CHICAGO (HedgeWorld.com)–The Chicago Mercantile Exchange Inc. has commented on joint proposed rules of the Securities and Exchange Commission and the Commodity Futures Trading Commission concerning futures and security futures on debt securities and debt securities indexes.
On March 29, the SEC and CFTC jointly promulgated the rules, which would exclude certain debt securities indexes from the definition of “narrow-based securities index.” Accordingly, a futures contract on an index that meets the criteria wouldn’t be a securities future and would be subject to the exclusive jurisdiction of the CFTC, which in turn would set the stage for the exchange listing of such a contract.
The CME’s brief comment, signed by Craig S. Donohue, its chief executive, April 25, commends the SEC and CFTC for the proposed rules, “which if applied with an understanding of debt market structures and practices, will allow an efficient new risk management tool.”
The premise of the new rules is that although a narrow index, or one relying on illiquid securities, might create an opportunity for market manipulation, these opportunities shrink as the index itself broadens.
On a related point, the two agencies propose to modify listing standards. Mr. Donohue observes that historically, the SEC hasn’t published for comment its listing standards for equity securities, instead applying “non-promulgated guidance.” He suggests, though, that it ought to act differently in the debt securities context. “In particular, we believe that it is critical that security futures on debt securities not be subject to the same standards applicable to equity securities, particularly with respect to seasoning and volume requirements, because the typical life cycle of corporate debt securities is such that they tend to be issued, marketed and traded briefly and generally ‘put away’ for long-term investment.”
When these proposed rules were first published there was some speculation that they might amount to bad news for banks, because exchange listings of futures contracts on debt securities indexes could cut into the business banks do on such instruments over the counter. But Janet Tavakoli, of Tavakoli Structured Finance Inc., Chicago, disagreed with such speculation.
Futures, she said, “may be a welcome enhancement to the bond markets and create more trading and product development” in the way that Treasury futures have enhanced the Treasury bond market.
The CFTC and SEC expect to finalize the new rules by June 30.
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