the statutory obligation to update its regulations in light of market developments and should be able to do so without creating legal uncertainty and placing OTC dealers and end-users in regulatory limbo because of inconsistent regulation.

In addition to the specter of future regulatory inconsistency, there are several areas in which the SEC's proposal is in direct conflict with current regulations under the CEA. First, the SEC's criteria defining an "eligible OTC derivative instrument" are similar to, but not the same as, the criteria defining qualifying transactions in the CFTC's Part 35 Swaps Exemption. 38 Consequently, registered OTC derivatives dealers could effect transactions that would be permissible under the SEC's proposed rules, but that would not be exempted under Part 35 from the provisions of the CEA and, therefore, could be considered illegal futures or option contracts. 39 Avoiding such legal uncertainty for market participants was a primary reason that Congress enacted Section 4(c) of the CEA. 40

Second, similar conflicts may arise in connection with the SEC's proposed definition of "permissible derivatives counterparty." The SEC currently proposes to define the term "permissible derivatives counterparty" in the same that "eligible swap participant" is defined under the CFTC's Part 35 regulations. The SEC, however, specifically solicits comments on whether to expand its definition to include certain parties who would not be eligible swap participants under Part 35. 41 If the SEC were to expand the definition and an OTC derivatives dealer then entered into a transaction with a "permissible derivatives counterparty" who was not an eligible swap participant, the transaction would be outside the exemption of the CFTC's Part 35 regulations and could, therefore, constitute an illegal futures or option contract.

Third, in developing its proposed definition of "hybrid security," the SEC appears to have given no consideration to the scope of the exemption for hybrid instruments contained in the CFTC's Part 34 regulations. A hybrid instrument combines elements of futures or options with elements of securities or deposits. To the extent that hybrid instruments display the elements of futures contracts or options (other than options on securities or securities indexes), they are subject to the exclusive statutory authority of the CFTC. As the United States Court of Appeals for the Seventh Circuit has held:

The (CFTC) has authority to regulate trading of futures contracts (including futures on securities) and options on futures contracts. The (SEC) has authority to regulate trading of securities and options on securities. If an instrument is both a security and a futures contract, the CFTC is the sole regulator. . . . . 42

Some of the instruments that the SEC proposes as acceptable "hybrid securities" are actually futures or option contracts which are not exempted under the CFTC's Part 34 regulations and could thus be illegal under the CEA.

In summary, by purporting to set forth regulatory standards for activities and products over which it has no statutory authority and by failing to address the statutory standards of the CEA for transactions by OTC derivatives dealers, the SEC's proposal would create jurisdictional conflict and legal uncertainty and would impair the CFTC's exercise of its statutory obligation to oversee OTC futures and option instruments.

B. Different Levels of Protection for Counterparties of "Securities OTC Derivatives" and Counterparties of Other OTC Derivatives

The SEC's proposal would create significant disparities in the standards applied to the OTC derivatives dealer's conduct of "securities OTC derivatives transactions" and other OTC derivatives transactions, undoubtedly because the SEC lacks statutory authority over the latter transactions. 43 Thus, the proposal would impose sales practice standards as to "securities OTC derivatives transactions" but would impose no such standards as to other OTC derivatives transactions. This disparity underscores the need for a coordinated regulatory approach between the SEC and the CFTC in order adequately to regulate the OTC derivatives market.

Under the proposed rules, "securities OTC derivatives transactions" would be subject to the sales practice requirements applicable to fully-regulated broker-dealers. The SEC's proposal achieves this end by requiring all "securities OTC derivatives transactions" to be effected through a fully-regulated broker-dealer. As a result, such derivatives would be subject to sales practice requirements established by the broker-dealer's self-regulatory organization, which would include elements such as disclosure and antifraud protections, as well as suitability and supervision requirements. Thus, the SEC has recognized the need for customer protection in such transactions, even for presumably sophisticated "permissible derivatives counterparties."

By contrast, other OTC derivatives transactions would not be subject to any sales practice requirements under the SEC proposal. But there is no reason to believe that the need for sales practice standards for such other derivatives is any less urgent than for "securities OTC derivatives." Indeed, the SEC's obvious concern about sales practice standards in the OTC derivatives market confirms the CFTC's decision to examine its regulatory approach in that area

The SEC's desire to impose reasonable sales practice standards on "securities OTC derivatives transactions" is laudable. Its inconsistent treatment of "securities OTC derivatives transactions" and other OTC derivatives transactions in this regard is not an oversight by the agency, but rather is an unavoidable result of the jurisdictional limitations discussed above. These regulatory gaps and inconsistencies demonstrate the need for a comprehensive and coordinated approach to regulation of the OTC derivatives market.

IV. Conclusion

As mentioned at the outset, the CFTC has been engaged in a comprehensive regulatory reform effort designed to update the agency's oversight of both exchange and off-exchange markets. As part of this effort, the CFTC intends to publish a concept release on issues relating to the OTC derivatives market. The concept release will request comment on how best to achieve an appropriate balance between the need to ensure that U.S. entities have the opportunity to remain competitive in the global financial marketplace and the need to maintain adequate regulatory safeguards. After receiving public comment and consulting with the industry, the users of OTC derivatives instruments, relevant regulatory authorities, and other interested parties, the CFTC will be in a position to address new developments in the OTC derivatives markets and to satisfy its obligations to protect derivatives end-users and the public while fostering innovation and avoiding unduly burdensome regulation. The CFTC strongly believes that the CFTC and the SEC should work together closely to ensure a coordinated regulatory approach to the OTC derivatives market.

CFTC staff would be pleased to discuss with SEC staff any of the matters raised in these comments. If you have any questions, please contact I. Michael Greenberger, Director, Division of Trading and Markets, at (202) 418-5430.


Jean A. Webb

Secretary of the Commission


1 62 Fed. Reg. 67940 (December 30, 1997).
2 7 U.S.C. 1 et seq . (1994).
3 See General Accounting Office, GAO/GGD-98-5, "OTC Derivatives: Additional Oversight Could Reduce Costly Sales Practice Disputes" 42, (October 1997) (hereinafter "1997 GAO Report").
4 See 62 Fed. Reg. at 67940.
5 House Comm. on Agriculture, Report on the Futures Trading Act of 1982, H. Rep. No. 97-565, Part 1, 97th Cong. 2d Sess. 40 (1982).
6 Section 4(c) of the CEA, 7 U.S.C. 6(c)(1994).
7 See, e.g. , Proposed Rulemaking Permitting Futures-Style Margining of Commodity Options, 62 Fed. Reg. 66569 (December 19, 1997); Denomination of Customer Funds and the Location of Depositories, 62 Fed. Reg. 67841 (December 30, 1997); Account Identification for Eligible Bunched Orders, 63 Fed. Reg. 695 (January 7, 1998); Maintenance of Minimum Financial Requirements by Futures Commission Merchants and Introducing Brokers, 63 Fed. Reg. 2188 (January 14, 1998); Requests for Exemptive, No-Action and Interpretive Letters, 63 Fed. Reg. 3285 (January 22, 1998); Regulation of Noncompetitive Transactions Executed on or Subject to the Rules of Contract Market, 63 Fed. Reg. 3708 (January 26, 1998); Distribution of Risk Disclosure Requirements by Futures Commission Merchants and Introducing Brokers, 63 Fed. Reg. ____ (February 20, 1998). See also Application of FutureCom, Ltd. For Designation as a Contract Market in Live Cattle Futures and Options, 62 Fed. Reg. 62566-68 (November 26, 1997)(internet-based trading system); Application of Cantor Financial Futures Exchange For Designation as a Contract Market in U.S. Treasury Bond, Ten-Year Note, Five-Year Note and Two-year Note Futures Contracts, 63 Fed. Reg. 5505 (February 3, 1998)(electronic trading system).
8 See Group of Thirty, "Derivatives: Practices and Principles" 2 (1993).
9 7 U.S.C. 2(i) (1994). The CFTC's authority to regulate certain of these products is limited by the Treasury Amendment to the CEA, 7 U.S.C. 2(ii) (1994).
10 See 1997 GAO Report at 42.
11 Id . In addition, options on SEC-regulated debt securities constituted less than 1.06 percent of the total notional value of derivative instruments reported by the BIS. See Bank for International Settlements, "Central Bank Survey of Foreign Exchange and Derivatives Market Activity, 1995" (May 1996).
12 ISDA Market Survey, International Swaps And Derivatives Association (1997), available at
13 Id .
14 Id .
15 1997 GAO Report, at 3, note 6. The notional amount represents the amount upon which payments to the parties to a derivatives transaction are based and is the most commonly used measure of outstanding derivatives transactions. Notional amounts generally overstate the amount at risk in derivatives transactions.
16 1997 GAO Report, at 71. The GAO total loss estimate includes losses attributable to OTC derivatives, structured notes (which in some cases may be OTC derivatives) and mortgage backed securities. However, the estimate excludes other losses, including losses incurred by dealers and "derivatives-related losses involving the sale of mutual funds or OTC contracts that CFTC or a court found to be illegal, off-exchange futures contracts." Id . note 25.
17 It is often difficult to calculate the financial losses attributable to specific types of derivative instruments, since a given end-user's portfolio may include several different types of derivatives and the publicly available information about a particular loss situation (often limited to press reports) may not describe the instruments in question with sufficient precision. Given these limitations, the derivatives losses cited herein may include losses that do not arise from derivative instruments within the CFTC's statutory mandate.
18 Hearings on H.R. 467 Before the Subcommittee on Risk Management and Specialty Crops of the House Committee on Agriculture, 105th Cong., 1st Sess., Statement of Brooksley Born, Chairperson, CFTC, Appendix 2, 1 (April 15, 1997).
19 Brett Fromson, Asian Crisis Takes Toll on 3 U.S. Banks; Morgan Hit Hardest, Chase, Citicorp Hurt, Washington Post (January 21, 1998) at C11.
20 62 Fed. Reg. at 67942. The definitions of these terms are discussed below.
21 Id . at 67941.
22 Id . at 67944.
23 Id . at 67940.
24 Id . at 67941.
25 Id .
26 See Proposed 240.3b-13, 62 Fed. Reg. at 67957.
27 62 Fed. Reg. at 67942.
28 7 U.S.C. 2(i)(1994). See also Section 4c(b) of the CEA, 7 U.S.C. 6c(b). The SEC has jurisdiction over "any transaction whereby any party . . . acquires any put, call, or other option on one or more securities . . . including any group or index of such securities, or any interest therein or based on the value thereof." 7 U.S.C. 2a(i)(1994). Nor is the CEA "deemed to govern or in any way be applicable to transactions in foreign currency, security warrants, security rights, resales of installment loan contracts, repurchase options, government securities, or mortgages or mortgage purchase commitments unless such transactions involve the sale thereof for future delivery conducted on a board of trade." 7 U.S.C. 2(ii)(1994).
29 7 U.S.C. 1a(3)(1994). Courts have reaffirmed this jurisdiction in a variety of contexts. See , e.g. , Chicago Mercantile Exchange v. SEC , 883 F.2d 537 (7th Cir. 1989), rehearing denied , __ F.2d __ (7th Cir. 1989), cert . denied, 496 U.S. 936 (1990)(CFTC has exclusive jurisdiction over futures contracts if "the instrument is both a security and a futures"); Board of Trade of the City of Chicago v. SEC , 677 F.2d 1137, 1146-1147 (7th Cir. 1982), vacated as moot 459 U.S. 1026 (1982)(CFTC has exclusive jurisdiction over commodity option transactions); Point Landing, Inc. v. Omni Capital International Ltd. , 795 F.2d 415 (5th Cir. 1986)(CEA provides exclusive cause of action arising out of a futures transaction); Messer v. E.F. Hutton & Co. , 847 F.2d 673 (11th Cir. 1988)(exchange-traded Treasury bond futures are under the exclusive jurisdiction of the CFTC).
30 See , e.g ., CFTC Interpretative Letter 77-12, Dealers in GNMA Certificates as a Board of Trade, (1977-1980 Transfer Binder) Com. Fut. L. Rep. (CCH) 20,467 (CFTC 1977); CFTC Interpretative Letter 84-7, Banking Institutions as Purchasers of Foreign Currency Options, (1982-1984 Transfer Binder) Comm. Fut. L. Rep. (CCH) 22,025 (CFTC 1984); CFTC Interpretative Letter 85-2, Bank Activities Involving the Sale of Precious Metals, (1984-1986 Transfer Binder) Comm. Fut. L. Rep. (CCH) 22,673 (CFTC 1985).
31 See , e.g ., The Regulation of Leverage Transactions and Other Off-Exchange Future Delivery Type Instruments -- Statutory Interpretation, 50 Fed. Reg. 11656 (March 25, 1985); Characteristics Distinguishing Cash and Forward Contracts and "Trade" Options, 50 Fed. Reg. 39656 (September 30, 1985); Trading in Foreign Currencies for Future Delivery, 50 Fed. Reg. 42983 (October 23, 1985).
32 See , e.g. , 54 Fed. Reg. 30694 (July 21, 1989) (CFTC Policy Statement Concerning Swap Transactions); 55 Fed. Reg. 13582 (April 11, 1990) (Statutory Interpretation Concerning Hybrid Instruments).
33 7 U.S.C. 6(c) (1994).
34 Section 4(c) requires the CFTC in adopting any exemption to make specific findings that: (1) the exemption is consistent with the public interest; (2) the exemption is consistent with the purposes of the CEA; (3) the exempted transaction will be entered into solely between appropriate persons; and (4) the exempted transaction "will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties" under the CEA.
35 H. Rep. No. 102-978, supra n. __ at 81.
36 17 C.F.R. 34.1 et seq; 58 Fed. Reg. 5580, 5581-82 (January 22, 1993)(adopting current Part 34 rules).
37 17 C.F.R. 35.1 et seq; 58 Fed. Reg. 5587, 5591-92 (January 22, 1993)(adopting Part 35 rules).
38 Specifically, the SEC's proposed definition of "eligible OTC derivative instrument" does not require that the creditworthiness of any party having an obligation under an agreement must be a material consideration in entering into a transaction, as does the CFTC's Swaps Exemption. Compare Proposed Rule 240.3b-13 and CFTC Regulations 35.1 and 35.2.
39 Furthermore, the CEA expressly preempts from state "bucketshop" or gaming laws transactions exempted from regulation under the CEA by any rule or order issued by the CFTC pursuant to Section 4(c) of the CEA. See Section 16(e)(2) of the CEA, 7 U.S.C. 16(e)(2)(A). Thus, SEC-approved "eligible OTC derivative instruments" that do not meet the criteria of the CFTC's Swaps Exemption may also have a questionable status under state law.
40 As Congress noted: "In granting exemptive authority to the Commission under new Section 4(c), the Conferees recognize the need to create legal certainty for a number of existing categories of instruments. . . ." H. Rep. No. 102-978, supra n.__ at 81.
41 See 62 Fed. Reg. at 67942.
42 Chicago Mercantile Exchange v. SEC , 883 F.2d 537 (7th Cir. 1989).
43 The failure of the SEC to define "securities OTC derivatives" in its proposal makes it impossible to analyze whether those instruments are subject to the SEC's statutory authority or to the CEA and the CFTC's statutory authority.