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. 06-18 

August 24, 2006 

No-Action 

Office of General Counsel 

Jorge Alegria Formoso 

Chief Executive Officer 

Mercado Mexicano de Derivados, S.A. de C.V. 

Paseo de la Reforma 255 

Cuauhtémoc 06500 

México, D.F. 

 Re: Mercado Mexicano de Derivados, S.A. de C.V.’s Request for No-Action 

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

 Futures Contract Based On the Mexican Stock Exchange’s Price and 

 Quotation Index 

Dear Mr. Formoso: 

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

dated from September 12, 2005 to August 2, 2006, requesting on behalf of Mercado 

Mexicano de Derivados, S.A. de C.V. (“MexDer”) 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 (“US”) of 

MexDer’s futures contract based on the Mexican Stock Exchange’s Price and Quotation 

Index (“IPC” or “Index”). 

 We understand the facts to be as follows. MexDer is a futures and options 

exchange located in Mexico that is duly incorporated and authorized by the Mexican 

financial authorities to act as a derivatives exchange.1 The financial authorities in 

Mexico include the Secretaria de Hacienda y Crédito Público, the Banco de México, and 

the Comisión Nacional Bancaria y de Valores (“CNBV”). Market surveillance in the 

securities and derivatives markets in Mexico is conducted by the CNBV, which is 

authorized under Mexican law to execute agreements with national and international 

bodies performing similar surveillance activities and provide them with assistance when 

required.2

1 See letter from Jorge Alegria Formoso, Chief Executive Officer, MexDer, to Patrick J. 

McCarty, General Counsel, CFTC, dated September 12, 2005. 

2 See electronic mail from Rafael Garcia Job, Sudirector Jurídico, MexDer, to Julian E. 

Hammar, Counsel, CFTC, dated February 3, 2006. 
 The IPC is a broad-based, market-capitalization-weighted composite security 

index of highly capitalized and actively traded stocks currently listed on the Bolsa 

Mexicana de Valores, S.A. (“Mexican Stock Exchange” or “BMV”). BMV generally 

selects for inclusion in the IPC stocks from its marketability index that were among the 

35 most liquid during each of the previous six months prior to its annual review of the 

IPC’s composition.3 Based on data supplied by MexDer, the total market capitalization 

of the IPC was approximately US$ 155.6 billion as of August 30, 2005.4 Also as of that 

date, the largest single security by weight represented 16.97%, and the five most 

heavily-weighted securities represented 55.48%, of the IPC.5 The securities comprising 

the lowest 25% of the Index had a six-month aggregate dollar value of average daily 

trading volume in excess of US$ 30 million: approximately US$ 65.4 million for the 6-

month period ending August 2005.6 The Index is calculated in real time and is 

disseminated by electronic means through major data vendors, including Bloomberg 

and Reuters.7

 MexDer’s IPC futures contract provides for cash settlement. Prices are quoted in 

Index points with each Index point equal to 10 Mexican pesos per contract. The 

minimum price movement is one Index point. MexDer lists for trading the four nearest 

months of the March quarterly cycle (March, June, September and December). The last 

trading day of the contract is the third Friday of the contract month (or, if such day is not 

a business day, the business day immediately preceding such Friday). Cash settlement 

occurs on the first business day following the last trading day of the contract. The final 

cash settlement price for the contract is the closing level of the IPC on the last trading 

day.8

 The Commodity Exchange Act (“CEA”),9 as amended by the Commodity Futures 

Modernization Act of 2000 (“CFMA”),10 provides that the offer or sale in the US of 

 

3 See letter from Mr. Formoso to Mr. McCarty, dated September 12, 2005, at Exhibit 

(E)(iii). If there are not 35 stocks meeting this criterion, the BMV selects stocks based 

on the capitalization and the frequency of inclusion in the marketability index. Id.

4 Id. at Exhibit E(ii). 

5 Id. at Exhibits E(ii) and F. 

6 Id. at Exhibits E(v) and F. 

7 Id. at Exhibit E(i). 

8 Id. at Exhibits A-1 and E(iv). 

9

 7 U.S.C. § 1 et seq. 

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

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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,11 with the exception of security futures products,12

over which the Commission shares jurisdiction with the Securities and Exchange 

Commission (“SEC”).13 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).14

 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 US, except as permitted under CEA 

Section 2(a)(1)(C)(ii) or CEA Section 2(a)(1)(D).15 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 (“DTEFs”): 

 (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.16

 

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

12 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). 

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

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

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

16 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 

3
 While Section 2(a)(1)(C)(ii) provides that no board of trade or DTEF 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 US 

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 DTEF to trade those 

products.17

 Accordingly, this Office has examined the IPC and MexDer’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 IPC, and MexDer’s futures contract based thereon, 

conform to these requirements.18

 

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). 

17 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 

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. 

18 In making this determination, the Commission staff has concluded that the IPC 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 DTEF. In addition, the IPC Index is 

excluded from the definition of a narrow-based security index pursuant to Section 

1a(25)(B)(ii) of the CEA. In this regard, the Commission approved the Chicago 

Mercantile Exchange’s futures contract based on the IPC on May 22, 1996, prior to the 

enactment of the CFMA. See letter from Jean A. Webb, Secretary, CFTC, to Norman 

E. Mains, Senior Vice President, Chief Economist & Director of Research, Chicago 

Mercantile Exchange, dated May 22, 1996. 

4
 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. All of the securities 

underlying the IPC are listed and traded on BMV. Under Mexican law, only the 

Secretaria de Hacienda y Crédito Público, the Banco de México, and the CNBV are 

authorized to carry out market surveillance activities on the BMV, with CNBV having the 

primary responsibility for conducting such surveillance.19 Thus MexDer does not have 

access to information regarding the securities underlying the IPC. 

 However, the CNBV has access to market surveillance information, including 

customer identification information with regard to securities transactions conducted on 

BMV and futures transactions conducted on MexDer.20 Mexican Law authorizes the 

CNBV to share such information with foreign authorities pursuant to an exchange of 

information agreement.21 Both the CNBV and the CFTC are signatories to the IOSCO 

Multilateral Memorandum of Understanding Concerning Consultation and Cooperation 

and the Exchange of Information (“IOSCO MOU”).22 The CNBV has represented that it 

is willing and able to share information, including the identity of the ultimate customer to 

a transaction, with the CFTC pursuant to the terms of the IOSCO MOU, with regard to 

the IPC Index futures contract traded on MexDer and the securities underlying the IPC 

Index.23 Thus, the CNBV should have access to information necessary to detect and 

deter manipulation, and may share such information with the CFTC.24 In the event that 

CNBV is unable to obtain access to adequate surveillance data in this regard, or is 

 

19 See letter from Mr. Formoso to Mr. McCarty, dated September 12, 2005, at Exhibit C. 

20 See letter from Jorje Alegria Formoso, Chief Executive Officer, MexDer, to Patrick J. 

McCarty, General Counsel, CFTC, dated February 10, 2006, at 1-3. 

21 Id. at 4. 

22 The IOSCO MOU is a multilateral mechanism for sharing surveillance information on 

a bilateral basis between regulators. Prior to signing the IOSCO MOU, a regulator must 

establish through a fair and transparent process that it has the legal capacity to fulfill its 

terms and conditions. 

23 See letter from Miguel Angel Garza, Vice President (Supervision of Financial 

Institutions and International Affairs), CNBV, to Nanette R. Everson, General Counsel, 

CFTC, dated August 2, 2006. 

24 MexDer represents that there are no restrictions in Mexican law (e.g. blocking 

statutes) that would impact the CFTC’s ability to obtain information from CNBV, other 

than a requirement that an exchange of information agreement must be previously 

executed with CNBV before CNBV may share information with a foreign authority. 

MexDer has represented that the IOSCO MOU satisfies this provision of Mexican law. 

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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 MexDer’s futures contract based on the IPC is offered or sold in the US. 

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 MexDer with all 

regulatory requirements imposed by the CNBV, and the applicable laws and regulations 

of Mexico. 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 US of MexDer’s futures contract on the IPC 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 US.26

 Sincerely, 

 

 Nanette R. Everson 

 General Counsel 

 

25 The CNBV and the CFTC are also signatories to a Memorandum of Understanding on 

Consultation, Technical Assistance, and Mutual Assistance for the Exchange of 

Information, dated May 11, 1995. MexDer is a signatory to the International Information 

Sharing Memorandum of Understanding and Agreement signed on March 15, 1996, at 

Boca Raton, Florida. 

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

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