Joint Proposed Rules: Application of the Definition of Narrow-Based Security Index to Debt Securities Indexes and Security Futures on Debt Securities, 18030-18038 [06-3188]

Agencies

• SECURITIES AND EXCHANGE COMMISSION
• Commodity Futures Trading Commission

[Federal Register Volume 71, Number 68 (Monday, April 10, 2006)]
[Proposed Rules]
[Pages 18030-18038]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-3188]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038 AB86

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-53560; File No. S7-07-06]
RIN 3235-AJ54


Joint Proposed Rules: Application of the Definition of Narrow-
Based Security Index to Debt Securities Indexes and Security Futures on 
Debt Securities

AGENCIES: Commodity Futures Trading Commission and Securities and 
Exchange Commission.

ACTION: Joint proposed rules.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the 
Securities and Exchange Commission (``SEC'') (together, the 
``Commissions'') are proposing to adopt a new rule and to amend an 
existing rule under the Commodity Exchange Act (``CEA'') and to adopt 
two new rules under the Securities Exchange Act of 1934 (``Exchange 
Act''). These proposed rules and rule amendments would exclude from the 
definition of ``narrow-based security index'' debt securities indexes 
that satisfy specified criteria. A future on a debt securities index 
that is excluded from the definition of ``narrow-based security index'' 
would not be a security future and could trade subject to the exclusive 
jurisdiction of the CFTC. In addition, the proposed rules would expand 
the statutory listing standards requirements to permit security futures 
to be based on debt securities, including narrow-based security indexes 
composed of debt securities.

DATES: Comments must be received on or before May 10, 2006.

ADDRESSES: Comments should be sent to both agencies at the addresses 
listed below.
    CFTC: Comments may be submitted, identified by RIN 3038 AB86, by 
any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: secretary@cftc.gov. Include ``Application of the 
Definition of Narrow-Based Security Index to Debt Securities Indexes'' 
in the subject line of the message.

[[Page 18031]]

     Fax: 202/418-5521.
     Mail: Send to Jean A. Webb, Secretary, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.
     Courier: Same as Mail above.
    All comments received will be posted without change to https://
www.cftc.gov, including any personal information provided.
    SEC: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the SEC's Internet comment form https://www.sec.gov/
rules/proposed.shtml; or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-07-06 on the subject line; or
     Use the Federal eRulemaking Portal (https://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number S7-07-06. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review your comments more efficiently, please use 
only one method. The SEC will post all comments on the SEC's Internet 
Web site (https://www.sec.gov/rules/proposed.shtml). Comments will also 
be available for public inspection and copying in the SEC's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549. All comments 
received will be posted without change; we do not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:
    CFTC: Elizabeth L. Ritter, Deputy General Counsel, at 202/418-5052, 
or Julian E. Hammar, Counsel, at 202/418-5118, Office of General 
Counsel; or Thomas M. Leahy, Jr., Associate Director, Product Review, 
at 202/418-5278, Division of Market Oversight, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.
    SEC: Yvonne Fraticelli, Special Counsel, at 202/551-5654; or Leah 
Mesfin, Special Counsel, at 202/551-5655, Office of Market Supervision, 
Division of Market Regulation, Securities and Exchange Commission, 100 
F Street, NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION: The Commissions are proposing to add Rule 
41.15 and to amend 41.21 under the CEA,\1\ and to add Rule 3a55-4 and 
Rule 6h-2 under the Exchange Act.\2\
---------------------------------------------------------------------------

    \1\ All references to the CEA are to 7 U.S.C. 1 et seq.
    \2\ All references to the Exchange Act are to 15 U.S.C. 78a et 
seq.
---------------------------------------------------------------------------

I. Introduction

    Futures contracts on single securities and on narrow-based security 
indexes (collectively, ``security futures'') are jointly regulated by 
the CFTC and the SEC.\3\ The definition of ``narrow-based security 
index'' under both the CEA and the Exchange Act sets forth the criteria 
for such joint regulatory jurisdiction. Futures on indexes that are not 
narrow-based security indexes are subject to the exclusive jurisdiction 
of the CFTC. Under the CEA and the Exchange Act, an index is a 
``narrow-based security index'' if it meets any one of four 
characteristics.\4\ Further, the CEA and Exchange Act provide that, 
notwithstanding the statutory criteria, an index is not a narrow-based 
security index if a contract of sale for future delivery on the index 
is traded on or subject to the rules of a board of trade and meets such 
requirements as are jointly established by rule, regulation, or order 
of the Commissions.\5\
---------------------------------------------------------------------------

    \3\ See Section 1a(31) of the CEA, 7 U.S.C. 1a(31); Section 
3(a)(55)(A) of the Exchange Act, 15 U.S.C. 78c(a)(55)(A).
    \4\ The four characteristics are as follows: (1) It has nine or 
fewer component securities; (2) any one of its component securities 
comprises more than 30% of its weighting; (3) any group of five of 
its component securities together comprise more than 60% of its 
weighting; or (4) the lowest weighted component securities 
comprising, in the aggregate, 25% of the index's weighting have an 
aggregate dollar value of average daily trading volume (``ADTV'') of 
less than $50 million (or in the case of an index with 15 or more 
component securities, $30 million). See section 1a(25)(A)(i)-(iv) of 
the CEA, 7 U.S.C. 1a(25)(A)(i)-(iv); section 3(a)(55)(B)(i)-(iv) of 
the Exchange Act, 15 U.S.C. 78c(a)(55)(B)(i)-(iv).
    \5\ See Section 1a(25)(B)(vi) of the CEA, 7 U.S.C. 
1a(25)(B)(vi); Section 3(a)(55)(C)(vi) of the Exchange Act, 15 
U.S.C. 78c(a)(55)(C)(vi).
---------------------------------------------------------------------------

    The statutory definition of ``narrow-based security index'' was 
designed primarily for indexes composed of equity securities, not debt 
securities. For example, while three criteria in the narrow-based 
security index definition evaluate the composition and weighting of the 
securities in the index, another criterion evaluates the liquidity of 
an index's component securities. The liquidity criterion in the 
statutory definition of narrow-based security index, which is important 
for indexes composed of common stock, may not be an appropriate 
criterion for indexes composed of debt securities.\6\ Debt securities 
generally do not trade in the same manner as equity securities. 
Accordingly, most indexes comprised of debt securities, regardless of 
the number or amount of underlying component securities in the index, 
fall within the definition of narrow-based security index because few 
debt securities meet the ADTV criterion in the definition of narrow-
based security index.
---------------------------------------------------------------------------

    \6\ Debt securities include notes, bonds, debentures, or 
evidences of indebtedness.
---------------------------------------------------------------------------

    The Commissions believe that it is appropriate to exclude certain 
debt securities indexes from the definition of ``narrow-based security 
index'' using criteria that differ in certain respects from the 
criteria applicable to equity securities to evaluate whether debt 
securities indexes are narrow-based indexes. The Commissions believe 
that using such modified criteria for debt securities indexes are 
necessary or appropriate in the public interest and consistent with the 
protection of investors because the criteria recognize the differences 
between equity and debt and permit security futures to be based on debt 
securities indexes.\7\ In particular, the Commissions believe that the 
modified criteria addressing diversification and public information 
about, and market familiarity with, the issuer of the securities 
underlying a debt securities index would reduce the likelihood that a 
future on such an index would be readily susceptible to manipulation 
and thus are more appropriate criteria for debt securities indexes.
---------------------------------------------------------------------------

    \7\ See 15 U.S.C. 78mm(a)(1).
---------------------------------------------------------------------------

    For this reason, the Commissions are proposing rules and rule 
amendments to exclude from the definition of narrow-based security 
index a debt securities index that meets certain criteria, as described 
below. A futures contract on such an index would not be a security 
future and thus would be subject to the exclusive jurisdiction of the 
CFTC. In addition, the proposed rules and rule amendments would expand 
the statutory listing standards to permit the trading of security 
futures based on debt securities. The proposed rules and rule 
amendments would permit the trading of security futures on single debt 
securities and on narrow-based security indexes composed of debt 
securities, subject to the Commissions' joint jurisdiction. Futures on 
debt securities indexes that satisfy the criteria of the proposed 
exclusion would be subject to the exclusive jurisdiction of the CFTC. 
Although broad-based debt securities indexes that meet the criteria in 
the

[[Page 18032]]

proposed rules should have a reduced likelihood of being readily 
susceptible to manipulation, such indexes must also be determined to be 
not readily susceptible to manipulation in accordance with Section 
2(a)(1)(C)(ii)(II) of the CEA.

II. Proposed Rules Excluding Certain Debt Securities Indexes From the 
Definition of Narrow-Based Security Index

    The Commissions are proposing that a debt securities index that 
satisfies the specified criteria would not be considered a narrow-based 
security index for purposes of Section 3(a)(55) of the Exchange Act and 
Section 1a(25) of the CEA.
    The proposed criteria specify:
     The type of security that may be in the index;
     The maximum weighting and concentration of securities of 
any issuer in the index;
     Eligibility conditions regarding the issuer of any 
security in the index that is not an exempted security under the 
Exchange Act; and
     The minimum remaining outstanding principal amount of the 
security in the index.
    The exclusion also would provide a de minimis exception from 
certain of the criteria regarding the issuer eligibility and minimum 
outstanding remaining principal amount conditions if a predominant 
percentage of the securities comprising the index's weighting satisfied 
all the applicable criteria.
    The proposed rules also contain a definition of ``control'' solely 
to assess affiliation among issuers for purposes of determining 
satisfaction of the criteria.
    Under proposed Rule 41.15 under the CEA and proposed Rule 3a55-4 
under the Exchange Act, an index would not be a narrow-based security 
index if the index satisfied the criteria described below.

A. Index Composed Solely of Debt Securities

    Accordingly, the Commissions' proposed exclusion from the 
definition of ``narrow-based security index'' would require that each 
component security of the index be a security \8\ that is a note, bond, 
debenture, or evidence of indebtedness.\9\ Further, none of the 
securities of an issuer included in the index could be an equity 
security, as defined in Section 3(a)(11) of the Exchange Act and the 
rules adopted thereunder.\10\ Thus, any security index that includes an 
equity security would not qualify for the proposed exclusion for 
indexes composed of debt securities.\11\ The Commissions request 
comment on the proposed types of securities that could be included in a 
debt securities index under this exclusion. The proposed rule and rule 
amendments are intended to establish criteria for determining the 
circumstances in which a debt securities index is not a narrow-based 
security index.
---------------------------------------------------------------------------

    \8\ The term ``security'' is defined in Section 2(a)(1) of the 
Securities Act of 1933, 15 U.S.C. 77b(a)(1) (the ``Securities 
Act''), and Section 3(a)(10) of the Exchange Act, 15 U.S.C. 
78c(a)(10).
    \9\ See proposed Rule 3a55-4(a)(1) under the Exchange Act and 
proposed Rule 41.15(a)(1) under the CEA. The federal securities laws 
do not contain a single definition of debt security. The 
Commissions, therefore, are using the terms found in the Trust 
Indenture Act of 1939 [15 U.S.C. 77aaa-bbb] (which governs debt 
securities of all types) to define the debt securities for purposes 
of the proposed rule and rule amendments.
    \10\ 15 U.S.C. 78c(a)(11). See proposed Rule 3a55-4(a)(2) under 
the Exchange Act and proposed Rule 41.15(a)(2) under the CEA. A 
security convertible into an equity security is an equity security 
under the Exchange Act and the Securities Act.
    \11\ Indexes that include both an equity and debt security or 
securities would be subject to the criteria for narrow-based 
security indexes enumerated in Section 1a(25) of the CEA and Section 
3(a)(55) of the Exchange Act.
---------------------------------------------------------------------------

B. Number and Weighting of Index Components

    The proposed exclusion also would include conditions relating to 
the minimum number of securities of non-affiliated issuers that must be 
included in an index and the maximum permissible weighting of 
securities in the index for the index to qualify for the exclusion from 
the definition of ``narrow-based security index.'' Specifically, the 
debt securities index would have to satisfy each of the following 
conditions regarding the number and weighting of its component 
securities:
     The index must be comprised of more than nine securities 
issued by more than nine non-affiliated issuers; \12\
     The securities of any issuer cannot comprise more than 30% 
of the index's weighting; \13\ and
     The securities of any five non-affiliated issuers cannot 
comprise more than 60% of the index's weighting.\14\
---------------------------------------------------------------------------

    \12\ See proposed Rule 3a55-4(a)(3) under the Exchange Act and 
proposed Rule 41.15(a)(3) under the CEA.
    \13\ See proposed Rule 3a55-4(a)(4) under the Exchange Act and 
proposed Rule 41.15(a)(4) under the CEA.
    \14\ See proposed Rule 3a55-4(a)(5) under the Exchange Act and 
proposed Rule 41.15(a)(5) under the CEA.
---------------------------------------------------------------------------

    The foregoing proposed conditions are virtually identical to the 
criteria contained in the Exchange Act and the CEA that apply in 
determining if a security index would not be a narrow-based security 
index.\15\ In addition, the proposed rules would provide that the term 
``issuer'' includes a single issuer or group of affiliated issuers. An 
issuer would be affiliated with another issuer for purposes of the 
proposed exclusion if it controls, is controlled by, or is under common 
control with, that other issuer. The proposed rules would define 
control solely for purposes of the exclusion to mean ownership of 20% 
or more of an issuer's equity or the ability to direct the voting of 
20% or more of an issuer's voting equity. While the definition of 
affiliate under the Federal securities laws is generally a facts and 
circumstances determination based on the definition of affiliate 
contained in such laws,\16\ certain rules under the Exchange Act 
contain a 20% threshold for purposes of determining a relationship 
between two or more entities.\17\ The definition of control would apply 
solely to the proposed rules and is designed to provide a clear 
standard for determining control and affiliation for purposes of the 
proposed exclusion. The proposed rules make clear that for purposes of 
weighting, all the debt securities of all affiliated issuers included 
in the index would be aggregated so that the index is not concentrated 
in securities of a small number of issuers and their affiliates.
---------------------------------------------------------------------------

    \15\ See supra note 4.
    \16\ See, e.g., Rule 405 under the Securities Act [17 CFR 
230.405] and Rule 12b-2 under the Exchange Act [17 CFR 240.12b-2].
    \17\ See, e.g., Rule 13d-1(c) under the Exchange Act [17 CFR 
240.13d-1(c)] and Securities Exchange Act Release No. 39538 (Jan. 
12, 1998), 63 FR 2854 (Jan. 16, 1998). See also Rule 3-05 under 
Regulation S-X [17 CFR 210.3-05].
---------------------------------------------------------------------------

    The number and weighting criteria would require that an index meet 
minimum diversification conditions with regard to both issuers and the 
underlying securities and, therefore, the Commissions believe that 
these criteria would reduce the likelihood that a future on such a debt 
securities index would be too dependent on the price behavior of a 
component single security, small group of securities or issuers or 
their affiliates. The Commissions request comment on the above proposed 
criteria. In particular, the Commissions request comment on whether the 
proposed number and weighting criteria that are essentially the same as 
for equity security indexes would provide for sufficient 
diversification of the index with respect to both the securities and 
the issuers. The Commissions request comment on whether different 
number or weighting criteria would be appropriate, and request analysis 
and empirical data regarding the debt market

[[Page 18033]]

as compared to the equity market to support any suggested modification 
to the number or weighting criteria. The Commissions also request 
comment on whether owning 20% of an issuer's equity or the ability to 
direct the voting of 20% or more of an issuer's voting equity is an 
appropriate threshold for determining whether there is control of an 
issuer and therefore affiliation for purposes of the proposed 
exclusion.

C. Issuer or Security Eligibility Criteria

    The proposed criteria would require that for securities that are 
not exempted securities under the Exchange Act and rules thereunder, 
such as municipal securities or securities issued by the United States 
government, the issuer of the component security must satisfy one of 
the following:
     The issuer must be required to file reports pursuant to 
section 13 or 15(d) of the Exchange Act; \18\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78m and 78o(d).
---------------------------------------------------------------------------

     The issuer must have a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more;
     The issuer must have outstanding securities that are 
notes, bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion; or
     The issuer of the security must be a government of a 
foreign country or a political subdivision of a foreign country.
    The proposed issuer eligibility criteria are aimed at conditioning 
the exclusion for a debt securities index from the definition of 
narrow-based security index on the public availability of information 
about the issuers of the securities included in the index. For example, 
an issuer that is required to file reports pursuant to section 13 or 
15(d) of the Exchange Act \19\ makes regular and public disclosure 
through its Exchange Act filings. For issuers that are not required to 
file reports with the SEC under the Exchange Act, the Commissions 
similarly believe that issuers that have either worldwide equity market 
capitalization of $700 million or $1 billion in outstanding debt are 
likely to have public information available about them.\20\ 
Accordingly, the issuer eligibility criteria should help ensure that, 
other than with respect to exempted securities in the index, the debt 
securities index includes debt securities of issuers for which public 
information is available, thereby reducing the likelihood that an index 
qualifying for the exclusion would be readily susceptible to 
manipulation.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78m and 78o.
    \20\ These thresholds are similar to ones the SEC recently 
adopted in its Securities Offering Reform rules. See Securities Act 
Release No. 8591 (July 19, 2005), 70 FR 44722 (Aug. 3, 2005).
---------------------------------------------------------------------------

    The issuer eligibility criteria would not apply if the component 
security in the index is an exempted security, as defined in the 
Exchange Act; \21\ or if the issuer of the security is a government of 
a foreign country or a political subdivision of a foreign country. The 
Commissions believe that it is appropriate to allow indexes qualifying 
for the exclusion to include exempted securities and the debt 
obligations of foreign countries and their political subdivisions. 
Current law permits futures on individual exempted debt securities, 
other than municipal securities, and on certain foreign sovereign debt 
obligations.\22\ Because a future may be based on one of these exempted 
debt securities, the Commissions believe that it is reasonable and 
consistent with the purposes of the CEA and the Exchange Act to allow 
futures to be based on indexes comprised of such debt securities. The 
Commissions request comment on the proposed issuer eligibility 
criteria. If commenters disagree with these criteria, the Commissions 
request views as to what different or additional criteria would be 
appropriate that would continue to satisfy the purpose of including 
securities of issuers for which there is publicly available 
information. The Commissions also request comment on the exception to 
the specific issuer eligibility conditions for exempted debt 
securities, as defined in the Exchange Act, and the debt securities 
issued by a foreign government or political subdivision of a foreign 
country that may be included in the debt securities index.
---------------------------------------------------------------------------

    \21\ See 15 U.S.C. 78c(a)(12). While issuers of exempt 
securities are not subject to the same issuer eligibility 
conditions, other existing rules and regulatory regimes applicable 
to most of such issuers provide for ongoing public information about 
such issuers. See for example, Rule 15c2-12 under the Exchange Act, 
17 CFR 240.15c2-12.
    \22\ In this regard, Section 2(a)(1)(C)(iv) of the CEA, 7 U.S.C. 
2(a)(1)(C)(iv), prohibits any person from entering into a futures 
contract on any security except an exempted security under Section 
3(a)(12) of the Exchange Act, 15 U.S.C. 78c(a)(12), other than a 
municipal security as defined in Section 3(a)(29) of the Exchange 
Act, 15 U.S.C. 78c(a)(29). In addition, Rule 3a12-8 under the 
Exchange Act, 17 CFR 240.3a12-8, deems the debt obligations of 
specified foreign governments to be exempted securities for the 
purpose of permitting the offer, sale, and confirmation of futures 
contracts on those debt obligations in the United States.
---------------------------------------------------------------------------

D. Minimum Principal Amount Outstanding

    The proposed rules would require that each index component have a 
total remaining principal amount of at least $250,000,000. Although 
trading in most debt securities is limited, trading volume generally 
increases for debt securities with $250,000,000 or more in total 
remaining principal amount outstanding. The proposed criteria do not 
require that the securities included in the index have an investment 
grade rating. Nor do the criteria require particular trading volume, 
due to the generally lower trading activity in the debt markets 
compared to the equity markets. Instead, the Commissions are proposing 
a minimum principal amount criterion which is intended, together with 
the other proposed criteria geared to the debt securities market, to 
provide a substitute criterion for trading volume.\23\ Accordingly, the 
Commissions believe that adopting a minimum remaining principal amount 
criterion, together with the other proposed criteria, would decrease 
the likelihood that a future on such an index would be readily 
susceptible to manipulation. The Commissions request comment on the 
proposed $250,000,000 minimum principal amount requirement for each 
security included in an index. Is $250,000,000 too high or too low for 
purposes of the proposal? If so, what figure would be more appropriate 
in light of the intent of the proposals? Commenters should provide 
empirical facts, data, and analysis supporting any different minimum 
principal amount.
---------------------------------------------------------------------------

    \23\ Based on data obtained from the Trade Reporting and 
Compliance Engine (TRACE) database supplied by the National 
Association of Securities Dealers, Inc., in the debt securities 
market, trading activity in a debt security generally increases as 
the principal amount of the debt security increases. It is important 
to note, however, that generally non-investment-grade debt 
securities trade more frequently than investment-grade debt 
securities. Consequently, the Commissions believe that trading 
volume would not be an appropriate determinant of whether a debt 
securities index is narrow-based.
---------------------------------------------------------------------------

E. De Minimis Exception

    The proposed exclusion from the definition of narrow-based security 
index would except an issuer included in a debt securities index from 
the proposed issuer eligibility and minimum outstanding principal 
balance criteria for securities of an issuer if:
     All securities of such issuer included in the index 
represent less than 5% of the index's weighting; \24\ and
---------------------------------------------------------------------------

    \24\ In determining whether the five percent threshold is met, 
all securities of an issuer and it affiliates would be aggregated 
because of the potential for concentrated risk of the index in a 
limited group of issuers.
---------------------------------------------------------------------------

     Securities comprising at least 80% of the index's 
weighting satisfy the

[[Page 18034]]

issuer eligibility and minimum outstanding principal balance 
criteria.\25\
---------------------------------------------------------------------------

    \25\ The 80 percent calculation would be based on the entire 
index's weighting without subtracting issuers who are not required 
to satisfy the issuer eligibility criteria and minimum outstanding 
principal amount criteria. This is important to ensure that a 
predominant percentage of the index satisfies the proposed criteria.
---------------------------------------------------------------------------

    The Commissions preliminarily believe that an index that included a 
very small proportion of securities and issuers that do not satisfy 
certain of the above criteria should nevertheless be excluded from the 
definition of narrow-based security index. To satisfy the exclusion, 
both the five percent weighting threshold and the 80 percent weighting 
threshold must be met at the time of the assessment. The five percent 
weighting threshold would ensure that issuers and securities not 
satisfying certain of the proposed criteria would comprise only a very 
small portion of the index. The 80 percent weighting threshold would 
ensure that a predominant percentage of the securities and the issuers 
in the debt securities index satisfied the proposed criteria. The 
Commissions believe that the de minimis exception should allow debt 
securities indexes that include debt securities of a small number of 
issuers and securities that do not satisfy certain of the proposed 
criteria to qualify for the proposed exclusion. The Commissions believe 
that this de minimis exception would provide certain flexibility in 
constructing an index or determining whether a debt securities index 
satisfied the proposed exclusion.
    The Commissions preliminarily believe that the proposed de minimis 
exception would be appropriate for indexes that are predominantly 
comprised of securities that satisfy the specified criteria, would be 
consistent with the protection of investors, and would reduce the 
likelihood that the index would be readily susceptible to manipulation. 
The Commissions request comment on the proposed five percent threshold 
for when the securities of an issuer and its affiliates represent a de 
minimis proportion of an index. The Commissions also request comment on 
whether 80 percent represents an appropriate proportion of a debt 
securities index for purposes of the exclusion. If other thresholds are 
suggested, please provide empirical data and analysis supporting such 
other thresholds.

III. Tolerance Period

    Section 1a(25)(B)(iii) of the CEA \26\ and Section 3(a)(55)(C)(iii) 
of the Exchange Act \27\ provide that, under certain conditions, a 
future on a security index may continue to trade as a broad-based index 
future, even when the index temporarily assumes characteristics that 
would render it a narrow-based security index under the statutory 
definition. An index qualifies for this tolerance and therefore is not 
a narrow-based security index if: (1) A future on the index traded for 
at least 30 days as an instrument that was not a security future before 
the index assumed the characteristics of a narrow-based security index; 
and (2) the index does not retain the characteristics of a narrow-based 
security index for more than 45 business days over three consecutive 
calendar months.\28\
---------------------------------------------------------------------------

    \26\ 7 U.S.C. 1a(25)(B)(iii).
    \27\ 15 U.S.C. 78c(a)(55)(C)(iii).
    \28\ If the index becomes narrow-based for more than 45 days 
over three consecutive calendar months, the statute then provides an 
additional grace period of three months during which the index is 
excluded from the definition of narrow-based security index. See 
Section 1a(25)(D) of the CEA, 7 U.S.C. 1a(25)(D), and Section 
3(a)(55)(E) of the Exchange Act, 15 U.S.C. 78c(a)(55)(E).
---------------------------------------------------------------------------

    In addition, Rules 41.12 under the CEA and 3a55-2 under the 
Exchange Act address the circumstance when a broad-based security index 
underlying a future becomes narrow-based during the first 30 days of 
trading. In such case, the future does not meet the requirement of 
having traded for at least 30 days to qualify for the tolerance period 
granted by Section 1a(25)(B)(iii) of the CEA \29\ and Section 
3(a)(55)(C)(iii) of the Exchange Act.\30\ These rules, however, provide 
that the index will nevertheless be excluded from the definition of 
narrow-based security index throughout that first 30 days, if the index 
would not have been a narrow-based security index had it been in 
existence for an uninterrupted period of six months prior to the first 
day of trading.
---------------------------------------------------------------------------

    \29\ 7 U.S.C. 1a(25)(B)(iii).
    \30\ 15 U.S.C. 78c(a)(55)(C)(iii).
---------------------------------------------------------------------------

IV. Modification of the Statutory Listing Standards Requirements for 
Security Futures Products

    The Commodity Futures Modernization Act of 2000 \31\ amended the 
Exchange Act and the CEA by, among other things, establishing the 
criteria and requirements for listing standards regarding the category 
of securities on which security futures products can be based. The 
Exchange Act \32\ provides that it is unlawful for any person to effect 
transactions in security futures products that are not listed on a 
national securities exchange or a national securities association 
registered pursuant to Sections 6(a) or 15A(a), respectively, of the 
Exchange Act.\33\ The Exchange Act \34\ further provides that such 
exchange or association is permitted to trade only security futures 
products that conform with listing standards filed with the SEC and 
that meet the criteria specified in Section 2(a)(1)(D)(i) of the 
CEA.\35\ The CEA states \36\ that no board of trade shall be designated 
as a contract market with respect to, or registered as a derivatives 
transaction execution facility (``DTEF'') for, any contracts of sale 
for future delivery of a security futures product unless the board of 
trade and the applicable contract meet the criteria specified in that 
section. Similarly, the Exchange Act \37\ requires that the listing 
standards filed with the SEC by an exchange or association meet 
specified requirements.
---------------------------------------------------------------------------

    \31\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
    \32\ Section 6(h)(1) of the Exchange Act, 15 U.S.C. 78f(h)(1).
    \33\ 15 U.S.C. 78f(a) and 78o-3(a).
    \34\ Section 6(h)(2) of the Exchange Act, 15 U.S.C. 78f(h)(2).
    \35\ 7 U.S.C. 2(a)(1)(D)(i).
    \36\ Section 2(a)(1)(D)(i) of the CEA, 7 U.S.C. 2(a)(1)(D)(i).
    \37\ Section 6(h)(3) of the Exchange Act, 15 U.S.C. 78f(h)(3).
---------------------------------------------------------------------------

    In particular, the Exchange Act \38\ and the CEA \39\ require that, 
except as otherwise provided in a rule, regulation, or order, a 
security future must be based upon common stock and such other equity 
securities as the Commissions jointly determine appropriate. A security 
future on a debt security or a debt securities index currently would 
not satisfy this requirement.
---------------------------------------------------------------------------

    \38\ Section 6(h)(3)(D) of the Exchange Act, 15 U.S.C. 
78f(h)(3)(D).
    \39\ Section 2(a)(1)(D)(i)(III) of the CEA, 7 U.S.C. 
2(a)(1)(D)(i)(III).
---------------------------------------------------------------------------

    The Exchange Act and the CEA, however, provide the Commissions with 
the authority to 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.\40\
---------------------------------------------------------------------------

    \40\ Section 6(h)(4)(A) of the Exchange Act, 15 U.S.C. 
78f(h)(4)(A); Section 2(a)(1)(D)(v)(I) of the CEA, 7 U.S.C. 
2(a)(1)(D)(v)(I).
---------------------------------------------------------------------------

    Pursuant to this authority, the Commissions propose to amend CEA 
Rule 41.21 and to add Exchange Act Rule 6h-2 to modify the listing 
standards for security futures to permit the trading of security 
futures based on debt securities that are notes, bonds, debentures, or 
evidences of indebtedness and indexes composed of such debt securities. 
The Commissions note that the Exchange Act \41\ requires

[[Page 18035]]

that the listing standards for security futures products be no less 
restrictive than comparable listing standards for options traded on a 
national securities exchange or national securities association. In 
addition, the CEA and the Exchange Act \42\ provide that the listing 
standards for a security futures product must require that trading in 
the security futures product not be readily susceptible to manipulation 
of the price of such security futures product, nor to causing or being 
used in the manipulation of the price of an underlying security, option 
on such security, or option on a group or index including such 
securities. The Commissions preliminarily believe that the proposed 
modification to permit the listing of security futures on debt 
securities and indexes composed of such debt securities would allow the 
listing and trading of new and potentially useful financial products, 
while providing the necessary safeguards to ensure that such products 
are not readily susceptible to manipulation. Therefore, the Commissions 
believe that the proposed modification would foster the development of 
fair and orderly markets in security futures products, would be 
appropriate in the public interest, and would be consistent with the 
protection of investors. In the absence of this modification, security 
futures on debt securities and indexes composed of such debt securities 
would continue to be prohibited, thus preventing the development of 
potentially useful financial products.
---------------------------------------------------------------------------

    \41\ Section 6(h)(3)(C) of the Exchange Act, 15 U.S.C. 
78f(h)(3)(C).
    \42\ Section 2(a)(1)(D)(i)(VII) of the CEA, 7 U.S.C. 
2(a)(1)(D)(i)(VII); Section 6(h)(3)(H) of the Exchange Act, 15 
U.S.C. 78f(h)(3)(H).
---------------------------------------------------------------------------

V. Request for Comments

    The Commissions solicit comments on all aspects of proposed Rule 
41.15 and amendments to Rule 41.21 under the CEA and proposed Rule 
3a55-4 and Rule 6h-2 under the Exchange Act. Specifically, the 
Commissions seek comment on whether the proposed rules establish 
appropriate criteria for identifying debt securities indexes that are 
not narrow-based and, if not, what other or additional criteria would 
be appropriate, providing empirical data and analysis supporting any 
suggestions. Further, the Commissions solicit comment on whether any of 
the proposed criteria is inappropriate and/or should not be included, 
also providing detailed analysis and empirical support. In addition, 
the Commissions seek comment on whether modifying the statutory listing 
standards to permit security futures based on debt securities and debt 
securities indexes that are narrow-based would foster 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. Commenters are also welcome to offer their 
views on any other matters raised by the proposed rules. Commenters 
should provide empirical data and analysis to support their 
suggestions.

VI. Paperwork Reduction Act

    CFTC: The Paperwork Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501 
et seq., imposes certain requirements on Federal agencies (including 
the CFTC) in connection with their conducting or sponsoring any 
collection of information as defined by the PRA. The proposed rule and 
rule amendments do not require a new collection of information on the 
part of any entities.
    Accordingly, for purposes of the PRA, the CFTC certifies that the 
proposed rule and rule amendments, if promulgated in final form, would 
not impose any new reporting or recordkeeping requirements.
    SEC: Proposed Rules 3a55-4 and 6h-2 would not impose a new 
``collection of information'' within the meaning of the PRA.

VII. Costs and Benefits of the Proposed Rules

    CFTC: Section 15(a) of the CEA requires the CFTC to consider the 
costs and benefits of its actions before issuing new regulations under 
the CEA. By its terms, Section 15(a) does not require the CFTC to 
quantify the costs and benefits of new regulations or to determine 
whether the benefits of the proposed regulations outweigh their costs. 
Rather, Section 15(a) requires the CFTC to ''consider the cost and 
benefits'' of the subject rules.
    Section 15(a) further specifies that the costs and benefits of the 
proposed rules shall be evaluated in light of five broad areas of 
market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The CFTC may, 
in its discretion, give greater weight to any one of the five 
enumerated areas of concern and may, in its discretion, determine that, 
notwithstanding its costs, a particular rule is necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or to accomplish any of the purposes of the CEA.
    The proposed rule and rule amendments should foster the protection 
of market participants and the public by establishing criteria for 
futures on broad-based debt securities indexes that should reduce the 
likelihood that these products would be readily susceptible to 
manipulation. The statutory listing standards for security futures 
provide for similar protection of market participants with regard to 
security futures on narrow-based debt securities indexes and individual 
debt securities that would be made available for listing and trading 
pursuant to the proposed rules.
    In addition, the proposed rule and rule amendments should encourage 
the efficiency and competitiveness of futures markets by permitting the 
listing for trading of new and potentially useful products on debt 
securities and security indexes. In the absence of the proposed rule 
and rule amendments, futures on debt securities indexes that meet the 
proposed criteria for non-narrow-based security index treatment, as 
well as security futures on narrow-based debt securities indexes and 
individual debt securities, would be prohibited. Efficiencies should 
also be achieved because the proposed rules, in establishing criteria 
for broad-based debt securities indexes, take into consideration the 
characteristics of such indexes and the issuers of the underlying debt 
securities that would render joint SEC and CFTC regulation unnecessary. 
By not subjecting futures on debt securities indexes that meet the 
proposed criteria to joint SEC and CFTC regulation, the costs for 
listing such products should be minimized.
    The proposed rule and rule amendments should have no material 
impact from the standpoint of imposing costs or creating benefits, on 
price discovery, sound risk management practices, or any other public 
interest considerations.
    Although exchanges may incur costs in order to determine whether a 
debt securities index meets the criteria to be considered broad-based 
established by the proposed rules, the CFTC believes that these costs 
are outweighed in light of the factors and benefits discussed above. 
Accordingly, the CFTC has determined to propose the addition and 
amendment to Part 41 as set forth below. The CFTC specifically invites 
public comment on its application of the criteria contained in section 
15(a) of the CEA for consideration. Commenters are also invited to 
submit any quantifiable data that they may have concerning the costs 
and benefits of the proposed rule and rule amendments with their 
comment letters.

[[Page 18036]]

    SEC: Proposed Rule 6h-2 under the Exchange Act would permit a 
national securities exchange, subject to certain conditions, to list 
and trade security futures based on single debt securities and on 
narrow-based indexes composed of debt securities. Proposed Rule 3a55-4 
would exclude from the definition of a narrow-based security index debt 
securities indexes that satisfy specified criteria. The SEC has 
preliminarily identified certain costs and benefits relating to 
proposed Rules 3a55-4 and 6h-2. The SEC requests comments on all 
aspects of this cost-benefit analysis, including the identification of 
any additional costs and/or benefits of the proposed rules. The SEC 
encourages commenters to identify and supply any relevant data, 
analysis, and estimates concerning the costs and/or benefits of the 
proposed rules.

A. Benefits

    The benefits of proposed Rules 3a55-4 and 6h-2 generally would 
accrue from expanding the range of securities on which security futures 
and other index futures may be based. Currently, security futures 
cannot be based on debt securities or debt securities indexes. The 
proposed rules and rule amendments would eliminate this prohibition. As 
a result, the proposed rules and rule amendments would permit a greater 
variety of financial products to be listed and traded that potentially 
could facilitate price discovery and the ability to hedge. Investors 
generally would benefit by having a wider choice of financial products 
to buy and sell. The measure of this benefit would likely be correlated 
to the volume of trading in these new instruments. Because security 
futures based on debt securities would be new products, however, the 
SEC is unable to quantify these benefits and therefore requests 
comments, data, and estimates on these benefits.
    Proposed Rule 3a55-4 provides criteria that would exclude from the 
jurisdiction of the SEC futures contracts on certain debt securities 
indexes. Futures contracts on debt securities indexes that do not meet 
the criteria in proposed Rule 3a55-4 would be subject to the joint 
jurisdiction of the SEC and CFTC, while debt securities indexes that 
meet the criteria for the proposed exclusion would be subject to the 
exclusive jurisdiction of the CFTC. The SEC requests comments, data, 
and estimates regarding the benefits associated with allowing the 
listing and trading of futures on debt securities and narrow-based debt 
securities indexes under proposed Rule 6h-2 and with the exclusion 
proposed in Rule 3a55-4.

B. Costs

    In complying with proposed Rule 3a55-4, a national securities 
exchange, national securities association, designated contract market, 
registered DTEF, or foreign board of trade (each a ``listing market'') 
that wishes to list and trade futures contracts based on debt 
securities indexes would incur certain costs. A listing market that 
wishes to list and trade such futures contracts would be required to 
ascertain whether a particular debt securities index was or was not a 
narrow-based security index, according to the criteria set forth in 
proposed Rule 3a55-4, and thus whether a futures contract based on that 
security index were subject to the joint jurisdiction of the SEC and 
CFTC or to the exclusive jurisdiction of the CFTC. The SEC notes, 
however, that any such costs replace the current cost of doing the same 
analysis under the statutory definition of narrow-based security index. 
Market participants that elect to create debt securities indexes would 
also incur costs associated with constructing these products. Such 
costs would be the existing costs of doing business. The SEC requests 
comment as to the costs that such determinations would impose on 
listing markets or other market participants. Commenters are encouraged 
to submit empirical data to support these estimates and to identify any 
other costs associated with the proposal that have not been considered 
herein, and what the extent of those costs would be.

VIII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

    SEC: Section 3(f) of the Exchange Act \43\ requires the SEC, when 
engaged in a rulemaking that requires it to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider whether the action would promote efficiency, competition, 
and capital formation. Section 23(a)(2) of the Exchange Act \44\ 
requires the SEC, in adopting rules under the Exchange Act, to consider 
the impact any rule would have on competition. In particular, Section 
23(a)(2) of the Exchange Act prohibits the SEC from adopting any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78c(f).
    \44\ 15. U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The SEC preliminarily believes that proposed Rule 3a55-4 would 
promote efficiency by setting forth clear methods and guidelines for a 
listing market to distinguish futures contracts on debt securities 
indexes that are subject to joint jurisdiction of the SEC and CFTC from 
futures contracts on debt securities indexes that are subject to the 
sole jurisdiction of the CFTC.
    Proposed Rules 3a55-4 and 6h-2 would lift the ban on the listing 
and trading of security futures based on debt securities and narrow-
based debt securities indexes. Thus, the SEC preliminarily believes 
that the proposed rules would not have an adverse effect on capital 
formation.
    The SEC preliminarily believes that the proposed rules would not 
impose any significant burdens on competition. The SEC instead believes 
that, by allowing listing markets to list and trade new financial 
products, proposed Rule 6h-2 would promote competition by creating 
opportunities for listing markets to compete in the market for such 
products and perhaps for some of these new products to compete against 
existing products.
    The SEC requests comments on the potential benefits, as well as 
adverse consequences, that may result with respect to efficiency, 
competition, and capital formation if the proposed rules are adopted.

IX. Regulatory Flexibility Act Certifications

    CFTC: The Regulatory Flexibility Act (``RFA'') \45\ requires 
Federal agencies, in promulgating rules, to consider the impact of 
those rules on small entities. The rules adopted herein would affect 
contract markets and registered DTEFs. The CFTC previously established 
certain definitions of ``small entities'' to be used by the CFTC in 
evaluating the impact of its rules on small entities in accordance with 
the RFA.\46\ In its previous determinations, the CFTC has concluded 
that contract markets and DTEFs are not small entities for the purpose 
of the RFA.\47\
---------------------------------------------------------------------------

    \45\ 5 U.S.C. 601 et seq.
    \46\ 47 FR 18618-21 (Apr. 20, 1982).
    \47\ 47 FR 18618, 18619 (Apr. 20, 1982) (discussing contract 
markets); 66 FR 42256, 42268 (Aug. 10, 2001) (discussing DTEFs).
---------------------------------------------------------------------------

    Accordingly, the CFTC does not expect the rules, as proposed 
herein, to have a significant economic impact on a substantial number 
of small entities. Therefore, the Chairman, on behalf of the CFTC, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed 
amendments will not have a significant economic impact on a substantial

[[Page 18037]]

number of small entities. The CFTC invites the public to comment on 
this finding and on its proposed determination that the trading 
facilities covered by these rules would not be small entities for 
purposes of the RFA.
    SEC: Section 603(a) \48\ of the Administrative Procedure Act 
(``APA''),\49\ as amended by the RFA, generally requires the SEC to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' \50\ Section 605(b) of the RFA specifically exempts 
from this requirement any proposed rule, or proposed rule amendment, 
which if adopted, would not ``have a significant economic impact on a 
substantial number of small entities.'' Proposed Rules 3a55-4 and 6h-2 
would permit the listing and trading of security futures based on debt 
securities and establish criteria for excluding certain debt securities 
indexes from the definition of narrow-based security index. Only 
markets that are registered with the SEC as national securities 
exchanges and designated as contract markets or derivatives transaction 
execution facilities with the CFTC would be making determinations as to 
the status of the debt securities indexes on which futures contracts 
are trading. The national securities exchanges \51\ and contract 
markets \52\ that would be subject to the proposed rules are not 
``small entities'' for purposes of the Regulatory Flexibility Act. 
Therefore, the proposed rules, if adopted, would not have a significant 
economic impact on a substantial number of small entities for purposes 
of the Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \48\ 5 U.S.C. 603(a).
    \49\ 5 U.S.C. 551 et seq.
    \50\ Although Section 601(b) of the RFA defines the term ``small 
entity,'' the statute permits agencies to formulate their own 
definitions. The SEC has adopted definitions for the term small 
entity for the purposes of SEC rulemaking in accordance with the 
RFA. Those definitions, as relevant to this proposed rulemaking, are 
set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act 
Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
    \51\ See 17 CFR 240.0-10(e). Paragraph (e) of Exchange Act Rule 
0-10 provides that the term ``small entity,'' when referring to an 
exchange, means any exchange that has been exempted from the 
reporting requirements of 17 CFR 240.11Aa3-1 and is not affiliated 
with any person that is not a small entity. Under this standard, 
none of the exchanges affected by the proposed rule is a small 
entity.
    \52\ The CFTC has previously established certain definitions of 
``small entities'' to be used in evaluating the impact of its rules 
on small entities in accordance with the RFA. See 47 FR 18618-21 
(Apr. 30, 1982). In its previous determinations, the CFTC has 
concluded that contract markets are not small entities for the 
purpose of the RFA. See id. at 18619 (discussing contract markets).
---------------------------------------------------------------------------

    For the above reasons, the SEC certifies that proposed Rules 3a55-4 
and 6h-2 would not have a significant economic impact on a substantial 
number of small entities. The SEC invites commenters to address whether 
the proposed rules would have a significant economic impact on a 
substantial number of small entities, and, if so, what would be the 
nature of any impact on small entities. The SEC requests that 
commenters provide empirical data to support the extent of such impact.

X. Consideration of Impact on the Economy

    CFTC and SEC: For purposes of the Small Business Regulatory 
Enforcement Fairness Act of 1996 (``SBREFA''),\53\ the SEC and the CFTC 
must advise the Office of Management and Budget as to whether the 
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results or is likely to 
result in: (1) An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease); (2) a major increase 
in costs or prices for consumers or individual industries; or (3) 
significant adverse effect on competition, investment or innovation. If 
a rule is ``major,'' its effectiveness will generally be delayed for 60 
days pending Congressional review. The SEC requests comment on the 
potential impact of the proposed rules on the economy on an annual 
basis. Commenters are requested to provide empirical data and other 
factual support for their view to the extent possible.
---------------------------------------------------------------------------

    \53\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

XI. Statutory Authority

    Pursuant to the CEA and the Exchange Act, and, particularly, 
Sections 1a(25)(B)(vi) and 2(a)(1)(D) of the CEA \54\ and Sections 
3(a)(55)(C)(vi), 3(b), 6(h), 23(a), and 36 of the Exchange Act,\55\ the 
Commissions are proposing Rule 41.15 and amendments to Rule 41.21 under 
the CEA,\56\ and Rules 3a55-4 and 6h-2 under the Exchange Act.\57\
---------------------------------------------------------------------------

    \54\ 7 U.S.C. 1a(25)(B)(vi) and 2(a)(1)(D).
    \55\ 15 U.S.C. 78c(a)(55)(C)(vi), 78c(b), 78f(h), 78w(a), and 
78mm.
    \56\ 17 CFR 41.15 and 41.21.
    \57\ 17 CFR 240.3a55-4.
---------------------------------------------------------------------------

XII. Text of Proposed Rules

List of Subjects

17 CFR Part 41

    Security futures products.

17 CFR Part 240

    Securities.

Commodity Futures Trading Commission

    In accordance with the foregoing, Title 17, chapter I, part 41 of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 41--SECURITY FUTURES PRODUCTS

    1. The authority citation for part 41 continues to read as follows:

    Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat. 
2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).

Subpart B--Narrow-Based Security Indexes

    2. Add Section 41.15 to read as follows:


Sec.  41.15  Exclusion from Definition of Narrow-Based Security Index 
for Indexes Composed of Debt Securities.

    (a) An index is not a narrow-based security index if:
    (1) Each of the securities of an issuer included in the index is a 
security, as defined in section 2(a)(1) of the Securities Act of 1933 
and section 3(a)(10) of the Securities Exchange Act of 1934 and the 
respective rules promulgated thereunder, that is a note, bond, 
debenture, or evidence of indebtedness;
    (2) None of the securities of an issuer included in the index is an 
equity security, as defined in section 3(a)(11) of the Securities 
Exchange Act of 1934 and the rules promulgated thereunder;
    (3) The index is comprised of more than nine securities that are 
issued by more than nine non-affiliated issuers;
    (4) The securities of any issuer included in the index do not 
comprise more than 30 percent of the index's weighting;
    (5) The securities of any five non-affiliated issuers included in 
the index do not comprise more than 60 percent of the index's 
weighting;
    (6) Except as provided in paragraph (8) of this section, for each 
security of an issuer included in the index one of the following 
criteria is satisfied:
    (i) The issuer of the security is required to file reports pursuant 
to section 13 or section 15(d) of the Securities Exchange Act of 1934;
    (ii) The issuer of the security has a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more;
    (iii) The issuer of the security has outstanding securities that 
are notes, bonds, debentures, or evidences of

[[Page 18038]]

indebtedness having a total remaining principal amount of at least $1 
billion;
    (iv) The security is an exempted security as defined in the 
Securities Exchange Act of 1934 and the rules promulgated thereunder; 
or
    (v) The issuer of the security is a government of a foreign country 
or a political subdivision of a foreign country; and
    (7) Except as provided in paragraph (8) of this section, each 
security of an issuer included in the index has a total remaining 
principal amount of at least $250,000,000 except as provided in 
paragraph (8) of this section.
    (8) Paragraphs (a)(6) and (a)(7) of this section will not apply to 
securities of an issuer included in the index if:
    (i) All securities of such issuer included in the index represent 
less than five percent of the index's weighting; and
    (ii) Securities comprising at least 80 percent of the index's 
weighting satisfy the provisions of paragraphs (a)(6) and (a)(7) of 
this section.
    (b) For purposes of this section:
    (1) An issuer is affiliated with another issuer if it controls, is 
controlled by, or is under common control with, that issuer.
    (2) Control means ownership of 20 percent or more of an issuer's 
equity, or the ability to direct the voting of 20 percent or more of 
the issuer's voting equity.
    (3) The term issuer includes a single issuer or group of affiliated 
issuers.

Subpart C--Requirements and Standards for Listing Security Futures 
Products

    3. Amend Section 41.21 by:
    a. Removing ``or'' at the end of paragraph (a)(2)(i);
    b. Removing ``; and,'' at the end of paragraph (a)(2)(ii) and 
adding ``, or'' in its place;
    c. Adding paragraph (a)(2)(iii);
    d. Removing ``or'' at the end of paragraph (b)(3)(i)
    e. Removing ``; and,'' at the end of paragraph (b)(3)(ii) and 
adding ``, or'' in its place; and
    f. Adding paragraph (b)(3)(iii).
    The additions read as follows:


Sec.  41.21  Requirements for underlying securities.

    (a) * * *
    (2) * * *
    (iii) a note, bond, debenture, or evidence of indebtedness; and,
* * * * *
    (b) * * *
    (3) * * *
    (iii) A note, bond, debenture, or evidence of indebtedness; and,
* * * * *

Securities and Exchange Commission

    In accordance with the foregoing, Title 17, chapter II, part 240 of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    2. Section 240.3a55-4 is added to read as follows:


Sec.  240.3a55-4  Exclusion from definition of narrow-based security 
index for indexes composed of debt securities.

    (a) An index is not a narrow-based security index if:
    (1) Each of the securities of an issuer included in the index is a 
security, as defined in section 2(a)(1) of the Securities Act of 1933 
(15 U.S.C. 77b(a)(1)) and section 3(a)(10) of the Act (15 U.S.C. 
78c(a)(10)) and the respective rules promulgated thereunder, that is a 
note, bond, debenture, or evidence of indebtedness;
    (2) None of the securities of an issuer included in the index is an 
equity security, as defined in section 3(a)(11) of the Act (15 U.S.C. 
78c(a)(11)) and the rules promulgated thereunder;
    (3) The index is comprised of more than nine securities that are 
issued by more than nine non-affiliated issuers;
    (4) The securities of any issuer included in the index do not 
comprise more than 30 percent of the index's weighting;
    (5) The securities of any five non-affiliated issuers included in 
the index do not comprise more than 60 percent of the index's 
weighting;
    (6) Except as provided in paragraph (a)(8) of this section, for 
each security of an issuer included in the index one of the following 
criteria is satisfied:
    (i) The issuer of the security is required to file reports pursuant 
to section 13 or section 15(d) of the Act (15 U.S.C. 78m and 78o(d));
    (ii) The issuer of the security has a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more;
    (iii) The issuer of the security has outstanding securities that 
are notes, bonds, debentures, or evidences of indebtedness having a 
total remaining principal amount of at least $1 billion;
    (iv) The security is an exempted security as defined in the Act and 
the rules promulgated thereunder; or
    (v) The issuer of the security is a government of a foreign country 
or a political subdivision of a foreign country;
    (7) Except as provided in