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. 05-08 

May 16, 2005 

No-Action 

Office of General Counsel 

Michael S. Sackheim, Esq. 

Sidley Austin Brown & Wood, LLP 

787 Seventh Avenue 

New York, NY 10019 

Re: Requests for No-Action Relief in Connection with the Offer and Sale in the 

United States of Futures Contracts Based on the Taiwan Stock Exchange 

Electronic Sector Index and the Taiwan Stock Exchange Finance Sector 

Index Traded on the Taiwan Futures Exchange 

Dear Mr. Sackheim: 

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

from January 3, 2005 to March 4, 2005, requesting on behalf of your client, the Taiwan 

Futures Exchange (“TAIFEX”), 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 TAIFEX’s futures 

contracts based on, respectively, the Taiwan Stock Exchange Electronic Sector Index 

(“TE”) and the Taiwan Stock Exchange Finance Sector Index (“TF”) (collectively, 

“Indices”). 

 We understand the facts to be as follows. TAIFEX is a futures exchange in 

Taiwan founded in 1997 pursuant to the joint efforts of the Taiwanese government and 

the private sector.1

 Originally named the Taiwan International Mercantile Exchange, the 

exchange’s name was changed to TAIFEX in 1999. TAIFEX was granted a corporate 

license, and its Board of Directors was selected as the highest executive body of the 

exchange. The principal regulatory authority in Taiwan having oversight over TAIFEX 

1 See letter from Michael S. Sackheim, Sidley Austin Brown & Wood, LLP, to Patrick J. 

McCarty, General Counsel, CFTC, dated January 3, 2005, at 2 and letter from Michael 

S. Sackheim, Sidley Austin Brown & Wood, LLP, to Patrick J. McCarty, General 

Counsel, CFTC, dated January 12, 2005, at 2. Commission staff recently issued noaction relief to TAIFEX with regard to its futures contracts on the Taiwan Stock 

Exchange Capitalization Weighted Stock Index. See CFTC Staff Letter No. 04-16 

[2003-2004 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 29,781 (June 2, 2004). 
was the Taiwan Securities and Futures Commission (“SFC”). To achieve the goal of 

consolidating financial supervision, on June 30, 2004, the Taiwan Legislative Yuan 

enacted the “Organic Act of the Financial Supervisory Commission, Executive Yuan,” 

creating the new department of “Financial Supervisory Commission, Executive Yuan” 

(“FSC”). As a result, the SFC became subordinate to the FSC effective on July 1, 2004, 

and the SFC changed its name to “Securities and Futures Bureau, Financial 

Supervisory Commission” (“SFB”). The SFB has broad supervisory responsibility for all 

aspects of securities and futures trading in Taiwan, including inspection, supervision, 

surveillance and enforcement. The Futures Trading Law of 1997 (“FTL”), enforced by 

the SFB, is the principal statute under which TAIFEX operates.2

The TE and TF are broad-based, market capitalization-weighted indices 

maintained by the Taiwan Stock Exchange Corporation (“TSEC”).3

 The TE covers all 

electronics related stocks listed on the TSEC, and the TF covers all finance related 

TSEC listed stocks.4

 Both Indices exclude preferred stocks, full-delivery stocks5 and 

newly listed stocks that are listed for less than one calendar month.6

 Based on data 

supplied by TAIFEX, the total adjusted market capitalizations of the TE and TF were 

approximately US$ 195.56 billion and US$ 85.55 billion, respectively, as of November 

30, 2004.7

 Also as of that date, stocks of 289 companies were components of the TE 

 

2 Id. 

3 See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 5 and letter 

from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 4. 

4 See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 5 and letter 

from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 5. 

5

 Unlike trading of regular common stocks in which transactions are settled or closed on 

the first business day immediately after the transaction day and in which stocks bought 

and sold, and consideration thereof, on the same day, can be offset against each other, 

“full delivery” stocks as declared by TSEC can only be traded by “full payment” in 

advance and no offset is permitted during the intra-day transactions. Margin trades are 

not permitted for the transaction of “full delivery” shares. The main purpose of this 

measure is to restrict the liquidity of the stocks of financially troubled companies, and 

thus these “full delivery” shares are excluded from computation of the Indices. See 

letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 5-6 and letter from 

Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 5. 

6 Id.

7 See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 9 and letter 

from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 9. 

2
and 43 companies were components of the TF.8

 The largest single security by weight 

represented 17.53% of the TE and 18.77% of the TF.9

 The five most heavily weighted 

securities represented 43.13% and 51.40% of the TE and TF, respectively.10 The

securities comprising the lowest 25% of the respective Indices had six-month aggregate 

dollar values of average daily trading volume in excess of US$ 30 million: 

approximately US$ 421.9 million for the TE and US$ 125.1 million for the TF for the 6-

month period ending November 2004.11 The Indices are calculated in real time and are 

disseminated by electronic means through major data vendors, such as Bloomberg and 

Reuters.12

TAIFEX’s TE futures contract and TF futures contract both commenced trading 

on July 21, 1999.13 Both contracts provide for cash settlement. Prices are quoted in 

Index points with each Index point equal to NT$ 4,000 for the TE futures contract and 

NT$ 1,000 for the TF futures contract.14 The minimum price fluctuation is 0.05 Index 

point per TE contract and 0.2 Index point per TF contract. The remaining terms and 

conditions of the TE and TF contracts are identical. The contracts are listed for trading 

from 8:45 AM to 1:45 PM Taiwan time Monday through Friday. TAIFEX lists for trading 

the spot month, the next calendar month, and the next three quarter months. The last 

trading day is the third Wednesday of the delivery month. Cash settlement occurs on 

the first business day after the last trading day. The final cash settlement price for the 

contracts is calculated based on the first fifteen minute volume-weighted average of 

each component stock’s prices on the final settlement day.15

 

8 See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 5 and letter 

from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 5.

9 See electronic mail from Mr. Sackheim dated March 1, 2005, Exhibit C, and letter from 

Mr. Sackheim to Mr. McCarty, dated January 12, 2005, Exhibit C. 

10 See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 17 and letter 

from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 16. 

11 Id.

12 See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 9-10 and 

letter from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 9.

13 See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 3-4 and letter 

from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 3-4. 

14 “NT$” is a symbol for New Taiwan Dollars, the Taiwanese currency. 

15 For those component stocks that are not traded during the beginning fifteen minute 

interval on the final settlement day, their last closing prices would be applied. Id. 

3
The Commodity Exchange Act (“CEA”),16 as amended by the Commodity Futures 

Modernization Act of 2000 (“CFMA”),17 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,18 with the exception of security futures products,19

over which the Commission shares jurisdiction with the Securities and Exchange 

Commission (“SEC”).20 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).21

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).22 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 

 

16 7 U.S.C. § 1 et seq. 

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

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

19 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). 

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

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

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

4
(3) the group or index of securities must not constitute a narrow-based 

security index.23

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.24

Accordingly, this Office has examined the TE and TF and TAIFEX’s respective 

futures contracts based thereon to determine whether the Indices and the futures 

contracts 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 TE and TF, and TAIFEX’s 

respective futures contracts based thereon, conform to these requirements.25

 

23 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). 

24 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. 

25 In making this determination, the Commission staff has concluded that neither the TE 

nor the TF have any of the elements of a narrow-based security index as enumerated in 

5
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 stocks 

underlying the TE and TF are traded on the TSEC.26 On June 30, 2000, TAIFEX 

entered into a joint surveillance and information sharing agreement with the TSEC, as 

well as the GreTai Securities Market (the Taiwan over-the-counter market) and the 

Taiwan Securities Central Depository Co., Ltd., for the exchange of market and 

surveillance information.27 Thus, TAIFEX should have access to information necessary 

to detect and deter manipulation.28 In the event that TAIFEX is unable to obtain access 

 

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

indices if traded on a designated contract market or DTF. 

26 TAIFEX represents that the TSEC has access to all material information necessary to 

conduct proper surveillance of securities traded on the TSEC. See letter from Mr. 

Sackheim to Mr. McCarty, dated January 3, 2005, at 13 and letter from Mr. Sackheim to 

Mr. McCarty, dated January 12, 2005, at 12. 

27 Pursuant to this agreement, all parties are required to share with each other 

information regarding (i) domestic and foreign material political and economic 

extraordinary events, (ii) major trading defaults, and (iii) failures or interruptions of 

trading systems. TSEC is required to provide the other contracting parties information 

regarding (i) financial crises or material fraud of securities firms, (ii) material delay in 

settlement by securities firms, (iii) material illegal trading by securities firms or investors 

or the initiation of material litigation concerning securities firms, and (iv) listed company 

involvement in financial crises or material fraud. TAIFEX is required to provide the other 

contracting parties information regarding (i) financial crisis or material fraud by futures 

commission merchants (“FCMs”), introducing brokers (“IBs”), or its clearing members, 

(ii) open positions that reach certain threshold amounts, (iii) clearing members’ material 

default in making the applicable margin payments and (iv) material illegal trading by 

FCMs, IBs, and clearing members or investors, or the initiation of material litigation 

concerning FCMs, IBs and clearing members. In addition, all parties to the agreement 

have agreed to notify each other of other matters deemed as potential threats to the 

structural security of cross-market operations, and to share additional information with 

each other pursuant to written requests. See letter from Mr. Sackheim to Mr. McCarty, 

dated January 3, 2005, at 13-14 and letter from Mr. Sackheim to Mr. McCarty, dated 

January 12, 2005, at 13. 

28 TAIFEX represents that it has access to all material information necessary to conduct 

proper surveillance of futures contracts traded on TAIFEX. See letter from Mr. 

Sackheim to Mr. McCarty, dated January 3, 2005, at 13 and letter from Mr. Sackheim to 

Mr. McCarty, dated January 12, 2005, at 12. 

6
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.29

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 TAIFEX’s futures contracts based on, respectively, the TE and TF are 

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 TAIFEX with all regulatory requirements imposed by the SFB, and the 

applicable laws and regulations of Taiwan. In addition, this position may be affected by 

any rules that the Commission may adopt regarding futures contracts based on nonnarrow-based security indices. 

The offer and sale in the US of TAIFEX’s futures contracts on the TE and TF 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.30

 

29 In this regard, TAIFEX represents that there are no blocking statutes in Taiwan that 

could impact the ability of the CFTC or other US government agencies from obtaining 

information concerning the trading of TAIFEX’s futures contracts. See letter from Mr. 

Sackheim to Mr. McCarty, dated January 3, 2005, at 15 and letter from Mr. Sackheim to 

Mr. McCarty, dated January 12, 2005, at 14. Moreover, TAIFEX has agreed to 

cooperate with any CFTC requests for information regarding its futures contracts on the 

TE and TF. See letter from Mr. Sackheim to Mr. McCarty, dated January 3, 2005, at 13 

and letter from Mr. Sackheim to Mr. McCarty, dated January 12, 2005, at 12. TAIFEX 

also is a signatory to the International Information Sharing Memorandum of 

Understanding and Agreement signed on March 15, 1996, at Boca Raton, Florida. 

On January 11, 1993, a Memorandum of Understanding between the American 

Institute in Taiwan and the Coordination Council for North American Affairs on the 

Exchange of Information Concerning Commodity Futures and Options Matters (“MOU”), 

was entered into by The American Institute in Taiwan, on behalf of the CFTC, and the 

Coordination Council for North American Affairs, now the Taipei Economic and Cultural 

Representative Office in the US, on behalf of Taiwan’s regulator, now the SFB. The 

MOU established arrangements to exchange supervisory, surveillance, and 

investigatory information between the regulatory authorities in Taiwan and the US in 

securing compliance with laws, rules and regulations regarding futures matters. In 

connection with TAIFEX’s requests for no-action relief, the SFB has represented that 

the SFB is willing and able to exchange information with the CFTC pursuant to the 

MOU. See letter from Sherry Wang, Director, Division of Futures and Options Markets, 

SFB, to David R. Merrill, Deputy General Counsel, CFTC, dated March 4, 2005. The 

SFB, through its predecessor, the SFC, also is a signatory to the Declaration on 

Cooperation and Supervision of International Futures Markets and Clearing 

Organizations, as amended, signed on March 15, 1996, at Boca Raton, Florida. 

7
 Sincerely,

 Patrick J. McCarty

 General Counsel 

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

8