Dear 

UNITED STATES OF AMERICA 

COMMODITY FUTURES TRADING CO(\IlMISSION 

2033 K Street, N.W. 

Washington, O.C. 20581 

September 23, 1988 

Re: Offer.:i,ng of 

By letters dated August 20, 1987, July 1, 1988 and 

July 29, 1988, as supplemented by discussions with Commission 

staff, you have requested on behalf of 

that Commission staff confirm that it will not 

recommena to the Commission that enforcement action be taken 

against in connection with a proposed offering of 

certificates of deposit with interest payable at maturity indexed 

in part to the spot price of gold (Indexed CDs). 1/ 

You represent that proposes to offer certain 

deposit-taking institutions the opport.unity to issue, and its 

retail customers the opportunity to purchase, certificates of 

deposit with interest payable at maturity indexed to the spot price of gold. proposes to offer both "bear" direction 

Indexed CDs, where the amount of interest to be received will 

increase as the value of the index dec:reases, and "bull" direction Indexed CDs, where the amount of :Lnterest to be received at 

maturity will increase as the value of the index increases. In 

addition to a return based upon fluctuations in the price of 

gold, each Indexed CD will provide a guaranteed rate of interest 

that will equal or exceed 35% of the estimated annual yield at 

the time of deposit of a non-indexed CD of like maturity and 

denomination issued by the same bank. The principal amount of 

Indexed CDs will not be indexed and is required to be fully 

11 Although certain of submissions relate to other 

instruments, the analysis and conclusions set forth herein 

pertain only to proposed marketing of 

gold-indexed CDs issued by Federal Deposit Insurance 

Corporation (FDIC)-insured, federally regulated national 

banks and FDIC-insured state-chartered commercial banks. 
' 

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repaid at maturity. represents that in its 

opinion the full amount of principal, non-commodity-linked 

interest and commodity-indexed return of the Indexed CDs will be 

insured by the FDIC. No 11 upfront" fees will be charged by in connection with the sale of Indexed COs. Indexed CDs 

will be subject to substantial early withdrawal penalties, except in the case of death or incapacity. represents that it 

will not make a secondary market in Indexed CDs and that no 

secondary market for Indexed COs will exist. 

In an Advance Notice of Proposed Rulemaking Relating to the 

Regulation of Certain Hybrid and Related Instruments (Advance 

Notice), 52~. Bgg. 47022 tDecember 11, 1987), the Commission 

has requested comment on a proposed regulatory framework which 

would exempt from Commission regulation certain otherwise-regu- lated instruments with incidental commodity option components. In view of the fact that the Advance N~tice r~mains pending and 

that the Commission has not reached a final determination with 

respect to the proposals set forth therein, the staff believes 

that it is appropriate, in limited circumstances such as b.-\is, to 

address certain instruments on a case-by-case basis. aased upon 

the representations contained in the correspondence referred to 

above and in discussions with the staff, we understand the 

relevant facts to include the following. 

(1) Term to Maturity 

In the Advance Notice, the Commission proposed to establish 

a minimum term to maturity of thret }dars for hybrid instruments 

qualifying for exemptive relief. proposes to offer and 

sell Indexed COs having only a one-year term to maturity. You 

have explained that has proposed a ons-year term for 

Indexed COs because the market for CDs is overwhelmingly in 

shorter maturities. represents that in 1997 approxi- mately 75% of the aggregate principal amount of COs sold by it 

involved COs with a maturity of one year or less. Further, 

advises that the "difficulty and cost" of longer term 

hedging for gold-indexed CDs currently are such as to render the 

pricing of deposits of longer term CDs "relatively unattractive 

to investors." further represents that there will not 

be a secondary market in Indexed COs and that substantial penalties for early withdrawal would be assessed. 

(2) Maximum Commodity-Based Return and Minimum 

Non-Commodity-Based Return 

The exemption proposed in the Advance Notice also would be 

conditioned upon ~Qrnpliance with requirements that the hybrid instrument: (i) have a minimum annual yield or return independent of its commodity-related component equal to at least 35% of the 

estimated annual yield at the time of issuance for a comparable 
Page 3 

pure debt or depository instrument; and (ii) have no more than a 

maximum average potential return on its commodity-related component of 20% on an annualized basis of the total principal or face 

amount of the.instrument. You have represented that each Indexed 

CD will hav~;.. a guaranteed interest n.t:.e that will equal or exceed 

35% of the estimated annual yield at the time of deposit for a CD 

issued by the same b1:tnk that is not indexed but has a like maturity and denomina~·.ion. Further, you have represented that the 

purchaser of an Indelced CD will participate in no more than the 

first. 20% of any per annum change in the underlying index of gold 

prices and that nc' index multiplier in excess of one will be 

applied to determine the investor's return based upon the commodity-related feature c•f the Indexed CDs. 7..1 

(3) Line of BusinU§. 

The Advance Notice also proposed a "line of business" 

requirement that ~..,ould limit the availability of exetnptive 

treatment to those hybrid instruments ·in which the commodity 

component o£ the instrument is used in a principal line of 

busin<::lss of the ist~ue:r. This requirement was proposed to assure 

that the issuer hat; ot:>mmeroial experience in addressing the 

commodity-related 1:iska of qualifying hybrid instruments and that 

such risks are likElly to be offset or reduced by reserves, 

inventories, forwa1:d <:oT!tract commitments or other cover that 

could be expected to increase in value with the size of the 

issuer's or offerol:'s commodity-related obligations. 

You have repre:setlted that federal and state banking regulations generally provide that commercial banks have the 

power to buy and sell gold and that a number of commercial banks 

participate in the institutional gold market. Although the 

proposed Indexed CD program does not appear to be limited to COs 

issued by bartks that participa:..e in the gold market as a 

principal line of business, has represented that each 

2:.1 Your have provided the following example concerning the 

calculation of the commodity and non-commodity-based yields 

on Indexed CDa. If a depositor owns a one-year bull 

direction gold indexed CD with a guaranteed rate of 6% and 

an Index Multiplier of .10 and gold prices increased 30% 

over the one-year term of the CD, the depositor would 

participate only in the first 20% of the price increase. 

The depositor's total return would be computed as follows: 

Index Based Interest= .20(.1) = 2% 

Guaranteed Minimum Interest = 6% 

Total Interest at Maturity = 8%. 
Page 4 

bank participating in its Indexed CD program will be required to 

hedge fully its commodity-related obligations under the Indexed 

CDs through hedging agreements which "would result in the bank 

being indifferent to movements in the price of the underlying 

comrnodi ty. " J./ 

(4) otherwise Regulated 

Indexed CDs will constitute 11 seourities" issued by a bank 

and therefore will be exempt from registration under the 

Securities Act of 1933 (Securities Act). However, the antifraud 

provisions of Section 17 of the Securities Act would be 

applicable to the Indexed CDs. In addition, , an 

SECMregistered broker-dealer, would be subject to the antifraud 

and customer protection rules of the Securities Exchange Act of 

1934 with respect to its sales of Indexed Cos. 

Igsuing deposit institutions will be subject to regulation by federal or state banking regulators. Indexed cos of each 

issuing deposit institution will be federally insured, together with other deposits at the same institution, to an aggregate maximum of $100 1 000 for each depositor. You have advised the 

staff that in the opinion of , both the 

principal and yield on Indexed CDs, including all returns based 

upon the commodity-indexing feature of the instruments as well as 

fixed interest payments, would be covered by FDIC insurance. 

(5) Net Worth and Cover 

The Advance Not.toe also proposed two 11 performance criteria," 

$100 rni.llion net worth and maintenance ~f cover, relevant to the 

issuer's ability to satisfy its commodity-related obligations under a hybrid instrument. You have represented that 

Indexed CD program would be limited to CDs issued by FDIC-insured 

national and FDIC-insurecl state chartered commercial banks whose 

net worth substantially exceeds $100 million. In addition, as 

noted above, has represented that each bank participating in its Indexed CD program will hedge fully its commodity- related obligations under the Indexed CDs such that it will not 

be affected ad~Jersely by movements in the price of the underlying commodity. 

11 Although has represented that it will require each 

participating bank to enter into a hedging agreement with 

or 2 affiliate, the staff does not intend 

to a~p.t"ove, or condition the position taken herein upon, any requ~rernent that such hedging agreements be confined to 

or a affiliate. 
.. 

Page 5 

(6) Minimum Unit Price 

The Advance Notice proposed a $20,000 minimum unit 

requirement. Indexed CDs will be issued at a minimum unit price 

of $20,000. 

(7) Marketing and Disclosure 

agrees that it will not market the Indexed CDs as 

having the beneficial characteristics of commodity options or 

futures contracts, except as may be necessary to disclose fully the operation and financial consequences of the instr\tment. 

( 13) Saecial CalJ,.~ 

agl·ees to comply with Commission requests for 

information con~~rning all matters relevant to the staff's 

no-action position w~tb respect to the issuance of the Indexed 

CDs, including the matters discussed above .• 

Based upon the representations made in your correspondence and discussions with the staff, the staff has determined that it 

will not recommend to the Commission that enforcement action 

under Section 4c of the Act be instituted against based 

upon the offer and sale of Indexed CDs. This position is based; 

among other things, upon the conclusion that in the circumstances 

delineated above, the sale of Indexed CDs would not be inconsistent with the exemptive framework proposed in the Advance Notice 

for certain otherwise regulated hybrid instruments with incidental commodity option components. While Indexed CDs would not 

have a term to maturity of three yRars as proposed in the Advance 

Notice, the staff is of the view that applicable penalties against early withdrawal, the fact that Indexed CDs will not be 

traded in a secondary market and the limited commodity component of Indexed CDs warrant an exception from the proposed term to 

maturity requirement. Similarly, although banks issuing Indexed 

CDs may not strictly satisfy the line of business criterion 

proposed in the Advance Notice, we believe that in the circumstances presented here other protections, including cover and 

FDIC insurance, substantially fulfill the performance and customer protection purposes of the proposed requirement. 

This position does not excuse or the issuing banks 

from complying with any otherwise applicable provisions of the 

Commodity Exchange Act, nor does it address any other instrument 

or proposed instrument. Any different, omitted or changed facts 

or conditions might require a different conclusion. It should 

also be noted that this ~osition is that of the staff and is not 

binding upon the Commiss~on .and that any subsequent determination 

by the Commission with regard to the rulernaking pr~ceeding ini-
I. 

\ 

.. -..• _, ... ,. ···I· ·'' ...... ' 

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tiated by the Advance Notice of proposed rulemaking may require a recon~ideration of this staff position. 

fr:incerel~ // f//L~ 

~ Co-Chairman E. Hanbury J 

Off-Exchange Task Force 

·tP~~.~ Paula A. Tosini 

Co-Chairman 

Off-Exchange Task Force