[Federal Register Volume 66, Number 96 (Thursday, May 17, 2001)]
[Proposed Rules]
[Pages 27560-27579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12278]



[[Page 27559]]

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Part IV





Commodity Futures Trading Commission





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17 CFR Part 41





Securities and Exchange Commission





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17 CFR Part 240



Method for Determining Market Capitalization and Dollar Value of 
Average Daily Trading Volume; Application of the Definition of Narrow-
Based Security Index; Proposed Rules

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / 
Proposed Rules

[[Page 27560]]



COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038-AB77

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-44288; File No. S7-11-01]
RIN 3235-AI13


Method for Determining Market Capitalization and Dollar Value of 
Average Daily Trading Volume; Application of the Definition of Narrow-
Based Security Index

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

ACTION: Joint proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the 
Securities and Exchange Commission (``SEC'') (collectively, 
``Commissions'') are proposing Rule 41 under the Commodity Exchange Act 
(``CEA'') and Rules 3a55-1 through 3a55-3 under the Securities Exchange 
Act of 1934 (``Exchange Act''). These proposed rules would implement 
new statutory provisions enacted by the Commodity Futures Modernization 
Act of 2000 (``CFMA''). Specifically, the CFMA directs the Commissions 
to jointly specify by rule or regulation the method to be used to 
determine ``dollar value of average daily trading volume'' and ``market 
capitalization'' for purposes of the new definition of ``narrow-based 
security index'' in the CEA and the Exchange Act. Proposed Rule 41.11 
under the CEA and proposed Rule 3a55-1 under the Exchange Act are 
intended to fulfill this statutory directive by specifying such 
methods. In addition, these proposed rules define certain terms that 
would add clarity to the statutory definition of ``narrow-based 
security index.''
    In addition, proposed Rule 41.12 under the CEA and proposed Rule 
3a55-2 under the Exchange Act would create an exception to the 
definition of narrow-based security index, to permit, subject to 
certain conditions, a designated contract market, registered 
derivatives transaction execution facility (``DTEF''), or foreign board 
of trade to continue trading a contract of sale for future delivery on 
a security index that becomes a narrow-based security index during the 
first 30 days after the future begins trading. Similarly, proposed Rule 
41.14 under the CEA would permit a national securities exchange to 
continue trading a contract of sale for future delivery on an index 
that ceases to be a narrow-based security index, subject to certain 
conditions. These rules are intended to minimize market disruption when 
a broad-based security index becomes a narrow-based security index, and 
when a narrow-based security index becomes a broad-based security 
index.
    Finally, proposed Rule 41.13 under the CEA and proposed Rule 3a55-3 
under the Exchange Act would provide that when a futures contract on a 
security index is traded on or subject to the rules of a foreign board 
of trade, that index shall not be considered a narrow-based security 
index if it would not be a narrow-based security index pursuant to the 
statutory definition of a narrow-based security index or the exclusions 
from that definition. These rules would clarify and establish that when 
a futures contract on a security index is traded on or subject to the 
rules of a foreign board of trade, the index underlying such contract 
shall be considered a broad-based security index if it qualifies as 
such pursuant to the statutory definition of narrow-based security 
index, or pursuant to the exclusions from that definition.

DATES: Comments must be received on or before June 18, 2001.

ADDRESSES: Comments should be sent to both agencies at the addresses 
listed below.
    CFTC: Comments should be sent to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581, Attention: Office of the Secretariat. Comments may be sent by 
facsimile transmission to (202) 418-5521, or by e-mail to 
<a href="/cdn-cgi/l/email-protection#483b2d2b3a2d3c293a31082b2e3c2b662f273e"><span class="__cf_email__" data-cfemail="7201171100170613000b32111406115c151d04">[email protected]</span></a>. Reference should be made to ``Narrow-Based Security 
Indexes.''
    SEC: Persons wishing to submit written comments should send three 
copies to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Comments 
also may be submitted electronically at the following e-mail address: 
<a href="/cdn-cgi/l/email-protection#790b0c151c541a1614141c170d0a390a1c1a571e160f"><span class="__cf_email__" data-cfemail="d1a3a4bdb4fcb2bebcbcb4bfa5a291a2b4b2ffb6bea7">[email protected]</span></a>. All comment letters should refer to File No. S7-
11-01; this file number should be included on the subject line if e-
mail is used. Comment letters received will be available for public 
inspection and copying in the SEC's Public Reference Room, 450 Fifth 
Street, NW., Washington, DC 20549-0102. Electronically submitted 
comment letters will be posted on the SEC's Internet web site (http://www.sec.gov). The SEC does not edit personal identifying information, 
such as names or e-mail addresses, from electronic submissions. Submit 
only the information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:
    CFTC: Elizabeth L.R. Fox, Acting Deputy General Counsel; Richard A. 
Shilts, Acting Director; or Thomas M. Leahy, Jr., Financial Instruments 
Unit Chief, Division of Economic Analysis, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Telephone: (202) 418-5000. E-mail: (<a href="/cdn-cgi/l/email-protection#cb8e8da4b38ba8adbfa8e5aca4bd"><span class="__cf_email__" data-cfemail="80c5c6eff8c0e3e6f4e3aee7eff6">[email protected]</span></a>), 
(<a href="/cdn-cgi/l/email-protection#4416172c2d28303704272230276a232b32"><span class="__cf_email__" data-cfemail="dd8f8eb5b4b1a9ae9dbebba9bef3bab2ab">[email protected]</span></a>), or (<a href="/cdn-cgi/l/email-protection#46120a23272e3f062520322568212930"><span class="__cf_email__" data-cfemail="386c745d595041785b5e4c5b165f574e">[email protected]</span></a>).
    SEC: Nancy J. Sanow, Assistant Director, at (202) 942-0771; Ira L. 
Brandriss, Special Counsel, at (202) 942-0148; or Sapna C. Patel, 
Attorney, at (202) 942-0166, Office of Market Supervision, Division of 
Market Regulation, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Commissions are proposing Subparts A and 
B of Rule 41 (Rules 41.1 and 41.2 and Rules 41.10 through 41.14) under 
the CEA,\1\ 17 CFR 41, and Rules 3a55-1 through 3a55-3 under the 
Exchange Act,\2\ 17 CFR 3a55-1 through 3a55-3.\3\
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    \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.
    \3\ Subpart A of proposed Rule 41 under the CEA consists of 
general provisions for purposes of the rule, including definitions 
(Rule 41.1) and recordkeeping requirements (Rule 41.2). Subpart B of 
proposed Rule 41, ``Narrow-Based Security Indexes,'' begins with 
proposed Rule 41.10 on purpose and scope. Proposed Rules 41.11, 
41.12, and 41.13 of Subpart B correspond to proposed Rules 3a55-1, 
3a55-2, and 3a55-3 under the Exchange Act, respectively. Proposed 
Rule 41.14 of Subpart B parallels provisions incorporated in the CEA 
and the Exchange Act by the CFMA.
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Table of Contents

I. Introduction
II. Definition of ``Narrow-Based Security Index''
    A. Indexes Included within the Definition of a Narrow-Based 
Security Index
    B. Indexes Excluded from the Definition of a Narrow-Based 
Security Index
    1. The Index's Component Securities Have High Market 
Capitalization and Dollar Value of Average Daily Trading Volume
    2. A Futures Contract on a Broad-Based Security Index that 
Becomes Narrow-Based
    a. Statutory Grace Period
    b. Proposed Exclusion from the Definition of Narrow-Based 
Security Index During First 30 Days of Trading
    3. Proposed Rule for Futures Contracts Traded on or Subject to 
the Rules of a Foreign Board of Trade

[[Page 27561]]

III. Method for Determining Market Capitalization and Dollar Value 
of Average Daily Trading Volume
    A. Determining Market Capitalization
    B. Determining Dollar Value of Average Daily Trading Volume
    C. Determining Average Daily Trading Volume
    D. Determining Average Price
    1. Basic Definition
    2. Exception Permitting Use of Non-Volume-Weighted Average Price 
for Certain Calculations
    E. Component Securities of an Index that Trade in Foreign 
Markets
    F. Determining ``the Preceding 6 Full Calendar Months''
    G. The Lowest Weighted 25% of an Index
IV. Transitional Exemption for Broad-Based Index Futures
V. Request for Comments
VI. Paperwork Reduction Act
    CFTC:
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    1. Capital Costs
    2. Burden Hours
    E. General Information About the Collection of Information
    F. Request for Comment
    SEC:
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    1. Capital Costs
    2. Burden Hours
    E. General Information About the Collection of Information
    F. Request for Comment
VII. Costs and Benefits of the Proposed Rules
    CFTC
    SEC:
    A. Benefits
    B. Costs
VIII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation
IX. Regulatory Flexibility Act Certifications
    CFTC
    SEC
X. Statutory Bases and Text of Proposed Rules

I. Introduction

    The CFMA,\4\ which became law on December 21, 2000, lifted the ban 
on single stock and narrow-based stock index futures (``security 
futures''). In addition, the CFMA established a framework for the joint 
regulation of these newly-permissible products by the CFTC and the SEC.
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    \4\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
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    Prior to enactment of the CFMA, the Shad-Johnson Accord 
(``Accord'') governed trading in contracts of sale for future delivery 
(``futures contracts'' or ``futures'') on securities and security 
indexes. Negotiated by the Chairmen of the SEC and the CFTC in 1982 and 
signed into law in 1983, the Accord permitted futures exchanges to 
offer futures contracts on security indexes if the contracts satisfied 
certain statutory criteria: (1) the contract had to be cash-settled; 
(2) the contract could not be readily susceptible to manipulation; and 
(3) the underlying securities had to measure and reflect the entire 
market or a substantial segment of the market, i.e., it was a contract 
on a ``broad-based'' security index.\5\ The Accord prohibited any 
futures contracts on security indexes that did not meet these criteria.
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    \5\ Section 2(a)(1)(B) of the CEA implemented the terms of the 
1982 jurisdictional accord between the SEC and the CFTC. Futures 
Trading Act of 1982 Section 101, Publ. Law. No. 97-444, 96 Stat 2294 
[codified at 7 U.S.C. Section 2(a)], repealed by the Commodity 
Futures Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 
2763 (2000).
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    In addition to repealing the prohibition on certain types of 
security futures, the CFMA amended the CEA and the Exchange Act by 
adding a definition of ``narrow-based security index.'' This definition 
establishes an objective test of whether a security index is narrow-
based.\6\ Futures contracts on security indexes that are narrow-based 
security indexes will be jointly regulated by the CFTC and the SEC 
under the framework established by the CFMA.\7\ Futures contracts on 
indexes that are broad-based security indexes,\8\ on the other hand, 
are under the sole jurisdiction of the CFTC and, therefore, only 
designated contract markets, registered derivatives transaction 
execution facilities (``DTEFs''), and foreign boards of trade may trade 
these products.
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    \6\ See Section 1a(25) of the CEA and Section 3(a)(55) of the 
Exchange Act.
    \7\ No person may execute or trade a security future product 
until the later of December 21, 2001 or such date that a futures 
association registered under Section 17 of the CEA meets the 
requirements in Section 15A(k)(2) of the Exchange Act, except that 
beginning on August 21, 2001, eligible contract participants may 
enter into transactions with each other on a principal-to-principal 
basis.
    \8\ Use of the term ``broad-based security index'' in this 
release means a security index that is not a narrow-based security 
index.
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    For this reason, it is important that the definition of ``narrow-
based security index'' in the CEA and the Exchange Act be easily 
understood and applied by market participants. As directed by the CFMA, 
the rules jointly proposed today by the Commissions specify the method 
to be used to determine market capitalization and dollar value of 
average daily trading volume for purposes of the new definition of 
``narrow-based security index.'' \9\
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    \9\ Section 1a(25)(E) of the CEA and Section 3(a)(55)(F) of the 
Exchange Act.
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    The proposed rules would also establish provisions governing 
certain circumstances when narrow-based security indexes become broad-
based, and when broad-based security indexes become narrow-based.

II. Definition of ``Narrow-Based Security Index''

    The CFMA amended the definition of ``security'' in the Exchange 
Act,\10\ the Securities Act of 1933 (``Securities Act''),\11\ the 
Investment Company Act of 1940 (``Investment Company Act''),\12\ and 
the Investment Advisers Act of 1940 (``Investment Advisers Act'') \13\ 
to include a ``security future.'' For purposes of each of those Acts, 
as well as the CEA, ``security future'' is defined, in relevant part, 
as ``a contract of sale for future delivery of a single security or of 
a narrow-based security index.'' \14\ The definition of ``narrow-based 
security index'' in the CEA and the Exchange Act is the focus of this 
release.\15\
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    \10\ Section 3(a)(10) of the Exchange Act.
    \11\ Section 2(a)(14) of the Securities Act, 15 U.S.C. 
77b(a)(14).
    \12\ Section 2(a)(36) of the Investment Company Act, 15 U.S.C. 
80a-2(a)(36).
    \13\ Section 202(a)(18) of the Investment Advisers Act, 15 
U.S.C. 80b-2(a)(18).
    \14\ The term ``security future'' is defined in Section 
3(a)(55)(A) of the Exchange Act. This definition is incorporated by 
reference in Section 2(a)(16) of the Securities Act, 15 U.S.C. 
77b(a)(16); Section 2(a)(52) of the Investment Company Act, 15 
U.S.C. 80a-2(a)(52); and Section 202(a)(27) of the Investment 
Advisers Act, 15 U.S.C. 80b-2(a)(27). ``Security future'' is also 
defined in Section 1a(31) of the CEA.
    \15\ See Section 3(a)(55) of the Exchange Act. The definition of 
``narrow-based security index'' in the Exchange Act is incorporated 
by reference in Section 2(a)(16) of the Securities Act, 15 U.S.C. 
77b(a)(16); Section 2(a)(52) of the Investment Company Act, 15 
U.S.C. 80a-2(a)(52); and Section 202(a)(27) of the Investment 
Advisers Act, 15 U.S.C. 80b-2(a)(27). ``Narrow-based security 
index'' is also defined in Section 1a(25) of the CEA.
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A. Indexes Included within the Definition of a Narrow-Based Security 
Index

    Under the CEA and the Exchange Act, an index is a ``narrow-based 
security index'' if it has any one of the following four 
characteristics: (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

[[Page 27562]]

securities, $30 million).\16\ An index that has none of the four 
characteristics set forth above is not a ``narrow-based security 
index.'' Accordingly, any contract of sale for future delivery on such 
an index would not be a security future and thus would be subject to 
the sole jurisdiction of the CFTC.\17\
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    \16\ Section 1a(25)(A)(i)--(iv) of the CEA and Section 
3(a)(55)(B)(i)--(iv) of the Exchange Act.
    \17\ See Section 2(a)(1)(C)(ii) of the CEA. A contract of sale 
for future delivery on a security index that is not a narrow-based 
security index may include component securities that are not 
registered under Section 12 of the Exchange Act.
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    With regard to the fourth test noted above, i.e., whether an index 
is a ``narrow-based security index'' based on the dollar value of ADTV 
of the lowest weighted securities in the index, the CEA and the 
Exchange Act require the CFTC and SEC to jointly specify the method of 
determining the dollar value of average daily trading volume, and 
mandate that this value be calculated as of the ``preceding 6 full 
calendar months.'' \18\ The proposed rules discussed below in Part III. 
of this release specify such a method and define the terms ``preceding 
6 full calendar months'' and ``lowest weighted 25% of the index's 
weighting'' as those terms are used in the proposed rules.
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    \18\ Section 1a(25)(E) of the CEA and Section 3(a)(55)(F) of the 
Exchange Act.
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B. Indexes Excluded from the Definition of a Narrow-Based Security 
Index

    In addition to defining an index as narrow-based if the index has 
any of the characteristics described above, the definition of ``narrow-
based security index'' in the CEA and Exchange Act excludes from its 
scope indexes that satisfy certain criteria. Any contract of sale for 
future delivery on an index excluded from the definition, as described 
below, is not a security futures product under the securities laws, and 
thus would be subject solely to the jurisdiction of the CFTC.
1. The Index's Component Securities Have High Market Capitalization and 
Dollar Value of Average Daily Trading Volume
    Under the CEA and the Exchange Act, an index is not a ``narrow-
based security index'' if it has all of the following characteristics: 
(1) it has at least nine component securities; (2) no component 
security comprises more than 30% of its weighting; (3) each of its 
component securities is registered under Section 12 of the Exchange 
Act; and (4) each component security is one of 750 securities with the 
largest market capitalization (``Top 750'') and one of 675 securities 
with the largest dollar value of ADTV (``Top 675'').\19\
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    \19\ Section 1a(25)(B)(i) of the CEA and Section 3(a)(55)(C)(i) 
of the Exchange Act.
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    The CEA and the Exchange Act require the Commissions to jointly 
specify the method to be used to determine market capitalization and 
dollar value of ADTV for purposes of this exclusion from the definition 
of ``narrow-based security index.'' \20\ These values are to be 
calculated as of the preceding 6 full calendar months.\21\ The rules 
the Commissions are proposing today specify the methods to determine 
these values, and are discussed below in Part III.
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    \20\ Section 1a(25)(E) of the CEA and Section 3(a)(55)(F) of the 
Exchange Act.
    \21\ Id.
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    To assure that a futures contract on a security index qualifies for 
this exclusion, a designated contract market, registered DTEF, or 
foreign board of trade trading the futures contract must calculate both 
the Top 750 and Top 675 securities based on market capitalization and 
dollar value of ADTV, respectively, for the preceding 6 full calendar 
months, in addition to assessing compliance with the exclusion's other 
criteria.\22\
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    \22\ As a general matter, any national securities exchange, 
designated contract market, registered DTEF, or foreign board of 
trade that trades a futures contract on a security index will be 
required to determine whether or not the contract is a security 
future to assure that the market is in compliance with the CEA and 
the Exchange Act. The Commissions note that national securities 
exchanges, designated contract markets, or registered DTEFs that 
trade security index futures will need to preserve records of all 
their determinations with respect to the daily narrow-based or non-
narrow-based status of security indexes in order to comply with 
their recordkeeping requirements under Sections 5(d)(17) and 
5a(d)(8) of the CEA and proposed Rule 41.2 under the CEA, and Rule 
17a-1 under the Exchange Act, 17 CFR 240.17a-1.
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    Q1: The Commissions request comment on whether it would be 
difficult for market participants to determine the Top 750 and Top 675 
out of all securities registered under Section 12 of the Exchange Act. 
Should the Commissions establish, by rule, a subset of Section 12-
registered securities from which market participants would have to 
determine the Top 750 and Top 675? If so, what should this subset of 
securities be? For example, would it be appropriate to limit the 
universe of securities from which market participants determine the Top 
750 and Top 675 to the securities traded on the New York Stock 
Exchange, the Nasdaq National Market System, and the American Stock 
Exchange? Is there another subset that would be more appropriate, such 
as the securities comprising the Russell 3000 Index?
    Q2: The Commissions also request comment on whether they should 
undertake to determine the Top 750 and Top 675. For example, should the 
Commissions determine these securities and make these lists publicly 
available? If the Commissions do this, how often should the Top 750 and 
Top 675 be determined and published? Monthly? Quarterly? More or less 
often? If the Commissions do publish such lists, they would have to 
establish a rule that any security that appears on both the Top 750 and 
Top 675 list would be deemed to be one of the Top 750 and Top 675 
securities every day during the period in which these lists were 
publicly available. Conversely, any security that did not appear on the 
lists would be deemed not to satisfy paragraph (B)(i)(III) of Section 
1a(25) of the CEA and paragraph (C)(i)(III) of Section 3(a)(55) of the 
Exchange Act. The Commissions solicit commenters' views on the benefits 
and drawbacks of this approach and on any preferable methods for the 
Commissions to determine the Top 750 and the Top 675.
    Q3: Are there any other approaches or issues that the Commissions 
should consider with respect to determining the Top 750 and Top 675?
2. A Futures Contract on a Broad-Based Security Index that Becomes 
Narrow-Based
a. Statutory Grace Period
    If a futures contract were trading on an index that was broad-based 
for at least 30 days and subsequently the index became a narrow-based 
security index, the index is excluded from the definition of a 
``narrow-based security index'' if it is narrow-based for 45 or fewer 
business days over the course of three consecutive calendar months. If 
the index is a ``narrow-based security index'' for more than 45 
business days over three consecutive calendar months, the index is a 
``narrow-based security index,'' but the Exchange Act and the CEA 
provide a temporary grace period of three months before the futures 
contract becomes a security future.\23\ In contrast, under these 
statutory provisions, if the futures contract has been trading for 
fewer than 30 days as a contract of sale for future delivery on an 
index that is not a ``narrow-based security index,'' the future would 
become a security futures product immediately if the index satisfies 
any of the criteria set forth in Section 1a(25)(A) of the CEA and 
Section 3(a)(55)(B) of the Exchange Act.\24\
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    \23\ Section 1a(25)(D) of the CEA and Section 3(a)(55)(E) of the 
Exchange Act.
    \24\ See supra note 16 and accompanying text.

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[[Page 27563]]

    If a security index on which a futures contract is trading became 
narrow-based for more than 45 days over three consecutive months, and 
thus pursuant to Section 1a(25)(D) of the CEA and Section 3(a)(55)(E) 
of the Exchange Act becomes narrow-based, the Commissions believe that 
in order for trading to continue to be regulated exclusively by the 
CFTC, the designated contract market, registered DTEF, or foreign board 
of trade trading the contract would be required, before the temporary 
three-month grace period elapses, to change the composition of, or 
weightings of securities in, the index so that the index is not a 
narrow-based security index. Alternatively, the designated contract 
market, registered DTEF, or foreign board of trade trading a futures 
contract on such index could comply with the requirements of the 
securities laws applicable to security futures products.
    Q4: Should the Commissions specify expressly the extent of changes 
a designated contract market, registered DTEF, or foreign board of 
trade needs to make to an index before the end of the temporary three-
month grace period so that it does not need to comply with the 
securities laws applicable to markets trading security futures 
products? If so, commenters are asked for their views on what types of 
changes should be required.
b. Proposed Exclusion from the Definition of Narrow-Based Security 
Index During First 30 Days of Trading
    To address the potential dislocation of market participants trading 
a future on an index that becomes narrow-based during the first 30 days 
of trading, and thus does not qualify for the statutory grace period 
under Section 1a(25)(D) of the CEA and Section 3(a)(55)(E) of the 
Exchange Act, the Commissions are proposing Rule 41.12 under the CEA 
and Rule 3a55-2 under the Exchange Act. These rules are being proposed 
pursuant to paragraph (vi) of Section 1a(25)(B) of the CEA and Section 
3(a)(55)(C) of the Exchange Act, which permit the Commissions to 
establish, by rule, requirements for futures contracts on indexes that, 
if met, would provide additional exclusions from the definition of a 
``narrow-based security index.'' \25\
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    \25\ Section 1a(25)(B)(vi) of the CEA and Section 
3(a)(55)(C)(vi) of the Exchange Act provide that notwithstanding the 
definition of narrow-based security index, an index is not a narrow-
based security if a futures contract 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 by [the 
Commissions].''
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    Specifically, the proposed rules would provide an exclusion from 
the definition of narrow-based security index for a futures contract 
that began trading on a security index that was not narrow-based and 
became narrow-based during the first 30 days after it began trading, if 
the index would not have been a narrow-based index, had it been in 
existence, for an uninterrupted period of 6 months prior to the first 
day of trading. The Commissions preliminarily believe that this six-
month period is appropriate as an indication that the change in the 
index's character during the first 30 days was an anomaly, so that a 
temporary exclusion from the definition of a narrow-based security 
index is warranted.
    The proposed rules provide, however, that an index that is not a 
narrow-based security index for the first 30 days of trading, as 
discussed above, would become a narrow-based security index if it has 
been a narrow-based security index for more than 45 business days over 
three consecutive calendar months, and would be a security future, with 
the attendant legal obligations, following an additional three-month 
grace period.
    Q5: The Commissions request commenters to provide their views on 
proposed Rule 41.12 under the CEA and proposed Rule 3a55-2 under the 
Exchange Act. In particular, the Commissions request comment on their 
proposal that an index not be narrow-based for 6 months prior to a 
futures contract on such index commencing to trade in order for the 
exclusion in these proposed rules to apply. Is 6 months the appropriate 
time frame?
3. Proposed Rule for Futures Contracts Traded on or Subject to the 
Rules of a Foreign Board of Trade
    As noted above, the statutory definition of narrow-based security 
index set forth in Section 1a(25)(A) of the CEA and Section 3(a)(55)(B) 
of the Exchange Act, and the exclusions from that definition provided 
by Section 1a(25)(B) of the CEA and Section 3(a)(55)(C) of the Exchange 
Act, in effect also define a broad-based security index. The federal 
securities laws do not apply to futures contracts on broad-based 
security indexes. Prior to the enactment of the CFMA, futures contracts 
on broad-based security indexes were reviewed by both the CFTC and the 
SEC to ensure compliance with the provisions of the Shad-Johnson 
Accord. Specifically, this review evaluated whether the contract was 
cash-settled, not readily susceptible to manipulation, and represented 
a broad market segment. The CFMA altered the statutory requirements for 
approval of broad-based indexes such that no approval or review is 
required by the SEC for these products.
    With regard to security index futures traded on or subject to the 
rules of foreign boards of trade, the Commissions believe that security 
indexes underlying such contracts should be considered broad-based 
security indexes if they qualify as such pursuant to the statutory 
definition of a narrow-based index, or pursuant to the exclusions from 
that definition. The Commissions are proposing Rule 41.13 under the CEA 
and Rule 3a55-3 under the Exchange Act to clarify and establish that 
when a futures contract on an index is traded on or subject to the 
rules of a foreign board of trade, such index would not be a narrow-
based security index (i.e., it would be broad-based) if it would not be 
a narrow-based security index if a futures contract on such index were 
traded on a designated contract market or registered DTEF.\26\ The 
Commissions recognize their obligation to jointly adopt rules or 
regulations that set forth the requirements that a futures contract on 
a security index traded on or subject to the rules of a foreign board 
of trade must meet in order for the index to be excluded from the 
definition of narrow-based security index and request comment on how 
rules relating to foreign broad-based indexes should address issues 
specific to indexes traded on or subject to the rules of a foreign 
board of trade.
---------------------------------------------------------------------------

    \26\ Section 1a(25)(B)(iv) of the CEA and Section 
3(a)(55)(C)(iv) of the Exchange Act grant the Commissions joint 
authority to exclude an index underlying a futures contract from the 
definition of narrow-based security index when that index is traded 
on or subject to the rules of a foreign board of trade and meets 
such requirements that are established by rule or regulation jointly 
by the Commissions.
---------------------------------------------------------------------------

    Additionally, the Commissions note that Section 1a(25)(B)(v) of the 
CEA and Section 3(a)(55)(C)(v) of the Exchange Act create a 
``grandfather'' provision that permits the offer and sale in the United 
States of security index futures traded on or subject to the rules of 
foreign boards of trade that were authorized by the CFTC before the 
CFMA was enacted.\27\ This ``grandfather'' provision is in effect for 
18 months after the CFMA's enactment, after which such indexes will be 
subject

[[Page 27564]]

to the ongoing requirements of the CEA and any new standard in effect 
thereafter.
---------------------------------------------------------------------------

    \27\ Certain such futures contracts are currently offered to 
U.S. customers pursuant to no-action letters by the CFTC staff, to 
which the SEC did not object. The Commissions note that some of the 
index futures trading on or subject to the rules of foreign boards 
of trade that are trading pursuant to such no-action letters would 
not be considered to be broad-based index futures under Sections 
1a(25)(A) or 1a(25)(B)(i) of the CEA and Sections 3(a)(55)(B) or 
3(a)(55)(C)(i) of the Exchange Act.
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    The Commissions have identified and request comment on the 
following issues:
    Q6: The Commissions ask for comment on their proposed rules. As 
noted above, the Commissions propose that the statutory definition of 
narrow-based security index under Section 1a(25)(A) of the CEA and 
Section 3(a)(55)(B) of the Exchange Act and the exclusion under Section 
1a(25)(B)(i) of the CEA and Section 3(a)(55)(C)(i) of the Exchange Act 
would be applicable to futures on indexes traded on or subject to the 
rules of a foreign board of trade, including indexes comprised of 
domestic securities as well as those that are comprised primarily of 
securities traded on foreign markets. Would it be appropriate for the 
statutory definition and exclusion to be the sole criteria for index 
futures traded on or subject to the rules of a foreign board of trade? 
\28\ If not, what issues should be considered in order to develop an 
additional exclusion from the statutory definition to describe whether 
an index that underlies a future trading on or subject to the rules of 
a foreign board of trade is broad-based?
---------------------------------------------------------------------------

    \28\ The Commissions note that currently some futures contracts 
on indexes traded on or subject to the rules of foreign boards of 
trade are excluded from the definition of narrow-based security 
index solely under the ``grandfather'' provisions in Section 
1a(25)(B)(v) of the CEA and Section 3(a)(55)(C)(v) of the Exchange 
Act, which terminate on June 21, 2002.
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    Q7: What criteria should be set forth for futures on indexes traded 
on or subject to the rules of a foreign board of trade in order for 
such indexes to be considered broad-based? For example, commenters are 
asked for their views regarding criteria for the depth of the market, 
the concentration of the component securities, the permissibility of 
any affiliation among the issuers of component securities, the 
liquidity of component securities, and any other factors.
    Q8: What provisions should be included to assure the accuracy of 
the information that is used to determine that the index is broad-
based, in view of the fact that certain key data regarding such foreign 
securities is often not required to be disclosed.
    Q9: If commenters believe that an additional exclusion is 
warranted, what are the unique characteristics of foreign securities 
and foreign securities markets that would argue in favor of a different 
standard for determining whether an index comprised of such securities 
is broad-based? Commenters are also requested to provide their views on 
the impact of such a different standard on investor protection. Taking 
into account the nature and size of the markets for the securities 
underlying the index, is it appropriate to consider indexes comprised 
of foreign securities to be broad-based where those indexes are more 
concentrated in one or a few securities? Is it appropriate to consider 
indexes comprised of foreign securities to be broad-based, considering 
the nature and size of the underlying securities markets, if they are 
comprised of less liquid securities than would be permitted in a broad-
based index, pursuant to the statutory definition of narrow-based 
security index? If so, please indicate why this is appropriate.
    Q10: If a rule is adopted providing an additional exclusion from 
the definition of narrow-based security index for an index underlying a 
futures contract traded on or subject to the rules of a foreign board 
of trade, how should the Commissions address any potential competitive 
disadvantage to U.S. securities exchanges, alternative trading systems, 
designated contract markets, or registered DTEFs that might result from 
an additional exclusion?
    Q11: How can the Commissions craft rules that avoid potential 
uncertainty as to the characterization of an index on an ongoing basis? 
How can the Commissions best design criteria that remain sound over 
time and do not introduce unforeseeable uncertainties into the 
regulatory and trading framework?
    Q12: As noted above, certain futures contracts on indexes of 
foreign securities that are currently traded on foreign boards of trade 
(and in some cases, domestic contract markets) have been permitted to 
be offered to U.S. customers under CFTC no-action relief granted under 
standards that required such indexes to represent a broad segment of 
the cash market; the SEC did not object to such relief. Some of these 
indexes may become narrow-based security indexes in the absence of the 
``grandfather'' provision described above. Would it be appropriate for 
the Commissions to use their authority under Section 1a(25)(B)(vi) of 
the CEA and Section 3(a)(55)(C)(vi) to jointly establish rules 
excluding such indexes or exclude such indexes by order?
    Q13: The SEC asks for comment on whether an additional exclusion 
from the definition of narrow-based security index for index futures 
contracts traded on or subject to the rules of foreign boards of trade 
would be consistent with the purposes of the federal securities laws.

III. Method for Determining Market Capitalization and Dollar Value 
of Average Daily Trading Volume

A. Determining Market Capitalization

    As discussed above, an index is not a ``narrow-based security 
index'' under paragraph (B)(i) of Section 1a(25) of the CEA and 
paragraph (C)(i) of Section 3(a)(55) of the Exchange Act if, among 
other things, all of its component securities are among the Top 750 
securities in terms of market capitalization. The Commissions are 
jointly proposing new rules under the CEA and the Exchange Act that 
would set forth the method for determining the market capitalization of 
a security.\29\
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    \29\ The proposed method would apply only to calculating market 
capitalization of a security to determine whether it is a Top 750 
security. Because the CFMA directs the two Commissions to specify a 
method for calculating market capitalization solely for this 
purpose, the sponsor or compiler of an index otherwise categorized 
as a market capitalization-weighted index would not be required to 
use the proposed method to determine the relative weightings of the 
index's component securities. See Section 1a(25)(E)(ii) of the CEA 
and Section 3(a)(55)(F)(ii) of the Exchange Act.
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    Paragraph (a)(1) of proposed Rule 41.11 under the CEA and proposed 
Rule 3a55-1 under the Exchange Act would establish that market 
capitalization is the product of: (1) the number of outstanding shares 
of the security as reported in the most recent quarterly or annual 
report of the company \30\--'i.e., Form 10-Q, 10-K, 10-QSB, 10-KSB, or 
20-F; \31\ and (2) the average price of the security over the preceding 
6 full calendar months. The definitions of ``average price'' of a 
security and ``preceding 6 full calendar months'' are discussed in 
Parts III.D. and III.F. below.\32\
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    \30\ To rely on this exclusion from the definition of narrow-
based security index, all the component securities of an index must 
be registered pursuant to Section 12 of the Exchange Act. See 
Section 1a(25)(B)(i)(III)(aa) of the CEA and Section 
3(a)(55)(C)(i)(III)(aa) of the Exchange Act. Therefore, information 
regarding the number of outstanding shares will be contained in the 
company's annual and periodic reports.
    \31\ 17 CFR Sections 249.308a, 249.310, 249.308b, 249.310b, and 
249.220f.
    \32\ See infra notes 40-41 and 48-49 and accompanying text.
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    A national securities exchange, designated contract market, 
registered DTEF, or foreign board of trade that trades or proposes to 
trade a futures contract on a security index may contract with an 
outside party to supply the information and data analysis required to 
determine market capitalization. For example, the market trading the 
futures contract may have a contract with a data vendor that supplies 
transaction information through an electronic medium.

[[Page 27565]]

However, in these circumstances, the market would be responsible for 
determining that the calculation by the outside party is consistent 
with the Commissions' proposed rules.
    Q14: The Commissions solicit comment on their proposed method for 
calculating the market capitalization of a security. In particular, are 
there other methods of calculating the market capitalization of a 
security that would be better for market participants to use? If so, 
are these alternatives as appropriate as the method proposed by the 
Commissions?
    Q15: The Commissions also solicit comment on whether relying on the 
information reported by issuers to the SEC is the best way to determine 
the number of outstanding shares of a security.
    Q16: It is possible that a corporate event affecting the number of 
shares outstanding of a security, such as a stock split, stock 
dividend, stock buyback, or merger, can occur after the filing by its 
issuer of an annual or periodic report. This may be particularly 
relevant in the case of foreign issuers that file with the SEC just 
once a year. Should the proposed rule specifically address such events, 
and, if so, how? For example, should national securities exchanges, 
designated contract markets, registered DTEFs, and foreign boards of 
trade be permitted to or be required to rely on updated information 
contained in any subsequent Form 8-K \33\ filed by the issuer, or on 
more current information submitted to the primary market center for the 
underlying security? Are there reliable means other than SEC annual, 
periodic, and current reports to determine the current number of shares 
outstanding of a security in the event of a corporate event that 
results in a change in the number of outstanding shares?
---------------------------------------------------------------------------

    \33\ 17 CFR 249.308.
---------------------------------------------------------------------------

    Q17: The Commissions solicit comment on whether they should permit 
a national securities exchange, designated contract market, registered 
DTEF, or foreign board of trade to rely on an independent calculation 
of the market capitalization of a security by a third party. Should 
there be any conditions imposed when such a third party is used?
    Q18: Do third parties, such as data vendors, calculate market 
capitalization using a different method than that proposed by the 
Commissions? If so, what are these methods? Should the Commissions 
incorporate these methods into the proposed rules? What would be the 
impact of any variation that may result if the same calculations are 
made based on slightly different information?
    Q19: If national securities exchanges, designated contract markets, 
registered DTEFs, and foreign boards of trade rely on the calculations 
of third parties, should those third parties be required to meet 
certain qualification standards? For example, should third parties be 
qualified only if data dissemination and calculation is part of their 
regular business? Should notification to the Commissions be required if 
a third party's calculations are used?

B. Determining Dollar Value of Average Daily Trading Volume

    Dollar value of ADTV is used in two provisions of the definition of 
``narrow-based security index.'' \34\ As required by the CFMA, the 
Commissions are proposing rules that would set forth the method for 
determining an individual security's dollar value of ADTV. 
Specifically, paragraph (a)(2) of proposed Rule 41.11 under the CEA and 
proposed Rule 3a55-1 under the Exchange Act would establish that dollar 
value of ADTV is the product of: (1) the average daily trading volume 
of the security over the preceding 6 full calendar months; and (2) the 
average price of the security over the preceding 6 full calendar 
months.
---------------------------------------------------------------------------

    \34\ Section 1a(25)(A)(iv) and (B)(i) of the CEA and Section 
3(a)(55)(B)(iv) and (C)(i) of the Exchange Act.
---------------------------------------------------------------------------

    The Commissions believe that multiplying a security's average daily 
trading volume over the preceding 6 full calendar months by its average 
price over the same period is a reasonable and simple method to use to 
determine the dollar value of its ADTV. The definitions of ``average 
price'' of a security and ``preceding 6 full calendar months,'' are 
discussed in Parts III.D. and III.F. below.
    A national securities exchange, designated contract market, 
registered DTEF, or foreign board of trade that trades or proposes to 
trade a futures contract on a security index may contract with a third 
party information provider to calculate, or provide the information 
necessary to calculate, the dollar value of ADTV. The market, however, 
would be responsible for determining that such calculation is 
consistent with the Commissions' proposed rules.
    Q20: The Commissions solicit comments on their proposed method of 
calculating a security's dollar value of ADTV.
    Q21: The Commissions are also interested in commenters' views on 
whether alternative ways to calculate this value would be more accurate 
or less burdensome to compute. For example, should the dollar value of 
ADTV of a security be calculated by multiplying the number of shares in 
each transaction by the price at which the transaction took place, then 
summing these values for each day in the six-month period, and finally 
dividing that sum by the number of trading days in the six-month 
period?
    Q22: While the security of an issuer that underlies an American 
Depository Receipt (``ADR'') must be registered under Section 12 of the 
Exchange Act, the ADR itself is deemed to be a separate security and is 
exempt from registration under Section 12. The Commissions solicit 
comments on whether, when determining the ADTV of a security, the ADTV 
of ADRs representing shares of such security should be included. The 
Commissions also solicit comment on whether, when determining average 
price of a security, the average price, on a proportional basis, of 
ADRs representing shares of such security should be considered.
    Q23. For purposes of the exclusion from the definition of narrow-
based security index in Section 1a(25)(B)(i) of the CEA and Section 
3(a)(55)(C)(i) of the Exchange Act, should an ADR be considered 
registered pursuant to Section 12 of the Exchange Act if its underlying 
security is so registered?
    Q24: The Commissions solicit comment on whether they should permit 
a national securities exchange, designated contract market, registered 
DTEF, or foreign board of trade to rely on an independent calculation 
of the dollar value of ADTV of a security by a third party. Should 
there be any conditions imposed when such a third party is used?
    Q25: Do third parties, such as data vendors, calculate dollar value 
of ADTV using a different method than that proposed by the Commissions? 
If so, what are those methods? Should the Commissions incorporate these 
methods into the proposed rules? What would be the impact of any 
variation that may result if the same calculations are made based on 
slightly different information?
    Q26: If national securities exchanges, designated contract markets, 
registered DTEFs, and foreign boards of trade rely on the calculations 
of third parties, should those third parties be required to meet 
certain qualification standards? For example, should third parties be 
qualified only if data dissemination and calculation is part of their 
regular business? Should notification to the Commissions be required if 
a third party's calculations are used?

[[Page 27566]]

C. Determining Average Daily Trading Volume

    Paragraph (b)(1) of Proposed Rule 41.11 under the CEA and proposed 
Rule 3a55-1 under the Exchange Act would define the ADTV of a security 
as the total number of shares of such security traded on the trading 
days of the principal market for the security \35\ during the preceding 
6 full calendar months divided by the number of trading days on the 
principal market for the security during the same period.\36\ The 
inclusion of foreign trading data is discussed in Part III.E. 
below.\37\
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    \35\ The principal market for a security is proposed to mean the 
single market with the largest aggregate reported trading volume for 
the security during the preceding 6 full calendar months. See 
Paragraph (b)(7) of proposed Rule 41.11 under the CEA and proposed 
Rule 3a55-1 under the Exchange Act.
    \36\ See below in Part III.E. regarding the proposed limitation 
of trading days to ``trading days of the principal market for the 
security.''
    \37\ See infra notes 42-47 and accompanying text.
---------------------------------------------------------------------------

    Q27: The Commissions request comment on the proposed definition of 
ADTV.
    Are there other, more appropriate ways to determine ADTV?

D. Determining Average Price

1. Basic Definition
    The proposed methods for determining market capitalization and 
dollar value of ADTV require assessing the average price of a security 
over the preceding 6 full calendar month period. Paragraph (b)(2)(i) of 
proposed Rule 41.11 under the CEA and proposed Rule 3a55-1 under the 
Exchange Act would establish a method that takes into account the 
number of shares in each transaction in calculating the average price 
of a security. This method, often termed ``volume-weighted average 
price,'' would require that there first be established a value for each 
transaction, by multiplying the price per share in U.S. dollars of each 
transaction by the number of shares traded in that transaction. Then, 
the sum of these values for all the transactions in the security during 
the 6-month period is divided by the total number of shares traded 
during that period. The inclusion of foreign trading data is discussed 
in Part III.E. below.\38\
---------------------------------------------------------------------------

    \38\ Id.
---------------------------------------------------------------------------

    Q28: The Commissions request commenters' views on the proposed 
method for calculating a security's ``average price.'' Are there other 
methods that would be more appropriate? For example, another way to 
determine ``average price'' is to use the closing price of the security 
for each day of the preceding 6 full calendar months averaged over that 
same 6-month period. Should the rules permit the use of the average 
closing price of a security to calculate dollar value of ADTV instead 
of requiring an overall average price based on transactions throughout 
the day?
    Q29: Do third parties, such as data vendors, calculate the average 
price of a security using a different method than that proposed by the 
Commissions? If so, what are those methods? Should the Commissions 
incorporate these methods into the proposed rules?
    Q30: If national securities exchanges, designated contract markets, 
registered DTEFs, and foreign boards of trade rely on the calculations 
of third parties, should those third parties be required to meet 
certain qualification standards? For example, should third parties be 
qualified only if data dissemination and calculation is part of their 
regular business? Should notification to the Commissions be required if 
a third party's calculations are used?
2. Exception Permitting Use of Non-Volume-Weighted Average Price for 
Certain Calculations
    Paragraph (b)(2)(ii) of proposed Rule 41.11 under the CEA and 
proposed Rule 3a55-1 under the Exchange Act would permit the use of a 
non-volume-weighted average price under certain conditions. 
Specifically, for purposes of determining whether the dollar value of 
ADTV of the lowest weighted 25% of a security index exceeds the 
statutory threshold \39\ of $50 million (or $30 million for indexes 
with 15 or more component securities), national securities exchanges, 
designated contract markets, registered DTEFs, and foreign boards of 
trade would be permitted to use an average price for each component 
security defined as the average price level at which transactions in 
the security took place over the six-month period, irrespective of the 
number of shares traded in each transaction.\40\
---------------------------------------------------------------------------

    \39\ See Section 1a(25)(A)(iv) of the CEA and Section 
3(a)(55)(B)(iv) of the Exchange Act.
    \40\ Id.
---------------------------------------------------------------------------

    Such non-volume-weighted average price may be easier to calculate 
than a volume-weighted average price, and the Commissions preliminarily 
believe that it would be a reasonable alternative for purposes of this 
one aspect of the statutory definition of narrow-based security 
index.\41\ However, because the method does not take into account the 
volume of shares traded at each price, and thus yields only an 
approximation of a security's true average price, the Commissions are 
proposing to permit its use subject to a limitation.
---------------------------------------------------------------------------

    \41\ The Commissions do not believe it appropriate to permit the 
use of an alternative method to true, volume-weighted average price 
for purposes of the other statutory tests that require the use of 
average price. If a choice of methods was permitted for these other 
tests--which require determining whether a security is one of the 
Top 750 and Top 675 securities in terms of market capitalization and 
dollar value of ADTV--different markets might arrive at different 
lists of the Top 750 and Top 675 securities. As a result, the same 
index could be deemed a narrow-based security index in one market 
and a broad-based index in another.
---------------------------------------------------------------------------

    Sometimes, the dollar value of ADTV of the lowest weighted 25% of 
an index, when based on the non-volume-weighted average price of each 
security comprising it, may exceed the statutory threshold, while the 
real dollar value of its ADTV--based on the more exact, volume-weighted 
figures for average price of each security--falls short. Accordingly, 
paragraphs (a)(2)(iii) and (b)(2)(ii) of proposed Rule 41.11 under the 
CEA and proposed Rule 3a55-1 under the Exchange Act would stipulate 
that this method may be used only when the dollar value of ADTV of the 
lowest weighted 25% of an index based on this method equals or exceeds 
$55 million (or $33 million for indexes with 15 or more component 
securities)--i.e., it exceeds the statutory thresholds of $50 million 
(or $30 million for indexes with 15 or more component securities) by at 
least 10%. If it does not, the average price of securities must be 
calculated using the volume-weighted average price method in paragraph 
(a)(2)(i) of the proposed rules. The Commissions preliminarily believe 
that when the dollar value of ADTV of a security index exceeds the $50 
million threshold (or the $30 million threshold, as the case may be) by 
10% when using the non-volume weighted price, the security index would 
most likely exceed those thresholds if the volume-weighted average 
price test was used.
    Q31: The Commissions request comment on this proposed alternative 
method for calculating average price for purposes of determining 
whether the dollar value of ADTV of the lowest weighted 25% of an index 
equals or exceeds $55 million (or $33 million, for indexes with 15 or 
more component securities). Is the 10% threshold appropriate? Should it 
be higher or lower?

E. Component Securities of an Index That Trade in Foreign Markets

    Security indexes may contain a number of securities that are 
registered under Section 12 of the Exchange Act and traded in the 
United States and that may also trade in markets outside the United 
States.
    Paragraphs (b)(1) and (b)(2)(i) and (ii) of proposed Rule 41.11 
under the CEA

[[Page 27567]]

and proposed Rule 3a55-1 under the Exchange Act would permit data from 
non-U.S. markets to be included in determining the average daily 
trading volume and average price of a security, provided that the 
information has been reported to a foreign financial regulatory 
authority \42\ in the jurisdiction where the security is traded. The 
Commissions preliminarily believe that it is reasonable to allow 
markets to include such non-U.S. trading volume in determining the 
total dollar value of a security's ADTV.\43\ To the extent that trades 
that are executed on non-U.S. markets are included in the calculation 
of a security's ADTV, the proposed rules would also require those same 
trades to be included in calculating the security's average price.\44\
---------------------------------------------------------------------------

    \42\ ``Foreign financial regulatory authority'' is defined in 
the paragraph (b)(3) of proposed Rule 41.11 under the CEA and 
proposed Rule 3a55-1 under the Exchange Act to have the same meaning 
as in Section 3(a)(52) of the Exchange Act.
    \43\ The use of foreign trading data could also affect average 
price for purposes of determining market capitalization, although 
the Commissions do not believe that the impact would be significant.
    \44\ See paragraph (b)(2)(iv) of proposed Rule 41.11 under the 
CEA and proposed Rule 3a55-1 under the Exchange Act.
---------------------------------------------------------------------------

    In addition, paragraph (b)(2)(ii) and (iii) of proposed Rule 41.11 
under the CEA and proposed Rule 3a55-1 under the Exchange Act would 
allow price information from non-U.S. markets to be figured into the 
average price only when the price for each transaction included in that 
calculation is translated into U.S. dollars at the trading date's noon 
buying rate in New York City for cable transfers in foreign currencies 
as certified for customs purposes by the Federal Reserve Bank of New 
York (``noon buying rate'').\45\
---------------------------------------------------------------------------

    \45\ See also 17 CFR 229.301 (Instructions to Item 301, No. 7), 
which similarly requires registrants to use the noon buying rate for 
purposes of determining the rate of exchange for selected financial 
data included in registration statements under the Securities Act 
and periodic reports under the Exchange Act.
---------------------------------------------------------------------------

    Finally, the Commissions recognize that because the trading days in 
various countries do not necessarily conform to each other, a uniform 
standard would be appropriate. To assure consistency, the proposed 
rules would permit price and trading volume data for each security to 
be included only for the trading days of the ``principal market for the 
security.'' \46\ ``Principal market'' for a security is defined as the 
single market with the largest aggregate reported trading volume for 
the security during the preceding 6 full calendar months.\47\
---------------------------------------------------------------------------

    \46\ See paragraphs (b)(1) and (b)(2)(i) and (ii) of proposed 
Rule 41.11 under the CEA and proposed Rule 3a55-1 under the Exchange 
Act.
    \47\ Paragraph (b)(7) of proposed Rule 41.11 under the CEA and 
proposed Rule 3a55-1 under the Exchange Act.
---------------------------------------------------------------------------

    Q32: Do the proposed rules adequately allow foreign trading volume 
to be included? Is information regarding non-U.S. trading volume for 
the preceding 6 full calendar months readily available?
    Q33: The Commissions solicit comment specifically on the proposed 
requirement that the exchange rate used be the noon buying rate. Are 
rates readily available for all currencies in which securities may 
trade worldwide? How should the rule account for the possibility that 
trades occur on days when the noon buying rate is unavailable? For 
example, should the rule require that the prior day's rate, or an 
average rate over a period of time, be used? Is another exchange rate 
method preferable to the noon buying rate, and if so, which exchange 
rate method?
    Q34: The Commissions also solicit comment specifically on the 
proposed limitation on the use of market data to data for the trading 
days of the principal market of the security. Is there an alternative 
way to take into account the fact that trading calendars in various 
countries are not always synchronous? For example, one alternative way 
is to calculate the dollar value of ADTV over the preceding 6 full 
calendar months separately for each securities market where the 
security trades, based on that market's own trading calendar (and 
taking into account the appropriate exchange rate), and then to sum the 
dollar value of ADTV over the preceding 6 full calendar months for all 
the securities markets. What would be the advantages and disadvantages 
of such an approach? Commenters are asked to provide specific examples 
of how to determine both ADTV and average price if data from various 
securities markets for all trading days is to be included.
    Q35: Commenters are requested to provide their views regarding 
whether any other issues relating to foreign trading data need to be 
addressed.

F. Determining ``the Preceding 6 Full Calendar Months''

    The CEA and Exchange Act specify that the dollar value of ADTV and 
market capitalization shall be calculated as of the ``preceding 6 full 
calendar months.'' \48\ Paragraph (b)(5) of proposed Rules 41.11 under 
the CEA and 3a55-1 under the Exchange Act would define the preceding 6 
full calendar months, with respect to a particular day, as the period 
of time beginning on the same day of the month 6 months before such 
day, and ending on the day prior to such day. For example, for August 
16 of a particular year, the preceding 6 full calendar months means the 
period beginning February 16 and ending August 15. Similarly, for March 
8 of a particular year, the 6-month period begins on September 8 of the 
previous year and ends on March 7.
---------------------------------------------------------------------------

    \48\ Section 1a(25)(E)(i) of the CEA and Section 3(a)(55)(F)(i) 
of the Exchange Act.
---------------------------------------------------------------------------

    The Commissions believe that this ``rolling'' 6-month approach is 
appropriate, particularly in light of issues that would arise if 6 full 
calendar months were measured from the first to the last day of each 
month on the calendar. If that approach were used, it would be 
difficult to apply the CEA and Exchange Act provisions excepting a 
security index from the definition of narrow-based security index if, 
among other things, it is narrow-based for 45 or fewer business days in 
a three-month period.\49\
---------------------------------------------------------------------------

    \49\ Sections 1a(25)(B)(iii) and (D) of the CEA and Sections 
3(a)(55)(C)(iii) and (E) of the Exchange Act.
---------------------------------------------------------------------------

    For example, if a national securities exchange, designated contract 
market, registered DTEF, or foreign board of trade needed to assess the 
dollar value of ADTV for the six months preceding July 20, and the 
measuring period for which the dollar value of ADTV for the component 
securities of an index is determined as the 6-month period from January 
1 through June 30, the dollar value of ADTV would be static for each 
day in July. In this example, the calculation would not take into 
account any transactions that occurred during July. Thus, if this 
approach were used to define the 6-month period, the Commissions 
believe it would leave meaningless the statutes' provisions concerning 
the number of days within a three-month period that a future on an 
index that is narrow-based may continue to trade under the regulatory 
framework for futures on indexes that are not narrow-based.
    Q36: Is there an approach other than the one proposed to determine 
the preceding 6 full calendar months? How would such an alternative 
work in applying the provision that excludes a non-narrow based index 
future that becomes narrow-based from the definition of a narrow-based 
security index future if it is narrow-based for 45 or fewer days in a 
three month period?

G. The Lowest Weighted 25% of an Index

    As discussed in Part II.A. above, one of the factors that may 
render a security index narrow-based is if the aggregate dollar value 
of the ADTV of the lowest

[[Page 27568]]

weighted 25% of its component securities is less than $50 million (or 
$30 million for an index of 15 component securities or more).\50\
---------------------------------------------------------------------------

    \50\ Section 1a(25)(A)(iv) of the CEA and Section 
3(a)(55)(B)(iv) of the Exchange Act.
---------------------------------------------------------------------------

    The proposed rules would establish that the ``lowest weighted 25% 
of an index's weighting'' is comprised of those component securities 
that have the lowest weightings in the index such that, when their 
weightings are summed, they equal no more than 25% of the weight of the 
index.\51\ To identify these securities, the following method would 
apply: (1) all component securities in an index would be ranked from 
the lowest to highest weighting; and (2) beginning with the lowest 
weighted security and proceeding to the next lowest weighted security 
and continuing in this manner, the weightings would be added to each 
other until they reach the sum that would come closest to, or equal 
25%, but would not exceed 25%. Those securities would then comprise the 
lowest weighted 25% of the index.
---------------------------------------------------------------------------

    \51\ Paragraph (b)(4) of proposed Rule 41.11 under the CEA and 
proposed Rule 3a55-1 under the Exchange Act. Paragraph (b)(9) of the 
proposed rules, respectively, would clarify that ``weighting'' of a 
component security of an index means the percentage of the index's 
value represented or accounted for by that component security.
---------------------------------------------------------------------------

    In addition, the calculation of ADTV and its dollar value for any 
given moment in time must take into account trading volume and price 
data for the relevant securities over the preceding 6 months of 
trading. Yet the securities that comprise the lowest weighted 25% of an 
index may vary from day to day. The proposed rules establish how the 
ADTV of the lowest weighted 25% of an index and its dollar value is to 
be determined.
    Specifically, the proposed rules would establish that, for any 
particular day, the ADTV of the lowest weighted 25% of the index is 
calculated based on the price and trading data over the preceding 6 
months for the securities that comprise the lowest weighted 25% of the 
index for that day. The Commissions believe that this method of taking 
a ``snapshot'' of the current lowest weighted 25% and then looking 
retroactively to determine the aggregate dollar value of the ADTV over 
the preceding 6 months of the securities in the snapshot is a 
reasonable approach for the purposes of the statute and would be 
considerably less burdensome than the alternative of requiring a 
calculation of the data for the lowest weighted 25% of the index for 
each day of the preceding 6 full calendar months.
    Q37: The Commissions request comment concerning whether the method 
for identifying the securities comprising the lowest weighted 25% of an 
index's weighting is practicable. Is there any other approach the 
Commissions should consider?

IV. Transitional Exemption for Broad-Based Index Futures

    As discussed above, the statutory definition of narrow-based 
security index provides a temporary exclusion under certain conditions 
for a futures contract trading on an index that was not narrow-based 
and subsequently became narrow-based for no more than 45 business days 
over three consecutive calendar months. If the index becomes narrow-
based for more than 45 days over three consecutive calendar months, the 
statute then provides a grace period of three months during which the 
index is excluded from the definition of narrow-based security 
index.\52\
---------------------------------------------------------------------------

    \52\ See supra, Part II.B.2.
---------------------------------------------------------------------------

    The CFTC is proposing to adopt Rule 41.14 under the CEA to provide 
a similar temporary exclusion and transitional grace period for a 
security futures product that was trading on a narrow-based security 
index that becomes a broad-based index. Paragraph (a) of proposed Rule 
41.14 under the CEA would establish a temporary exclusion for a 
security future that began trading on an index that was narrow-based 
and subsequently became broad-based for no more than 45 days in a 
three-month calendar period. In such case the index would continue to 
be considered narrow-based. Paragraph (b) of proposed Rule 41.14 would 
provide a transition period for an index that was a narrow-based 
security index and became broad-based for more than 45 days over three 
consecutive calendar months, permitting it to continue to be a narrow-
based security index for the three following calendar months.\53\
---------------------------------------------------------------------------

    \53\ Proposed Rule 41.1(a) under the CEA would define ``broad-
based security index'' as ``a group or index of securities that does 
not constitute a narrow-based security index.''
---------------------------------------------------------------------------

    To minimize disruption, paragraph (c) of the proposed CEA rule also 
provides that a national securities exchange may, following the 
transition period, continue to trade only in those months in which the 
contract had open interest on the date the transition period ended and 
shall limit trading to liquidating positions. The Commissions note that 
a national securities exchange that intends to trade an index following 
the end of the transition period, other than as specified in paragraph 
(b), would be required to take such action as may be necessary to trade 
the index as a broad-based index subject to the sole jurisdiction of 
the CFTC.\54\
---------------------------------------------------------------------------

    \54\ See Section 2(a)(1)(C)(ii) of the CEA.
---------------------------------------------------------------------------

V. Request for Comments

    The Commissions solicit comments on all aspects of proposed Rules 
41.1 and 41.2 and Rules 41.10 through 41.14 under the CEA and proposed 
Rules 3a55-1 through 3a55-3 under the Exchange Act. In particular, the 
Commissions seek comments on whether the proposed methods for 
determining the market capitalization and dollar value of ADTV are 
appropriate, or whether other calculation methodologies would be more 
suitable. In suggesting other methodologies, commenters should provide 
specific examples. Commenters are welcome to offer their views on any 
other matter raised by the proposed rules.

VI. Paperwork Reduction Act

CFTC

A. Summary of Collection of Information

    The Paperwork Reduction Act (``PRA'') of 1995 \55\ 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.
---------------------------------------------------------------------------

    \55\ 44 U.S.C. 3504(h).
---------------------------------------------------------------------------

    Futures contracts on security indexes that meet the statutory 
definition of narrow-based security index are jointly regulated by the 
SEC and CFTC. Futures contracts on indexes that do not meet the 
statutory definition of narrow-based remain under the sole jurisdiction 
of the CFTC. To implement the definition of a narrow-based security 
index, the Commissions are required to jointly specify by rule or 
regulation the method for determining market capitalization and dollar 
value of ADTV of securities comprising an index.
    In addition, the CFMA amended the CEA by requiring national 
securities exchanges that deal in security futures products to become 
designated contract markets solely for the purpose of trading security 
futures products (``notice-registered contract markets'').\56\
---------------------------------------------------------------------------

    \56\ See Sections 2(a)(1)(D)(ii) and 5f of the CEA.
---------------------------------------------------------------------------

    A designated contract market or registered DTEF that trades or 
proposes to trade a futures contract on a security index must ascertain 
whether or not the security index falls within the definition of 
narrow-based security index to determine the jurisdiction under which 
trading in such contract falls, and whether the market in which it 
trades is

[[Page 27569]]

in compliance with the relevant securities and commodities laws. This 
will entail, among other things, a collection of the information 
necessary to make the requisite determination under the provisions of 
the CEA and the Exchange Act regarding the market capitalization and 
dollar value of ADTV of individual securities or groups of securities 
comprising the index.
    The proposed rules would provide the method by which a market 
trading a futures contract on a security index must determine the 
market capitalization and dollar value of ADTV of securities comprising 
the index in order to assure that it is in compliance with the 
applicable requirements of the CEA and the Exchange Act.
    Proposed Rule 41.2 requires designated contract markets (including 
notice-registered contract markets) and registered DTEFs that trade a 
security index or security futures product to maintain, in accordance 
with the requirements of Rule 1.31, books and records of all activities 
relating to the trading of such products. This proposed rule restates 
the existing recordkeeping requirements of the CEA.\57\ The proposed 
rule also specifies that, in order to comply with these recordkeeping 
requirements, designated contract markets and registered DTEFs that 
trade futures contracts on security indexes and security futures 
products would be required to preserve records of any calculations used 
to determine whether an index is broad-based or narrow-based.
---------------------------------------------------------------------------

    \57\ See Sections 5(d)(17) and 5a(d)(8) of the CEA.
---------------------------------------------------------------------------

B. Proposed Use of Information

    Designated contract markets and registered DTEFs that wish to trade 
futures contracts on a security index would use the methods specified 
in the proposed rules to determine market capitalization and dollar 
value of ADTV of a security or a group of securities comprising the 
index. These determinations would enable these designated contract 
markets and registered DTEFs to ascertain whether a security index on 
which they propose to trade or are trading a futures contract is 
``narrow-based,'' and thus subject to the joint jurisdiction of the SEC 
and the CFTC, or is ``broad-based,'' and thus subject to the exclusive 
jurisdiction of the CFTC.
    Any market that trades a futures contract on a broad-based or 
narrow-based security index would be required to retain records of its 
determinations as required by the recordkeeping requirements of the 
proposed rules.

C. Respondents

    The only entities required under the proposed rules to retain such 
records would be designated contract markets (including notice-
registered contract markets) and registered DTEFs that trade futures 
contracts on security indexes. The CFTC estimates that potentially 11 
designated contract markets (of which four would be notice-registered) 
would be required by the proposed rules to comply with these 
recordkeeping requirements. No registered DTEFs are currently trading 
futures products. The CFTC requests comment on whether any additional 
entities would be required to keep these records.

D. Total Annual Reporting and Recordkeeping Burden

1. Capital Costs
    Designated contract markets (including notice-registered contract 
markets) and registered DTEFs that trade futures contracts on security 
indexes would be required to keep on file all records concerning their 
determinations that such indexes were either broad-based or narrow-
based for a period of five years, of which the first two years of such 
records would be required to be readily accessible. Because these 
markets are already required to have recordkeeping systems in place, 
the CFTC preliminarily estimates that any additional costs of retaining 
and storing the collected information discussed above would be nominal. 
The CFTC is soliciting comment on this finding.
2. Burden Hours
    Designated contract markets and registered DTEFs that trade futures 
contracts on security indexes would be required to retain and store the 
determinations of market capitalization and dollar value of ADTV 
obtained by applying the methods provided by the proposed rules for 
five years; of which the first two years of such records would be 
required to be readily accessible. The CFTC estimates that it would 
take the 11 respondents one hour each to retain any documents made or 
received by it in determining whether an index is narrow-based or 
broad-based. The total burden in complying with proposed rule 41.2 
would be 11 hours. The CFTC is soliciting comment on this estimate.

E. General Information About the Collection of Information

    The collection of information required by the proposed rules is 
mandatory and would need to be retained by designated contract markets 
and registered DTEFs for five years, and for the first two years the 
information must be readily accessible. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid OMB control number.

F. Request for Comment

    The CFTC requests comments: (1) on whether the proposed collection 
of information is necessary for the proposed performance of the 
functions of the agency, including whether the information shall have 
practical utility; (2) to evaluate the accuracy of the CFTC's estimate 
of the burden of the proposed collection of information; (3) on whether 
the proposed collection of information will enhance the quality, 
utility, and clarity of the information to be collected; and (4) 
whether the proposed collection of information will minimize the burden 
of collection on those who are to respond, including through the use of 
electronic or automated collection techniques or other forms of 
information technology.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the Office of Information and 
Regulatory Affairs, OMB, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attention: Desk Officer for the CFTC, and to the 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW, Washington, DC 20581, Attention: Office of the Secretariat. 
Comments may be sent by facsimile transmission to (202) 418-5521 or by 
e-mail to <a href="/cdn-cgi/l/email-protection#681b0d0b1a0d1c091a11280b0e1c0b460f071e"><span class="__cf_email__" data-cfemail="592a3c3a2b3c2d382b20193a3f2d3a773e362f">[email protected]</span></a>. Reference should be made to Narrow-Based 
Security Indexes.
    The CFTC has submitted the proposed collection of information to 
OMB for approval. Members of the public should direct any general 
comments to both the CFTC and OMB within 30 days. OMB is required to 
make a decision concerning the collection of information between 30 and 
60 days after publication in the Federal Register, so a comment to OMB 
is best assured of having its full effect if OMB receives it within 30 
days of publication of this release. Requests for the materials 
submitted to OMB by the CFTC with regard to this collection of 
information are available from the CFTC Clearance Officer, Three 
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581, 
Telephone: (202) 418-5160.

SEC

    Certain provisions of the proposed rules contain ``collection of 
information'' requirements within the

[[Page 27570]]

meaning of the Paperwork Reduction Act of 1995 (``PRA''),\58\ and the 
SEC has submitted them to the Office of Management and Budget (``OMB'') 
for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The 
SEC is proposing to amend the collection of information entitled ``Rule 
17a-1: Recordkeeping rule for national securities exchanges, national 
securities associations, registered clearing agencies, and the 
Municipal Securities Rulemaking Board'' (OMB Control Number 3235-0208). 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information, unless it displays a currently 
valid OMB control number.
---------------------------------------------------------------------------

    \58\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    As noted above, the CFMA lifted the ban on trading single stock and 
narrow-based stock index futures and established a framework for the 
joint regulation of these products by the SEC and the CFTC. In 
addition, the CFMA amended the Exchange Act and CEA by adding a 
definition of ``narrow-based security index,'' which establishes an 
objective test of whether a security index is narrow-based.\59\ Futures 
contracts on security indexes that meet the statutory definition of 
narrow-based security index are jointly regulated by the SEC and the 
CFTC. Futures contracts on indexes that do not meet the statutory 
definition of narrow-based security index remain under the sole 
jurisdiction of the CFTC. To implement the definition of a narrow-based 
security index, the Commissions are required to specify jointly by rule 
or regulation the method for determining market capitalization and 
dollar value of ADTV of securities comprising an index.\60\
---------------------------------------------------------------------------

    \59\ See Section 1a(25)(A) of the CEA and Section 3(a)(55)(B) of 
the Exchange Act.
    \60\ Section 3(a)(55)(F) of the Exchange Act and Section 1a 
(25)(E) of the CEA.
---------------------------------------------------------------------------

    In addition, the CFMA amended the Exchange Act by adding new 
Section 6(g), which would require an exchange that is a designated 
contract market or a registered DTEF that lists or trades security 
futures products to register as a national securities exchange 
(``notice-registered national securities exchange'') solely for the 
purpose of trading security futures products.\61\
---------------------------------------------------------------------------

    \61\ See Section 6(g) of the Exchange Act, 15 U.S.C. 78f(g).
---------------------------------------------------------------------------

    A national securities exchange, designated contract market, 
registered DTEF, or foreign board of trade that trades or proposes to 
trade a futures contract on a security index must ascertain whether or 
not the security index falls within the definition of narrow-based 
security index to determine the jurisdiction under which trading in 
such contract falls, and whether the market in which it trades is in 
compliance with the relevant securities and commodities laws. This will 
entail, among other things, a collection of the information necessary 
to make the requisite determination under the provisions of the 
Exchange Act and the CEA regarding the market capitalization and dollar 
value of ADTV of individual securities or groups of securities 
comprising the index.
    Proposed Rule 3a55-1 under the Exchange Act specifies the method to 
determine market capitalization and dollar value of ADTV of index 
securities.\62\ Thus, the proposed rule would provide the method by 
which a market trading a futures contract on a security index must 
determine the market capitalization and dollar value of ADTV of index 
securities in order to assure that it is in compliance with the 
applicable requirements of the Exchange Act and the CEA.
---------------------------------------------------------------------------

    \62\ Proposed Rule 41.11 under the CEA parallels proposed Rule 
3a55-1.
---------------------------------------------------------------------------

    Rule 17a-1 under the Exchange Act,\63\ among other things, requires 
national securities exchanges, which by definition include entities 
registered under the new notice registration provisions of the Exchange 
Act,\64\ to retain copies of all documents, including all 
correspondence, memoranda, papers, books, notices, accounts, and other 
records made or received by them in the course of their business and in 
the conduct of their self-regulatory activities for a period of not 
less than five years, in the first two years in an easily accessible 
place. Any exchange that lists or trades a futures contract on a 
narrow-based security index product must be registered with the SEC 
pursuant to Section 6 of the Exchange Act and, as a registered national 
securities exchange, will be subject to the recordkeeping requirements 
of Rule 17a-1. Rule 17a-1 thus will apply to any notice-registered 
national securities exchange. Accordingly, in order to comply with 
these recordkeeping requirements, a national securities exchange, 
including a notice-registered national securities exchange, that lists 
or trades futures contracts on narrow-based security indexes would be 
required to preserve records of any calculations used to determine 
whether an index is narrow-based.\65\
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17a-1.
    \64\ See Section 6 of the Exchange Act, 15 U.S.C. 78f.
    \65\ This PRA analysis does not include any collection of 
information and recordkeeping requirements that would apply to 
designated contract markets, registered DTEFs, and foreign boards of 
trade that trade futures contracts on security indexes that are not 
narrow-based because the trading of these products is not subject to 
the SEC's jurisdiction. Therefore, such information and 
recordkeeping would not be subject to Rule 17a-1 under the Exchange 
Act.
---------------------------------------------------------------------------

B. Proposed Use of Information

    National securities exchanges, designated contract markets, 
registered DTEFs, and foreign boards of trade would use the methods 
specified in the proposed rules to determine market capitalization and 
dollar value of ADTV of a security or a group of securities comprising 
the index. These determinations would enable these national securities 
exchanges, designated contract markets, registered DTEFs, and foreign 
boards of trade to ascertain whether a security index on which they 
propose to trade or are trading a futures contract is ``narrow-based,'' 
and thus is subject to the joint jurisdiction of the SEC and CFTC. If 
the market determined that the index is not narrow-based under the 
proposed rules' methodology, the futures contract would be solely under 
the CFTC's jurisdiction.
    The SEC will use the collected information to monitor the accuracy 
of the determinations made by national securities exchanges, including 
notice-registered national securities exchanges, as to whether a 
security index is narrow-based.
    Any national securities exchange, including any notice-registered 
national securities exchange, that trades a futures contract on a 
narrow-based security index would be required to retain records of its 
determinations pursuant to the recordkeeping requirements of Rule 17a-
1.

C. Respondents

    The only entities required under Rule 17a-1 under the Exchange Act 
to retain such records would be national securities exchanges 
(including designated contract markets and registered DTEFs registered 
as national securities exchanges pursuant to Section 6(g) of the 
Exchange Act) that trade futures contracts on narrow-based security 
indexes. The SEC estimates that potentially 4 national securities 
exchanges and 7 notice-registered national securities exchanges 
(designated contract markets registered pursuant to Section 6(g) of the 
Exchange

[[Page 27571]]

Act)\66\ would be required by the Exchange Act and the rules thereunder 
to comply with these recordkeeping requirements. No registered DTEFs 
are currently trading futures products. The SEC requests comment on 
whether any additional entities would be required to keep these 
records.
---------------------------------------------------------------------------

    \66\ Notice-registered national securities exchanges are those 
entities that register in accordance with Section 6(g) of the 
Exchange Act and proposed Rule 6a-4 under the Exchange Act by filing 
a proposed Form 1-N. See Securities Exchange Act Release No. 44279 
(May 8, 2001).
---------------------------------------------------------------------------

D. Total Annual Reporting and Recordkeeping Burden

1. Capital Costs
    Rule 17a-1 under the Exchange Act would require national securities 
exchanges, including any notice-registered national securities 
exchanges, that trade futures contracts on narrow-based security 
indexes to keep on file for a period of no less than five years, the 
first two years in an easily accessible place, all records concerning 
their determinations that such indexes were narrow-based.\67\ Because 
national securities exchanges, including notice-registered national 
securities exchanges that have been designated contract markets with 
the CFTC, currently are required to have recordkeeping systems in 
place,\68\ the SEC preliminarily estimates that any additional costs of 
retaining and storing the collected information discussed above would 
be nominal. The SEC is soliciting comment on this estimation.
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17a-1.
    \68\ See Rule 17a-1 under the Exchange Act, 17 CFR 240.17a-1, 
and Sections 5(d)(17) and 5a(d)(8) of the CEA.
---------------------------------------------------------------------------

2. Burden Hours
    National securities exchanges, including notice-registered national 
securities exchanges, that trade futures contacts on security indexes 
would be required to comply with the recordkeeping requirements under 
Rule 17a-1 under the Exchange Act.\69\ National securities exchanges, 
including notice-registered national securities exchanges, would be 
required to retain and store any documents related to determinations 
made using the definitions in proposed Exchange Act Rule 3a55-1 for no 
less than five years, the first two years in an easily accessible 
place. The current burden estimate for Rule 17a-1, as of July 20, 1998, 
is 50 hours per year for each exchange.\70\ The SEC estimates that it 
would take each of the 11 respondents one hour annually to retain any 
documents made or received by it in determining whether an index is a 
narrow-based security index. The total burden in complying with Rule 
17a-1 for each national securities exchange, including notice 
registered national securities exchanges, under proposed Rule 3a55-1 
would be 11 hours. The SEC is soliciting comment on this estimate.
---------------------------------------------------------------------------

    \69\ 17 CFR 240.17a-1.
    \70\ See 63 FR 38865 (July 20, 1998) (SEC File No. 270-244, OMB 
Control No. 3235-0208) (seeking an extension of OMB approval of 
Rule17a-1 under the Exchange Act).
---------------------------------------------------------------------------

E. General Information About the Collection of Information

    The collection of information required by the proposed rules is 
mandatory and would need to be retained by the national securities 
exchanges and notice-registered national securities exchanges for no 
less than five years, and for the first two years the information must 
be in an easily accessible place, as required under Exchange Act Rule 
17a-1. Under Rule 17a-1, the information collected pursuant to the 
proposed rules would be retained by the national securities exchange or 
the notice-registered national securities exchange that is relying on 
the proposed rules. The SEC would obtain access to the information upon 
request. Any collection of information received by the SEC would not be 
made public.

F. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the SEC solicits comments to: 
(1) evaluate whether the proposed collection of information is 
necessary for the proposed performance of the functions of the agency, 
including whether the information shall have practical utility; (2) 
evaluate the accuracy of the SEC's estimate of the burden of the 
proposed collection of information; (3) enhance the quality, utility, 
and the clarity of the information to be collected; and (4) minimize 
the burden of collection on those who are to respond, including through 
the use of electronic or automated collection techniques or other forms 
of information technology.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the following persons: (1) Desk 
Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Washington, D.C. 20503; and (2) Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 
20549-0609, with reference to File No. S7-11-01.
    The SEC has submitted the proposed collection of information to OMB 
for approval. Members of the public should direct any general comments 
to both the SEC and OMB within 30 days. OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication in the Federal Register, so a comment to OMB is 
best assured of having its full effect if OMB receives it within 30 
days of publication of this release. Requests for the materials 
submitted to OMB by the SEC with regard to this collection of 
information should be in writing, refer to File No. S7-11-01, and be 
submitted to the Securities and Exchange Commission, Records 
Management, Office of Filings and Information Services, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609.

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 action before issuing a new regulation.\71\ The 
CFTC understands that, by its terms, Section 15(a) does not require the 
CFTC to quantify the costs and benefits of a new regulation or to 
determine whether the benefits of the proposed regulation outweigh its 
costs. Nor does it require that each proposed rule be analyzed in 
isolation when that rule is a component of a larger package of rules or 
rule revisions. Rather, Section 15(a) simply requires the CFTC to 
``consider the costs and benefits'' of its action.
---------------------------------------------------------------------------

    \71\ Section 15(a) of the CEA, 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Section 15(a) further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the CFTC could in its discretion give 
greater weight to any one of the five enumerated areas of concern and 
could in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The proposed rules constitute a package of related rule provisions. 
The rules provide guidance to trading facilities in order to facilitate 
compliance with governing laws. Furthermore, the rules provide 
alternatives that may reduce the costs of compliance.

[[Page 27572]]

    The CFTC is considering the costs and benefits of the proposed 
rules as a totality, in light of the specific areas of concern 
identified in Section 15(a). The proposed rules should have no effect, 
from the standpoint of imposing costs or creating benefits, on the 
financial integrity or price discovery function of the futures and 
options markets or on the risk management practices of trading 
facilities or others. The proposed rules also should have no material 
effect on the protection of market participants and the public and 
should not impact the efficiency and competition of the markets.
    Accordingly, the CFTC has determined to propose the rules discussed 
above. The CFTC invites public comment on the application of the cost-
benefit provision of Section 15(a) of the CEA in regard to the proposed 
rules. Commenters also are invited to submit any data that they may 
have quantifying the costs and benefits of the proposed rules.

SEC

    The SEC is proposing new rules, Rules 3a55-1 through 3a55-3, under 
the Exchange Act. The proposed rules are in response to the mandate of 
the CFMA, which, among other things, requires the CFTC and SEC to 
jointly specify by rule or regulation the method to be used to 
determine ``market capitalization'' and ``dollar value of average daily 
trading volume'' with respect to implementing the new provisions of the 
CEA and Exchange Act regarding contracts for future delivery on 
security indexes.
    The CFMA lifted the ban on, and will permit the trading of, single 
stock futures and futures on narrow-based security indexes. In addition 
to repealing the prohibition on certain types of security index 
futures, the CFMA amended the CEA and Exchange Act by adding the 
definition of ``narrow-based security index.'' This definition 
establishes an objective test of whether a security index is narrow-
based.\72\ Futures contracts on security indexes that are narrow-based 
security indexes will be jointly regulated by the CFTC and the SEC 
under the framework established by the CFMA. Futures contracts on 
indexes that are not narrow-based security indexes, on the other hand, 
will be under the sole jurisdiction of the CFTC, and therefore only a 
designated contract market, registered derivatives transaction 
execution facility (``DTEF''), or foreign board of trade may trade 
these products.
---------------------------------------------------------------------------

    \72\ See Section 1a(25) of the CEA and Section 3(a)(55) of the 
Exchange Act.
---------------------------------------------------------------------------

    Proposed Rule 3a55-1 under the Exchange Act would provide methods 
of calculating market capitalization and dollar value of average daily 
trading volume (``ADTV'') for purposes of determining whether a 
security index is narrow-based within the meaning of the Exchange Act. 
Proposed Rule 3a55-2 under the Exchange Act would exempt from the 
definition of narrow-based security index those security indexes on 
which futures contracts have traded on a designated contract market, a 
registered DTEF, or foreign board of trade for fewer than 30 days, 
provided they would not have been narrow-based security indexes for an 
uninterrupted 6 full calendar months prior to the first day of trading. 
Proposed Rule 3a55-3 under the Exchange Act would establish that when a 
futures contract on a security index is traded on or subject to the 
rules of a foreign board of trade, that index shall not be considered a 
narrow-based security index if it would not be a narrow-based security 
index pursuant to the statutory definition of a narrow-based index or 
the exclusions from that definition. These proposed rules would provide 
methods of calculation and guidance for national securities exchanges, 
designated contract markets, registered DTEFs, and foreign boards of 
trade in determining whether or not a security index is narrow-based 
under the Exchange Act.
    The SEC has identified below certain costs and benefits relating to 
proposed Rules 3a55-1 through 3a55-3 under the Exchange Act. The SEC 
requests comments on all aspects of this cost-benefit analysis, 
including 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 3a55-1 through 3a55-3 under the 
Exchange Act are related to the benefits that will accrue as a result 
of the enactment of the CFMA. By repealing the ban on single stock 
futures and futures on narrow-based security indexes, the CFMA will 
enable a greater variety of financial products to be traded that 
potentially could facilitate price discovery and the ability to hedge. 
Investors will benefit by having a wider choice of financial products 
to buy and sell, and markets and market participants will benefit by 
having the ability to trade these products. The benefits are likely to 
relate to the volume of trading in these new instruments. Because 
security futures are a new product, however, the SEC is unable to 
quantify these benefits and therefore requests comments, data, and 
estimates.
    Furthermore, the CFMA clarifies the jurisdiction of the CFTC and 
the SEC over futures contracts on security indexes, and alleviates the 
regulatory burden of dual CFTC and SEC jurisdiction where it is 
appropriate to do so. Under the new provisions of the CEA and Exchange 
Act, the CFTC and SEC will jointly regulate futures contracts on 
narrow-based security indexes. The trading of futures contracts on 
broad-based security indexes will be under the sole jurisdiction of the 
CFTC and may be traded only on designated contract markets and by and 
through intermediaries registered with the CFTC. The CFMA provides 
objective criteria for determining whether or not a security index is 
narrow-based, and the proposed rules would provide instruction in 
applying those criteria. The SEC requests comments, data, and estimates 
regarding the increased regulatory certainty that will result from the 
definition of narrow-based security index contained in the Exchange 
Act.
    Proposed Rule 3a55-1 under the Exchange Act would provide 
methodologies for determining market capitalization and the dollar 
value of ADTV for purposes of ascertaining whether or not a security 
index is narrow-based as defined in the CFMA. The proposed rules would 
provide the benefit of clear, objective standards for determining both 
market capitalization and the dollar value of ADTV. Market 
capitalization would, under the proposed rules, be computed as the 
product of the average price of a component security and the number of 
outstanding shares of that security. The dollar value of ADTV would, 
under the proposed rules, be computed as the product of the average 
price of a component security and the ADTV of that security.
    To implement these calculations, the proposed rules would define 
``average daily trading volume'' and, as more fully described below, a 
method to calculate ``average price.'' In addition, the proposed rules 
would clarify how to calculate the dollar value of ADTV for the lowest 
weighted 25% of an index. The SEC requests specific comments regarding 
the benefits and efficiency of the proposed methods for determining 
market capitalization and the dollar value of ADTV, and invites 
comments regarding the benefits of any alternative approaches.
    Proposed Rule 3a55-1 under the Exchange Act would provide the 
following objective definition for

[[Page 27573]]

``average price'' for purposes of calculating market capitalization and 
dollar value of ADTV: The total dollar value of all transactions in a 
component security on the trading days of the principal market for the 
security during the preceding 6 full calendar months divided by the 
total number of shares traded in such transactions for the preceding 6 
full calendar months, where the dollar value for each transaction is 
the price per share in U.S. dollars of that transaction multiplied by 
the number of shares in such transaction (``volume-weighted average 
price'').
    For purposes of determining whether the dollar value of the ADTV of 
the lowest weighted 25% of an index reaches the statutory threshold of 
$50 million (or $30 million), the proposed rules would also permit a 
national securities exchange, designated contract market, registered 
DTEF, or foreign board of trade to elect a different method of 
calculation of average price, under certain conditions,\73\ which may 
be more cost-efficient for it to use. Average price according to this 
method would be the sum of the price per share in U.S. dollars for each 
transaction in a component security during the preceding 6 full 
calendar months divided by the total number of such transactions during 
the preceding 6 full calendar months (``non-volume-weighted average 
price''). This choice provides flexibility in a manner that may lower 
implementation costs. The SEC seeks comments as to the benefits and 
flexibility of these two methods of calculating ``average price'' for 
purposes of determining whether the dollar value of ADTV of the lowest 
weighted 25% of an index meets the statutory threshold under the above-
stated condition.
    Proposed Rule 3a55-1 under the Exchange Act would also mandate a 
``snapshot'' method for determining dollar value of ADTV for the lowest 
weighted 25% of an index.\74\ On a particular day, the lowest weighted 
component securities comprising, in the aggregate, 25% of an index's 
weighting, would be those securities that are the lowest weighted 
securities when all the securities in such index are ranked from lowest 
to highest based on the index's weighting methodology, and for which 
the sum of the weight of such securities is equal to, or less than, 
25%.
    The SEC believes that taking a ``snapshot'' of the securities 
comprising the lowest weighted 25% of an index for a particular day, 
and then using that ``snapshot'' to determine the dollar value of ADTV 
for those securities for the preceding 6 months, is a reasonable method 
of calculation that may reduce the computation burden on national 
securities exchanges, designated contract markets, registered DTEFs, 
and foreign boards of trade. Otherwise, for each day of the preceding 6 
full calendar months, the market would have to assess the weighting of 
each security, rank the securities by weighting, and then determine the 
ADTV for the lowest weighted 25% of the index that day. The SEC seeks 
comments as to the benefits of this ``snapshot'' method of calculating 
the lowest weighted 25% of an index.
    Under the Exchange Act, market capitalization and the dollar value 
of ADTV must be calculated ``as of the preceding 6 full calendar 
months.'' The proposed rule would specify a ``rolling'' 6 month period, 
i.e., with respect to a particular day, the ``preceding 6 full calendar 
months'' would mean the period of time beginning on the same calendar 
date 6 months before and ending on the day prior to that day. A 
national securities exchange, designated contract market, registered 
DTEF, or foreign board of trade would benefit from this definition 
because a specific and objective time frame for the required 
calculations would be provided. The SEC requests comment as to the 
benefits of this ``preceding 6 full calendar months'' criteria and asks 
for suggestions and examples of any alternative approach.
    The SEC believes proposed Rule 3a55-1 under the Exchange Act would 
provide an additional benefit to national securities exchanges, 
designated contract markets, registered DTEFs, and foreign boards of 
trade by permitting use of foreign trading data for the calculations of 
market capitalization and the dollar value of ADTV when component 
securities of an index are also traded on markets outside of the United 
States. The proposed rule would clarify that such foreign transaction 
data may be used only if it has been reported to a foreign financial 
regulatory authority in the jurisdiction in which the security is 
traded, and that, if the price information is reported in a foreign 
currency, it must be converted into U.S. dollars on the basis of the 
transaction date's noon buying rate in New York City for cable 
transfers in foreign currencies as certified for customs purposes by 
the Federal Reserve Bank of New York. The SEC invites comments and 
appropriate data regarding the benefits and/or costs associated with 
the use of information from transactions outside the United States.
    In addition, proposed Rule 3a55-2 under the Exchange Act would 
provide a limited exclusion from the definition of ``narrow-based 
security index'' for an index underlying a futures contract that has 
traded for less than 30 days, as long as the index would not have been 
a narrow-based index for the 6 full calendar months prior to the first 
day of trading. This exclusion would be beneficial because it would 
allow futures contracts to continue to trade during this 30 day period 
without triggering Exchange Act provisions requiring registration by 
the market trading the futures. The SEC requests comments on the 
benefits of this exemption.
    Finally, proposed Rule 3a55-3 under the Exchange Act would 
establish that when a futures contract on a security index is traded on 
or subject to the rules of a foreign board of trade, that index shall 
not be considered a narrow-based security index if it would not be a 
narrow-based security index pursuant to the statutory definition of a 
narrow-based security index or the exclusions from that definition. The 
proposed rule would clarify and establish that when a futures contract 
on an index is traded on or subject to the rules of a foreign board of 
trade, such index would not be a narrow-based security index if it 
would not be a narrow-based security index if a futures contract on 
such index were traded on a designated contract market or registered 
DTEF. The SEC seeks comments on the benefits of such a rule.
---------------------------------------------------------------------------

    \73\ The proposed rules specify that the volume-weighted average 
price must be used for purposes of determining dollar value of ADTV 
of the lowest weighted 25% of an index, if the result is less than 
$55,000,000 when using the non-volume-weighted average price 
($33,000,000 in the case of an index with 15 or more component 
securities).
    \74\ For purposes of the Exchange Act, a narrow-based security 
index includes an index in which the lowest weighted component 
securities comprising in the aggregate 25% of the index's weighting 
have an aggregate dollar value of ADTV of less than $50,000,000 
($30,000,000 in the case of an index with 15 or more component 
securities).
---------------------------------------------------------------------------

    The SEC welcomes comments as to the benefits and flexibility 
provided by the methods of calculation and limited exclusion discussed 
above and also seeks comments as to any alternative methodologies that 
may be used.

B. Costs

    In complying with proposed Rules 3a55-1 through 3a55-3 under the 
Exchange Act, a national securities exchange, designated contract 
market, registered DTEF, or foreign board of trade would incur certain 
costs. Under the CFMA, national securities exchanges, designated 
contract markets, registered DTEFs, and foreign boards of trade must 
use the methods provided by the proposed rules to determine whether or 
not a security index is narrow-based and thus whether the

[[Page 27574]]

futures contract is subject solely to the CFTC's jurisdiction or 
subject to joint jurisdiction of the CFTC and SEC. Thus the costs of 
complying with the proposed rules primarily are attributable to the 
implementation of the new provisions of the Exchange Act pertaining to 
the definition of narrow-based security index. National securities 
exchanges, designated contract markets, registered DTEFs, and foreign 
boards of trade trading these products are responsible for assuring 
compliance with the proposed rules and thus would incur various costs 
in determining the market capitalization and the dollar value of ADTV 
for component securities of a security index. The SEC, however, is 
unable at this time to estimate the extent of the costs the proposed 
calculation methodologies will engender.
    The statutorily-mandated computations contained in the proposed 
rules would require national securities exchanges, designated contract 
markets, registered DTEFs, and foreign boards of trade to gather 
information to ascertain the market capitalization and the dollar value 
of ADTV for component securities of an index with respect to each day, 
taking into account data for the preceding 6 full calendar months. To 
compute market capitalization, the proposed rules require a market to 
know the number of outstanding shares of a security as reported on the 
issuer's most recent annual or periodic report filed with the SEC and 
each security's average price during the preceding 6 full calendar 
months. To compute dollar value of ADTV, the rules require a market to 
tally the average daily trading volume and the average price for each 
component security during the preceding 6 full calendar months. An 
additional calculation would be required to determine the lowest 
weighted 25% of an index. Alternatively, a market could incur costs if 
it contracted with an outside party to perform the calculations. In 
addition, a national securities exchange, designated contract market, 
registered DTEF, or foreign board of trade may be confronted with costs 
associated with obtaining and accessing appropriate data from an 
independent third party vendor. For example, national securities 
exchanges, designated contract markets, registered DTEFs, and foreign 
boards of trade may be required to pay certain fees to such a vendor to 
acquire the necessary information. Furthermore, if the market 
capitalization and dollar value of ADTV calculations require data that 
is not readily available, particularly if foreign data is used, 
national securities exchanges, designated contract markets, registered 
DTEFs, and foreign boards of trade possibly would incur additional 
costs to obtain such data. The SEC requests comments, data, and 
estimates on all aspects of the costs associated with the proposed 
calculations. Commenters should address the likelihood that certain 
market information may not be readily available and the potential costs 
associated with obtaining that information.
    In addition, an exclusion from the definition of narrow-based 
security index is available when all component securities are among 
both the Top 750 securities (by market capitalization) and Top 675 
securities (by dollar value of ADTV). A designated contract market, 
registered DTEF, or foreign board of trade would be charged with 
identifying these Top 750 and Top 675 securities to determine whether a 
security index qualifies for this exclusion by using the calculations 
specified in the proposed rules. Commenters are requested to provide 
comments, cost estimates, and any other relevant data with respect to 
the costs involved in making such determinations.
    The calculations required under the proposed rules for market 
capitalization and the dollar value of ADTV may require additional data 
storage.\75\ A national securities exchange, designated contract 
market, or registered DTEF would need to consider how to store the 
data--whether to maintain hard copies or electronic copies of all the 
computations. The national securities exchange, designated contract 
market, or registered DTEF would also have to take into consideration 
the time period for which the data would have to be stored and the 
costs associated with such storage and maintenance. The SEC 
specifically requests comments on the recordkeeping costs and data 
maintenance associated with the proposals and whether these costs would 
be significant.
---------------------------------------------------------------------------

    \75\ Under Rule 17a-1 under the Exchange Act, 17 CFR 240.17a-1, 
and Sections 5(d)(17) and 5a(d)(8) of the CEA, and proposed Rule 
41.2 under the CEA, respectively, national securities exchanges, 
designated contract markets, and registered DTEFs would need to 
preserve records of all their determinations with respect to the 
narrow-based or non-narrow-based status of security indexes.
---------------------------------------------------------------------------

    A national securities exchange, designated contract market, 
registered DTEF, or foreign board of trade may also incur resource 
costs to carry out the computations required under the proposed rules. 
Comments are requested as to whether the proposed rules are likely to 
result in a need to increase the number of staff, or result in 
additional resource burdens, to perform the required calculations. 
Commenters should provide cost data to support their views.
    Finally, the SEC requests commenters to identify any other costs 
associated with the proposals 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 requires the SEC, when engaged in 
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.\76\ Section 23(a)(2) requires the SEC, in adopting rules 
under the Exchange Act, to consider the impact any rule would have on 
competition.\77\
---------------------------------------------------------------------------

    \76\ Section 3(f) of the Exchange Act, 15 U.S.C. 78c(f).
    \77\ Section 23(a)(2) of the Exchange Act, 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The SEC believes that proposed Rule 3a55-1 would promote efficiency 
by setting forth clear methods and guidelines for national securities 
exchanges, designated contract markets, registered DTEFs, and foreign 
boards of trade in applying the statutory definition of narrow-based 
security index. The SEC further believes that proposed Rule 3a55-2 
would promote efficiency by providing designated contract markets, 
registered DTEFs, and foreign boards of trade a way to ensure that a 
futures contract trading solely under the jurisdiction of the CFTC does 
not suddenly become a security future within the first 30 days of 
trading and subject, as a result, to a new regulatory regime. The SEC 
also believes that proposed Rule 3a55-3 would promote efficiency by 
clarifying and establishing that when a futures contract on an index is 
traded on or subject to the rules of a foreign board of trade, such 
index would not be a narrow-based security index if it would not be a 
narrow-based security index if a futures contract on such index were 
traded on a designated contract market or registered DTEF.
    The SEC preliminarily believes that the proposed rules may enhance 
capital formation, because the proposed rules would provide clarity 
with respect to the method for determining whether a particular 
security index is narrow-based or broad-based. In this way, market 
participants would have

[[Page 27575]]

certainty as to whether a futures contract on a particular index falls 
within the sole jurisdiction of the CFTC or will be under the joint 
jurisdiction of the SEC and CFTC. The benefits to the capital formation 
process, however, principally flow from the CFMA itself, which lifts 
the ban on the trading of single stock futures and narrow-based stock 
index futures.
    The SEC preliminarily believes that the proposed rules would not 
impose any significant burdens on competition. The statutory definition 
of narrow-based security index and the exclusions from that definition 
contained in Section 1a(25)(A) and (B) of the CEA and Section 
3(a)(55)(B) and (C) of the Exchange Act set forth the criteria that a 
market trading a futures contract on a stock index must use to 
determine whether the SEC and CFTC jointly, or the CFTC alone, would 
have regulatory authority over that futures contract. The statutory 
definition of a narrow-based security index and the exclusions from 
that definition substantively are identical in both the CEA and the 
Exchange Act, and the joint CFTC-SEC rules proposed in this release 
also are substantively identical.
    The CFMA directs the SEC and CFTC to jointly specify methods for 
determining market capitalization and the dollar value of ADTV as those 
terms are used in the aforementioned statutory definition and 
exclusion. The SEC believes that proposed Rule 3a55-1, developed 
jointly with the CFTC, sets forth objective methods in fulfillment of 
the CFMA directive and further clarifies the application of the 
statute. The SEC believes that proposed Rule 3a55-2 is necessary in the 
public interest to prevent potential dislocations for market 
participants trading a futures contract on an index that becomes 
narrow-based during the first 30 days of trading and would impose no 
burden on competition. In addition, the SEC believes that proposed Rule 
3a55-3 is necessary in the public interest and would impose no burden 
on competition because it serves to clarify and establish that when a 
futures contract on a security index is traded on or subject to the 
rules of a foreign board of trade, that index shall not be considered a 
narrow-based security index if it would not be a narrow-based security 
index pursuant to the statutory definition of a narrow-based security 
index or the exclusions from that definition.
    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'') requires federal agencies, 
in promulgating rules, to consider the impact of those rules on small 
entities.\78\ The rules adopted herein would affect contract markets 
and other trading facilities. 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.\79\ 
In its previous determinations, the CFTC has concluded that contract 
markets are not small entities for the purpose of the RFA.\80\ The CFTC 
has also recently proposed determining that the other trading 
facilities subject to its jurisdiction, for reasons similar to those 
applicable to contract markets, would not be small entities for 
purposes of the RFA.\81\
---------------------------------------------------------------------------

    \78\ 5 U.S.C. 601 et seq.
    \79\ See 47 FR 18618-21 (April 30, 1982).
    \80\ See id. at 18619 (discussing contract markets).
    \81\ See 66 FR 14262, 14268 (March 9, 2001).
---------------------------------------------------------------------------

    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 Acting 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 
number of small entities. The CFTC invites the public to comment on 
this finding and on its proposed determination that trading facilities 
such as registered DTEFs not be small entities for purposes of the RFA.

SEC

    Section 603(a) \82\ of the Administrative Procedures Act 
(``APA''),\83\ as amended by the RFA,\84\ 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.''\85\ 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 Rule 3a55-1 provides 
methods for determining market capitalization and dollar value of ADTV 
in addition to other guidelines in applying the definition of narrow-
based security index. Proposed Rule 3a55-2 creates an exemption from 
the definition of narrow-based security index for designated contract 
markets, registered DTEFs, and foreign boards of trade trading certain 
futures contracts. Proposed Rule 3a55-3 under the Exchange Act 
establishes that when a futures contract on a security index is traded 
on or subject to the rules of a foreign board of trade, that index 
shall not be considered a narrow-based security index if it would not 
be a narrow-based security index pursuant to the statutory definition 
of a narrow-based security index or the exclusions from that 
definition. Because only national securities exchanges, designated 
contract markets, registered DTEFs, and foreign boards of trade would 
be making determinations as to the status of security indexes on which 
future contracts are trading, the Acting Chairman of the SEC has 
certified that the proposed rules, if adopted, would not have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \82\ 5 U.S.C. 603(a).
    \83\ 5 U.S.C. 551 et seq.
    \84\ 5 U.S.C. 601 et seq.
    \85\ Although Section 601(b) of the RFA defines the term ``small 
entity,'' the statute permits agencies to formulate their own 
definitions. The Commission has adopted definitions of the term 
small entity for the purposes of Commission 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. 18452 (January 28, 1982), 47 FR 
5215 (February 4, 1982).
---------------------------------------------------------------------------

    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.
    This certification is attached as an Appendix.

X. Statutory Bases and Text of Proposed Rules

List of Subjects

17 CFR Part 41

    Security futures products, Reporting and recordkeeping 
requirements.

17 CFR Part 240

    Securities.

Commodity Futures Trading Commission

17 CFR Chapter I

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

[[Page 27576]]

PART 41--SECURITY INDEX AND SECURITY FUTURES PRODUCTS

Sec.
Subpart A--General Provisions
41.1   Definitions.
41.2   Required records.
41.3-41.9   [Reserved]
Subpart B--Narrow-Based Security Indexes
41.10  Purpose and scope.
41.11  Method for determining market capitalization and dollar value 
of average daily trading volume; application of the definition of 
narrow-based security index.
41.12   Indexes underlying futures contracts trading for fewer than 
30 days.
41.13   Futures contracts on security indexes trading on or subject 
to the rules of a foreign board of trade.
41.14   Transition period for indexes that cease being narrow-based 
security indexes.

    Authority: 7 U.S.C. 1a(25), 2a and 12a(5).

Subpart A--General Provisions


Sec. 41.1  Definitions.

    For purposes of this part:
    (a) Broad-based security index means a group or index of securities 
that does not constitute a narrow-based security index.
    (b) Foreign board of trade means a board of trade located outside 
of the United States, its territories or possessions, whether 
incorporated or unincorporated, where foreign futures or foreign 
options are entered into.
    (c) Narrow-based security index has the same meaning as in section 
1a(25) of the Commodity Exchange Act.


Sec. 41.2  Required records.

    A designated contract market or registered derivatives transaction 
execution facility that trades a security index or security futures 
product shall maintain in accordance with the requirements of Sec. 1.31 
books and records of all activities related to the trading of such 
products, including: Records related to any determination under subpart 
B of this part whether or not a futures contract on a security index is 
a narrow-based security index or a broad-based security index.


Secs. 41.3--41.9  [Reserved]

Subpart B--Narrow-Based Security Indexes


Sec. 41.10  Purpose and scope.

    This subpart includes methods to be used by trading facilities for 
the purpose of determining whether a futures product is based on an 
index of securities subject to the joint jurisdiction of the Commodity 
Futures Trading Commission and the Securities and Exchange Commission 
or is based on a broad-based security index subject to the exclusive 
jurisdiction of the Commodity Futures Trading Commission. The methods 
included in this subpart relate to determining market capitalization 
and dollar value of average daily trading volume which are terms used, 
but not developed, in the statutory definitions of ``narrow-based 
security product.'' Consistent with Section 1a(25)(E)(ii) of the 
Commodity Exchange Act and Section 3a(55)(F)(ii) of the Securities 
Exchange Act of 1934, the methods for determining market capitalization 
and dollar value of average daily trading volume set forth in this 
subpart have been adopted jointly by the Commodity Futures Trading 
Commission and the Securities and Exchange Commission. The subpart also 
includes rules that permit, subject to certain conditions, a trading 
facility to continue to trade a narrow-based security index or a broad-
based security index, as the case may be, after that index has become a 
broad-based security index or a narrow-based security index, as the 
case may be. The comparable rules of the Securities and Exchange 
Commission may be found at 17 CFR 240.3a55-1 through 240.3a55-3.


Sec. 41.11  Method for determining market capitalization and dollar 
value of average daily trading volume; application of the definition of 
narrow-based security index.

    (a) Determining market capitalization and dollar value of average 
daily trading volume (``ADTV''). The method to be used to determine a 
security's market capitalization for purposes of Section 1a(25)(B) of 
the Act (7 U.S.C. 1a(25)(B)), and dollar value of ADTV for purposes of 
Section 1a(25)(A) and (B) of the Act (7 U.S.C. 1a(25)(A) and (B)) shall 
be as follows:
    (1) Market capitalization. The market capitalization of a security 
is the product of:
    (i) The average price of such security; and
    (ii) The number of outstanding shares of such security.
    (2) Dollar value of ADTV. (i) The dollar value of ADTV of a single 
security is the product of:
    (A) The average price of such security; and
    (B) The ADTV of such security.
    (ii) The dollar value of ADTV of the lowest weighted 25% of an 
index is the sum of the dollar value of ADTV of each of the component 
securities comprising the lowest weighted 25% of such index.
    (iii) The dollar value of ADTV of the lowest weighted 25% of an 
index may be calculated by using average price as defined in paragraph 
(b)(2)(ii) of this section, provided that when such average price is 
used, the dollar value of ADTV of the lowest weighted 25% of the index 
equals or exceeds $55,000,000 (or in the case of an index with 15 or 
more component securities, $33,000,000).
    (b) Definitions. For purposes of this section:
    (1) Average daily trading volume in a security means the total 
number of shares of such security traded on the trading days of the 
principal market for the security during the preceding 6 full calendar 
months (which may include any shares traded on a market outside the 
United States, provided such information has been reported to a foreign 
financial regulatory authority in the jurisdiction where the security 
is traded) divided by the number of trading days of the principal 
market for the security during the preceding 6 full calendar months.
    (2) Average price. (i) Average price of a security means the total 
dollar value of all transactions in such security on the trading days 
of the principal market for the security during the preceding 6 full 
calendar months (which may include transactions on a market outside the 
United States, provided such information has been reported to a foreign 
financial regulatory authority in the jurisdiction where the security 
is traded) divided by the total number of shares traded in such 
transactions, where the dollar value for each transaction is the price 
per share in U.S. dollars of such transaction multiplied by the number 
of shares in such transaction.
    (ii) For purposes of paragraph (a)(2)(iii) of this section only, 
average price of a security may be calculated as the sum of the price 
per share in U.S. dollars for each transaction in such security on the 
trading days of the principal market for the security during the 
preceding 6 full calendar months (which may include prices of 
transactions on a market outside the United States, provided such 
information has been reported to a foreign financial regulatory 
authority in the jurisdiction where the security is traded) divided by 
the total number of such transactions during the preceding 6 full 
calendar months.
    (iii) If the price of a transaction is reported in a currency other 
than U.S. dollars, such price must be converted into U.S. dollars on 
the basis of the transaction date's noon buying rate in New York City 
for cable transfers in foreign currencies as certified for customs 
purposes by the Federal Reserve Bank of New York.

[[Page 27577]]

    (iv) The transactions used to determine average price must be the 
same transactions used to determine ADTV.
    (3) Foreign financial regulatory authority has the same meaning as 
in Section 3(a)(52) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(52)).
    (4) Lowest weighted 25% of an index. With respect to any particular 
day, the lowest weighted component securities comprising, in the 
aggregate, 25% of an index's weighting for purposes of Section 1a(25) 
of the Act (``lowest weighted 25% of an index''), means those 
securities:
    (i) That are the lowest weighted securities when all the securities 
in such index are ranked from lowest to highest based on the index's 
weighting methodology; and
    (ii) For which the sum of the weight of such securities is equal 
to, or less than, 25%.
    (5) Outstanding shares of a security means the number of 
outstanding shares of such security as reported on the most recent 
Form10-K, Form10-Q, Form 10-KSB, Form 10-QSB, or Form 20-F (17 CFR 
Secs. 249.310, 249.308a, 249.310b, 249.308b, or 249.220f) filed with 
the Securities and Exchange Commission by the issuer of such security.
    (6) Preceding 6 full calendar months means, with respect to a 
particular day, the period of time beginning on the same day of the 
month 6 months before and ending on the day prior to such day.
    (7) Principal market for a security means the single securities 
market with the largest reported trading volume for the security during 
the preceding 6 full calendar months.
    (8) Trading days of the principal market means all days on which 
the principal market for the security is open for trading.
    (9) Weighting of a component security of an index means the 
percentage of such index's value represented, or accounted for, by such 
component security.


Sec. 41.12  Indexes underlying futures contracts trading for fewer than 
30 days.

    (a) An index on which a contract of sale for future delivery is 
trading on a designated contract market, registered derivatives 
transaction execution facility, or foreign board of trade is not a 
narrow-based security index under Section 1a(25) of the Act (7 U.S.C. 
1a(25)) for the first 30 days of trading, if such index would not have 
been a narrow-based security index on each day of the preceding 6 full 
calendar months prior to the commencement of trading of such contract.
    (b) An index that is not a narrow-based security index for the 
first 30 days of trading pursuant to paragraph (a) of this section, 
shall become a narrow-based security index if such index has been a 
narrow-based security index for more than 45 business days over 3 
consecutive calendar months.
    (c) An index that becomes a narrow-based security index solely 
because it was a narrow-based security index for more than 45 business 
days over 3 consecutive calendar months pursuant to paragraph (b) of 
this section shall not be a narrow-based security index for the 
following 3 calendar months.
    (d) Preceding 6 full calendar months has the same meaning as in 
Sec. 41.11(b)(6).


Sec. 41.13  Futures contracts on security indexes trading on or subject 
to the rules of a foreign board of trade.

    When a contract of sale for future delivery on a security index is 
traded on or subject to the rules of a foreign board of trade, such 
index shall not be a narrow-based security index if a futures contract 
on such index were traded on a designated contract market or registered 
derivatives transaction execution facility.


Sec. 41.14  Transition period for indexes that cease being narrow-based 
security indexes.

    (a) Forty-five day tolerance provision. An index that is a narrow-
based security index that becomes a broad-based security index for no 
more than 45 days over 3 consecutive calendar months shall be a narrow-
based security index.
    (b) Transition period for indexes that cease being narrow-based 
security indexes for more than forty-five days. An index that is a 
narrow-based security index that becomes a broad-based security index 
for more than 45 days over 3 consecutive calendar months shall continue 
to be a narrow-based security index for the following 3 calendar 
months.
    (c) Trading in months with open interest following transition 
period. After the transition period provided for in paragraph (b) of 
this section ends, a national securities exchange may continue to trade 
only in those months in the security futures product that had open 
interest on the date the transition period ended and shall limit 
trading to positions that liquidate previously-established positions.
    (d) Definition of calendar month. Calendar month means, with 
respect to a particular day, the period of time beginning on a calendar 
date and ending during another month on a day prior to such date.

    By the Commodity Futures Trading Commission.
    Dated: May 10, 2001.
Jean A. Webb,
Secretary.

Securities and Exchange Commission

17 CFR Chapter II

    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, 78f, 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 
and 80b-11, unless otherwise noted.
* * * * *
    2. Sections 240.3a55-1 through 240.3a55-3 are added to read as 
follows:


Sec. 240.3a55-1  Method for determining market capitalization and 
dollar value of average daily trading volume; application of the 
definition of narrow-based security index.

    (a) Determining market capitalization and dollar value of average 
daily trading volume (``ADTV''). The method to be used to determine a 
security's market capitalization for purposes of Section 3(a)(55)(C) of 
the Act (15 U.S.C. 78c(a)(55)(C)) and dollar value of ADTV for purposes 
of Section 3(a)(55)(B) and (C) of the Act (15 U.S.C. 78c(a)(55)(B) and 
(C)) shall be as follows:
    (1) Market capitalization. The market capitalization of a security 
is the product of:
    (i) The average price of such security; and
    (ii) The number of outstanding shares of such security.
    (2) Dollar value of ADTV. (i) The dollar value of ADTV of a single 
security is the product of:
    (A) The average price of such security; and
    (B) The ADTV of such security.
    (ii) The dollar value of ADTV of the lowest weighted 25% of an 
index is the sum of the dollar value of ADTV of each of the component 
securities comprising the lowest weighted 25% of such index.
    (iii) The dollar value of ADTV of the lowest weighted 25% of an 
index may be calculated by using average price as defined in paragraph 
(b)(2)(ii) of this section, provided that when such average price is 
used, the dollar value of ADTV of the lowest weighted 25% of

[[Page 27578]]

the index equals or exceeds $55,000,000 (or in the case of an index 
with 15 or more component securities, $33,000,000).
    (b) Definitions. For purposes of this section:
    (1) Average daily trading volume in a security means the total 
number of shares of such security traded on the trading days of the 
principal market for the security during the preceding 6 full calendar 
months (which may include any shares traded on a market outside the 
United States, provided such information has been reported to a foreign 
financial regulatory authority in the jurisdiction where the security 
is traded) divided by the number of trading days of the principal 
market for the security during the preceding 6 full calendar months.
    (2) Average price. (i) Average price of a security means the total 
dollar value of all transactions in such security on the trading days 
of the principal market for the security during the preceding 6 full 
calendar months (which may include transactions on a market outside the 
United States, provided such information has been reported to a foreign 
financial regulatory authority in the jurisdiction where the security 
is traded) divided by the total number of shares traded in such 
transactions, where the dollar value for each transaction is the price 
per share in U.S. dollars of such transaction multiplied by the number 
of shares in such transaction.
    (ii) For purposes of paragraph (a)(2)(iii) of this section only, 
average price of a security may be calculated as the sum of the price 
per share in U.S. dollars for each transaction in such security on the 
trading days of the principal market for the security during the 
preceding 6 full calendar months (which may include prices of 
transactions on a market outside the United States, provided such 
information has been reported to a foreign financial regulatory 
authority in the jurisdiction where the security is traded) divided by 
the total number of such transactions during the preceding 6 full 
calendar months.
    (iii) If the price of a transaction is reported in a currency other 
than U.S. dollars, such price must be converted into U.S. dollars on 
the basis of the transaction date's noon buying rate in New York City 
for cable transfers in foreign currencies as certified for customs 
purposes by the Federal Reserve Bank of New York.
    (iv) The transactions used to determine average price must be the 
same transactions used to determine ADTV.
    (3) Foreign financial regulatory authority has the same meaning as 
in Section 3(a)(52) of the Act (15 U.S.C. 78c(a)(52)).
    (4) Lowest weighted 25% of an index. With respect to any particular 
day, the lowest weighted component securities comprising, in the 
aggregate, 25% of an index's weighting for purposes of Section 
3(a)(55)(B)(iv) of the Act (15 U.S.C. 78c(a)(55)(B)(iv)) (``lowest 
weighted 25% of an index'') means those securities:
    (i) That are the lowest weighted securities when all the securities 
in such index are ranked from lowest to highest based on the index's 
weighting methodology; and
    (ii) For which the sum of the weight of such securities is equal 
to, or less than, 25%.
    (5) Outstanding shares of a security means the number of 
outstanding shares of such security as reported on the most recent Form 
10-K, Form 10-Q, Form 10-KSB, Form 10-QSB, or Form 20-F (17 CFR 
249.310, 249.308a, 249.310b, 249.308b, or 249.220f) filed with the 
Commission by the issuer of such security.
    (6) Preceding 6 full calendar months means, with respect to a 
particular day, the period of time beginning on the same day of the 
month 6 months before and ending on the day prior to such day.
    (7) Principal market for a security means the single securities 
market with the largest reported trading volume for the security during 
the preceding 6 full calendar months.
    (8) Trading days of the principal market means all days on which 
the principal market for the security is open for trading.
    (9) Weighting of a component security of an index means the 
percentage of such index's value represented, or accounted for, by such 
component security.


Sec. 240.3a55-2  Indexes underlying futures contracts trading for fewer 
than 30 days.

    (a) An index on which a contract of sale for future delivery is 
trading on a designated contract market, registered derivatives 
transaction execution facility, or foreign board of trade is not a 
narrow-based security index under Section 3(a)(55) of the Act (15 
U.S.C. 78c(a)(55)) for the first 30 days of trading, if such index 
would not have been a narrow-based security index on each day of the 
preceding 6 full calendar months prior to the commencement of trading 
of such contract.
    (b) An index that is not a narrow-based security index for the 
first 30 days of trading pursuant to paragraph (a) of this section, 
shall become a narrow-based security index if such index has been a 
narrow-based security index for more than 45 business days over 3 
consecutive calendar months.
    (c) An index that becomes a narrow-based security index solely 
because it was a narrow-based security index for more than 45 business 
days over 3 consecutive calendar months pursuant to paragraph (b) of 
this section shall not be a narrow-based security index for the 
following 3 calendar months.
    (d) Preceding 6 full calendar months has the same meaning as in 
Sec. 240.3a55-1.


Sec. 240.3a55-3  Futures contracts on security indexes trading on or 
subject to the rules of a foreign board of trade.

    When a contract of sale for future delivery on a security index is 
traded on or subject to the rules of a foreign board of trade, such 
index shall not be a narrow-based security index if it would not be a 
narrow-based security index if a futures contract on such index were 
traded on a designated contract market or registered derivatives 
transaction execution facility.

    By the Securities and Exchange Commission.
    Dated: May 10, 2001.
Margaret H. McFarland,
Deputy Secretary.

Appendix

    Note: This appendix to the preamble will not appear in the Code 
of Federal Regulations.

Regulatory Flexibility Act Certification

    I, Laura S. Unger, Acting Chairman of the Securities and 
Exchange Commission (``SEC''), hereby certify, pursuant to 5 U.S.C. 
605(b), that proposed Rules 3a55-1, 3a55-2, and 3a55-3 under the 
Securities Exchange Act of 1934 (``Exchange Act'') would not, if 
adopted, have a significant economic impact on a substantial number 
of small entities. Under the Commodity Futures Modernization Act of 
2000, the SEC and the Commodity Futures Trading Commission 
(``CFTC'') jointly must specify the method to be used to determine 
``market capitalization'' and ``dollar value of average daily 
trading volume'' (``ADTV'') for purposes of Section 3(a)(55) of the 
Exchange Act and Section 1a(25) of the Commodity Exchange Act. 
Proposed Rule 3a55-1 would specify the methods for determining the 
dollar value of ADTV and market capitalization for purposes of 
ascertaining whether a security index is narrow-based under Section 
3(a)(55) of the Exchange Act. Proposed Rule 3a55-2 would create an 
exemption from the definition of narrow-based security index for 
designated contract markets, registered derivatives transaction 
execution facilities (``DTEFs''), and foreign boards of trade 
trading certain futures contracts. Proposed Rule 3a55-3 under the 
Exchange Act would establish that

[[Page 27579]]

when a futures contract on a security index is traded on or subject 
to the rules of a foreign board of trade, that index shall not be 
considered a narrow-based security index if it would not be a 
narrow-based security index pursuant to the definition of a narrow-
based security index, or the exclusions from that definition, 
contained in Section 3(a)(55) of the Exchange Act. The proposed 
rules would be incorporated into a joint rulemaking with the CFTC. 
Only national securities exchanges, designated contract markets, 
registered DTEFs, and foreign boards of trade would be involved in 
the calculation of ADTV and market capitalization, all of which are 
not small entities for purposes of the Regulatory Flexibility Act. 
Accordingly, proposed Rules 3a55-1, 3a55-2, and 3a55-3 would not 
have a significant economic impact on a substantial number of small 
entities.

    Dated: May 9, 2001.

Laura S. Unger,
Acting Chairman.
[FR Doc. 01-12278 Filed 5-16-01; 8:45 am]
BILLING CODE 8010-01-P


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