Securities Regulation Daily Wrap Up, COMMODITY FUTURES—CFTC issues no-action relief to Korea Exchange concerning offer or sale of futures contracts, (Oct 18, 2022)

By Elena Eyber, J.D.

The CFTC issued no-action relief to Korea Exchange with respect to two futures contracts on a security index comprised of 200 Korean stocks.

The CFTC’s Division of Market Oversight (DMO) issued no-action relief to Korea Exchange, Inc. (KRX), a foreign board of trade (FBOT), for the offer or sale of Korea Composite Stock Price Index (KOSPI) 200 Futures Contracts and Mini KOSPI 200 Futures Contracts to persons located within the U.S. while the CFTC’s review of KRX’s request for certification of the contracts under CFTC Regulation 30.13 is pending. The letter is effective October 24, 2022.

Broad- and narrow-based security indexes. DMO issued a similar letter when the KOSPI 200 became a broad-based security index in 2021. The KOSPI 200 became a narrow-based security index earlier this year. Futures contracts based on narrow-based security indexes are subject to joint CFTC and SEC jurisdiction. Products based on broad-based security indexes are subject to exclusive CFTC jurisdiction. The KOSPI 200 is set to become a broad-based security index on October 22, and October 24 is the first trading day after the index becomes broad-based. KRX noted that a lag may exist between when the KOSPI 200 index becomes a broad-based security index and when KRX secures certification of the contracts under CFTC Regulation 30.13.

Mersinger statement. Commissioner Mersinger issued a statement supporting the staff’s issuance of the no-action relief, which will provide assurance to market participants while the CFTC considers KRX’s request for certification of the contracts pursuant to CFTC Rule 30.13. However, Mersinger is concerned that almost identical relief was issued with respect to the contracts just under a year ago. Mersinger accepts that an FBOT may submit multiple requests for certification of a futures contract on a security index due to the complicated allocation of jurisdiction between the CFTC and the SEC with respect to futures contracts on broad- and narrow-based security indexes under U.S. law. But what she does not accept is the staff having to devote resources to multiple requests for no-action relief accompanying these requests for certification.

“The reason an FBOT such as KRX requests this no-action relief is because, under our rules, a lag may exist between the date that a security index underlying the FBOT’s futures contract is characterized as broad-based and the date on which the FBOT secures the Commission’s certification of its contract. The Commission should amend CFTC Rule 30.13, and/or issue appropriate guidance, to reduce (if not eliminate) the likelihood of FBOT requests for no-action relief to address such a time lag. Unfortunately, though, I am not aware that the Commission has provided direction or resources to our staff to do either” said Mersinger.

The CFTC Letter is No. 22-13.

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