U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5120 

Facsimile: (202) 418-5524

Office of General Counsel

CFTC letter No. 05-04 

March 14, 2005 

No-Action 

Office of General Counsel 

 

 

Tina Woo, Esq. 

Clifford Chance US LLP 

31 West 52nd Street 

New York, NY 10019-6131 

Re: Osaka Securities Exchange Co., Ltd.’s Request for No-Action Relief in 

Connection with the Offer and Sale in the United States of its Futures 

Contract Based on the Russell/Nomura Prime Index 

Dear Ms. Woo: 

 This is in response to letters, attachments, facsimiles and electronic mail dated 

from November 11, 2004 to January 19, 2005, requesting on behalf of your client, the 

Osaka Securities Exchange Co., Ltd. (“OSE”), that the Office of General Counsel 

(“Office”) of the Commodity Futures Trading Commission (“Commission” or "CFTC") 

issue a “no-action” letter concerning the offer and sale in the United States (“U.S.”) of 

OSE’s futures contract based on the Russell/Nomura Prime Index (“RNP” or “Index”). 

 We understand the facts to be as follows. OSE currently is the largest equity 

derivatives exchange in Japan measured by trading volume and contract values.1

 The 

OSE is an incorporated organization established in accordance with Japan’s Securities 

and Exchange Law (Law No. 25 of 1948, as amended) (“Securities and Exchange 

Law”). The OSE is licensed to act as a stock exchange by the Prime Minister of Japan 

pursuant to a license initially granted by the Minister of Finance of Japan under the 

Securities and Exchange Law. As a licensed stock exchange, the OSE is authorized to 

trade stocks, bonds and equity derivatives products. The equity derivatives products 

authorized for trading include futures contracts and options on security indices and 

options on securities.2

 

Under the Securities and Exchange Law, the Prime Minister has supervisory 

authority over all stock exchanges in Japan. Among other things, the Prime Minister is 

 

1 See letter from Tina Woo, Esq., Clifford Chance US LLP, to Patrick J. McCarty, 

General Counsel, CFTC, dated November 11, 2004, at 1. 

2 Id. at 1-2. 
2

authorized to grant licenses to stock exchanges, to approve their Articles of 

Incorporation, Business Regulations, and Brokerage Agreement Standards, and to 

approve futures contracts on security indices. The Prime Minister, in turn, has 

delegated these powers, other than the authority to grant licenses to stock exchanges, 

to the Commissioner of the Financial Services Agency of Japan (“FSA”). The FSA was 

established in July 2000 and results from the merger of the Financial Supervisory 

Agency and Financial System Planning Bureau of the Ministry of Finance. The FSA has 

broad supervisory responsibility for all aspects of financial services, including 

inspection, supervision and surveillance of financial activities.3

The RNP is a broad-based, free-float capitalization-weighted index jointly 

developed and maintained by the Russell Investment Group (“Russell”) and Nomura 

Securities Company (“Nomura”).4 The composition of the RNP is derived from 1,000 of 

the most highly capitalized and actively traded common stocks listed on all the stock 

exchanges in Japan: the Tokyo Stock Exchange (“TSE”), the Nagoya Stock Exchange 

(“NSE”), the Fukuoka Stock Exchange (“FSE”), the OSE and JASDAQ.5 The 995 

stocks currently in the RNP, after mergers and delistings, represent 91% of the market 

value of the Japanese equity markets.6 Based on data supplied by OSE, the total freefloat adjusted market capitalization of the RNP was U.S. $1.74 trillion as of September 

30, 2004.7

 As of that date, the largest single stock by weight represented 4.83%, and 

the five most heavily weighted stocks represented 12.37%, of the adjusted market 

capitalization of the RNP.8 The stocks comprising the lowest 25% of the RNP had a 

six-month aggregate dollar value of average daily trading volume in excess of U.S. $30 

million: approximately U.S. $3.19 billion for the 6-month period ending September 30, 

2004.9 The RNP is calculated in real time and disseminated by QUICK Corporation, on 

 

3 Id. at 2. 

4 Id. at 2. Nomura’s Index Products Group, which is within Nomura’s Financial & 

Economic Research Center, is in charge of managing the RNP. Rules regarding the 

inclusion of constituent stocks and weightings are established by Russell and Nomura. 

Nomura also convenes the “Nomura Index Policy Committee,” which includes staff from 

Russell and independent industry practitioners, to determine the validity of Index rules. 

5 Id. at 3. 

6 Id. 

7

 Id. at 5. See data file entitled “Appendix C Table 1&2.xls,” attached to the electronic 

mail from Tina Woo, Esq., dated January 19, 2005. 

8 Id. 

9 See id. and data file entitled “Appendix C Table 3.xls,” attached to the electronic mail 

from Tina Woo, Esq., dated January 19, 2005. 
3

consignment from Nomura, through electronic means to major data vendors, including 

Bloomberg and Reuters.10

 OSE’s RNP futures contract, which will commence trading in April 2005, provides 

for cash settlement. The notional value of the contract is determined by multiplying the 

Index level by 10,000 Japanese yen. OSE lists for trading five months of the March 

quarterly cycle, and the last trading day of the contract is the business day prior to the 

second Friday of each contract month. Cash settlement must be completed by the 

second business day following the last trading day based on the final settlement price. 

The final settlement price for the contract is calculated by QUICK Corporation based on 

a special opening quotation for the constituent stocks in the Index on the business day 

following the last trading day.11 

 

The Commodity Exchange Act (“CEA”),12 as amended by the Commodity Futures 

Modernization Act of 2000 (“CFMA”),13 provides that the offer or sale in the United 

States of futures contracts based on a group or index of securities, including those 

contracts traded on or subject to the rules of a foreign board of trade, is subject to the 

Commission's exclusive jurisdiction,14 with the exception of security futures products,15

over which the Commission shares jurisdiction with the Securities and Exchange 

Commission (“SEC”).16 Thus, the Commission’s jurisdiction remains exclusive with 

regard to futures contracts on a group or index of securities that are broad-based 

pursuant to CEA Section 1a(25).17

 

10 See letter from Ms. Woo to Mr. McCarty, dated November 11, 2004, at 3 & Appendix 

B. 

11 See letter from Tina Woo, Esq. to David R. Merrill, Deputy General Counsel, CFTC, 

dated January 19, 2005, Appendix III and letter from Ms. Woo to Mr. McCarty, dated 

November 11, 2004, at 7. 

12 7 U.S.C. § 1 et seq. 

13 Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000). 

14 See CEA Section 2(a)(1)(C)(ii). 

15 Security futures products are defined as a security future or any put, call, straddle, 

option, or privilege on any security future. See CEA Section 1a(32). A security future is 

defined as a contract of sale for future delivery of a single security or of a narrow-based 

security index, including any interest therein or based on the value thereof, with certain 

exceptions. See CEA Section 1a(31). 

 

16 See CEA Section 2(a)(1)(D). 

17 See CEA Section 2(a)(1)(C)(ii). 
4

 CEA Section 2(a)(1)(C)(iv) generally prohibits any person from offering or selling 

a futures contract based on a security index in the United States, except as permitted 

under CEA Section 2(a)(1)(C)(ii) or CEA Section 2(a)(1)(D).18 By its terms, CEA 

Section 2(a)(1)(C)(iv) applies to futures contracts on security indices traded on both 

domestic and foreign boards of trade. CEA Section 2(a)(1)(C)(ii) sets forth three criteria 

to govern the trading of futures contracts on a group or index of securities on 

designated contract markets and registered derivatives transaction execution facilities 

(“DTFs”): 

 (1) the contract must provide for cash settlement; 

(2) the contract must not be readily susceptible to manipulation nor to being 

used to manipulate any underlying security; and 

(3) the group or index of securities must not constitute a narrow-based 

security index.19

 While Section 2(a)(1)(C)(ii) provides that no board of trade or DTF may trade a 

security index futures contract unless it meets the three criteria noted above, it does not 

explicitly address the standards to be applied to a foreign security index futures contract 

traded on a foreign board of trade. This Office has applied those same three criteria in 

evaluating requests by foreign boards of trade to allow the offer and sale within the 

United States of their foreign security index futures contracts when those foreign boards 

of trade do not seek designation as a contract market or registration as a DTF to trade 

those products.20 

 

18 CEA Section 2(a)(1)(D) governs the offer and sale of security futures products. 

19 The first two criteria under CEA Section 2(a)(1)(C)(ii) were unchanged by the CFMA. 

With regard to the third criterion, an index is a “narrow-based security index” under both 

the CEA and the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et 

seq., 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) the five highest weighted component securities in the 

aggregate comprise more than 60% of the index’s 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 of less than $50 million (or in 

the case of an index with 15 or more component securities, $30 million). See CEA 

Section 1a(25)(A)(i)-(iv); Exchange Act Section 3(a)(55)(B)(i)-(iv). Thus, an index that 

does not have any of these elements is not a narrow-based security index for purposes 

of CEA Section 2(a)(1)(C)(ii). See also CEA Section 1a(25)(B); Exchange Act Section 

3(a)(55)(C). 

20 With regard to the third criterion, the CFTC and SEC jointly promulgated Rule 41.13 

under the CEA and Rule 3a55-3 under the Exchange Act, governing security index 
5

 

 Accordingly, this Office has examined the RNP and OSE’s futures contract based 

thereon to determine whether the Index and the futures contract meet the requirements 

enumerated in CEA Section 2(a)(1)(C)(ii). Based on the information noted herein and 

as set forth in the letters, attachments, facsimiles and electronic mail noted above, we 

have determined that the RNP and OSE’s futures contract based thereon conform to 

these requirements.21

 In determining whether a foreign futures contract based on a foreign security 

index is not readily susceptible to manipulation or being used to manipulate any 

underlying security, one preliminary consideration is the requesting exchange’s ability to 

access information regarding the securities underlying the index. As noted above, the 

securities underlying the RNP are traded on the TSE, NSE, FSE, OSE and JASDAQ. 

The OSE, TSE, NSE and FSE have been working in a mutual cooperative framework 

for market surveillance in order to prevent unfair transactions in the derivatives markets 

and cash stock markets under the administrative guidance of the FSA.22 OSE 

represents that it is able to obtain all necessary information from these exchanges for 

surveillance.23 The JASDAQ, which was the Japanese over-the-counter market, 

recently became licensed as an exchange in Japan, and OSE and JASDAQ have 

 

futures contracts traded on foreign boards of trade. These rules provide that “[w]hen 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.” CFTC Rule 41.13, 17 C.F.R. § 41.13; Exchange Act Rule 3a55-3, 17 C.F.R. § 

240.3a55-3. 

21 In making this determination, the Commission staff has concluded that the RNP does 

not have any of the elements of a narrow-based security index as enumerated in CEA 

Section 1a(25)(A), and accordingly the Index would not be a narrow-based security 

index if traded on a designated contract market or DTF. 

22 See letter from Ms. Woo to Mr. McCarty, dated November 11, 2004, at 7. 

Specifically, OSE reports and exchanges information necessary for coordinated 

surveillance of stocks and derivatives trading with TSE, NSE and FSE. This information 

includes daily market reports of derivatives trading; positions established with index 

arbitrage and program trading in the cash markets of the other stock exchanges; state 

of market orders immediately before the opening of the trading session on the day the 

special quotation is calculated; information regarding large lot open interests in equity 

options trading held by transaction participants; and other information upon request. In 

addition, OSE contacts other Japanese stock exchanges, as the need arises, and 

exchanges information necessary for coordinated surveillance of stocks and derivatives 

trading with those exchanges. See id., Appendix F. 

23 Id. at 7. 
6

reached agreement on the general outline of a surveillance sharing agreement.24 Thus, 

OSE should have access to information necessary to detect and deter manipulation. In 

the event that OSE is unable to obtain access to adequate surveillance data in this 

regard, or is unable to share such data with the CFTC, this Office reserves the right to 

reconsider the position we have taken herein.25

 In light of the foregoing, this Office will not recommend any enforcement action to 

the Commission based on Sections 2(a)(1)(C)(iv), 4(a), or 12(e) of the CEA, as 

amended, if OSE’s futures contract based on the RNP is offered or sold in the U.S. 

Because this position is based upon facts and representations contained in the letters, 

attachments, facsimiles and electronic mail cited above, it should be noted that any 

different, omitted or changed facts or conditions might require a different conclusion. 

This position also is contingent on the continued compliance by OSE with all regulatory 

requirements imposed by the FSA, and the applicable laws and regulations of Japan. In 

addition, this position may be affected by any rules that the Commission may adopt 

regarding futures contracts based on non-narrow-based security indices. 

 The offer and sale in the U.S. of OSE’s futures contract on the RNP is, of course, 

subject to Part 30 of the Commission’s regulations, which governs the offer and sale of 

foreign futures and foreign option contracts in the U.S.26 

 Sincerely, 

 Patrick J. McCarty 

 General Counsel 

 

24 See letter from Ms. Woo to Mr. Merrill, dated January 19, 2005, at 4. Securities with 

a primary listing on JASDAQ represent 0.55% of the weight of the Index. 

25 OSE has agreed that it will cooperate with CFTC requests for information made 

pursuant to this no-action letter. See letter from Ms. Woo to Mr. McCarty, dated 

November 11, 2004, at 7. Moreover, OSE is a signatory to the International Information 

Sharing Memorandum of Understanding, dated March 15, 1996. OSE also is an affiliate 

member of the Intermarket Surveillance Group (“ISG”), which consists of 

representatives from securities and futures exchanges in the U.S. and other countries. 

The members of ISG have agreed to share information to ensure coordinated 

surveillance of intermarket trading abuses. Id. In addition, OSE’s regulator, the FSA, 

signed a Statement of Intent Concerning Cooperation, Consultation and the Exchange 

of Information (“SOI”) with the SEC and the CFTC on May 17, 2002. 

26 See 17 C.F.R. Part 30.