CFTC/SEC Agreement to Reform Shad-Johnson Accord
The agreement provides for joint jurisdiction between the CFTC and the
SEC over single stock futures and narrow-based stock indices, both
defined as security futures. Broad-based indices, as defined below, will
remain under the CFTC’s jurisdiction.
Broad-Based Stock Indices
If a futures contract on a stock index satisfies either of the criteria
set forth in Path A or Path B below, it qualifies as a broad-based
index under the CFTC’s exclusive jurisdiction:
"Path A" defines a broad-based index as one that has:
ten or more securities;
no single component constitutes more than 30% of the weighting;
the five largest components by weight collectively constitutes no
more than 60% of the weighting; and
the bottom quartile of component stocks has a combined average
daily dollar trading volume of more than $50 million, or $30
million if the index includes at least 15 securities.
"Path B" alternatively defines a broad based index as one
nine or more securities;
no component constitutes more than 30% of the weighting; and
each component is a "large" stock (defined as one of the
top 500 stocks common to rankings of both the largest market
capitalization and largest average daily trading volume).
An index that does not qualify as "broad-based" under either
Path A or Path B would be defined as a security future subject to the
joint jurisdiction of the CFTC and SEC.
Joint Jurisdiction over Security Futures
The CFTC would be the primary regulator of futures markets and futures
commission merchants ("FCMs"); the SEC would be the primary
regulator of securities markets and broker-dealers.
To trade security futures, futures exchanges and FCMs would be required
to file notice registration with the SEC, and securities exchanges and
broker dealers would be required to file notice registration with the
All exchanges and intermediaries that trade security futures would be
regulated by both the SEC and CFTC, but only core provisions of each
agency’s statutes would apply to notice registrants.
Futures exchanges would be required to file with the SEC, subject to an
expedited rule filing process, rule changes that relate to security
futures. The rule filing with the SEC could be made after the effective
date of the rule if adopted by the futures exchange under certification
to the CFTC, but remains subject to abrogation by the SEC after
consultation with the CFTC. Similarly, securities exchanges would be
subject to the CFTC’s rule review and disapproval provisions.
Designated contract markets would be subject to inspection by both
agencies at any time as deemed appropriate. To avoid duplicative and
inconsistent regulation, the SEC is required to coordinate with the
CFTC on examinations of SEC notice-registered exchanges and
broker-dealers, and the CFTC would coordinate with the SEC on
examinations of CFTC notice-registered markets and intermediaries.
The National Futures Association ("NFA") would be permitted
to register as a national securities association for the limited
purpose of regulating activities of notice-registered broker-dealers.
In such capacity, the NFA would develop suitability and other sales
practice rules comparable to those applicable to securities
transactions and would test its members for knowledge of securities
Segregation requirements under CFTC rules would apply to
customers’ security futures positions held in futures accounts
maintained by FCMs. Securities Investor Protection Corporation
("SIPC") insurance coverage would extend to customers’
security futures positions held in securities accounts maintained by
Mandatory Linked Clearing Facilities
Linked clearing of fungible securities on security futures by futures
and securities clearinghouses will be mandatory through joint
rulemaking on the later of:
Two years after trading commences in any security future; or
The date on which the market is deemed to be viable (180 days after the
first month in which average aggregate comparable share volume of
single stock futures equals or exceeds 10% of average aggregate
comparable share volume of options on equity securities).
"Section 31" Transaction Fees
Transaction fees which are normally charged on securities transactions
pursuant to section 31 of the Securities Exchange Act would not
apply to security futures.
Margins on Security Futures
Margin requirements for security futures would be the higher of:
margin requirements for comparable option contracts, exclusive of
the amount required by the applicable exchange using its risk-based
portfolio margining system.
Large Trader Reporting
CFTC large trader reporting requirements would apply to securities
exchanges and broker-dealers that trade security futures.
Security futures would be permitted to trade on the date the Secretary
of the Treasury certifies that the tax treatment applicable to security
futures is equivalent to equity options (but not earlier that one year
after enactment of the Commodity Futures Modernization Act of 2000); or
on January 2, 2003 if the disparity between tax treatment is not
resolved. Security futures would be permitted to trade for two years
under the current tax treatment, subject to a sunset provision if
Congress has not resolved the tax treatment disparity.
Dual Trading Restriction
The CFTC will issue regulations to prohibit dual trading in security
futures on contract markets, subject to limited exceptions