SEC/CFTC Allow Futures on Unregistered Debt Securities
The SEC and the CFTC have issued a joint order allowing unregistered debt securities to underlie security futures products. Four conditions must be met: (1) the debt must be publicly offered, (2) the issuer must have a class of equity securities registered under Section 12, (3) the issuer must utilize a registered transfer agent, and (4) the offering must qualify under the Trust Indenture Act. The purpose of the joint order is to allow the creation of “potentially new financial instruments,” “facilitate price discovery,” and allow for useful hedging. Separately, the SEC and the CFTC issued a joint order clarifying that futures on volatility indexes are subject to exclusive CFTC jurisdiction, subject to several conditions.
OUR TAKE: We believe that the SEC and the CFTC are attempting to drive more debt derivatives to the public, regulated market and away from privately-negotiated transactions, which many believe caused/exacerbated the credit crisis.