27560 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

1All references to the CEA are to 7 U.S.C. 1 et

seq.

2All references to the Exchange Act are to 15

U.S.C. 78a et seq.

3Subpart 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.

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 NarrowBased Security Index

AGENCIES: Commodity Futures Trading

Commission and Securities and

Exchange Commission.

ACTION: Joint proposed rules.

SUMMARY: The Commodity Futures

Trading Commission (‘‘CFTC’’) and the

Securities and Exchange Commission

(‘‘SEC’’) (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 ‘‘narrowbased 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 narrowbased 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 narrowbased security index if it would not be

a narrow-based security index pursuant

to the statutory definition of a narrowbased 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 broadbased 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 secretary@cftc.gov.

Reference should be made to ‘‘NarrowBased 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: rule-comments@sec.gov.

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. Email: (EFox@cftc.gov),

(RShilts@cftc.gov), or

(TLeahy@cftc.gov).

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

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 NarrowBased

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

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27561

4Pub. L. No. 106–554, 114 Stat. 2763 (2000).

5Section 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).

6See Section 1a(25) of the CEA and Section

3(a)(55) of the Exchange Act.

7No 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.

8Use of the term ‘‘broad-based security index’’ in

this release means a security index that is not a

narrow-based security index.

9Section 1a(25)(E) of the CEA and Section

3(a)(55)(F) of the Exchange Act.

10Section 3(a)(10) of the Exchange Act.

11Section 2(a)(14) of the Securities Act, 15 U.S.C.

77b(a)(14).

12Section 2(a)(36) of the Investment Company

Act, 15 U.S.C. 80a–2(a)(36).

13Section 202(a)(18) of the Investment Advisers

Act, 15 U.S.C. 80b–2(a)(18).

14The 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.

15See 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.

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 NonVolume-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.

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 cashsettled; (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.

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.

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

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

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

27562 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

16Section 1a(25)(A)(i)—(iv) of the CEA and

Section 3(a)(55)(B)(i)—(iv) of the Exchange Act.

17See 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.

18Section 1a(25)(E) of the CEA and Section

3(a)(55)(F) of the Exchange Act.

19Section 1a(25)(B)(i) of the CEA and Section

3(a)(55)(C)(i) of the Exchange Act.

20Section 1a(25)(E) of the CEA and Section

3(a)(55)(F) of the Exchange Act.

21 Id.

22As 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 narrowbased 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.

23Section 1a(25)(D) of the CEA and Section

3(a)(55)(E) of the Exchange Act.

24See supra note 16 and accompanying text.

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

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.

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

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.

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

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 NarrowBased

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

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27563

25Section 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].’’

26Section 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.

27Certain 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.

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

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 narrowbased 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 broadbased 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 broadbased) 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 narrowbased 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.

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

27564 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

28The 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.

29The 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.

30To 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.

32See infra notes 40–41 and 48–49 and

accompanying text.

to the ongoing requirements of the CEA

and any new standard in effect

thereafter.

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 narrowbased 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?

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

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

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.

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27565

33 17 CFR 249.308.

34Section 1a(25)(A)(iv) and (B)(i) of the CEA and

Section 3(a)(55)(B)(iv) and (C)(i) of the Exchange

Act.

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?

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 ‘‘narrowbased 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.

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?

27566 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

35The 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. 36See below in Part III.E. regarding the proposed

limitation of trading days to ‘‘trading days of the

principal market for the security.’’ 37See infra notes 42–47 and accompanying text. 38 Id.

39See Section 1a(25)(A)(iv) of the CEA and

Section 3(a)(55)(B)(iv) of the Exchange Act. 40 Id. 41The 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.

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

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

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 NonVolume-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-volumeweighted 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 sixmonth period, irrespective of the

number of shares traded in each

transaction.40

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.

Sometimes, the dollar value of ADTV

of the lowest weighted 25% of an index,

when based on the non-volumeweighted 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

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27567

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.

43The 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.

44See paragraph (b)(2)(iv) of proposed Rule 41.11

under the CEA and proposed Rule 3a55–1 under the

Exchange Act.

45See 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.

46See 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.

47Paragraph (b)(7) of proposed Rule 41.11 under

the CEA and proposed Rule 3a55–1 under the

Exchange Act.

48Section 1a(25)(E)(i) of the CEA and Section

3(a)(55)(F)(i) of the Exchange Act.

49Sections 1a(25)(B)(iii) and (D) of the CEA and

Sections 3(a)(55)(C)(iii) and (E) of the Exchange Act.

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

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

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

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.

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

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

27568 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

50Section 1a(25)(A)(iv) of the CEA and Section

3(a)(55)(B)(iv) of the Exchange Act.

51Paragraph (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.

52See supra, Part II.B.2. 53Proposed 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.’’

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

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

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

weighted 25% of its component

securities is less than $50 million (or

$30 million for an index of 15

component securities or more).50

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.

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 BroadBased 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

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

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 broadbased index subject to the sole

jurisdiction of the CFTC.54

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.

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 (‘‘noticeregistered contract markets’’).56

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

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27569

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

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.

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 narrowbased 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 noticeregistered) 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 broadbased. 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

secretary@cftc.gov. 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

27570 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

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

59See Section 1a(25)(A) of the CEA and Section

3(a)(55)(B) of the Exchange Act.

60Section 3(a)(55)(F) of the Exchange Act and

Section 1a (25)(E) of the CEA.

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

78f(g).

62Proposed Rule 41.11 under the CEA parallels

proposed Rule 3a55–1.

63 17 CFR 240.17a–1.

64See Section 6 of the Exchange Act, 15 U.S.C.

78f.

65This 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.

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.

A. Summary of Collection of

Information

As noted above, the CFMA lifted the

ban on trading single stock and narrowbased 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

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 (‘‘noticeregistered national securities exchange’’)

solely for the purpose of trading security

futures products.61

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.

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 noticeregistered 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 narrowbased.65

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 ‘‘narrowbased,’’ 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 noticeregistered 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

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27571

66Notice-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).

67 17 CFR 240.17a–1.

68See Rule 17a–1 under the Exchange Act, 17

CFR 240.17a–1, and Sections 5(d)(17) and 5a(d)(8)

of the CEA.

69 17 CFR 240.17a–1.

70See 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). 71Section 15(a) of the CEA, 7 U.S.C. 19(a).

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.

D. Total Annual Reporting and

Recordkeeping Burden

1. Capital Costs

Rule 17a–1 under the Exchange Act

would require national securities

exchanges, including any noticeregistered national securities exchanges,

that trade futures contracts on narrowbased 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 noticeregistered 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.

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.

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.

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.

27572 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

72See Section 1a(25) of the CEA and Section

3(a)(55) of the Exchange Act.

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 ‘‘narrowbased 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.

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 narrowbased security index if it would not be

a narrow-based security index pursuant

to the statutory definition of a narrowbased 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 costbenefit 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

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27573

73The proposed rules specify that the volumeweighted 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).

74For purposes of the Exchange Act, a narrowbased 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).

‘‘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 (‘‘volumeweighted 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-volumeweighted 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 narrowbased 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.

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

27574 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

75Under 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.

76Section 3(f) of the Exchange Act, 15 U.S.C.

78c(f).

77Section 23(a)(2) of the Exchange Act, 15 U.S.C.

78w(a)(2).

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 narrowbased 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.

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

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 narrowbased or broad-based. In this way,

market participants would have

Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules 27575

78 5 U.S.C. 601 et seq.

79See 47 FR 18618–21 (April 30, 1982).

80See id. at 18619 (discussing contract markets).

81See 66 FR 14262, 14268 (March 9, 2001).

82 5 U.S.C. 603(a).

83 5 U.S.C. 551 et seq.

84 5 U.S.C. 601 et seq.

85Although 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).

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

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 narrowbased 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.

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:

27576 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

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

§ 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.

§ 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 § 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.

§§ 41.3—41.9 [Reserved]

Subpart B—Narrow-Based Security

Indexes

§ 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.

§ 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.

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

§ 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 narrowbased security index for the first 30 days

of trading pursuant to paragraph (a) of

this section, shall become a narrowbased 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 narrowbased 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

§ 41.11(b)(6).

§ 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.

§ 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 previouslyestablished 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:

§ 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

27578 Federal Register / Vol. 66, No. 96 / Thursday, May 17, 2001 / Proposed Rules

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.

§ 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 narrowbased security index for the first 30 days

of trading pursuant to paragraph (a) of

this section, shall become a narrowbased 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 narrowbased 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 § 240.3a55–

1.

§ 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

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