Securities And Futures Act Pdf

[Anita Damelio]

Theterm security futures product (SFP) encompasses security futures and options on security futures. The term security future includes both futures on a single security (called single stock futures) and futures on narrow-based security indexes.

The Commodity Futures Modernization Act of 2000 (CFMA) lifted the ban on trading of futures contracts based on single stocks. Previously, these products were prohibited from being offered in the United States. Instead, futures contracts based on securities (other than exempt securities that are not municipal securities) were allowed only on diversified indexes that contained many securities and could not be used as a surrogate for trading in a single security or small group of securities. With the passage of the CFMA, broad-based security index futures, which are not considered security futures products, continue to trade under the sole jurisdiction of the CFTC, while security futures products are subject to the joint jurisdiction of the CFTC and the Securities Exchange Commission (SEC).

Contract markets that have been designated by the CFTC (DCMs) may trade security futures products if they notice register with the SEC and comply with certain requirements of the Securities Exchange Act of 1934. Likewise, national securities exchanges and national securities associations registered with the SEC may trade security futures products if they notice register with the CFTC and comply with certain requirements of the Commodity Exchange Act (CEA).

Since an SFP is both a futures contract and a security, an entity effecting SFP transactions must be registered both as a futures commission merchant (FCM) with the CFTC and as a broker-dealer with the SEC. The CFTC and the SEC provide notice registration procedures for certain persons that are required to register with the respective agency solely because they are effecting SFP transactions. The notice registration procedures provide an entity that previously engaged exclusively in either the futures or securities business with the ability to participate in SFP business without having to go through a second full registration process.

To avoid conflicting or duplicative regulation, notice-registered FCMs are exempt from certain provisions of the CEA (including CFTC segregation requirements), and notice-registered broker-dealers are exempt from certain provisions of the Securities Exchange Act of 1934 (including SEC Rule 15c3-3).

The CEA and the Securities Exchange Act of 1934 require that securities underlying security futures products must be common stock or other equity securities as the CFTC and the SEC jointly deem appropriate. The CFTC and the SEC have jointly determined that certain American Depositary Receipts, Exchange Traded Funds, Trust Issued Receipts, closed-end funds, and debt securities also are eligible to underlie security futures products.

Broad-based Security Index

Although not defined in the CEA, a broad-based security index generally refers to any security index that would not be classified as a narrow-based security index under the definitions or exclusions set forth in the CEA and the Securities Exchange Act of 1934 or that meet certain criteria specified jointly by the CFTC and the SEC. Unlike SFPs, which are jointly regulated by the CFTC and the SEC, futures on broad-based security indexes are under the exclusive jurisdiction of the CFTC.

The CEA and the Securities Exchange Act of 1934 require that securities underlying security futures products must be common stock or other equity securities as the CFTC and the SEC jointly deem appropriate. The CEA and Securities Exchange Act also authorized the CFTC and the SEC to permit trading in non-equity securities.

The Commodity Futures Modernization Act of 2000 (CFMA) lifted the ban on the trading of futures on single securities and on narrow-based security indices (security futures). Security futures are regulated both as securities and as future contracts, and must be traded on trading facilities and through intermediaries registered with both the SEC and CFTC.

Security futures involve a high degree of risk and are not suitable for all investors. The possibility exists that your customers holding security futures could lose a substantial amount of money in a very short period of time because security futures are highly leveraged. The amount they could lose is potentially unlimited and can exceed the amount they originally deposited with your firm.

There are no trading strategies that can eliminate the risk in security futures. Strategies using combinations of positions, such as spreads, may be as risky as outright long or short futures positions. Trading in security futures requires knowledge of both the securities and futures markets.

The CFMA requires FINRA and the National Futures Association (NFA) to develop proficiency requirements related to security futures products. FINRA requires registered persons who intend to engage in a security futures business to complete a Firm Element continuing education program covering security futures.

FINRA and the NFA, in partnership with the Institute for Financial Markets, have developed a Web-based, Firm Element continuing education program focusing on essential information that should be known by persons who offer and sell security futures and those who supervise such persons. Interested members should review the training requirements and content outlines for more details.

In 2002, FINRA and NFA, with significant assistance from other futures and securities self-regulatory organizations, jointly developed a uniform security futures risk disclosure statement (Disclosure Statement) that, in general, provides customers with disclosures regarding the characteristics and potential risks of investing in standardized security futures contracts traded on regulated U.S. exchanges.

In December 2000, Congress established a framework for joint regulation by the CFTC and the Securities and Exchange Commission (SEC) of the trading of futures on single securities and futures on narrow-based security indexes. Collectively, these products are called security futures products or SFPs. SFPs have features of both securities and futures.

The CFTC and the SEC jointly promulgated regulations and guidance regarding the listing and trading of SFPs to implement the changes made to the Commodity Exchange Act and the Securities Exchange Act by the Commodity Futures Modernization Act.

The buyer of a futures contract must take possession of the underlying stocks or shares at the time of expiration and not before. Buyers of futures contracts may sell their positions before expiration. There is a difference between options and futures. American-style options give the holder the right, but not the obligation, to buy or sell the underlying asset any time before the expiration date of the contract.

When settling a futures contract, the method depends on the asset. Physical delivery is standard for commodities like oil, gold, or wheat. However, for futures contracts based on stocks and stock indexes, the settlement method is cash.

The futures markets are regulated by the Commodity Futures Trading Commission (CFTC). The CFTC is a federal agency created by Congress in 1974 to ensure the integrity of futures market prices, including preventing abusive trading practices, fraud, and regulating brokerage firms engaged in futures trading.

Trading futures instead of stocks provides the advantage of high leverage, allowing investors to control assets with a small amount of capital. This entails higher risks. Additionally, futures markets are almost always open, offering flexibility to trade outside traditional market hours and respond quickly to global events.

The profitability of futures versus options depends largely on the investor's strategy and risk tolerance. Futures tend to provide higher leverage and can be more profitable when predictions are correct, but they also carry higher risks. Options offer the safety of a nonbinding contract, limiting potential losses.

When equities are the underlying asset, traders who hold futures contracts until expiration settle their positions in cash. The trader will pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period. In some cases, however, futures contracts require physical delivery. In this scenario, the investor holding the contract until expiration would take delivery of the underlying asset.

Jack D. Schwager and Mark Etzkorn. "A Complete Guide to the Futures Market: Technical Analysis, Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles." John Wiley & Sons, 2019. Chapter 1.

Futures and options on futures in which the underlying interests are single securities or narrow-based indices of securities have never seen significant trading volumes in the United States, but they are becoming an increasingly popular means by which U.S. traders are obtaining exposure to foreign equity markets. While trading these products on U.S. exchanges is a relatively straightforward prospect, trading them on foreign exchanges is not straightforward and involves a number of pitfalls.

There has been renewed interest in the U.S. regulatory requirements for trading security futures, as certain widely traded foreign indexes have vacillated between two U.S. regulatory regimes due to changes in the market prices of the underlying securities. This Sidley Update provides a reminder on the current state of play when trading security futures in the United States.

A security futures contract is an agreement between two parties to purchase or sell a single security or a narrow-based index of securities on a specified future date at an agreed price. Options on security futures may also be traded. Security futures and options on security futures are collectively referred to under U.S. law as security futures products or SFPs. SFPs may be settled through delivery of the underlying security or securities or via payment of cash. In the United States, SFPs must be listed on a regulated exchange. Outside of the United States, SFPs also are generally listed on regulated exchanges, but they are subject to widely differing domestic regulation based on the location of the market.

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