Synopsis
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:
• 1. ten or more securities;
  2. no single component constitutes more than 30% of the weighting;
  3. the five largest components by weight collectively constitutes no more than 60% of the weighting; and
  4. 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 that has:
• 1. nine or more securities;
  2. no component constitutes more than 30% of the weighting; and
  3. 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 CFTC.
• 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 laws.
• 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 broker-dealers.

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:

1. Two years after trading commences in any security future; or
2. 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:

1. margin requirements for comparable option contracts, exclusive of premium; or
2. 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.

Tax Treatment

• 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