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LATEST UPDATE:
Comment Letter: Confirmation Requirements for Transactions in Securities Futures Products Effected in Futures Accounts, SEC File No. S7-19-02,67 Fed.Reg. 39647 - 7/24/02
BACKGROUND
On December 21, 2000, President Clinton signed into law the Commodity Futures Modernization Act of 2000 ("the CFMA"). Among many other things, the CFMA repealed the Shad-Johnson Accord, and for the first time permitted the trading of futures on narrow based indices and single stocks (collectively, "single stock futures" or "SSFs") which are products that straddle the traditional categories of "securities" and "futures." Later this year, both U.S. securities and futures exchanges for the first time will be eligible to trade security futures.
Because single stock futures don't easily fit into either of the pre-existing categories, the CFMA directed that these products be treated as both "securities" and "futures" and, accordingly, subject to regulation by both the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC"). Thus, a firm wishing to sell SSFs will need to be registered simultaneously as a broker-dealer (a "B/D") with the SEC and as a futures commission merchant ("FCM") with the CFTC.
Very generally, under existing law "securities" are financial instruments that are regulated by the SEC and the various securities exchanges (e.g., the New York Stock Exchange; NASDAQ; etc.) while "futures" are regulated by the CFTC and the futures exchanges (e.g., the Chicago Board of Trade; the New York Mercantile Exchange, etc.). In addition, two different operational infrastructures (clearance & settlement; systems; etc.) exist to support trading in securities and futures. The two regimes have evolved over decades, and while broadly similar in some respects, they differ in many details and often achieve conceptually similar goals through different mechanisms. Thus, establishing a framework to accommodate these products that will simultaneously meet the requirements of two different paradigms is a considerable challenge to both regulators and the industry.
On June 12, SIA submitted a memorandum to the SEC and CFTC highlighting the regulatory issues that will have to be addressed in light of the legislation. In a presentation at the April 2001 SIA Operations Conference John Davidson of Morgan Stanley outlined some of the operational and other issues that arise from the creation of single stock futures. And the Financial Information Forum has published a paper that addresses the question of appropriate security identifiers for these instruments.
SIA will be working cooperatively with regulators and with other industry groups in addressing these issues.
