.. 

. _, 

UNITED STATES OF AMERICA 

COMMODlTY FUTURES TRADING COMMISSION 

2033 K Street, N.W. 

Washington, D.C. 20581 

1'18 8 

[Addressee] 

Dear 

By letter dated July 7, 1988, you advised the staff of 

the Commodity Futures Trading Commission ("Commission") of . 

. intention to underwrite proposed offerings of 

instruments denominated as . . • on behalf of . These 

proposed offerings would be identical, except as 

specifically delineated in your letter, to the instruments 

which were addressed in earlier no-action letters from 

Commission staff, dated June 20, 1988, and July 13, 1988, 

("staff no-aci~.ion letters") . In your letter, you also 

propose a procedure to be followed for future proposed 

issues which rely upon those letters. 

The three proposed issuers are c9mpanies having in 

excess of $100 million net worth and whic.h are in the 

businesl? of fina·ncial. services~. The previo~sly iss·~ied and 

. outstanding debt of each of the·. issuers has be~n rated by -a 

nationally recogni~ed s~curities.~atirig organization as 

investin~nt grade~- ·In particular.r ... · .... ari .'indirect ·. · · 

w])..olly-owned f:lUbsidia:;r:y of:·. . .. ·finances the' s_ale of . . 

equipment and is involved in factoring, commer.cial _and. other 

lending, and other financial services. Similarly, . and 

•• offer a broad array of financial services, including 

lending and financing services. 

The proposed notes are substantially identical to 

those which were the subjects of the earlier staff no-action 

letters. They resemble debt instrument's de.nominated . in a 

foreign currency but differ from the earlier instruments 

witp. regard to.the identity of· :the-issuers and may. ,involve· 

different interest rates· and foreign currencies to-which the 

notes are tied~ Also, we understand that the proposed notes 

will be· registered with -t;.he Sec\].rities .a.nd Exchange. . 

· Corrunis_sion, will· be marketed· as·. qebt secu.ri:t.Les. and will not 

~e ~arketed to the public as tiaving the beneficial · · 

characteristics of commodity option or futures contracts. 

The proposed notes will be issued in denominations of not 

le~~·than U.S. $20,000. T~e proposed notes also ~ill ha~e 

.simil~r return chara6terist~~s td tho~~ w~ich were th~· 

subj'ect of the staff ·no-action lett'E:;r·s, i ~e., they ·will 

provide a princ.ipal return linked to a fCireign currency 

exchange rate on no more than a one-to-one basis as well as 
. 

'1. •' 

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a fixed rate of interest which is no less than the 

applicable market rate for that issuer. The term of the 

notes will be not less than three and' not more than seven 

years to maturity. The issuers will cover the foreign 

currency risk of the notes in the forward market for 'foreign 

currencies, will disclose that the notes are not subject to 

regulation by the Commission, and will undertake to submit 

to special calls requested by the Commission for information 

relating to the instruments and their offering. 

As the staff has indicated to you in its previous 

no-action letters, it appears that the commodity interest 

component of the proposed notes distributes returns between 

the lender and the borrower based upon the direction and 

magnitude of the price change in a foreign currency relative 

to the United States dollar. Thus, the notes have been 

viewed by the staff as coupon-bearing instruments where 

repayment of the principal has been indexed to the U.S. 

dollar value of a foreign currency on a one-to-one basis. 

The characteristics of these instruments, which resemble 

those of foreign currency-denominated debt instruments, 

"preclude ready characterization of the Notes as futures 

equivalents." (C.F.T.C. Interpretative Letter No. 88-10, 

dated June 20, 1988, at p. 5.) 

Moreover, as the staff further noted, although the 

proposed notes are not specifically encompassed by the 

·pending advance notice of proposed rulemaking relating to 

hybrid instruments·, !?·2 Fed. Reg. 47022 (Deceml;>er 11,.1987),· 

the no-action position set. forth- in our previous letters is 

not inconsistent with. the analysis and requirements of that 

.· relea·se·. Accordingiy( based upon the r·ep.resentations in .. · 

your ·letter that the three proposed issu<?s are identical to 

the instruments addressed in our previous no-action' letters, 

except as specifically detailed in your letter, and for the 

reasons explained more fully in those no-action letters, the 

staff will not recommend to the Commission any enforcement 

action under Section 4(a) of the Commodity Exchange Act 

based upon the issuance of the three proposed instruments. 

Proposed offerings with criteria that vary from those .in· 

this and· the pt·evious staff no-act.:i_on letters will ~ontin.u~ 

to be considered on·a case-by-cas~ bas~s. 

In add.:i_tion, you indicate that . contemplates 

underwriting issues in the future which are substantially 

.identical· to t:h_ose which. have been the subjects of the staff 

no-act'j_on. letters. Of course,. the staff would extend' 

similar no-action tr·eatment to all such identical 

instruments which meet the relevant criteria, including the 

qualifications of the issuers. In this connectiop, the 

~taff has d~termined.that a procedure should b~ established 

t¢ ·facilitate :the cipplication .of the staff '.s prio·r· no-action 

posi~ion t~·iristruments whi6h may be propo~ed in the .. £u~ure.· 
,1 3 

The staff's no-action position will apply to proposed 

instruments which are identical in all material respects, as 

reiterated below, to the notes which were the subjects of 

the no-action letters: 

1) 

2) 

3) 

4 ) 

5) 

6) 

7) 

8) 

9) 

the instruments are debt instruments; 

the principal amount of the note is indexed to a 

foreign currency on no more than a one-to-one 

basis; 

the interest paid on the note is at no less than 

the market rate for that issuer; 

the public offering of the notes is registered 

with the Securities and Exchange Commission under 

the Securities Act of 1933 and a prospectus has 

been prepared in compliance with the Securities 

Act and regulations thereunder and delivered to 

purchasers of the notes, unless the '·:iss"iier\ is 

exempt from such registration requirements; 

the net-worth of the issuer is at least $100 

miliion and its previously issued and·· outstanding 

debt has been rated as of investment graq~ by a · 

nationally recogni4ed securities rating 

organization; 

the notes have a term of at least three-years and 

are in minimum denominations of $20 1 000; 

the fiotes ~re mark~ted to 'the priblic as d~bt 

securities not having the beneficial 

characteristics of commodity options or futures 

contracts and disclosure is made that the notes 

are not regulated by the CFTC; 

the commodity-based risk of the instruments is to 

be covered simultaneously with the issuance 

thereof; and 

the issuer agrees to respond to special calls from 

the Commission for information confirming that the 

instrument meets the criteria set forth herein. 

Where the above criteria are clearly satisfied on the 

face of.the offering, specific confirmation that ea6h such 

issue is covered by the staff's prior no-action position is 

unnecessary. However, notification to the Commission prior 

to the public offering of such a proposed issue· is required. 

Specifically, a filing which.represents that each such 

proposed issue ~ualifies for this exemptive treatment must 

be· received by the Commi·ssion· two business days pr.lor to the·. 

issuanqe of the ~ioposed hates. The'fiil~~e ·of the staff to 
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notify the proposed issuer that its instrument does not fall 

within the bounds of the staff no-action letters within this 

time period, however, does not reflect acquiescence in, nor 

approval of, the issuance of the notes. Nor does such a 

failure to notify in any way limit the action that may be 

taken by the Commission or its staff with res.pect to the 

offering. 

The position of the staff is based upon the 

representations contained in your letter. This position 

does not excuse . • • or any of the proposed issuers from 

complying with any otherwise applicable provision of the 

Commodity Exchange Act, nor does it address any instrument 

or proposed instrument other than those which clearly fall 

within the scope of this letter. Any different, omitted or 

changed facts or conditions might require a different 

conclusion. It should also be noted that this position is 

that of the staff and is not binding upon the Commission and 

that any subsequent determination by the Commission with 

regard to the rulemaking proceeding initiated by the advance 

notice of proposed rulemaking may require a reconsideration 

of this staff position. 

cc: 

Sincerely, 

Marshall E. Hanbury 

Co-Chairman 

Commodity Futures Trading 

Commission 

Paula A. Tosini 

Co-chairman 

Commodity Futures Trading 

Commission · 

Off-Exchange T.ask Force