[Addressee] 

UNITED STATES OF AMERICA 

COMMODITY FUTURES TRADING COMMISSION 

2033 K Street, N.W. 

Washington, D.C. 20581 

RE: Proposed Offerings of Commercial Paper 

Dear 

By lette~s dated August 3, September 9, and November 8, 

1988, you requested on behalf of • • that the staff of the 

Commodity Futures Trading Commission confirm that it will not 

recommend to the Commission that any enforcement action be taken 

in connection with the proposed issuance and offering of notes 

("Notes") which constitute commercial paper under Section 3(a) (3) 

of the Securities Act of 1933 ("1933 Act"), the principal amount 

of which will at maturity be adjusted based on the fluctuation in 

the exchange rate between the United States dollar and a specified foreign currency. Based upon the characteristics of the 

Notes,·which resemble in certain respects foreign currency 

denominated debt instruments, and other matters as discussed 

below, the staff has determined that it will not recommend to the 

Commission any enforcement action under Section 4(a) of the 

Commodity Exchange Act based upon the issuance of the proposed 

Notes. 

As represented in your letters and at a meeting with 

Commission staff on August 18, 1988, the proposed Notes will 

constitute commercial paper under Section 3(a)(3) of the 1933 

Act. Commercial paper represents short-term corporate borrowings 

used to finance the· issuer's business operations. Under the 1933 

Act, the Notes, to constitute commercial paper, are required to 

have a maturity at the time of issuance not exceeding nine 

months. The proposed Notes will be issued by corporations with 

prime commercial paper credit ratings in the two highest 

categories established by two recognized rating agencies. The 

commercial paper exemption is not available under applicable law 

if offered and sold to members of the general public. See, SEC 

Rel. No. 33-4412, September 20, 1961. Thus, ••• represents 

that the Notes will be issued in minimum denominations of 

$100,000 and "will be offered solely to financially sophisticated 

institutions." ••. also represents that, in the vast majority 

of cases, such commercial paper is held by the purchasers until 

maturity, and, in any event, c_ommercial paper is not actively 

traded in a secondary market. 
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• • . further represents that the proposed Notes will have a 

principal face amount expressed in U.S. dollars, equal to the · 

purchase price paid by the investors. The Notes will bear 

interest on the principal amount at a rate of interest not less 

than the market rate for pure debt instruments offered by the 

issuer and will be payable in full at the maturity of the Notes. 

The principal amount due at maturity will be increased or 

decreased based on the intervening fluctuations in the exchange 

rate between the U.S. dollar and a specified foreign currency 

using the following formulae, with the exchange rate quoted in 

foreign currency units per dollar; 

1. where the dollar has risen in value against the foreign 

currency--

(a) the principal; plus 

(b) the stated amount of interest due; plus 

(c) an amount equal to the product of the principal 

and the difference between the exchange rate at 

the time of maturity and the exchange rate at the 

time of issuance, that difference divided by the 

exchange rate at the time of maturity; or 

2. where the dollar has fallen in value against the 

foreign currency-~ 

(a) the principal; plus 

(b) the stated amount of interest due; less 

(c) an amount equal to the product of the principal 

and the differenc~ bet~een the exchange rate at 

the time of issuance and the exchange rate at the 

time of maturity, that difference divided by the 

exchange rate at the time of maturity. 

• • • further repre8ents that the issuer will hedge fully the 

foreign currency risk ·attributed to the Notes through 

transactions entered into simultaneously with the offering. 

The proposed Notes may be characterized as "hybrid instruments," in that they coinbine certain elements of traditional 

commodity interests with those of debt instruments. Based upon 

the representations in your letter it appears that the commodity 

interest component of the Notes distributes returns between the 

lender and borrower based upon the direction and magnitude of the 

price change in a foreign currency relative to the U.S. dollar. 

In this respect, the Notes resemble the instruments addressed by 

CFTC Interpretative Letters No. 88-10, 88-11 and 88-12 dated 

June 20, July 13 and July 20, 1988, respectively. A comparison 
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of the proposed Notes with the criteria outlined in CFTC 

Interpretative Letter No. 88-12 follows: 

1. the non-commodity component of the Notes is a debt 

instrument; 

2. the principal amount of the Notes is indexed to a 

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

3. the interest paid on the Notes is at no less than the 

market rate for the issuer; 

4. the Notes are not offered pursuant to a registered 

offering, nor are they exempt under §3(a)(2) of the 

1933 Act. Rather, the Notes are.exempt from the 1933 

Act's registration requirements by Section 3(a)(3) of 

the 1933 Act; 

5. the net worth of the issuers is at least $100 million, 

and their outstanding debt has been rated as of 

investment grade by nationally recognized securities 

ratings organizations; 

6. the Notes are in m1n1mum denominations of $100,000 but 

have a· term less than the stipulated three-year term; 

7. the Notes will not be marketed to the public 

(regardless of how the commodity component is 

characterized); 

8. the commodity-based risk of the instruments is to be 

covered simultaneously with the issuance thereof; and 

9. • •.• has repres~nted that issuers will respond to 

special calls from the Commission. 

From the above, it is clear that the Notes meet most of the 

criteria set forth in CFTC Interpretative Letter No. 88-12. 

However, they do not meet two of the enumerated criteria, i.e., 

that the instruments be offered pursuant to a registered offering 

or are exempt from registration under Section 3(a)(2) of the 1933 

Act and that the term of the instrument be three years or more. 

The Notes do not meet these criteria because the nature of the 

security interest to which the commodity component is affixed 

differs from the security interests that were the subject of the 

referenced CFTC interpretative letters. In particular, the Notes 

are exempt from the registration provisions of the 1933 Act under 

Section 3(a)(3) of that Act. 
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In order to qualify for this exemption from the 1933 Act, 

the Notes must arise "out of a current transaction or the 

proceeds • • • have been or are to be used for current 

transactions, and [the paper] has maturity at the time of 

issuance.of not exceeding nine months ••.• " Section 3(a)(3) of 

the 1933 Act. Additionally, as noted above, to qualify for this 

exemption the Notes may not be offered and sold to members of the 

general public. Thus, although the Notes are exempt from the 

1933 Act registration requirements, they are subject to certain 

other regulatory proscriptions, such as their use, term to 

maturity, and the class of offerees. The Notes meet all of the 

remaining enumerated criteria of CFTC Interpretative Letter No. 

88-12 except for their term to maturity. However, any term to 

maturity that would meet that criterion enumerated in the 

Interpretative Letter would preclude the instrument from 

qualifying for the commercial paper exemption under the 1933 Act. 

Accordingly, 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 proposed Notes. The 

staff position is based upon the representations in your letter, 

including those relating to the terms and conditions of the 

instruments, the nature of the proposed offering as commercial 

paper qualifying for exemption from the Securities Act of 1933, 

and upon the agreement of the issuers to submit to .special calls 

for information with respect to the Notes in the matters 

addressed herein. Moreover, the staff's position is predicated 

on the representation in your letter of November 8, 1988, that 

the Securities and Exchange Commission does not object to the 

offer and sale of these instruments in reliance upon an exemption 

from registration under Section 3(a)(3) of the Securities Act of 

1933, and that although exempt from registration, this commercial 

paper product will still be subject to the antifraud provisions 

of the federal securi~ies law and SEC oversight. 

This position does not excuse the issuer from complying with 

any otherwise applicable provisions of the.Commodity Exchange Act 

and is based upon the facts and representations contained in your 

letter. Any different, omitted or changed facts or conditions 

might require a different conclusion. Moreover, it should 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 outstanding Advance Notice of 

Proposed Rulemaking Relating to the Regulation of Certain Hybrid 
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and Related Instruments, 52 Fed. Reg. 47022 (December 11, 1987), 

may require reconsideration of this position for subsequent 

offerings. 

Sincerely, 

Marshall E. Hanbury 

Co-Chairman 

Off-Exchange Task Force 

Paula A. Tosini 

Co-Chairman 

Off-Exchange Task Force 

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