Appendix 7
IOSCO SC2 Survey on Indexation: Securities Indexes and Index Derivatives1
Responses from Members
Products
For the stock index derivative products trading in your jurisdiction, please provide the following information:
1. Are stock index derivative products based on broad-based (market) indexes and narrow-based (industry) indexes traded in your jurisdiction?
Please indicate here whether any other related products (e.g. covered warrants) are traded in your jurisdiction.
Member’s Responses:
SC2 Member
Response
Australian Securities and
Investments Commission
In the Australian market there are currently only derivative products based on market indices. The following index based
products are traded on Australia's main exchanges:
Australian Stock Exchange Limited (ASX)
¾ Index Options (S&P/ASX200 Index, Low Exercise Price Options)
¾ Warrants (S&P/ASX200 Index and S&P500 Composite, Nikkei 225, Dow Jones Industrial Index)
¾ Exchange Traded Funds (Street TRACKS S&P/ASX50, Street TRACKS S&P/ASX 200 – listed by State Street
Global Advisers)
1
This questionnaire is intended to elicit information that will facilitate the updating of the Technical Committee’s 1992 Reports on Contract Design of Derivative Products on
Stock Indexes and Measures to Minimize Market Disruption. The focus of this project is on contract design issues regarding derivative products, taking into account the
introduction of new products such as derivatives on narrow-based indexes and other products related to indexes (ie. covered warrants), how trading in such products may affect
the cash market, and appropriate measures to minimize market disruption. The questionnaire seeks to identify, based on members’ experience, any effects on markets that have
resulted from the use of these products, the rebalancing of indexes as well as any impact on the liquidity or volatility of underlying securities.
This questionnaire is limited to derivative (i.e., futures and options) products based on indexes comprised of equity securities and similar products related to indexes (e.g. covered
warrants). This questionnaire does not include futures contracts based on indexes comprised of debt securities or other instruments.
1
The Corporations Regulations 2001 provides that ASX may list warrants and options over industry indices, for example,
S&P/ASX 200 Telecommunications Services (GIC) Sector Index, and S&P/ASX 200 Health Care (GIC) Sector Index.
Currently (June 2002), there are no ASX listed warrants or options over industry indices.
ASX Futures Exchange Pty Limited (ASXF)
¾ Futures contracts (S&P/ASX200 Index and S&P/ASX50 Index)
SFE Corporation Limited (SFE)
¾ Futures contracts (SFE SPI 200 Index)
¾ Options on futures contracts (SPI 200 futures contract)
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
There is a liquid futures contract on the São Paulo Stock Exchange Index (IBOVESPA) and less liquid options on the same
index and options on futures on the same index.
Yes. All index derivative products traded in Canada are listed on the Bourse de Montréal. The Bourse de Montréal lists options
and futures based on the S&P/TSX 60 index as well as options based on S&P/TSX 60 index participation units, futures based
on sectorial (industry) indices and sponsored options.
Stock index derivative products currently traded in Canada are:
ƒ Options on the S&P/TSX 60 Stock Index
ƒ Futures Contracts on the S&P/TSX 60 Stock Index
ƒ Options on the iUnits S&P/TSX 60 Index Participation Fund-i60
ƒ Futures Contracts on the S&P/TSX Sectorial Stock Index:
ƒ S&P/TSX Canadian Gold Index Futures
ƒ S&P/TSX Canadian Financial Index Futures
ƒ S&P/TSX Canadian Information Technology Index Futures
ƒ S&P/TSX Canadian Energy Index Futures
ƒ Sponsored options:
ƒ Dow Jones EURO STOXX 50 Index
ƒ S&P 500 IndexTM
Options on S&P/TSX Sectorial Indices and Options on Futures Contracts on the S&P/TSX 60 Stock Index are approved
products of the Bourse de Montréal but they are not currently traded.
There are also a number of exchange-traded funds traded on the Toronto Stock Exchange (TSX) that are based on both broadbased and narrow-based indices.
Stock index derivatives products traded on Euronext Paris includes both market index and industry indexes.
List of products traded on Euronext Paris using as underlying stock index:
Underlying
Options
Futures
Covered warrants
Certificates
Trackers
2
D
D
D
D
D
CAC40
D
DAX30 performance
D
D
D
D
DJ Euro Stoxx 50SM
SM
D
D
D
D
DJ Stoxx 50
D
DJ Stoxx SM Auto
SM
D
D
DJ Stoxx 600 Bank
SM
D
D
DJ Stoxx 600 Energy
SM
D
DJ Stoxx 600 Healthcare
D
D
DJ Stoxx SM Media
SM
D
DJ Stoxx Pharma
D
DJ Stoxx SM Retail
SM
D
DJ Stoxx 600 Technology
D
D
DJ Stoxx SM 600 Telecom
Underlying
Options Futures Covered warrants
Certificates
Trackers
D
D
DJ Euro Stoxx SM Bank
D
D
DJ Euro Stoxx SM Energy
D
D
DJ Euro Stoxx SM Healthcare
D
DJ Euro Stoxx SM Insurance
D
D
DJ Euro Stoxx SM Technology
D
D
DJ Euro Stoxx SM Telecom
D
DJ Euro Stoxx SM Utilities
D
D
Dow Jones Industrial Average
D
Nasdaq 100
D
Nikkei 225 average
D
S&P500 composite
Note: Stoxx sectorial indexes were also used as underlyings for warrants listed in 2001 but they expired early 2002 and were
not replaced by new issuances.
In Germany, stock index derivative products are based on broad-based indices as well as on narrow-based indices. Broad-based
Bundesastalt fur
Finanzdienstleistungsaufsicht, indices include, for example, the Deutscher Aktienindex (DAX), the Composite DAX (CDAX) and the DAX Future (FDAX).
Germany
Other related products are traded as well, such as futures and covered warrants of companies listed in the DAX, or special funds
(ETFs) which are tradable as shares in the XTF, a special segment of the German trading system XETRA.
Futures and options contracts based on both broad-based and narrow-based indexes are traded on the Hong Kong Futures
Securities and Futures
Exchange (“HKFE”). The broad-based equity indexes are the Hang Seng Index and MSCI China Free Index. The narrowCommission, Hong-Kong
based index is the Dow Jones Industrial Average.
3
In addition, there are equity index derivative warrants trading on the Stock Exchange of Hong Kong (“SEHK”). The SEHK
does not set out rigid requirements regarding what indexes are qualified to be the underlying indexes of derivative warrants.
These warrants are normally based on various well-known domestic and overseas indexes, e.g. Hang Seng Index, NASDAQ
Composite Index, NIKKEI 225 and Dow Jones Industrial Average, etc.
Apart from that, there are four exchanged-traded funds (ETF) trading on the SEHK (either on the Main Board or under the
Pilot Program). The ETF are based on the Hang Seng Index, MSCI China Index, MSCI Korea Index and MSCI Taiwan
Index.
Commissione Nazionale per le The futures and options contracts traded on the Italian regulated markets are based on domestic broad-based indexes (examples
of these contracts are the blue-chips index (MIB 30) future and option contracts and the middle-cap stocks index (MIDEX)
Societa e la Borsa, Italy
future contract).
As regards related products traded on the Italian markets, there are covered warrants on domestic and foreign indexes,
structured bonds (with embedded option on domestic and foreign indexes) and Exchange Traded Funds (to be launched).
As to stock index futures traded on stock exchanges, there are both broad-based indexed and narrow-based indexes. As to stock
Financial Services Agency,
index options traded on stock exchanges, there are only broad-based. In addition, Exchange Traded Funds based on indexes are
Japan
traded on stock exchanges.
Securities Commission,
Malaysia
Futures and options based on an index comprising 100 equity securities listed on the Kuala Lumpur Stock Exchange (the KLSE
Composite index) are traded on the Malaysian Derivatives Exchange. There are currently no other index-based derivative
products traded in Malaysia.
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
In our country there are stock-index futures and warrants. Both are based on the domestic stock index, Indice de Precios y
Cotizaciones (IPC), which is a broad-based index.
The Singapore Exchange (“SGX”) is an integrated exchange offering both a securities market SGX-Securities Trading (“SGXST”) and a futures market SGX-Derivatives Trading (“SGX-DT”). Both markets trade stock index derivative products.
SGX-DT currently offers stock index futures contracts covering the overall markets rather than industries or sectors.
SGX-ST offers warrants on stock indices, as well as exchange traded funds (ETFs) based on stock indices. These are generally
based on the overall market, though there are ETFs based on narrow-based indices.
Comision Nacional del
Mercado de Valores, Spain
Both families of indexes are traded on Spanish regulated derivative exchanges. Initially, only futures and options contracts on
the broad-based IBEX-35 Index were traded. The IBEX-35 Index is a capitalization-weighted index comprising the 35 most
liquid Spanish stocks traded on the cash market.
On June 21st 2001, MEFF launched stock index futures and options on the Standard & Poor’s Europe 350 Index, along with its
Financial, Information Technology and Telecom Services sector indexes. The launch of these products followed a plan
developed together by MEFF, the Chicago Mercantile Exchange, and Standard & Poor's. These futures and options are trades at
MEFF, with equal access for all MEFF members as well as CME members, and will be cleared through the CME.
MEFF is the Spanish Official Exchange for Fixed Income and Equity Derivatives and Clearing House. Its activity is to organise
4
the options and futures Market for Financial Derivatives and to run a clearing system integrated with the Market. MEFF started
trading in November, 1989.
Finansinspektionen, Sweden
In Sweden, there is only one derivatives exchange (Stockholmsbörsen AB, formerly OM – it is also the cash exchange). Its
main traded index product is the OMX-index, which is a broad-based (market) index. There are also traded some covered
warrants (OMX, Nasdaq 100), as well as covered warrants on some narrow-based indices (i.e. industry indices).
Swiss Federal Banking
Commission, Switzerland2
Yes, among derivatives based on other indexes (Nasdaq, STOXX, etc.) the following main index derivatives are traded on the
SWX Swiss Exchange (SWX):
SMI warrants
SMI futures (traded on Eurex)
SMI certificates
SNMI warrants
SNMI certificates
ETF SMI
Commodity Futures Trading
Commission, USA
Yes, futures contracts (and options on such futures) on the following broad-based indexes are traded on the Chicago Board of
Trade (CBOT), Chicago Mercantile Exchange (CME), New York Futures Exchange (NYFE) and Kansas City Board of Trade
(KCBT):
CME S&P 500 Index
CME E-mini S&P Index
CME NASDAQ 100 Index
CME E-mini NASDAQ 100Index
CME Nikkei 225 Index
CME S&P 400 Index
CME Russell 2000 Index
CME BARRA Value Index
2
Abbr.:
SMI
SPI
SNMI
ETF
SWX
virt-x
=
=
=
=
=
=
Swiss Market Index
Swiss Performance Index
Swiss New Market Index
Exchange traded Funds
SWX Swiss Exchange
European Blue Chips Exchange in London
5
CME BARRA Growth Index
CME Fortune E-50 Index
CBT Dow Jones Industrial Average
NYFE Regular Composite Index
NYFE Small Composite Index
NYFE Large Composite Index
NYFE Regular Russell 1000 Index
NYFE Large Russell 1000 Index
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
KCBT Mini Value Line Index
KCBT ISDEX
Options based on broad-based and narrow-based indexes, as well as futures on broad-based indexes, currently trade in the U.S.
Futures on narrow-based indexes do not currently trade in the U.S., although the Commodity Futures Modernization Act of
2000 (“CFMA”) authorized the trading of futures on narrow-based security indexes and on individual stocks (collectively,
“security futures”).3 Although U.S. markets have traded index warrants in the past, none are trading currently.
UK exchanges offer futures and options contracts on a range of broad-based stock indices. At present, there is only one futures
contract based on a sector index – the FTSE techMark 100. In addition, LIFFE trades futures contracts on a number of more
liquid individual equities, as well as a wide range options on individual equities. There is also a substantial volume of OTC
transactions in customized equity derivatives.
3
After December 21, 2003, the CFTC and the SEC may jointly determine to permit the trading of puts, calls, straddles, options, or privileges on security futures (along
with security futures, collectively referred to as “security futures products”).
6
2. Are stock index derivative products based on indexes comprised of foreign securities as well as domestic securities traded in your
jurisdiction?
Member’s Responses:
SC2 Members
Response
Australian Securities and
Investments Commission
There is no restriction on the composition of indices to include only domestic securities. The S&P/ASX200 and S&P/ASX50
indices currently (June 2002) include foreign securities (securities of entities incorporated in a foreign jurisdiction and with a
home listing in that foreign jurisdiction, and listed on the ASX), however, their inclusion is subject to the rules governing
construction and maintenance of an index (see below for further information).
In Australia, there are no indices specifically composed of foreign securities only, however there are some warrants over foreign
indices such as the S&P 500, Nikkei 225 and Dow Jones Industrial Index).
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
No.
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le
Yes, there are stock index derivative products on indices comprised of foreign as well as of domestic securities, one notable
example being the European indices (Dow Jones STOXX 50SM and Dow Jones Euro STOXX 50SM ).
Yes. Stock index derivative products traded in Canada are mostly based on indices comprised of domestic securities
(S&P/TSX), though some are based on indices comprised of foreign securities (Dow Jones EURO STOXX and S&P 500).
Yes. Here are some examples.
DJ Euro Stoxx SM 50 : Futures and Options
DJ Stoxx SM 50 : Futures and Options
DJ Euro Stoxx SM sector indexes : Futures
DJ Stoxx SM 600 sector indexes: Futures
Foreign equity options : Allianz AG, BASF AG, Bayer AG, Bayerische Hypo &Vereinsbank, Deutsh Bank, Daimlerchrysler
AG, Nokia OYJ, Siemens AG.
Yes, see answers to question 1.
Yes, as long as they are traded on an Italian regulated markets, foreign securities can be included in the index underlying
7
Societa e la Borsa, Italy
derivatives contracts. At present, however, only one foreign stock (namely STMicroelectronics)is included in the MIB30 index.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
Osaka Securities Exchange launched the trading of Dow Jones Industrial Average futures on July 15th, 2002.
See answer to question 1.
IPC is comprised of 35 domestic securities.
In addition to stock index futures based on Singapore securities market, SGX-DT offers stock index futures contracts covering
other stock markets. These includes Nikkei 225 and 300 Index futures and options contracts, MSCI Taiwan Index futures and
options contracts, MSCI Japan Index futures contract and S&P CNX Nifty Index futures contract.
SGX-ST also lists ETFs based on foreign indices. Currently, ETFs based on the Dow Jones Industrial Index, Dow Jones US
Technology Sector Index and the S&P 500 are listed.
Comision Nacional del
Mercado de Valores, Spain
Yes. As it was mentioned in the previous question, S&P Europe 350 Index futures and options are traded on MEFF. Currently,
the S&P Europe 350 Index comprises of 16 Spanish stocks and a vast majority of foreign European stocks.
Finansinspektionen, Sweden
On both, companies with domicile in Sweden and outside. As regards the OMX, the limitation for companies in index with
domicile outside Sweden is that only the number of shares registered in the Swedish CSD are registered at the exchange and
accounted for in the index.
Swiss Federal Banking
Commission, Switzerland
Yes, the SNMI (Swiss New Market Index) compromises also foreign securities as well as derivative products based on foreign
indexes (Nasdaq, STOXX, etc).
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Yes. Futures contracts on broad based foreign stock index futures products are traded on U.S. futures exchanges.
Financial Services Authority,
United Kingdom
Yes, U.S. markets trade stock index derivative products based on indexes comprised of foreign securities as well as domestic
securities. For example, U.S. options markets trade Eurotop 100 Index options, Hong Kong Index options, Japan Index options,
and CBOE Mexico Index options, and U.S. futures markets trade Nikkei 225 futures and S&P/TOPIX 150 Index futures.
Yes.
8
3. Please identify the entities that construct and maintain the underlying indexes (e.g., exchanges, third parties).
Member’s Responses:
SC2 Members
Response
Australian Securities and
Investments Commission
The Standard & Poors (S&P) Australian Index Committee comprising of 5 members representing S&P and ASX is responsible
for setting policy, determining index composition and administering the indices. The committee may add, remove or bypass
any company or security during the process.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
The São Paulo Stock Exchange (BOVESPA).
Commission des Operations
de Bourse, France
Standard & Poor’s and the TSX construct and maintain the Canadian S&P/TSX indices. The S&P/TSX Index Policy
Committee, which is comprised of 7 members representing both S&P and the TSX, is responsible for setting policy and
determining index composition. STOXX Limited and Standard & Poor’s respectively construct and maintain the Dow Jones
EURO STOXX and the Standard & Poor’s indices. (For the MSCI-based ETF, Morgan Stanley Capital International constructs
and maintains the index).
Underlying
CAC40
DAX30 performance
DJ Euro Stoxx 50SM
DJ Stoxx 50SM
DJ Stoxx SM Auto
DJ Stoxx SM Bank 600
DJ Stoxx SM Energy 600
DJ Stoxx SM Healthcare 600
DJ Stoxx SM Media
DJ Stoxx SM Pharma
DJ Stoxx SM Retail
DJ Stoxx SM Technology 600
DJ Stoxx SM Telecom 600
DJ Euro Stoxx SM Bank
Owner
Euronext
Deutsche Börse
STOXX Ltd
Identity
Stock exchange
Stock exchange
Joint venture (25% Euronext Paris; 25%
Deutsche Börse; SWX 25%; Dow Jones & Co
25%)
9
DJ Euro Stoxx SM Healthcare
DJ Euro Stoxx SM Insurance
DJ Euro Stoxx SM Technology
DJ Euro Stoxx SM Telecom
DJ Euro Stoxx SM Utilities
Dow Jones Industrial Average
Nasdaq 100
Nikkei 225 average
S&P500 composite
Dow Jones & Co
Nasdaq
Nihon
Keizai
Shimbun, Inc
Standard&Poor’s
Publishing company
Stock exchange (owned by NASD)
Publishing company
Rating agency owned by Mc Graw-Hill
(publishing company)
The relevant German broad-based indices (like the DAX, NEMAX 50) are constructed and maintained by Deutsche Börse AG.
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Narrow-based indices are constructed and maintained mainly by stock exchanges, banks, consultants, the economic press (e.g.
Germany
the FAZ-Index) and public incorporated companies. The indices of the stock exchange still provide the basis for relevant
derivative products.
Securities and Futures
Commission, Hong-Kong
The underlying indexes are all constructed and maintained by index calculation agencies.
Hang Seng Index: Constructed and maintained by HSI Services Limited
MSCI Indices: Constructed and maintained by Morgan Stanley Capital International Inc.
Dow Jones Industrial Average: Constructed and maintained by Dow Jones & Company, components of the index determined by
editors of The Wall Street Journal.
Commissione Nazionale per le Market indexes (MIB30: 30 blue-chips index and MIDEX: 25 middle-cap stocks indexes) are constructed and maintained by
Borsa Italiana S.p.a., a private company authorized by Consob to manage regulated markets.
Societa e la Borsa, Italy
Financial Services Agency,
Japan
TOPIX(Tokyo Stock Price Index) --- Tokyo Stock Exchange
Nikkei Average --- Nihon Keizai Shimbun, Inc. (Nikkei)
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
The KLSE Composite index is constructed and maintained by the Kuala Lumpur Stock Exchange (also see question 26 below).
Comision Nacional del
Management of the IBEX-35 is entrusted to the Indexes Management Secretariat within the Sociedad de Bolsas. Its main
The Mexican Stock Exchange (Bolsa Mexicana de Valores) is the entity that constructs and maintains the IPC.
SGX currently does not own or publish the underlying indices on which its futures contracts, warrants and ETFs are based. (pls
see answers to Q6)
10
Mercado de Valores, Spain
functions are the management, calculation, publication and maintenance of all the Sociedad de Bolsas Indexes.
The Sociedad de Bolsas4 is responsible for the technical management of the electronic trading system (SIBE), where the most
liquid securities are traded. SIBE is an order-driven market, with real-time information and immediate dissemination of trading
data. It has almost replaced the open-outcry trading system. It allows the four Spanish stock markets to drive their orders
through terminals connected to the mainframe.
The Technical Advisory Committee is in charge of the supervision of the calculation of the IBEX-35 Index and the redefinition
of it at least every six months. The Technical Advisory Committee is composed of a representative from each of the four
Spanish stock exchanges and some people of recognized expertise within the field of finance.
Finansinspektionen, Sweden
The OMX-index:
Index owner: OM AB
Index provider: Stockholmsbörsen AB (part of OM AB)
Index calculator: SIX AB (third party)
Index ombudsman (supervisor): KPMG
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
SWX Swiss Exchange is the index provider for the Swiss market equities and bonds.
Securities and Exchange
Commission, USA
U.S. options exchanges, broker-dealers and their affiliates, as well as other entities, such as Dow Jones, Standard & Poor’s
(“S&P”), and Frank Russell Company, construct and maintain indexes underlying stock index derivative products.
Financial Services Authority,
United Kingdom
The principal UK index provider is FTSE International Limited. Additionally, other international index providers (e.g. Morgan
Stanley Capital International Inc) operate indices including UK securities.
The underlying indexes are constructed by third parties (e.g., Standard and Poor’s, Frank Russell Company, Barra, Dow Jones),
and exchanges (e.g., NASDAQ, NYSE).
4
The capital of the Sociedad de Bolsas is distributed equally among the governing bodies of the Spanish stock exchanges and its board of directors consists of one
representative from each stock exchange plus one further member who acts as Chairman, elected by a majority of said stock exchanges.
11
4. Please describe, generally, the methodology for calculating the index levels.
Member’s Responses:
SC2 Members
Response
Australian Securities and
Investments Commission
S&P are generally responsible for calculating index levels. Generally, calculation for all indices are based on stock prices taken
from the official daily index close calculated after the market closes and are based on the last traded price for each constituent.
Further information is available on the S&P website: "S&P's Australia: Assuming Control of the Index Calculation Process" on
page: http://www.standardandpoors.com/australiaNZ/resourcecentre/methodology/index.html
Brazilian Securities
Commission, CVM
A portfolio of the most liquid stocks traded at BOVESPA is updated every four months. The index corresponds to the value of
this portfolio in Brazilian currency (“reais”), which is calculated in real time.
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
The S&P/TSX indices are market-capitalization weighted, with weight adjusted for available share float (calculation: price x
float shares, summed up for each constituent company and then divided by the index divisor).
Index calculations are based on prices taken from the TSX for each constituent. The official daily index close is based on the
last traded price for each constituent.
The Dow Jones EURO STOXX 50 index is weighted by free-float market capitalization. Each component’s weight is capped at
10% of the index’s total free-float market capitalization. Weights are reviewed quarterly. The index universe is defined as all
components of the 18 Dow Jones EURO STOXX market sector indices. The Dow Jones EURO STOXX market sector indices
represent the Eurozone portion of the Dow Jones STOXX Total Market Index, which in turn covers 95% of the total market
capitalization of the stocks traded on the major exchanges of 17 European countries.
Commission des Operations
de Bourse, France
The S&P 500 Index is calculated using a base-weighted aggregate methodology. That means the level of the Index reflects the
total market value of all 500 component stocks relative to a particular base period. The total market value of a company is
determined by multiplying the price of its stock by the number of shares outstanding.
All the underlying indexes but the Dow Jones Industrial Average and the Nikkei225 are market capitalization weighted and are
calculated with the Laspeyres' formula, which measures price changes against a fixed, base quantity weight. Each index has a
unique index divisor, which is adjusted to maintain the continuity of index values across changes due to corporate actions. Find
underneath the formula for Stoxx indexes:
12
n
pi0
qi0
pit
qit
fit
Ct
t
Mt
Bt
XitEURO
=
=
=
=
=
=
=
=
=
=
=
Base value
Number of stocks in the index
Closing price of stock [i] at the base date
Number of shares of company [i] at the base date
Price of stock [i] at time [t]
Number of shares of company [i] at time [t]
Free float factor of company [i] at time [t]
Adjustment factor for the base date market capitalisation
Time the index is computed
Market capitalisation of the index at time [t]
Adjusted base date market capitalisation of the index at time [t]
Cross rate: domestic currency in euros of company [i] at time [t]
Depending of the index. Usually 1,000 for blue chip indexes and 100 for sectorial
=
indexes on the base date
The Dow Jones Industrial Average and the Nikkei225 indexes are price weighted rather than market capitalization weighted.
Their component weightings are therefore affected only by changes in the stocks' prices, in contrast with other indexes'
weightings that are affected by both price changes and changes in the number of shares outstanding. To calculate one of the
averages, simply add up the prices of its components on their primary exchanges and divide the sum by the divisor.
The DAX30 has the feature to be a performance index (all the others are price indexes): all income from dividends and bonus
payments is additionally reinvested in the DAX30 portfolio.
The Nasdaq100 index uses a modified capitalization-weighted methodology (hybrid between equal weighting and conventional
capital-weighting).
The methodology for calculating the relevant German indices (both broad-based and narrow-based indices) is set out in the
Bundesastalt fur
Finanzdienstleistungsaufsicht, “Guidelines to Equity Indices” published by Deutsche Börse AG. Under these guidelines, equity indices are calculated (and
published) as both performance and price indices. Price indices measure the actual price development and are only adjusted for
Germany
income from subscription rights and special payments. With performance indices, all income from dividend and bonus
payments is likewise reinvested in the index portfolio. Furthermore, a daily settlement price is calculated once every day for
each index. The index formula applied to all equities indices is a Laspeyres formula with quarterly chaining.
Securities and Futures
Commission, Hong-Kong
Hang Seng Index:
Today’s Current
=
Index
Today’s Current Aggregate Market
Capitalization of Constituent Stocks
X
Yesterday’s Closing Aggregate Market
Capitalization of Constituent Stocks
Yesterday’s
Closing Index
13
MSCI Indices:
The methodology for calculatingMSCI Indices is similar to that of the Hang Seng Index. However, the market capitalization of
the components of MSCI Indices has to be free float-adjusted according to the following formula:
Free
Float-Adjusted
=
Market Capitalization
Foreign Inclusion
X
Factor (FIF)*
the
Component’s
Total
Market Capitalization
MSCI defines the free float of a security as the proportion of shares outstanding that are deemed to be available for purchase in
the public equity markets by international investors.
* In general, the Foreign Inclusion Factor is equal to the lesser of the 1) estimated free float available to foreign investors; 2)
foreign ownership limits minus foreign non-free float holdings.
Dow Jones Industrial Average:
The Dow Jones Industrial Average is calculated by dividing the total prices of the components by a divisor (Dt+1=Dt*∑Cat/∑Ct).
Where:
Dt+1
Dt
Cat
Divisor to be effective on trading session t+1
Divisor on trading session t
Components adjusted closing prices for stock dividends, splits,
spin-offs and other applicable corporate actions on trading
session t
Ct
-- Components closing prices on trading session t
Commissione Nazionale per le Index levels are calculated as the weighted arithmetic average of the constituent stock prices.
Societa e la Borsa, Italy
Nikkei Average : Modified Equal Dollar Weighting --- The value of an index is determined by multiplying the current price of
Financial Services Agency,
each component stock by the number of shares outstanding, adding those sums and dividing by an index divisor.
Japan
TOPIX : Modified Capitalization Weighting --- Current Market Value is dividing by Based Market Value (January 4th, 1968) *
100
Securities Commission,
Malaysia
----
The KLSE Composite index is a capitalisation-weighted index consisting of 100 constituent stocks. The index base year is
1977, and weights are adjusted for stock splits, dividends among other factors. Weights are calculated using last-done prices and
number of shares outstanding.
14
Comision Nacional Bancaria
y de Valores, Mexico
The formula used for calculating the IPC is shown below:
Where:
i
It
Pit
Qit
Fi
= 1, 2, 3, ..., 35
= Index at time t
= Price of issuer i at time t
= Shares of issuer i at time t
= Adjustment factor (cash dividends are no longer considered)
Some of the adjustment factors may be issuer’s spin offs or changes in equity composition.
Monetary Authority of
Singapore
SGX does not determine the index calculation methodology, but the methodologies may be found on the various websites of the
index providers. Generally, the indices are constructed by taking weighted averages of stock prices. The constituent stocks, as
well as the weights, are usually chosen on the basis of liquidity and market capitalization.
Comision Nacional del
Mercado de Valores, Spain
The control period for the securities contained in the IBEX-35 Index will be, for ordinary reviews, the six-month interval
beginning with the seventh month prior to the start of the calendar half-year period.
The Technical Advisory Committee will select as components of the IBEX-35 Index the 35 most representative securities,
having regard to the following liquidity factors:
1. The trading volume in euros in the principal market or orders market.
2. The quality of the said trading volume, considering:
a. Trading volume during the control period that is the result of transactions involving a change in the stable
shareholding structure of the company, was trades by the same market member in a small number of transactions, or
traded during a time period regarded by the Manager as not representative, suffers a decline such as to cause the
Manager to consider that the stock’s liquidity has been seriously affected.
b. The characteristics and amount of the transactions made in the market.
c. The statistics for the trading volume and characteristics of the trading.
3. Suspension of quotation or trading during a time period considered significant by the Technical Advisory Committee.
For a stock to be included in the IBEX-35 Index, its average capitalization in the index must be greater than 0,30% of the
average index capitalization during the control period.
Finansinspektionen, Sweden
4.8.3
INDEX VALUE
15
4.8.3.1
Calculation of the Index Value
The Index Value is the value of OMX at a given point of time. The
Index Value is presented in Swedish kronor (Presentation currency).
The formula for calculating the Index Value is
It =
MC t
× It − 1
MC t −1 + A
t
Pat
Sat
Vat
MCat
=
=
=
=
=
time of calculation
price of the Index Share "a" at time t
number of shares in issue for Index Share "a" at time t
Currency fix for Index Share a at time t
value of the Index Share "a" at time t, equal to
Pa t x Sa t x Va t
MCt
=
total value of all Index Shares at time "t", equal to
∑ MCa t
A
=
amount by which the value of the Index Share is adjusted
following an increase or decrease in the share capital of
the company in question, converted to the presentation
Aa x Va t
currency of the Index,
Aa
=
It
=
adjustment amount for Index Share a (modified number of
shares multiplied by the subscription price or Pat-1)
Index Value at time "t"
∑
4.8.3.2
Price (P)
Price is defined as the latest transaction price published by the
Exchange. This also applies when trading in an individual Index Share
is suspended. Currencies are converted in accordance with section
4.8.3.7.
16
The Index Calculator will normally obtain such prices by means of
automatic transmission of data from the Exchange and Reuters
Svenska AB (the Reuter-system). The prices thus received will be
utilised in the Index Calculation. In cases where the automatic
transmission of data from the Exchange or Reuters Svenska AB is
either wholly or partially unavailable, the Index Calculator may, in
accordance with 4.8.6 below, adopt an alternative means of obtaining
the relevant prices in order to calculate the Index.
4.8.3.3
Number of shares (S)
The number of shares per Index Share is stated by the Index
Calculator in the OMX Stock List applicable at any time.
Adjustment to the number of shares as a consequence of issues etc.
according to section 4.8.4 shall not be taken into account in the Index
Calculation until the day the Index Share in question is listed by the
Exchange without any right to participate in the issue.
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
The number of shares per Index Share may also be changed in
conjunction with de-registration of Parallel Listed shares (see above,
section 4.8.2.2) or in conjunction with a change to shares in another
company.
On SWX, all equities indexes are free float capitalization weighted indexes. The calculation of the indexes is in real-time and
disseminated to data providers directly.
Price weighted (Dow Jones and Nikkei 225)
The Dow Jones Averages are price weighted rather than market capitalization weighted. Their component weightings are
therefore affected only by changes in the stocks' prices, in contrast with other indexes' weightings that are affected by both price
changes and changes in the number of shares outstanding. To calculate one of the averages, add up the prices of its components
on their primary exchanges and divide the sum by the divisor. Over the years, adjustments have been made to the divisors to
ensure the continuity of the averages after corporate actions such as spin-offs and stock splits. As a result the divisors are no
longer equal to the number of components in each of the averages, as would be expected. For example, after 100 years of
17
adjustments, the current divisor for the Dow Jones Industrial Average, available here, is less than one.
http://www.djindexes.com/jsp/avgMethod.jsp
The Nikkei Stock Average is the average price of 225 stocks traded on the first section of the Tokyo Stock Exchange,
but it is different from a simple average in that the divisor is adjusted to maintain continuity and reduce the effect of
external
factors
not
directly
related
to
the
market.
See
http://www.nni.nikkei.co.jp/FR/SERV/nikkei_indexes/nifaq225.html#gen3
Market capitalization weighted (Russell and Barra indexes)
The purpose of this adjustment is to exclude from market calculations the capitalization that is not available for purchase and is
not part of the investing opportunity set. Stocks are weighted by their available market capitalization, which is calculated by
multiplying the composite closing price by the available shares. Note: Available shares are assumed to be shares available for
trading. Exclusion of capitalization held by other listed companies and large holdings of private investors (10% or more) is
based on information recorded in SEC corporate filings. Other sources are used in cases of missing or questionable data.
http://www.russell.com/US/Indexes/US/methodology_detail.asp
The Barra value and growth indexes are capitalization-weighted, meaning that each stock is weighted in proportion to its market
value. http://www.barra.com/research/sp_indices.asp
Base-weighted aggregate methodology (S&P, NYSE , KCBT mini-Value Line indexes)
The S&P Indices are calculated using a base-weighted aggregate methodology, meaning the level of the Index reflects the total
market value of all component stocks relative to a particular base period. Total market value is determined by multiplying the
price of its stock by the number of shares outstanding. http://www.spglobal.com/faqus.html#close
Securities and Exchange
Commission, USA
Modified capitalization-weighted methodology (Nasdaq100; Fortune e50, KCBT ISDEX)
The Nasdaq-100 Index is calculated under a modified capitalization-weighted methodology. The methodology is expected to
retain in general the economic attributes of capitalization-weighting while providing enhanced diversification. To accomplish
this, Nasdaq will review the composition of the Nasdaq-100 Index on a quarterly basis and adjust the weightings of Index
components using a proprietary algorithm, if certain pre-established weight distribution requirements are not met.
http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm
The FORTUNE e-50 Index is a modified capitalization-weighted index in which the representation of each component security
is proportional to its primary-exchange last sale price times the total number of shares outstanding -which are adjusted, first, by
proprietary Internet Revenue Factors and, second, by a periodic Index Weight Rebalancing. Real-time price-only values of the
FORTUNE e-50 Index are calculated by Bridge Information Systems America, Inc. and the American Stock Exchange (Ticker
Symbol: FEX) every 15 seconds based upon primary-exchange-listed sale prices. The Index was set to a base level of 1000.00
as of the end of trading on December 31, 1999. http://www.timeinc.net/fortune/dex/e50/desc.html
The level of an index reflects the total market value of all of the index’s component securities relative to a particular base
period. There are different methods for calculating indices, including capitalization weighting, modified capitalization
18
Financial Services Authority,
United Kingdom
weighting, price weighting, and equal dollar weighting. Many stock market indices are capitalization-weighted. The value of
capitalization-weighted index is determined by multiplying the current price of each component stock by the number of shares
outstanding, adding those sums and dividing by an index divisor. The divisor keeps the index comparable over time and is
adjusted periodically to maintain the index. For example, an index divisor may be adjusted after a change in the composition of
an index (e.g., additions, deletions, or replacements of companies) or in the event of certain corporate actions and capital
changes (e.g., mergers, rights offerings, or public offerings).
The FTSE Actuaries Share Indices are arithmetic weighted indices where the weights are the market capitalization of each
company. The price index is the summation of the market values (or capitalizations) of all companies within the index. (See
also Q5.)
19
5. Please indicate the index weighting methodology that is used for the underlying indexes (e.g., capitalization weighting, modified
capitalization weighting, equal dollar weighting).
Member’s Responses:
SC2 Members
Response
Australian Securities and
Investments Commission
S&P indices are capitalization weighted, that is, weightings given to each company make each company's influence on the
index's performance directly proportional to its market cap.
Brazilian Securities
Commission, CVM
The stocks in the portfolio are selected based on a “liquidity index”, itself a geometric average of (i) yearly financial turnover in
the stock as a percentage of market turnover and (ii) yearly number of trades involving the stock as a percentage of market
number of trades. All stocks traded at BOVESPA are ranked top-down according to the liquidity index and the top 80%
comprise the BOVESPA Index. Typically there are between 50 to 60 different stocks in the portfolio.
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
The “Modified capitalization weighting” methodology is used for the underlying indices. See response to question 4.
Underlying
CAC40
DAX30 performance
DJ Euro Stoxx 50SM
DJ Stoxx 50SM
DJ Stoxx SM Auto
DJ Stoxx SM Bank 600
DJ Stoxx SM Energy 600
DJ Stoxx SM Healthcare 600
DJ Stoxx SM Media
DJ Stoxx SM Pharma
DJ Stoxx SM Retail
DJ Stoxx SM Technology 600
DJ Stoxx SM Telecom 600
Price
weighed
Market capitalization weighted
by number of
Free Component
outstanding
float capped at x%
shares
D
D5
D
10%
D
10%
D
D
D
D
D
D
D
D
D
20
DJ Euro Stoxx SM Bank
DJ Euro Stoxx SM Energy
DJ Euro Stoxx SM Healthcare
DJ Euro Stoxx SM Technology
DJ Euro Stoxx SM Telecom
Dow Jones Industrial Average
Nasdaq 100
Nikkei 225 average
S&P500 composite
D
D
D
D
D
D
D
D
D
Stoxx indexes (DJ index guide v.7.1, §7.1 and 7.2):
- Free float factors
The free float factors are reviewed quarterly; they are calculated on the quarterly underlying data announcement dates,
implemented on the quarterly implementation dates and are fixed until the next quarterly review.
- Free float weighting cap factors (for the DJ Euro Stoxx 50SM and DJ Stoxx 50SM)
If the free float weighting of a blue chip stock is more than 10%, then its free float weighting cap factor is adjusted to reduce the
weighting to 10%. The free float weighting cap factors are calculated on the quarterly underlying data announcement dates,
implemented on the quarterly implementation dates and are fixed until the next quarterly review.
The methodology used for weighting the indices of Deutsche Börse AG is capitalization weighting, i.e. the weighting of each
Bundesastalt fur
Finanzdienstleistungsaufsicht, share is proportionate to its share of the total market capitalization of the shares contained in the index.
Germany
In order to calculate the weighting in both broad-based and narrow-based indices, all types of shares of a company which are
admitted to trading on a German stock exchange are aggregated. The price of the most liquid category is then weighted against
this sum of index calculation.
From June 2002 onwards, only one type of shares of each company and only the free float will be used to calculate the broadbased indices.
As the changes are made in June 2002, Deutsche Börse AG will switch over its index calculation to a free-floated weighting
basis. Simultaneously, in all indices the various share categories will be separated, i.e. each category of a company’s stock will
be considered separately. Only the most highly capitalized or liquid category will henceforth be admitted to a broad-based
index.
Securities and Futures
Commission, Hong-Kong
Hang Seng Index:
The Hang Seng Index is a market capitalization-weighted stock index.
MSCI China Indices:
21
The MSCI Indices are market capitalization-weighted stock indices.
Dow Jones Industrial Average:
The Dow Jones Industrial Average is a price-weighted stock index.
Commissione Nazionale per le A capitalization weighting methodology is used in index calculation. The weighting element is represented by the capitalization
value of each stock, observed at the revision date. The capitalization is computed by taking into account the whole amount of
Societa e la Borsa, Italy
stocks issued, and not only those outstanding.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
See 4.
In addition, MSCI Japan and S&P TOPIX adopted Modified Floating Stocks Capitalization Weighting
See question 4 above.
Monetary Authority of
Singapore
With the exception of the Nikkei 225 Index, which is price weighted, other indices on which SGX’s index futures contract are
based are capitalization-weighted.
Comision Nacional del
Mercado de Valores, Spain
The methodology used for the calculation of the IBEX-35 Index is based on the capitalization of the 35 equities composing the
Index. In order to obtain an efficient replication of the IBEX-35 Index, the Committee may use a number lesser than the number
of the issued shares to calculate the value of the index, bearing in mind criteria such as free float, a significant dispersion of
trading on more than one market, liquidity or any other deemed appropriate. In that sense, all those companies forming part of
the IBEX-35 Index and whose floating capital is between 40% and 50% included, shall, for calculation purposes, compute for
75% of their admitted capital. If the free float is between 30% and 40% included, they will compute for 60%; if it is between
20% and 30% included, they will compute for 40%; between 10% and 20% included, they will compute for 20%; if the freefloat is lower than or equal to 10%, they will compute for 10%; and if it is higher than 50%, they will compute for 100%.
Finansinspektionen, Sweden
Capitalization weighting (no. of registered shares multiplied with index price (latest paid price).
Swiss Federal Banking
Commission, Switzerland
see
clause
4.;
for
further
information,
http://www.swx.com/products/products_indexfamily_en.html
Commodity Futures Trading
Commission, USA
Securities and Exchange
See No. 4 above.
The IPC is a capitalization-weighted index. The relative value of each of the equity series which compose the IPC index is
explained by its market value. Thus, any change in price of any equity which composes the referred index, determines the index
value by its relative weight in the sample. This means that, a change in price of an equity with higher market value will,
therefore, produce a greater change in the index value than an equity with lower market value.
please
visit
the
SWX
website:
An index may be capitalization-weighted, modified capitalization-weighted, equal dollar-weighted, modified equal dollar-
22
Commission, USA
Financial Services Authority,
United Kingdom
weighted, or price-weighted.
Weighted capitalisation with free float adjustment for investibility.
23
6. Please identify the entities that calculate the index levels.
Member’s Responses:
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Standard & Poor's calculates the index levels. Prior to November 2001 the index levels were calculated by the ASX.
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
The entity responsible for calculating the relevant German indices is Deutsche Börse AG, which operates the Frankfurt Stock
Exchange (FWB) where calculations are based on the XETRA trading system (see above).
The São Paulo Stock Exchange.
S&P is responsible for calculating the S&P/TSX and the S&P 500 indices. STOXX Limited is responsible for the Dow Jones
EURO STOXX 50 Index.
All indexes’ owners are also index providers except for Standard&Poor’s who contracted with Reuters the calculation of the
S&P500 index. Please see above (Q.3) for owners’ identity.
Hang Seng Index: HSI Services Limited
MSCI Indices: Morgan Stanley Capital International Inc
Dow Jones Industrial Average: Dow Jones & Company
Commissione Nazionale per le Index levels are calculated by Borsa Italiana S.p.a.
Societa e la Borsa, Italy
TOPIX --- Tokyo Stock Exchange
Financial Services Agency,
Nikkei Average --- Nihon Keizai Shimbun, Inc(Nikkei)
Japan
S&P TOPIX --- Standard & Poors
DJIA --- Dow Jones & Company Inc,
MSCI Japan --- Morgan Stanley
FTSE Japan --- FTSE International Limited
Securities Commission,
Malaysia
Comision Nacional Bancaria
See question 3 above.
The BMV calculates the IPC, which is used as the underlying index for derivative products.
24
y de Valores, Mexico
Monetary Authority of
Singapore
For futures contracts, the entities that calculate the index levels are as follows:
Futures Contract
Nikkei 225, 300 Index Ftures
MSCI Japan, Singapore, Taiwan Index Futures
Straits Times Index Futures
S&P CNX Nifty (India) Index Futures
Index Provider
Nihon Keizan Shimbun (NKS)
Morgan
Stanley
Capital
International
(“MSCI”)
Singapore Press Holdings
India Services & Products (IISL)
For warrants, the indices are usually based on internationally reputable and widely disseminated indices, or indices provided by
the issuer. These indices should be easily available to investors.
Comision Nacional del
Mercado de Valores, Spain
As it was said in question 3, the Indexes Management Secretariat of the Sociedad de Bolsas calculates the IBEX-35 Index.
Standard and Poor’s calculates the S&P Europe index family.
Finansinspektionen, Sweden
SIX AB
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
see clause 3.
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
The indexes are calculated either by the entity that develops the index (e.g. Dow Jones, S&P, Fortune), or contracted out to third
parties such as data and news reporting services (e.g., Reuters/Bridge News for the Russell 2000, or ADP corporation for the
BARRA Value index).
Entities including Dow Jones and S&P calculate index levels. In addition, an options exchange that develops and maintains an
index may calculate the index levels for that index. If a broker-dealer maintains an index, the index must be calculated by a
third party who is not a broker-dealer.
The main UK index provider is FTSE International Limited, a company jointly owned by the Financial Times and the London
Stock Exchange.
25
7. Please indicate how often index values are calculated and disseminated during the trading day.
Member’s Responses:
SC2 Members
Response
Australian Securities and
Investments Commission
Currently index values are reviewed quarterly or on as needed basis when significant corporate events occurred. On 5 July
2002, Global Industry Classification Standards (GICS) will be implemented. This will result in index values being calculated in
real time for the ASX 200 and 50 indices and industry specific indices will be calculated at the end of the day eg. Midcap and
small resources. For further information refer to S&P Press Release dated 21 January 2002.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Real Time.
Commission des Operations
de Bourse, France
For the S&P indices, real-time quotes are provided through recognized vendors (via the TSX for the S&P/TSX indices).
The Dow Jones EURO STOXX 50 Index is calculated intraday and at the closing. The index dissemination period begins when
the first major trading system in the regional universe opens for trading. The actual dissemination of each index is triggered
when the first opening stock price for that index is received. The index dissemination period ends when the last major trading
system closes.
Underlying
CAC40
Calculation
frequency
30 s
DAX30 performance
15 s
DJ Euro Stoxx 50SM
DJ Stoxx 50SM
DJ Stoxx SM Auto
DJ Stoxx SM 600 Bank
DJ Stoxx SM 600 Energy
DJ Stoxx SM 600 Healthcare
DJ Stoxx SM Media
DJ Stoxx SM Pharma
DJ Stoxx SM Retail
DJ Stoxx SM 600 Technology
15 s
Calculation
period (CET)
9:00 am / 5:30
pm
9:00 am / 8:00
pm
Data source
NSC (Euronext
platform)
XETRA (DBAG
platform)
trading
trading
9:00 am / 8:00 European trading platforms
pm
via the data vendor Reuters
26
DJ Stoxx SM 600 Telecom
DJ Euro Stoxx SM Bank
DJ Euro Stoxx SM Energy
DJ Euro Stoxx SM Healthcare
DJ Euro Stoxx SM Technology
DJ Euro Stoxx SM Telecom
Dow Jones Industrial Average
real-time
3:30 am / 10:00 NYSE and Nasdaq trading
pm
systems
Nasdaq 100
15 s
3:30 am / 10:00 Nasdaq trading platform
pm
Nikkei 225 average
1 minute
2:00 am /
4:00 am
Tokyo Stock Exchange
and 5:30 am /
8:00 am
S&P500 composite
real-time
3:30 am / 10:00 NYSE and Nasdaq trading
pm
systems via Reuters
Index values are calculated each trading day, based on the day’s last prices quoted on Deutsche Börse's electronic trading
Bundesastalt fur
Finanzdienstleistungsaufsicht, system XETRA.
Germany
In addition to indices based on traded prices, for the DAX, MDAX and DAX 100 there is also one index each that is based on
the best bid and ask prices. Performance indices (except for the CDAX index family) are calculated continuously, i.e. every 15
seconds or every minute, whereas price indices are calculated once a day at the close of trading.
In addition, for each index except the NEMAX sector indices a daily settlement price is calculated once every day, based on
prices of the day’s auction, once all prices are available for the shares in the respective index.
Securities and Futures
Commission, Hong-Kong
As long as there are no opening prices available for individual shares, the indices are calculated on the basis of the previous
day’s closing prices. The continuous indices (calculated every 15 seconds or every minute) are published as soon as prices are
available on the current day for at least one of the companies contained in the index.
The “official” closing price of indices is calculated on the basis of XETRA closing prices (or the last prices quoted).
Some MSCI indices are calculated real time and disseminated real time via information vendors during trading hours of the
markets, whereas others and the Hang Seng Index are calculated and disseminated every 15 seconds during trading hours.
The Dow Jones Industrial Average is updated and disseminated real time during the trading hours of the New York Stock
Exchange. It is not updated during the trading hours in Hong Kong.
Commissione Nazionale per le MIB30 and MIDEX indexes are calculated every minute during the continuous phase6 on the basis of the prices of the latest
contracts concluded on each component stock.
Societa e la Borsa, Italy
27
Financial Services Agency,
Japan
Per 1 minute --- TOPIX, Nikkei Average, DJIA, FTSE Japan
Per 15 seconds --- S&P TOPIX, MSCI Japan
Securities Commission,
Malaysia
The index level is re-calculated every minute during trading hours (9am–12.30pm, 2.30pm–5pm). Index levels are disseminated
real-time through the Kuala Lumpur Stock Exchange’s electronic information and trading systems, and through them to various
third-party information vendors on a delayed or real-time basis.
Comision Nacional Bancaria
y de Valores, Mexico
The IPC is calculated continuously through the trading session every time a sale or buy is made with any of the equities from
the index sample. Thus, the BMV provides a real time index.
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
The indices are calculated and disseminated real-time.
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
The Sociedad de Bolsas, as Manager, publishes the real-time date information about the IBEX-35 Index in its vendor-feed data
flow available to professional information distributors. The IBEX-35 Index is recalculated, on real time, every time the price of
one of its constituents changes.
In the S&P Europe 350 Index, the opening price is the first trade of the stock at the stock exchange that opens first, and the
closing index value is calculated using the closing price of the stock that last traded at the stock exchange that closes last.
The index calculator calculate and disseminate the OMX index value to Stockholmsbörsen every minute. The values are at same
time disseminated in the exchange vendor feed (NMF-Nordic Market Feed), the cash market system SAXESS and the
derivatives system Click.
-
SMI (Swiss Market Index): every second in real time
SPI (Swiss Performancet Index): every 3 minutes
SNMI (Swiss New Market Index): every 3 minutes
Indexes values are calculated real time during the trading day – for example, real-time for the S&P, Nasdaq and Russell
indexes, and every fifteen seconds for the CME Barra value and Fortune e50 indexes).
U.S. indexes underlying derivative products are calculated and disseminated at least every 15 seconds throughout the trading
day, and some are calculated more frequently.
The value of the FTSE 100 is calculated every 15 seconds throughout the trading day. Other indices are calculated every 60
seconds or at the close of business.
28
8. Please indicate the source(s) of the prices of the component securities used in calculating the index levels.
Member’s Responses:
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
The prices of the component securities are based on the prices taken from the ASX after the market closes.
Commissione Nazionale per le
Societa e la Borsa, Italy
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
The market prices used to calculate the indexes are directly taken from the trading system.
BOVESPA.
All the Standard & Poor’s indices obtain price information from Reuters (Reuters obtains it from the TSX for the S&P/TSX
indices). The input data sources for the Dow Jones EURO STOXX 50 index calculation include: stock exchanges, regulatory
agencies, companies in the investable stock universe, related service providers.
See answer Q.7 above
As mentioned above in the answer to question 7, index values are calculated by the stock exchanges each trading day, based on
the day’s last prices quoted on Deutsche Börse's electronic trading system XETRA.
Prices of the components are obtained from the stock exchanges that the underlying stocks are trading.
Hang Seng Index:
The SEHK
MSCI Indices: The SEHK,the Korea Stock Exchange and the Taiwan Stock Exchange.
Dow Jones Industrial Average: New York Stock Exchange
Calculators use the price in the market where its component securities is primarily listed (the primary market). If a component
stock is not traded through a day at all, they use the latest price in the primary market.
The Kuala Lumpur Stock Exchange’s own trading system.
The source of the prices is the operations of the securities that take place in the stock exchange.
The index owner and publisher is responsible for sourcing for the prices of the constituent stocks. While the securities
exchange may be the ultimate source for the prices, the index publisher often obtains it through price vendors.
As a general reference, the price of each IBEX-35 constituent security will be that at which the last transaction was completed
on the Joint Stock Exchange System (SIBE).
29
Finansinspektionen, Sweden
The index calculator SIX receive market prices via the exchange vendor feed NMF (Nordic Market Feed). The original values
are from the Stockholmsbörsen cash market trading system SAXESS.
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
The source is the trading systems of SWX Swiss Exchange and virt-x.
Financial Services Authority,
United Kingdom
The entity that constructs the index decides the source, but typically the price is the last sales price of the underlying component
stock listed on the exchange at which the component stock trades.
The entity that develops and maintains the index determines the sources of the prices it will use in making intra-day calculations
of index levels. For example, an index developer could decide to use only prices from the primary market where the underlying
index components trade to calculate index levels. Alternatively, for securities traded on U.S. exchanges or Nasdaq, an index
developer could decide to use the trade prices reported by any market trading a component security in calculating index levels.
FTSE indices based on UK equities take their prices from the London Stock Exchange. FTSE indices that include foreign
equities take the prices of foreign securities, via a Reuters feed, from their primary trading locations.
30
Where Traded
9. Do the derivative products trade on the same exchange as the underlying securities?
SC2 Members
Response
Australian Securities and
Investments Commission
The main Australian exchanges have been issued with Australian Market Licenses (AML's) that govern which products may be
traded on their markets.
At present, the ASX may trade derivative products such as options, warrants and ETFs as well as the underlying securities. The
ASXF and the SFE market licences do not authorize the trading of securities. Therefore the derivatives products offered by SFE
and ASXF do not trade on the same exchange as the underlying securities.
Brazilian Securities
Commission, CVM
Partially. There is an option contract on the IBOVESPA which is traded at BOVESPA. On the other hand, the more liquid
derivative, the futures contract on the IBOVESPA, is traded at the Brazilian Futures Exchange – BM&F.
No options or futures trade on the same exchange as the underlying securities. Following a recent restructuring of Canadian
exchanges, senior equities are now traded on the TSX, while derivatives trade on the Bourse de Montréal. Therefore, the stocks
underlying the Canadian index derivatives that trade on the Bourse de Montréal are listed on the TSX. Stocks underlying the
foreign index derivatives that trade on the Bourse de Montréal are listed on American and European exchanges. ETFs, however,
trade on the same exchange as the underlying securities.
For domestic based derivatives products (CAC 40, equity options) : Yes
Commission des Operations
For Pan-European and other foreign products : No
de Bourse, France
Yes, some of the index-based derivative products, for instance DAX related warrants, are traded on the same exchange as the
Bundesastalt fur
Finanzdienstleistungsaufsicht, underlying securities.
Germany
Other index-related derivative products such as derivative products related to foreign indices or traded on Eurex, are traded
separately from the underlying securities and indices and on a different stock exchange.
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Securities and Futures
Commission, Hong-Kong
Not necessary. ETF and derivative warrants based on the Hang Seng Index are traded on the same exchange (the SEHK) as the
underlying securities. However, some ETF are based on securities traded on overseas exchanges. Apart from that, , stock index
futures and options contracts traded on the HKFE can be based on securities trading on the SEHK and overseas exchanges.
Commissione Nazionale per le No. While index constituent stocks are traded on the MTA (Mercato Telematico Azionario), derivative products are traded on a
different market, the IDEM (Italian Derivatives Equity Market), even though both the above mentioned markets are managed by
Societa e la Borsa, Italy
the same company, Borsa Italiana S.p.a..
31
Financial Services Agency,
Japan
Component stocks of TOPIX are traded on the same exchange as TOPIX futures and options. Most of the component stocks of
Nikkei Average are traded on Tokyo Stock Exchange, but some of them are on Osaka Securities Exchange. On the other hand,
Nikkei futures and options are traded on Osaka Securities Exchange.
Securities Commission,
Malaysia
No. The KLSE Composite index futures and index contracts are traded on the Malaysian Derivatives Exchange (MDEX), a
wholly-owned subsidiary of the KLSE Group. MDEX employs a separate trading platform from KLSE.
Comision Nacional Bancaria
y de Valores, Mexico
The IPC futures trade in a different exchange called MexDer, Mercado Mexicano de Derivados, where only derivative products
are traded, while the IPC warrants trade directly in the BMV.
Monetary Authority of
Singapore
For derivative products based on SGX-ST listed securities (Straits Times Index ETF, STI futures, Singapore MSCI Free
futures), the answer is yes, albeit in different divisions. However, where the indices are based on foreign stocks, they would
trade on different exchanges.
No. IBEX-35 index’s constituents are traded on the SIBE while the derivative products are traded on MEFF Renta Variable.
S&P Europe 350 constituents shares are traded on 15 European countries, in exchanges independent from MEFF.
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Yes. However, for covered warrants based on foreign indices, the actual trading in the underlying securities take place on a
foreign exchange, e.g Nasdaq 100 based products.
Swiss Federal Banking
Commission, Switzerland
SMI futures:
on Eurex
SMI ETF:
SWX, virt-x (and other Exchanges)
SMI warrants:
SWX (and other Exchanges)
SMI certificates:
SWX (and other Exchanges)
SNMI warrants / certific.:
SWX
Commodity Futures Trading
Commission, USA
Other derivatives index based products which are not calculated by SWX are also traded on SWX (Nasdaq, DAX, STOXX).
Currently, the futures products and options on such futures trade on different exchanges than the cash underlying securities.
However, options on broad-based security indexes such as the S&P 500 do trade on securities exchanges. With the approval of
joint rules by the CFTC and SEC with respect to security futures products, which permit national securities exchanges to trade
security futures products (see response No. 10 below), it is probable that both futures and the underlying security will eventually
trade on the same securities exchange.
32
Securities and Exchange
Commission, USA
Index derivative products may trade on the same exchange as an index’s component securities. For example, the American
Stock Exchange LLC (“Amex”) trades S&P MidCap 400 Index options and several component securities of the MidCap 400
Index. In addition, the Amex currently trades Nasdaq 100 Index options and plans to begin trading all of the component stocks
of the Nasdaq 100 Index in 2002. Amex rules, however, provide that when Amex-listed stocks comprise more than 10% of the
value of an index, options on that index must be traded in a room physically separated from the equity floor. This prohibition
against trading index options and their underlying component equities at the same physical location is designed to address
concerns regarding the potential for market participants to misuse non-public information and to engage in manipulative and
improper trading conduct. The Philadelphia Stock Exchange (“Phlx”) also trades index derivative products as well as their
component securities. While the Phlx does not have a specific rule regarding the location of trading of the index options and
component securities, the Phlx does maintain separate trading floors for options and equities. Thus, index options and their
components do not trade at the same location on the Phlx. With regard to other options exchanges, the Pacific Exchange and
the International Securities Exchange do not trade index options and the Chicago Board Options Exchange (“CBOE”) does not
trade component securities of the index options traded on the CBOE.
Financial Services Authority,
United Kingdom
No, in respect of index futures and options. (Covered warrants based on indices are likely to trade on the same exchange as the
securities underlying the index but to date there have been no such issues.)
33
Who Regulates
10. Please identify the government regulator(s) of stock index derivative products.
SC2 Members
Response
Australian Securities and
Investments Commission
Financial markets are regulated by ASIC. Market operators in creating products such as options over indices must include
details of the products in their operating rules which are subject to disallowance by the Minister. ASIC is involved in this
process as it makes a recommendation to the Minister on the appropriateness of the rules.
Brazilian Securities
Commission, CVM
Since the reform of the securities markets Law 6.385/76 last year, the Brazilian Securities Commission (CVM) has jurisdiction
over any derivative contract/product traded in Brazil.
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Bourse de Montréal is under the primary jurisdiction of the Commission des valeurs mobilières du Québec, which recognized it
as an SRO in Québec, and is exempted by the Ontario Securities Commission from the requirement to be recognized as an
exchange in Ontario (based on the fact that it is regulated by the Commission des valeurs mobilières du Québec). Therefore,
Bourse de Montréal must obtain prior approval from the Commission des valeurs mobilières du Québec for all the stock index
derivatives products it wishes to launch. The Ontario Securities Commission participates in the analysis by providing
comments to the Commission des valeurs mobilières du Québec but does not formally provide approval or non-approval for the
Bourse de Montréal’s products.
The Commission des Opérations de Bourse (COB).
Commission des Operations
de Bourse, France
In Germany, supervision of securities markets (which means also supervision of stock index derivative products) is shared by
Bundesastalt fur
Finanzdienstleistungsaufsicht, several authorities:
Germany
• the Federal Financial Supervisory Agency (Bundesanstalt für Finanzdienstleistungsaufsicht, short: BAFin) and
• the Stock Exchange Supervisory Authorities of the States (Börsenaufsichtsbehörden der Länder).
The tasks of the BAFin include overall surveillance of the markets (for example insider investigations), i.e. of on- and offexchange trading. The Exchange Supervisory Authorities of the States monitor the activities on the stock exchanges and
compliance with the trading rules.
The Hong Kong Securities and Futures Commission (“HKSFC”).
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le Consob is empowered by Legislative decree 24 February 1998, n.58 (Testo Unico della Finanza) to regulate and supervise the
34
Societa e la Borsa, Italy
markets on which stock index derivative products are traded.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Financial Services Agency
Monetary Authority of
Singapore
The Monetary Authority of Singapore (MAS) is the statutory regulator of the financial sector in Singapore. Approval from
MAS is required before new stock index derivative products are launched in Singapore.
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
The Comisión Nacional del Mercado de Valores (CNMV) is the regulator of the stock index derivative products.
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
The Swiss Federal Banking Commission (SFBC) is the final regulatory authority for the SWX. The law does not require any
direct licensing of index-products.
The Commodity Futures Trading Commission (CFTC) has exclusive jurisdiction over futures contracts that are based on
“broad-based indexes” (i.e., indexes that are not “narrow-based” as defined) and options on such contracts.
The Securities and Exchange Commission (SEC) regulates options on indexes, which are considered securities.
The CFTC and SEC regulate the trading of futures contracts on single securities and futures contracts on narrow-based security
indexes (collectively “security futures”) under a framework for joint regulation established by the Commodity Futures
Modernization Act of 2000 (CFMA).
Note re: “broad-based”/”narrow-based distinction and jurisdiction
The Commodity Futures Modernization Act (“CFMA”),7 which became law on December 21, 2000, establishes a framework
for the joint regulation of the trading of futures contracts on single securities and on narrow-based security indexes (collectively,
“security futures”) by the CFTC and the SEC. Previously, these products generally were statutorily prohibited from trading in
the United States.
Under the CFMA, designated contract markets and registered derivatives transaction execution facilities (“DTEFs”) may trade
security futures if they register with the SEC and comply with certain other requirements of the Exchange Act.8 Likewise,
national securities exchanges and national securities associations registered under Section 15A(a) of the Exchange Act9 may
trade security futures if they register with the CFTC and comply with certain other requirements of the CEA.10
To distinguish between security futures on narrow-based security indexes, which are jointly regulated by the Commissions, and
futures contracts on broad-based security indexes, which are under the exclusive jurisdiction of the CFTC, the CFMA also
amended the CEA and the Exchange Act by adding an objective definition of “narrow-based security index.”11 This definition
The Securities Commission of Malaysia.
•
•
•
National Banking and Securities Commission (CNBV)
Ministry of Finance (SHCP)
Central Bank (Banxico)
Finansinspektionen (the Swedish Financial Supervisory Authority)
35
excludes from its scope certain security indexes that satisfy specified criteria. A futures contract on an index that meets the
criteria of any of the six exclusions from the definition of narrow-based security index is not a security future under the
securities laws, and thus is subject solely to the jurisdiction of the CFTC.
1.Definition of Narrow-Based Security Index 12
Under the CEA and Exchange Act, an index is a “narrow-based security index” if it has any one of the following four
characteristics: (1) it has nine or fewer component securities; (2) any one of its component securities comprises more than 30%
of its weighting; (3) the five highest weighted component securities together comprise more than 60% of its weighting; or (4)
the lowest weighted component securities comprising, in the aggregate, 25% of the index’s weighting (“lowest weighted 25%”)
have an aggregate dollar value of average daily trading volume (“ADTV”) of less than $50 million (or in the case of an index
with 15 or more component securities, $30 million).13
Any security index that does not have any of the four characteristics set forth above is, in effect, a broad-based security index.
Accordingly, any future on such an index, including an index on foreign securities, would not be a security future and thus
would be subject to the sole jurisdiction of the CFTC.14
2. Indexes Excluded from Definition of Narrow-Based Security Index 15
The definition of narrow-based security index in the CEA and Exchange Act excludes from its scope certain security indexes
that satisfy specified criteria. A future on an index that meets the criteria of any of the six categories of indexes that are so
excluded from the definition is not a security future under the securities laws, and thus is subject solely to the jurisdiction of the
CFTC.
The first and most fundamental exclusion applies to indexes comprised wholly of U.S.-registered securities that have high
market capitalization and dollar value of ADTV, and meet certain other criteria. Specifically, a security index is not a narrowbased security index under this exclusion if it has all of the following characteristics: (1) it has at least nine component
securities; (2) no component security comprises more than 30% of the index’s weighting; (3) each of its component securities is
registered under Section 12 of the Exchange Act; and (4) each component security is one of 750 securities with the largest
market capitalization (“Top 750”) and one of 675 securities with the largest dollar value of ADTV (“Top 675”).16
The second exclusion provides that a security index is not a narrow-based security index if a board of trade was designated by
the CFTC as a contract market in a future on the index before the CFMA was enacted.17
The third exclusion provides that if a future was trading on an index that was not a narrow-based security index for at least 30
days, the index is excluded from the definition of a “narrow-based security index” as long as it does not assume the
characteristics of narrow-based security index for more than 45 business days over three calendar months.18 This exclusion, in
effect, creates a tolerance period that permits a broad-based security index to retain its broad-based status if it becomes narrowbased for 45 or fewer business days in the three-month period.19
The fourth exclusion provides that a security index is not a narrow-based security index if it is traded on or subject to the rules
of a foreign board of trade and meets such requirements as are jointly established by rule or regulation by the CFTC and SEC.20
The fifth exclusion is essentially a temporary “grandfather” provision that permits the offer and sale in the United States of
security index futures traded on or subject to the rules of foreign boards of trade that were authorized by the CFTC before the
CFMA was enacted.21 Specifically, the exclusion provides that, until June 21, 2002, a security index is not a narrow-based
security index if: (1) a future on the index is traded on or subject to the rules of a foreign board of trade; (2) the offer and sale
36
of such future in the United States was authorized before the date of enactment of the CFMA; and (3) the conditions of such
authorization continue to apply.22
The sixth exclusion provides that an index is not a narrow-based security index if a future on the index is traded on or subject to
the rules of a board of trade and meets such requirements as are established by rule, regulation, or order jointly by the two
Commissions.23 This exclusion grants the Commissions authority to jointly establish further exclusions from the definition of
narrow-based security index.
Based on such authority, the CFTC and SEC issued an order with respect to security index futures trading on foreign markets
that: 24
An index is not a narrow-based security index if: (1) it is traded on or subject to the rules of a foreign board of trade; (2) the
offer and sale in the United States of a contract of sale for future delivery on the index was authorized before the date of the
enactment of the CFMA; and (3) the conditions of such authorization continue to be met.
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
3.Where securities futures may trade 25
Security futures products (i.e., futures on narrow-based indexes and single shares) may be traded on any board of trade that is
designated as a contract market by the Commission pursuant to Section 5 of the CEA or that is registered with the Commission
as a derivatives transaction execution facility (“DTEF”) pursuant to Section 5a of the CEA.
In addition, Section 5f(a) of the CEA permits certain entities that are otherwise regulated by the SEC to be designated contract
markets for the limited purpose of trading security futures products. Specifically, any board of trade that is registered with the
SEC as a national securities exchange pursuant to Section 6(a) of the Exchange Act, is registered with the SEC as a national
securities association pursuant to Section 15A(a) of the Exchange Act, or is an alternative trading system (“ATS”) as defined by
Section 1a(1) of the CEA shall be a designated contract market in security futures products if certain conditions are met.26
The SEC regulates the market for index options and warrants and the CFTC oversees broad-based index futures. The CFTC
and the SEC jointly regulate narrow-based index futures.
The FSA.
37
11. Please indicate whether stock index derivative products are subject to market/SRO rules.
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
All stock index derivative products are subject to market/SRO rules. The rules, amongst other things, set out the contract
specifications, adjustment circumstances and the trading rules for these products.
Subject to BOVESPA and BM&F
Commission des Operations
de Bourse, France
Stock index derivative products are subject to the exchange rules. There are also subject to general regulation of financial
instruments.
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le
Societa e la Borsa, Italy
Yes, stock index derivative products are subject to the rules of the German stock and futures exchanges.
Financial Services Agency,
Japan
Securities Commission,
Bourse de Montréal is an exchange recognized as an SRO in Québec. All its products are subject to its market rules which must
be formally approved by the Commission des valeurs mobilières du Québec before they come into effect.
In addition, since all the products traded on the Bourse de Montréal are settled and cleared by the Canadian Derivatives
Clearing Corporation (CDCC), clearing and settlement rules related to stock index derivative products adopted by the CDCC
must also be formally approved by the Commission des valeurs mobilières du Québec.
Finally, stock index derivative products are also subject to the SRO member regulation rules adopted by the Investment Dealers
Association of Canada or the Bourse de Montréal. Member regulation is enforced by the SRO which has the primary audit
jurisdiction over the market participant.
Yes, stock index derivative products are subject to the Rules, Regulations and Procedures of the HKFE and SEHK
Derivative products, included stock index contracts, are subject to the Rules adopted by market management companies and
approved by Consob. In particular, the Rules provide for general requirements, while the Instructions accompanying those rules
set out contract specifications of each product listed. The Instructions regarding derivatives markets (i.e. derivatives contracts
specifications, underlying index calculation methodology and market making obligations) have to be submitted to Consob for
approval.
In this respect, Consob may ask any amendments to the Rules as it deems fit to guarantee market transparency, orderly conduct
of trading and investor protection.
These products are subject to market/SRO rules.
The derivative contracts are subject to the business rules of the Malaysian Derivatives Exchange and the derivatives clearing
38
Malaysia
house, as well as to futures legislation, namely the Future Industry Act 1993.
Comision Nacional Bancaria
y de Valores, Mexico
The stock index future contracts are subject to SRO rules and guidelines issued by the authorities.
Monetary Authority of
Singapore
Additionally, the IPC warrants are also subject to CNBV rules.
Yes, SGX has its own self-regulating rules and regulations governing derivatives trading and broking, as well as warrants and
ETFs. The MAS approves all rules and subsequent amendments to these rules by the SGX.
Comision Nacional del
Mercado de Valores, Spain
MEFF approves Circulars, with which the market members are obligate to comply, as part of its functions of organizing,
running, regulating and supervising the derivative market. The CNMV may suspend or annul the Circulars if it considers that
they infringe the legislation of the securities markets or impair the correction and transparency of the price formation process or
the interest of investors.
Finansinspektionen, Sweden
Stockholmsbörsen’s Rules and Regulations govern the terms and conditions for stock index derivative products that are listed at
Stockholmsbörsen
and
traded
in
the
derivative
trading
system
(Click).
There are no such rules for warrants and equivalent instruments that are traded in the cash trading system (Saxess).
Stock index derivative products are subject to market and SRO rules of the SWX.
Art. 4 of the Federal Act on Stock Exchanges and Securities Trading (SESTA) requires for the operation of an exchange the
setup of a SRO. Therefore the Surveillance & Enforcement Department (SVE) of the SWX is in charge of the supervision of the
activities of the SWX Swiss Exchange members and their traders. Independent Surveillance Eurex Zürich (ISE) – which
consists of the same staff as SVE – supervises on the basis of a service level agreement between Eurex Zurich plc and SWX
Swiss Exchange the activities at Eurex.
The SRO (SVE) of the SWX Swiss Exchange is under Art. 6 SESTA obliged to supervise all transactions in securities at the
SWX Swiss Exchange (and to report to the SFBC. Under Art. 2 SESTA the definition of securities also includes derivative
products, therefore stock index derivative products are subject to market/SRO rules.
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Yes. Each futures market has self-regulatory responsibilities and establishes rules applicable to the trading of stock index
futures.
In the U.S., exchange-traded stock index options and stock index warrants are subject to the rules of the exchange on which they
are listed and traded, including listing standards, trading rules, sales practice rules (including suitability rules), position and
exercise limits, margin requirements, and rules prohibiting members from engaging in acts or practices that are inconsistent
with just and equitable principles of trade. In addition, broker-dealers that trade index options in the over-the-counter market
are subject to the rules of the National Association of Securities Dealers, Inc. (“NASD”), including margin requirements,
suitability rules, rules prohibiting the sale of securities through any manipulative, deceptive, or fraudulent device or contrivance,
and requirements to deal fairly with customers and to observe just and equitable principles of trade in conducting business.
Finally, narrow-based stock index futures, once trading commences in such products, will be subject to the rules of the market
on which they are listed and traded.
39
Financial Services Authority,
United Kingdom
Derivative exchanges establish their own rules and protocols in respect of the contracts they admit to trading. In doing so, they
are required by the UK recognition requirements for exchanges to ensure that dealings on the exchange are limited to
investments in which there is a proper market.
40
Authorization of Stock Index Derivative Products
12. Please describe briefly the initial authorization procedures for listing stock index derivative products (e.g., is it necessary for a regulatory
authority to approve the product prior to listing? Is the developer of an index required to certify that the index complies with statutory or
exchange listing standards?)
SC2 Members
Response
Australian Securities and
Investments Commission
A market operator seeking to list stock index derivative products would propose changes to its operating rules which would
include the new product. The package would also include explanatory materials that detail how the index will be calculated and
by whom.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
The Corporations Act 2001, empowers the Minister to disapprove operating rule changes proposed by a market operator. ASIC
makes a recommendation to the Minister on the proposed amendments. Finally the Minister makes a decision on the rules.
All new derivatives contracts are subjected to the CVM for approval.
When the Bourse de Montréal develops a new product, it must file the related draft rule amendments and explanatory materials
with the Commission des valeurs mobilières du Québec for prior approval. It also files tehse materials with the Ontario
Securities Commission.
Prior approval from the Commission des valeurs mobilières du Québec must be obtained for both the rule amendments and the
product if, as a result of the launching of the new stock index derivative product, a new type of contract is traded on the Bourse
de Montréal. The Ontario Securities Commission participates in the analysis by providing comments to the Commission des
Valeurs Mibilieres du Québec but does not formally provide approval or non-approval for the Bourse de Montréal’s products.
Relevant sections are 67 and 177 of the Securities Act (Québec) and 71.1 of the Regulation concerning securities (Québec).
There are no statutory or exchange listing standards tailored for stock index derivative products.
Commission des Operations
Admission to trading of stock index derivative products are subject to a veto right from the COB.
de Bourse, France
The basic requirement for an initial listing is a prospectus, which must contain all information required to enable the public to
Bundesastalt fur
Finanzdienstleistungsaufsicht, make a proper assessment of the issuer and the securities.
Germany
If admission to a stock exchange has been sought the prospectus must include more detailed information, in particular about the
characteristics of the securities. This prospectus will be reviewed by the admission board of the stock exchange where the
derivative products are intended to be listed. Admission to a stock exchange will only be granted if the prospectus complies
with the requirements set out in Sections 13-42 of the Stock Exchange Admission Regulation (Börsenzulassungsverordnung).
41
Derivative products are also regulated in the German Exchange Act (Börsengesetz, short: BörsG). Under Section 50 of the
BörsG, exchange-related options and futures transactions, insofar as they are concluded on an exchange, require admission by
the Board of Management. Prior to granting the admission, the Board of Management shall, in each individual case, hear the
opinions of representatives of the business sector involved.
Securities and Futures
Commission, Hong-Kong
Stock index futures and options contracts traded on the HKFE are subject to the approval of the HKSFC.
Stock index derivatives warrants listed on the SEHK are subject to the Listing Rules and other trading rules of the SEHK.
For ETF to be listed on the SEHK, they require authorization of the HKSFC.
Commissione Nazionale per le The Rules adopted by Borsa Italiana SpA establish that the underlying index characteristics, the derivative contract
specifications and any modifications thereof have to be approved by Consob. Index characteristics, contract specifications and
Societa e la Borsa, Italy
their modification have to be considered approved by Consob unless it objects within 30 days of the notification by Borsa
Italiana.
A stock exchange which plans to list an index derivative shall have approval by the FSA. That application form shall include
Financial Services Agency,
Japan
component stocks, the way of calculation of index, and other information. Although there are no explicit listing standard
regarding stock index derivative products, when the FSA reviews the application, it considers the achievements of the
calculator, component stocks, and the number, the diversity, the capitalization, the weight, and the liquidity of component
stocks. It also reviews whether the stock exchange have the proper trading rules and the system for surveillance of unfair
tradings.
Securities Commission,
Malaysia
A proposed listing of derivatives product can only be done through an amendment to the business rules of the Malaysian
Derivatives Exchange, which in turn would be subject to the approval of the Securities Commission. As a condition for
approval, certain criteria would need to be met, eg, the exchange would be required to undertake simulation testing to ensure
system and market readiness, conduct proper audit, etc.
There are currently no statutory or specific listing standards required of the index. Please refer to question 13 below.
Comision Nacional Bancaria
y de Valores, Mexico
Concerning the IPC future contracts to be listed in the derivatives exchange (MexDer), it is required that authorities approve the
product prior to listing. The procedure for listing a future contract consists on sending a formal request with the terms and
conditions of the contract intended to be listed, to the authorities. Afterwards, MexDer integrates the General Conditions of the
contract, which specify the underlying asset, number of units of underlying assets per futures contract, operation procedure,
starting, maturity and settlement dates, calculation of settlement price, etc.
After the project is approved, the exchange, along with the clearing house can disclose it to the public to promote the
negotiation of the new contract.
With respect to IPC warrants, the issue of titles is made by unilateral declaration of will by the issuer (brokerage house or bank),
that has to present a prospectus’ project to the CNBV in order to approve the listing of titles in the BMV.
42
Monetary Authority of
Singapore
MAS’ approval is required to list new futures contracts on SGX-DT. For warrants and ETFs, the products only need to fulfil
the listing rules, and do not require explicit MAS endorsement. However, the listing rules and subsequent changes to the listing
rules have to be approved by MAS
Index developers have their own existing set of comprehensive and consistent standards for their suite of indices to meet their
primary benchmark objectives. Hence, an index is selected based on its existing suitability for a derivatives contract.
Comision Nacional del
Mercado de Valores, Spain
As with any other derivative contract to be listed on an Spanish derivative exchange, prior approval by the CNMV’s board is
required. No specific requirements are needed.
Finansinspektionen, Sweden
The stock index derivatives that are listed on Stockholmsbörsens are not approved by Finansinspektionen prior to the listing.
The procedure for derivatives traded in Click is that Stockholmsbörsen draws up a contract specification, and implements it in
its rulebook. Before listing, an exchange notice is sent out to the market, informing about the new product.
The procedure for derivatives traded in Saxess is that Stockholmsbörsen, upon application from the issuer, approves that the
instrument, e.g. a covered warrant, be listed on Stockholmsbörsen (and traded in Saxess). Even though the responsibility for
scrutinizing the prospectus rests with Finansinspektionen, Stockholmsbörsen makes an assessment of the prospectus as well.
Furthermore, Stockholmsbörsen plans to introduce a certain agreement, which the issuer shall sign before the listing takes place.
Information about the listing is sent out to the market by an exchange notice.
Swiss Federal Banking
Commission, Switzerland
The exchange determines which derivative contract shall be admitted to trading. Admission of a specific product to trading shall
not be permitted unless the maintenance of orderly options and futures trading and adequate performance of any market-making
function can be anticipated.
Derivatives intended for listing may be admitted provisionally to stock exchange trading. In such a case, an application for
provisional admission must be lodged. The applicant must describe the securities and provide an assurance that all listing
conditions pursuant to Arts. 5–31 of the SWX Listing Rules (LR) have been fulfilled, that a standard listing is intended and that
a listing application will follow. A brief description of the securities and the issuer must be lodged with the Admission Board no
later than three business days before the intended commencement of trading. Provisional trading, approved by the Listing
Department, may commence at the earliest three business days after the application has been lodged. Securities admitted
provisionally are not considered to be listed pursuant to these Listing Rules and are traded in a special segment. If the
application for listing is not lodged within two months, admission to provisional trading automatically lapses (Art. 62 LR). If
the issuer lodges its definitive listing application within the above deadline, the Listing Department takes the decision regarding
the listing within one month (Art. 50a LR).
If the derivative product is not a standard product or it is issued by a new issuer, the possibility of the provisional trading is not
given. In this case, the listing must be approved by the Executive Committee of the Admission Board of the SWX, and not by
the Listing Departement.
Commodity Futures Trading
Broad-based stock index futures contracts, which are solely subject to CFTC regulation, and “security futures” (i.e., narrow-
43
Commission, USA
based stock index futures and single security futures), which are subject to joint regulation by the CFTC and SEC, may be listed
on futures markets pursuant to (a) certification or (b) optional CFTC approval procedures. These procedures differ slightly
depending upon the type of futures market on which the index product trades. 27
Discussion
A.
Broad-based index futures contracts subject to exclusive CFTC jurisdiction
1. Designated contract markets
a. Certification
Designated contract markets are futures or option exchanges that may list for trading contracts based on all types of products
and that may allow access to their facilities by all types of traders, including retail customers. Designated contract markets are
most like traditional futures exchanges. Part 38 of the CFTC's rules sets forth the procedures and requirements for a board of
trade or trading facility to be designated as a contract market.
A designated contract market may list new products for trading by filing with the CFTC the contract’s terms and conditions and
a certification that the contract complies with the CEA and CFTC rules and policies.28 A self-certification filing must be
received at the CFTC Washington, DC headquarters no later than the close of business the day before the product is listed for
trading. The CFTC’s requirements and procedures for self-certification filings for listing new products and for implementing
rule amendments are set forth in CFTC rule 40.2 and CFTC rule 40.6, respectively.
b. Optional CFTC approval
A contract market may request CFTC approval of its futures or option products under the provisions of CFTC rule 40.3.
Product approval requests may be submitted concurrently with the filing of a contract under self-certification procedures or any
time later. The requirements for approval of a product are contained in the CFTC's "Guideline No. 1" (Appendix A to Part 40).
This guideline provides exchanges with more specific information regarding initial and continued compliance with the CEA and
the CFTC's rules and policies for listing contracts. In addition, a request for contract approval must be accompanied by a
nonrefundable filing fee, which is based on actual costs to the CFTC for processing contract approval requests
2.
Derivatives transaction execution facilities (DTEF)
Derivatives Transaction Execution Facilities or DTEFs are trading facilities that limit access to mostly institutional or otherwise
eligible traders. 29 DTEFs are available to eligible traders (institutional traders or non-institutional traders trading through
futures commission merchants having at least $20 million in net capital) for futures and option contracts on commodities that
have a nearly inexhaustible deliverable supply, are highly unlikely to be susceptible to the threat of manipulation, or have no
cash market, security futures products, and futures and option contracts on commodities that the Commission may determine, on
a case-by-case basis, are highly unlikely to be susceptible to the threat of manipulation. Separately, in addition, except as
provided in section 5(e)(2) of the CEA, eligible commercial entities trading for their own account may do so on a DTEF with
respect to futures and option contracts on commodities other than those enumerated in section 1a(4) of the Act. 30 Section 5a(g)
44
of the Act provides that a board of trade operating as a DTEF may trade on the facility agreements, contracts, or transactions
involving commodities excluded or exempt pursuant to sections 2(c), 2(d), 2(g), or 2(h) of the CEA, subject to the CFTC's
exclusive
jurisdiction.
a.
Certification
Prior to initial listing of products, the DTEF must certify to the Commission that it has the capacity to, and upon commencing
operations will, operate in compliance with the core principles, or it may voluntarily demonstrate that it is in compliance with
the core principles.
Notwithstanding the provisions of section 5c(c) of the Act and Rule 40.2, a registered DTEF is only required to notify the
Commission of the listing of new contracts for trading, posting of new product descriptions, terms and conditions or trading
protocols or providing for a new system product functionality. Under Part 37, this notice may be made by (1) filing with the
CFTC at its Washington, D.C. headquarters, a submission labeled “DTEF Notice of Product Listing” that includes the text of
the contract’s terms or conditions, product description, trading protocol or description of the system functionality or (2)
electronic notification of the foregoing at the time traders or participants in the market are notified.
b.
Optional CFTC approval
Alternatively, a DTEF may request CFTC approval of its futures or option products and its rules. Approval requests may be
submitted concurrently with an application or any time later. The requirements for submission of an application for approval of
a contract are contained in the CFTC's "Guideline No. 1" (Appendix A to Part 40). In addition, an application for contract
approval must be accompanied by a nonrefundable filing fee which is based on actual costs to the CFTC for processing contract
approval requests (see Appendix B to Part 40),
B.
Security futures products (i.e., narrow-based index futures products and single-stock futures)
Both certification and voluntary approval procedures apply, which are set forth in CFTC rules that are specific to security
futures. Because security futures products must also conform to listing standards that a national securities exchange or national
securities association files with the SEC, please see the response of the U.S. SEC for complete explanation of relevant rules and
procedures.
Security futures products may be traded on any board of trade that is designated as a contract market by the Commission
pursuant to Section 5 of the CEA or that is registered with the Commission as a derivatives transaction execution facility
(“DTEF”) pursuant to Section 5a of the CEA. In addition, Section 5f(a) of the CEA permits certain entities that are otherwise
regulated by the SEC to be designated contract markets for the limited purpose of trading security futures products.
Specifically, any board of trade that is registered with the SEC as a national securities exchange pursuant to Section 6(a) of the
Exchange Act, is registered with the SEC as a national securities association pursuant to Section 15A(a) of the Exchange Act, or
is an alternative trading system (“ATS”) as defined by Section 1a(1) of the CEA shall be a designated contract market in
security futures products if certain conditions are met.31 Please see the response of the U.S. SEC.
45
Securities and Exchange
Commission, USA
Procedural requirements – CFTC rule 41.23 32
1.
Certification
Section 2(a)(1)(D)(vii) of the CEA makes it unlawful for a designated contract market or registered derivatives transaction
execution facility to list for trading or execution a security futures product unless it has provided the Commission with a
certification that the security futures product and the board of trade meet specified requirements. CFTC rule 41.22 requires
designated contract markets and registered derivatives transaction execution facilities to certify that they meet the specified
requirements of Section 2(a)(1)(D)(vii) of the CEA.
Section 2(a)(1)(D)(vii) of the CEA prescribes that a designated contract market or registered derivatives transaction execution
facility must provide the Commission with a certification of compliance with section 2(a)(1)(D)(i) of the CEA before trading or
executing a security futures product. Paragraph (a) of rule 41.23 implements this requirement by describing the documents that
must be filed with the Commission, including documents and certifications required by rules 41.22 and 41.25. In addition, rule
41.23(a)(5) requires the contract market or derivatives transaction execution facility to certify that the security futures product
complies with the CEA and rules there under.33
2.
Optional CFTC approval34
Paragraph (b) of rule 41.23 establishes the procedures for voluntary submission by designated contract markets or registered
derivatives transaction execution facilities of security futures products for Commission approval, as permitted by section
5c(c)(2) of the CEA. Notice designated contract markets would not be permitted to request Commission approval of security
futures products, since they are exempt from the provisions of 5c of the CEA by virtue of section 5f(b)(1)(D) of the CEA.
Before an exchange may list a stock index derivative product, it must obtain SEC approval to list and trade the product. In
considering an exchange’s request to list a stock index derivative product, the SEC evaluates, among other things: (i) the
capitalization, trading volume, and number of shareholders of the index’s component securities; (ii) the weighting in the index
of the highest-weighted index component(s); (iii) the derivative market’s ability to obtain information concerning trading in the
component securities of the index; (iv) whether the entity that maintains the index has adopted policies designed to prevent the
misuse of material non-public information concerning the index; (v) whether there are clearly articulated and non-arbitrary
guidelines for deleting index components and selecting their replacements; (vi) whether the entity that maintains the index will
provide advance notice of changes to the index; (vii) whether the index is calculated and disseminated throughout the trading
day; (viii) if the index is comprised of U.S. component securities, whether the component securities are “reported securities”35
and whether they satisfy the criteria for the listing of standardized equity options;36 and (ix) whether the index derivative
product serves a hedging or other economic function.
The SEC has a process to approve class criteria for index products. These criteria consist of trading rules, procedures and the
exchange’s listing standards for the product class. To date, the SEC has approved such trading rules, procedures, and listing
standards for narrow-based stock index options and narrow-based stock index warrants. An exchange may list an index option
or index warrant that satisfies approved criteria (described more fully in the response to Question 13) and is required to notify
the SEC of such listing by filing a form with the SEC within five business days after the exchange begins trading the index
option or index warrant.
46
Financial Services Authority,
United Kingdom
There is no formal requirement for a UK exchange to obtain approval from the FSA before introducing a derivative contract to
trading. However, where an exchange intends to introduce derivative product that is generically new to the UK, or substantially
modified from an existing product, the exchange will invariably pre-consult with the FSA.
In addition, an issuer of ‘securitised derivatives’ – e.g. covered warrants – may apply to the UK Listing Authority (part of the
FSA) to have such instruments ‘listed’. In that case, the derivatives must comply with the UKLA’s listing rules for those
products.
47
Design/Listing Standards for Stock Index Derivative Products
II.
13. Please identify and describe briefly any laws, regulations, guidelines or rules (including market/SRO rules) that establish design or listing
standards for stock index derivative products.
SC2 Members
Response
Australian Securities and
Investments Commission
The Corporations Act 2001 does not establish listing standards for derivative products.
Using the ASX as an example, the market operator has rules which govern the products that are traded on the market. The rules
are very broad and provide, amongst other things, that the Exchange may approve securities or indices for trading on the options
market. The rules also state that the Exchange will determine the expiry month, the exercise level and the exercise style for
each series of options over an underlying index and notify the market of that determination when the series is opened for trading
(see rule 7.4.2.3).
The Exchange notifies the market of new option series and warrants through circulars and releases to participants in the market.
The Exchange may consult with market participants and industry bodies in the design of the derivative products.
The ASX website (www.asx.com.au) provides information on derivative products available on their market and their contract
specifications.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
N.a.
Current legislation in Canada does not provide for design or listing standards for stock index derivatives. The Rules of the
Bourse de Montréal however, contain a few sections dealing with Qualification for Underlying Interests:
“In the case of an index sponsored option, the sponsor must have a licensing rights agreement with the index
supplier. A copy of the agreement must be filed with the Bourse before the sponsored option is launched.” (Rule 6,
Section 6602)
In addition, the Canadian Derivatives Clearing Corporation’s rules provide that:
“The Underlying Interest of an Option issued by the Corporation and the Unit of Trading of that Underlying Interest
shall be approved by the Board following the recommendation of one or more Exchanges.”(Rule B-5, Section B502)
“The Underlying Interest and Contract Specifications of Futures cleared through the Corporation shall be approved
by the Board following the recommendation of one or more Exchanges.”(Rule C-6, Section C-602)
48
Commission des Operations
de Bourse, France
“For Sponsored Options where the Underlying Interest is an Index, the Index contract must be approved by Bourse de Montréal
Inc.” (Rule B-15, Section B-1504 (3))
According to COB guidelines, stock index derivative products must be based on index which component securities are traded
on large and liquid organized markets (regulated markets in the EEA) and which calculation methods are indisputable.
Listing standards for stock index derivative products are set out in the German Exchange Act (Börsengesetz, short: BörsG) and
Bundesastalt fur
Finanzdienstleistungsaufsicht, in the exchange rules of the futures and options exchange Eurex.
Germany
Under Section 50 of the BörsG, exchange-related options and futures transactions (which also include stock index derivative
products), insofar as they are concluded on an exchange, require admission by the Board of Management of the stock exchange
in question.
Under Section 4.1. of the Eurex Exchange Rules, the Board of Management determines which options and futures contract will
be admitted to trading at Eurex. Admission of a specific product to trading is not be permitted unless the maintenance of orderly
options and futures trading and adequate performance of any market-making function can be anticipated.
Securities and Futures
Commission, Hong-Kong
The trading of all stock index derivative products is subject to the rules, regulations and procedures of the HKFE and SEHK.
These rule, regulation and procedures may be amended based on the input of regulator and market participants.
When the HKSFC is approving the stock index derivative products traded on the HKFE, it will take into account the following
general principles:
(i)
to safeguard the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures
industry;
(ii)
to promote understanding by the public of the operation and functioning of the securities and futures industry and of
the relative benefits, risks and liabilities of investing in financial products;
(iii)
to secure an appropriate degree of protection for members of the public investing in or holding financial products;
(iv)
to reduce systemic risks in the securities and futures industry.
Commissione Nazionale per le Market rules establish that:
1. the asset underlying a derivative instrument has to meet requirements concerning liquidity, continuity of trading,
Societa e la Borsa, Italy
availability or accessibility of all the relevant information, and availability of financial or at any rate significant prices;
2. if the underlying asset is an index, the related method of calculation and dissemination must be known;
3. the settlement price must be determined in such a way as to ensure that it is based on a significant volume of trading in
the underlying asset.
Financial Services Agency,
Japan
Securities Commission,
Design or listing standards for stock index derivative products do not exist explicitly in laws and market/SRO rules.
There are no specific laws, regulations, guidelines or rules that establish design or listing standards for stock index derivatives,
49
Malaysia
although there are certain criteria for the inclusion and exclusion of shares in the KLSE Composite index (see question 26
below).
The design of stock index derivatives is left to the Malaysian Derivatives Exchange, who take into account factors such as
viability, marketability, manipulability, accessibility and liquidity.
Comision Nacional Bancaria
y de Valores, Mexico
There is regulation and SRO rules which establish the minimum requirements to present a solicitation of a contract for its
authorization, such as underlying asset information, margins, settlement procedure, size of the contract, negotiation terms and
schedules, pricing procedures, etc. The Exchange and the Clearing House make a project with the relevant information about
the new contract which is subject to the authorities’ approval.
As for the IPC warrants, the rules applicable establish the minimum requirements to present a solicitation to be listed, such as
the prospectus project and a document containing: issuer and underlying asset information, maturity of the contract, size of the
issue, negotiation terms and schedules, pricing procedures, settlement conditions and fines in case of default, among others.
Monetary Authority of
Singapore
MAS and SGX do not have any explicit rules regarding design or listing standards for stock index derivative products.
However, index derivative products are usually designed and launched with consultation from market participants. Indices
should generally be transparent in its methodology, widely disseminated and calculated by a reputable third-party. Also,
adequate disclosures (as are required for any securities product) must also be made.
Comision Nacional del
Mercado de Valores, Spain
No specific design or listing standards exists for stock index derivative products listed on the Spanish regulated exchanges. Both
design and listing requirements are those applicable to any derivative contract seeking the CNMV’s approval and by the time
the CNMV’s Secondary Markets team revised the contracts no potential design problems were detected. In all cases, the
Spanish Exchanges, where underlying stocks are traded, must issue an affirmative report where they must stated their
conformity with the contracts terms and design.
Note that the underlying of stock index contracts listed in MEFF are broad indexes, with very clear and known calculation rules
and maintained by independent from exchanges entities.
Chapter 4 Section 1, Paragraph 3 and 4 in the Swedish Stock Exchange and Clearing Operations Act: There must be a sufficient
trading with reliable pricing in the underlying asset, in order for a derivative based on that asset to be listed at an exchange. If
the underlying asset is an index, this requirement applies on each composite of the index, unless the index as such is reliably
priced
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
No laws apply directly to derivative products; references are made to self-regulation.
SWX Listing Rules:
The Listing Rules have the purpose of providing issuers with the freest and most uniform access possible to exchange trading,
as well as ensuring transparency for investors with regard to the issuers and securities (shares, bonds and derivatives).
50
SWX Directive for the Listing of Derivatives:
This Directive lays down the requirements pertaining to issuers, products and disclosure. It supplements and elucidates the
applicable provisions of the Listing Rules.
Communiqués of the Admission Board:
The Admission Board explains its practice on the application of individual provisions of the Listing Rules / Directives by
publishing its decisions in the form of Communiqués (in particular: 2002 numbers 3, 4 / 2001 numbers 12, 13, 17 / 2000
numbers 1, 4, 5, 9, 17 / 1999 number 11).
Commodity Futures Trading
Commission, USA
Guideline 1 for both broad-based and narrow-based index futures contracts; section 2(a)(1)(D) of the Commodity Exchange Act
and Section 6(h) of the Securities Exchange Act of 1934 and CFTC rules 41.21-41.25 for security futures (i.e. narrow-based
index and single share futures products).
A.
Broad-based contracts
As noted above in response No. 12 above, both designated contract markets and derivatives execution transaction facilities
certify (or document in the process of seeking optional CFTC approval of a contract), among other things, that the contract is
not inconsistent with the requirements of the CEA and rules there under. In this connection, Guideline No. 1 in Appendix A to
Part 40 of the CFTC rules, sets forth the requirements for contract design that satisfy the CEA. Under Guideline 1, a board of
trade submitting an application for cash settled futures contracts must submit:
(1) The rules setting forth the terms and conditions of the proposed futures contract;
(2) A description of the cash market for the commodity on which the contract is based.
(i) The description may include, in addition to or in lieu of materials prepared by the board of trade, existing studies by
industry trade groups, academics, governmental bodies or other entities, reports of consultants, or other materials
which provide a description of the underlying cash market.
(ii) Where the same, or a closely related commodity, is already designated as a contract market which is not dormant,
the cash market description can be confined to those aspects relevant to particular term(s) or conditions(s) which differ
from such existing contract; and
(3) A demonstration that cash settlement of the contract is at a price reflecting the underlying cash market, will not be
subject to manipulation or distortion, and is based on a cash price series that is reliable, acceptable, publicly available
and timely.
For purposes of this demonstration, Guideline 1 requests certain specified information, which may be provided in chart or
narrative form.
B.
Security Futures – Narrow-Based Indexes 37
Section 2(a)(1)(D) of the CEA and Section 6(h) of the Securities Exchange Act of 1934, as amended by the CFMA, provide that
in order for a board of trade to list security futures products, the security futures products and the securities underlying the
security futures products must meet a number of standards and conditions termed “listing standards.”
On October 25, 2001, the CFTC adopted rules 41.21 through 41.25, which address issues related to listing standards and
establish uniform requirements related to position limits, as well as provisions to minimize the potential for manipulation and
51
Securities and Exchange
Commission, USA
disruption to the futures markets and underlying securities markets.38 The rules also relate to the allowable types of securities
underlying security futures products; settlement procedures; who may deal in security futures products; restrictions on dual
trading; and rules governing surveillance, audit trails, trading halts, and margin requirements. See Appendix 1 for rules 41.2141.25.
It should be noted that in addition to satisfying the listing standards of the CEA, security futures products must conform to
listing standards that a national securities exchange or national securities association files with the SEC under Section 19(b)
of the Exchange Act.39 In addition, Section 6(h)(3)(C) of the Exchange Act imposes the additional requirement that the
exchange or association’s listing standards for security futures products must be no less restrictive than comparable listing
standards for security options. On September 5, 2001, the SEC issued guidance for boards of trade as to the listing standards
that would satisfy this requirement.40 Accordingly, please also refer to the responses of the U.S. SEC.
Finally, contracts traded by designated contract markets and derivatives transaction execution facilities would have to meet the
requirements of Guideline 1 (i.e., CFTC rule 41.23(a)(5) requires a certification that the contract complies with the CEA and
rules there under.)
As noted in the response to Question 12, an exchange may list an index option that satisfies SEC-approved criteria (the “Index
Option Criteria”) or an index warrant that satisfies SEC-approved criteria (the “Index Warrant Criteria”) without prior SEC
approval, provided that it notifies the SEC of such listing by filing a form with the SEC within five business days after the
exchange begins trading the index option or index warrant.41 The Index Option Criteria and the Index Warrant Criteria,
described below, are examples of listing standards for stock index options and stock index warrants.
The Index Option Criteria require that:
• The options be designated as a.m.-settled options;
• The index be capitalization-weighted, price-weighted, or equal dollar-weighted, and consist of ten or more
component securities;
• Each component security have a market capitalization of at least $75 million, except that for each of the lowest
weighted component securities in the index that in the aggregate account for no more than 10% of the weight of the
index the market capitalization need only be at least $50 million;
• Trading volume of each component security have been at least one million shares for each of the last six months,
except that for each of the lowest weighed component securities in the index that in the aggregate account for no
more than 10% of the weight of the index trading volume need only have been at least 500,000 shares for each of
the last six months;
• In a capitalization-weighted index, the lesser of the five highest weighted component securities in the index or the
highest weighted component securities in the index that in the aggregate represent at least 30% of the total number
of component securities in the index have had an average monthly trading volume of at least 2,000,000 shares over
the past six months;
• No single component security represent more than 25% of the weight of the index, and the five highest weighted
component securities in the index do not represent in the aggregate more than 50% (60% for an index consisting of
fewer than 25 component securities) of the weight of the index;
• Component securities that account for at least 90% of the weight of the index and at least 80% of the total number
52
of component securities in the index satisfy the criteria in the exchange’s rules for individual underlying equity
securities on which the exchange may list options;
• All component securities be “reported securities” as defined in Rule 11Aa3-1 under the Securities Exchange Act of
1934 (“Exchange Act”);42
• Non-U.S. component securities (stocks or ADRs) that are not subject to comprehensive surveillance sharing
agreements do not in the aggregate represent more than 20% of the weight of the index;
• The current underlying index value will be reported at least once every 15 seconds during the time the index options
trade on the exchange;
• If the index is an equal dollar-weighted index, it is rebalanced at least once every calendar quarter; and
• If the index is maintained by a broker-dealer, its value is calculated by a third party who is not a broker-dealer, and
the broker-dealer has erected a firewall around its personnel who have access to information concerning changes in
and adjustments to the index.
The Index Warrant Criteria are almost identical to the Index Option Criteria except that: (1) the index underlying a warrant
must contain a minimum of nine stocks at all times; and (2) closing prices may be used to determine the value of an index
warrant except that, where 25% or more of the value of the underlying index consists of stocks that trade primarily in the U.S.,
opening prices must be used at (a) the warrant’s expiration; and (b) on any date in which the warrant’s settlement value will be
based on prices on either of the two business days preceding expiration.
Among other things, the regulatory framework for index warrants also establishes requirements for the issuer of the index
warrant and for the warrant. For example, one SRO’s rules generally require, among other things, that the issuer of stock index
warrants have minimum tangible net worth in excess of $250 million or, in the alternative, minimum tangible net worth in
excess of $150 million, provided that the issuer does not have outstanding warrants whose aggregate original issue price
exceeds 25% of the issuer’s net worth. In addition, this SRO’s rules require that the issue has at least one million stock index
warrants outstanding, has a minimum market value of at least $4,000,000, and has at least 400 holders. Generally, these
standards provide that the SRO will only list warrants that will have sufficient public float, investor base, and trading interest to
ensure that the market has the depth and liquidity necessary to maintain fair and orderly markets.
The CFMA established certain requirements for the listing standards of markets trading security futures products. Specifically,
the CFMA provided that the listing standards for security futures products must, among other things:
• Require any security underlying a security future, including each component security of a narrow-based security
index, be registered pursuant to Section 12 of the Exchange Act, except as otherwise provided in a rule, regulation,
or order;
• Require that if the security futures product is not cash settled, the market on which it trades must have arrangements
in place with a registered clearing agency for the payment and delivery of the securities underlying the security
futures product;
• Be no less restrictive than comparable listing standards for options traded on a national securities exchange or
national securities association registered pursuant to Section 15A(a) of the Exchange Act;43
53
•
Financial Services Authority,
United Kingdom
Require that a security future be based upon common stock and such other equity securities as the SEC and the
CFTC jointly determine appropriate;
• Require that only a broker or dealer subject to suitability rules comparable to those of a registered national
securities association effect transactions in the security futures product;
• Require that security futures products be subject to certain statutory prohibitions against dual trading;
• Require that trading in a security futures product not be readily susceptible to manipulation of the price of the
security futures product, nor to causing or being used in the manipulation of the price of an underlying security,
option on the security, or option on a group or index including such securities;
• Require that procedures be in place for coordinated surveillance among the market on which the security futures
product is traded, any market on which any security underlying the security futures product is traded, and other
markets on which any related security is traded to detect manipulation and insider trading;
• Require that the market on which the security futures product is traded has in place audit trails to facilitate
coordinated surveillance;
• Require that the market on which the security futures product is traded has in place procedures to coordinate trading
halts between such market and any market trading a security underlying the security futures product and other
markets on which a related security trades; and
Require that the margin requirements for security futures products comply with federal regulations.
The recognition requirements for UK exchanges require an exchange to confine dealings on the exchange to investments in
which there is a proper market . FSA guidance on the factors to which it may have regard in determining whether a proper
market exists include, inter alia, the following considerations:
•
The existence of sufficient trading interest to bring about adequate forces of supply and demand;
•
The terms of a derivative are sufficiently precise to provide for an understandable relationship between the price of
the derivative and price (or other measure) of the underlying;
•
The existence of effective means to take and make delivery of an investment or underlying asset;
•
The adequacy of information in the public domain to enable make market participants to make an informed
judgment as to the value of an investment and the risks associated with it, including in the case of a derivative based
on an index (or similar measure) information about that index and fluctuations in it.
•
The procedures of the exchange for obtaining information relevant to determining whether it should suspend or
discontinue trading in the derivative.
The UK Listing Rules for securitized derivatives based on indices require the issuer to make available, inter alia, the following
information:
•
a short description of the relevant index,
•
the name of the index sponsor,
54
•
detailed provisions in the terms and conditions of the securitized derivative describing how the issuer deals with
events of modification and discontinuance of the index;
details of where the level or rate of the index is available.
55
14. Please indicate whether any law, rule, guideline, listing standard or other requirement establishes any of the following limitations for
underlying indexes and their component securities:44
a. limitations on the type of securities that may be included in an index (e.g., the component securities must be registered or listed on a
particular market);
b. additional requirements applicable to foreign securities included in an index;
c. limitations on the number of component securities in an index or requirements that a minimum number of securities be included in an
index;
d. limitations on the weighting of any single component security or group of securities in an index;
e. a requirement establishing a minimum market capitalization for the component securities;
f. a requirement establishing a minimum average daily trading volume requirement for the component securities (please identify the
measure used);
g. a requirement establishing a minimum number of holders for component securities;
h. limitations on the weighting of affiliated securities in the index (please indicate the level of ownership that will cause component
securities to be viewed as securities of affiliated issuers, and whether government ownership is excluded in defining what constitutes
affiliation).
SC2 Members
Response
Australian Securities and
Investments Commission
The Corporations Act 2001 does not establish limitations for underlying indices and their component securities. The Index
Committee determines index composition see above question 4.
a) All of the component securities must be listed on the ASX.
The S&P/ASX 200 index is comprised of the S&P/ASX 100 plus an additional 100 stocks. The S&P/ASX 100 is comprised of
100 stocks selected by the committee and it essentially covers large-cap and mid-cap stocks evaluated for liquidity and size).
The S&P/ASX 50 index comprises the 50 largest stocks by market capitalization in Australia.
b) No specific foreign securities rules.
56
c) The S&P/ASX indices have limitation on the maximum number of securities for example, the S&P/ASX 50. In addition,
inclusion in an index is also based on the security's liquidity and market capitalization as discussed above.
d) S&P take into account each company's market capitalization to determine its appropriate index delegation. The S&P
Australian Index Committee considers average market capitalization over a six month period when assessing whether a
company's market capitalization is sufficient for the company to be represented in the index.
The market capitalization of each company is adjusted by the company's liquidity factor (represents the proportion of the
company, as determined by the committee, that is included in the index). Liquidity factors are reviewed quarterly, using six
months of share turnover and market capitalization data. The liquidity factors may change intra-quarter in response to major
corporate actions.
e) S&P's "Undertsanding Indices" states:
"Constituents of an index need to have a sufficient level of market capitalization in order to be of relevance to institutional
investors….As S&P's indices are capitalization-weighted, each company's influence on the index's performance is directly
proportional to its market value, therefore the company with the largest market capitalization will have the largest weight and
relative impact on the index."
No requirement establishing a minimum market capitalization is detailed.
f) No specific requirement detailed publicly by S&P, however the committee must assess whether a company has "sufficient
liquidity" to be eligible for an index.
g) No specific requirement detailed publicly by S&P.
h) When assessing liquidity, parent holdings, strategic holdings and government holdings are excluded from the index.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
N.a.
Currently, Canadian regulations do not provide for any such limitations. However all the underlying indices are constructed and
maintained by entities which apply appropriate transparency rules.
a) The component securities must be listed on an organized market ( a regulated market in the EEA).
b) N.a.
c) There are no requirement as such.
d) See above.
e) There are no requirement as such.
f) There are no requirement as such. The policy would be to have a minimum average daily trading volume of 200 000 shares,
with possible exemptions.
g) N.a.
h) N.a.
a) As mentioned above, Deutsche Börse AG has a special guideline for its indices which lays down limitations as well as other
Bundesastalt fur
Finanzdienstleistungsaufsicht, rules applicable to the indices. With regard to the composition of indices, a distinction is made between all-share indices and
57
Germany
selection indices.
All-share indices contain all equities listed in the respective market segment, i.e. they are not limited to a certain number of
stocks. They thus measure the performance of the entire segment. Changes to the composition of the respective segment (e.g.
new admissions) are therefore directly reflected in the index. Examples of all-share indices include the CDAX (and CDAX
sector indices), the SMAX All-Share and the NEMAX All-Share index (and NEMAX sector indices).
By contrast, section indices aim to extract and replicate certain sub-sections of the segments with a fixed number of equities.
Section indices include, for example, the DAX, MDAX, DAX 100 (and DAX 100 sector indices), SDAX and the NEMAX 50
index.
The DAX, for instance, is limited to the largest 30 German companies with the highest turnover (Bluechips) in Official Trading
and the Regulated Market of the Frankfurt Stock Exchange. For each index, whether broad-based or narrow-based, there is an
equally detailed set of rules. The underlying securities must always comply with the admission requirements of the particular
markets.
b) The indices of Deutsche Börse AG include only securities which are listed on German stock exchanges. Foreign securities
traded on German stock exchanges have to pass the particular admission proceedings of the market segment in question.
Additional requirements for foreign securities included in an index do not exist. The requirements for the listing of foreign
securities on German stock exchange are set out in Section 10 of the Stock Exchange Admission Regulation
(Börsenzulassungsverordnung, short: BörsZulV). Under the BörsZulV, shares of an issuer domiciled in a country outside the
European Community or outside the other signatory states of the Agreement on the European Economic Area, and which are
neither officially listed on a stock exchange in such country nor in the country of their primary circulation, shall be admitted
only if it has been demonstrated that the listing has not been omitted in order to protect the public.
c) As already mentioned above, the number of component securities depends on the type of index. With section indices, the
number of components is limited to the number determined in the Guidelines of Deutsche Börse AG. All-share indices, in
contrast, comprise the whole set of equities of an entire market segment.
d) All indices of Deutsche Börse AG have the same weighting and cap limit. Both the methodology for calculating the indices
and the weighting methodology, which are set out in the Guidelines of Deutsche Börse AG, have been outlined above in the
answers to questions I. 4. and I. 5.
e) The requirements depend on the type of index. For the section indices (e.g. DAX, NEMAX 50, etc.), market capitalization is
one of the two major criteria (together with the exchange turnover, please see the next question), but it will be replaced in June
2002 by the free float.
In order to inform on the main criteria (exchange turnover and market capitalization), Deutsche Börse AG publishes a ranking
list of equity indices every month. A company’s market capitalization is defined as the number of shares in a particular category
multiplied by the respective share price for the category as per the last trading day of the respective month. Because of the
varying basic conditions, the ranking list comprises different sections for the
• DAX an MDAX
• SDAX
• NEMAX 50
The classes of shares included in the lists are either already represented in the index or fulfill the requirements regarding
58
membership of a segment. Only those shares are ranked which fulfill all the basic conditions and thus can be considered for
admission to an index, as well as those which are represented in the index and, for instance, do not fulfill the free float
requirements.
For all-share indices (e.g. the CDAX, NEMAX All-Share etc.) the only market capitalization requirement is the one set up by
the respective market segment, i.e. official trading and the regulated market as official markets and the Neuer Markt and the
SMAX-segment as unofficial (but regulated) market segments. Each of these market segments have their own admission
requirements:
• Admission of shares to official trading requires an issuing volume of € 1,25m (Section 2 of the BörsZulV).
• Admission of shares to the Regulated Market requires a nominal value of at least € 250.000 or at least 10.000 shares
(Section 58 of the BörsO).
• The first admission to the Neuer Markt requires an issuing volume of at least € 250.000 and the estimated market value has
to be at least € 5m (Section 3.7 of the Rules and Regulations of the Neuer Markt)
f) The daily trading volume is relevant only for section indices (e.g. DAX, NEMAX 50 etc.).
Measure used:
Exchange turnover is defined as the aggregated volume of a share class recorded in the FWB including XETRA and floor
trading. The preceding 12 months are taken as a period of reference for examining turnover. Because index examination takes
place about six weeks before adjustments are made, the ranking list as per the end of July is used for the September changing
date (making the period from August (year 1) to July (year 2) the relevant period for changes in September of year 2).
If turnover is not available for the full 12 months because listing took place at a later date, then the turnover recorded over the
first 20 days of trading (roughly equivalent to the first month of trading) is taken out of the calculation and the remaining data is
extrapolated for the 12 month-period. However, this applies only to those shares which were traded for at least 30 days prior to
the reporting date in the segment relevant to the respective ranking list, such that turnover for at least ten days is used for the
extrapolation.
g) As already mentioned above, Deutsche Börse AG will switch over its index calculation to a free-float weighting basis during
the changing procedure in June 2002. For the all-share indices this is without consequence, whereas it ensures that only the most
liquid securities become part of the section indices.
In addition to that, some market segments already require a minimum free-float, as there are the
• Official trading:
free-float at least 25%
• Neuer Markt:
at least 20% (10% if the issuing volume exceeds € 100m)
but a minimum of 25% is strongly recommended.
The SMAX requires a minimum free-float of at least 20%, but a minimum of 25% is strongly recommended here as well.
Moreover, the threshold defining the free-float will be reduced: from June 2002 onwards, ownership of 5 percent or more of the
share capital in one share category is no longer considered to be free-float.
h) As mentioned above, Deutsche Börse AG is going to separate the share categories in all indices during the changing
procedure in June 2002, i.e. each category of a company’s stock will be considered separately. Only the most highly capitalized
or liquid category will henceforth be admitted to a broad-based index.
The definition of the free-float in detail:
59
1. If a shareholder’s accumulated holdings in one share category amount to 5 percent or more of the share capital the shares are
not considered part of the free float. Also deemed to be a shareholder’s holdings are those shares
• which are owned by the shareholder’s family
• for which there is a pooling agreement in which the shareholder participates
• which are managed or held in custody on the shareholder’s account by a third party
• which are owned by a company that is controlled within the meaning of Section 22 para. 3 of the Securities Trading Act
(WpHG)
2. Irrespective of their sizes, all blocks of shares which are subject to a legal or contractual lock-up period of at least six months
before they can be sold by the shareholder are not considered to be free float. This is relevant only for the duration of the lockup period. Stocks within the meaning of the first sentence of this paragraph will be included in the stocks considered for
calculation under the first paragraph above.
3. Irrespective of the size of a stake, all shares are considered to be free float which are held by:
• asset managers and trust-fund companies
• funds and pension funds
• equity investment companies
• capital investment companies or foreign investment companies in their respective special trust assets with short-term
investment strategies.
This does not apply to stocks that are managed or held in custody according to the first paragraph above, or to assets held for
venture capital companies or similar purposes. Stocks within the meaning of sentence 1 will not be included in the stocks
considered for calculation under the first paragraph above.
The criteria laid down in paragraphs 1 through 3 also apply without restriction to share categories which are subject to thirdparty ownership restrictions.
Securities and Futures
Commission, Hong-Kong
The Hang Seng Index, MSCI China Free Index and the Dow Jones Industrial Average are constructed and maintained by private
companies, and are not governed by any law, rule, guideline, listing standard or any other requirement of the regulator in Hong
Kong.
a), b), c), d), e), f), g), h) N.a.
Commissione Nazionale per le a) No limitations on the type of securities eligible to be included in the blue-chips index (MIB30) are fixed (i.e. ordinary,
savings, preference). However, it is not allowed to include more than one share issued by one and the same company.
Societa e la Borsa, Italy
Having regard to the middle-cap index (MIDEX), only ordinary shares may be included; shares issued by financial holding
companies are not eligible to be included.
b) A foreign security can be included in an Italian indexes provided that its issuer complies with the requirements concerning
the setting and disclosures of dividend payment and capital operations dates.
c) No limitations.
d) No limitations. However, the opportunity to impose weighting limitations has been discussed in the past, due to the presence
in the index of high-weighting stocks (more than 20%). Currently, no MIB30 component stock accounts for more than 10%.
60
Financial Services Agency,
Japan
Securities Commission,
Malaysia
e) Shares with an average market capitalization greater than 1500 times the average trading volume are not eligible to be
included in the indexes. This rule has been fixed in order to prevent the inclusion in the indexes of stocks with high
capitalization but very low liquidity.
f) The selection of stocks to be included in the index is based on the liquidity and the capitalization of each stock in the last six
months. Where a stock has been listed for less then three months, Borsa Italiana may evaluate the significance of such a period
and the opportunity to include it in the index.
g) No requirements.
h) No requirements.
Although there are no listing standard regarding stock index derivative products, when the FSA reviews the application, it
considers the achievements of the calculator, component stocks and the number, the diversity, the capitalization, the weight and
the liquidity of component stocks. Therefore, the following items are basically confirmed during the review of each product.
a) The KLSE computes an index for each of the main sector categories of equity securities traded on the stock exchange. All
indices are computed based on a capitalization-weighted method.
The indices calculated by the KLSE are as follows:
• KLSE Composite (KLSE CI)
• Properties
•
EMAS (Exchange Main Board All •
Share)
•
Industrials
•
Plantations
•
Consumer Products
•
Syariah (Islamic-compliant)
•
Industrial Products
•
Technology
•
Construction
•
Second Board
•
Trading/Services
•
Mesdaq
growth)
•
Finance
The limitations are as follows:
Indices
All KLSE indices
Mining
Composite
(high-
Limitations
Only ordinary shares are included.
All KLSE indices with the exception of All others are all-share indices.
KLSE CI (100 companies) and
Industrial Index (30 companies)
61
All-share indices
New
companies
are
included
automatically three months after they
have been listed.
EMAS index
All companies on the Main Board.
Second Board index
All companies on the Second Board.
Mesdaq Composite index
All companies on the Mesdaq Market.
KLSE CI
criteria as attached on Appendix 1
b) None.
c) The KLSE Composite index has 100 component securities only.
d) None.
e) Listed companies whose capitalisation are in the lowest quartile of the Main Board are typically not considered for inclusion
in the KLSE Composite index.
f) Listed companies whose annual trading volume are in the lowest quartile of the Main Board are typically not considered for
inclusion in the KLSE Composite index.
g) None.
h) Please refer to appendix 1, criteria 4 in respect of limitations.
Comision Nacional Bancaria
y de Valores, Mexico
In general, there are no limitations indicated on laws, rules or guidelines, since the BMV is the entity in charge of the design and
calculation of the index. Nevertheless, there are some limitations imposed by the BMV described below:
a) For the calculation of the IPC, BMV chooses the 35 most liquid shares, but BMV decided not to include Citicorp shares
since their market value was even bigger than the market value of the rest of the listed companies and that created a
distortion on the index.
b) There are no foreign securities included in the IPC, however, there is no prohibition for including them.
c) BMV chooses the 35 most liquid companies.
d) IPC is a capitalization-weighted index, therefore, the weighting of a single component security is based on its market
capitalization. There is not an express limitation for weight, but as mentioned above, Citigroup, had to be excluded
because of the distortions it would have caused in the IPC.
e) There is no such requirement.
f) There is not a minimum average daily trading volume. BMV’s condition is to take the 35 most liquid companies.
g) There is no such requirement.
h) There is no such requirement.
Monetary Authority of
Most indices are calculated and published by independent international index providers (a) who have their own set of
62
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
comprehensive and consistent standards aimed at meeting their primary objectives as investment benchmarks and (b) who
operate across numerous jurisdictions and are usually not constrained by particular domestic regulations, if any, on their
independent index compilation methodology.
In Spain, there is no specific regulation about indexes. The following responses are focused on the IBEX-35 Index according to
the technical regulations for the composition and calculation of the Sociedad de Bolsas Indexes.
a) The Ibex 35 Index is composed of the 35 securities quoted on the SIBE, which were most liquid during the control period
pursuant to the terms of the technical regulations.
b) The Ibex 35 Index is only composed of securities quoted on the SIBE.
c) The Ibex 35 Index is composed of 35securities.
d) The weighting of a single component security depends on the free-float of such security. See question 5.
e) For a stock to be included in the IBEX-35, its average capitalization in the index must be greater than 0,30% of the average
index capitalization during the control period.
f) No minimum average daily trading volume is required for a security to be included in the IBEX-35.
g) A minimum number of holders for component is not required.
h) There are no limitations on the weighting of affiliated securities in the IBEX-35 Index.
Neither the law, nor any regulation from Finansinspektionen, contain specific rules aimed at indices. The following answers
apply to the OMX (unless otherwise stated), and are standards required by Stockholmsbörsen.
a) Listed on Stockholmsbörsens A or O-list.
b) The no. of shares included in an index including foreign companies (domicile outside Sweden) is equal to the maximum of
registered shares in the Swedish CSD.
c) The OMX index comprises the 30 most traded shares
d) Market capitalisation limit (Capping)
The following applies to the Stockholmsbörsen Benchmark Index, but not to the OMX.
The NOREX Exchanges will provide both an uncapped and a capped version of the Benchmark Index.
If a constituent dominates the index due to a large weight in the index, two problems arise. The constituent or its industry may
be over-represented in the index and skew the index performance compared to the investment universe of all stocks listed on the
NOREX Exchanges. The index is no longer investible for a majority of the users who benchmark against the index due to
possible investment restrictions.
Consequently, to comply with demands of an investible index, the capped version of the Benchmark Index is constructed in a
manner that complies with the investment restrictions implied by legislation regulating investments in mutual funds.
The following index weight restrictions must be met to comply with the legislation regulating investments in mutual funds:
• The market value of securities issued by the same body may not exceed 10 per cent of the index total market value.
• The market value of securities issued by the same body exceeding 5 per cent index weight must not combined exceed 40 per
cent of the index’ total market value.
The procedure maintaining these restrictions is applied subsequent to application of criteria 3.2.3.
Stockholmsbörsen and Oslo Børs are maintaining the weighting restrictions by using a monthly and daily procedure. The
63
weighting restrictions will be imposed by adjusting the number of shares of the constituents qi,t .
Monthly adjustment:
Securities are ranked by their company market value. Stocks are separated in two groups. The first group is filled with stocks
weighting between 5 and 10 per cent until the 40 per cent criteria are met.
The segregation of stocks in groups remains fixed throughout the month regardless of changes in market value for any index
constituents. This is to avoid a potential large portfolio turnover in the event of stocks changing groups.
Note: This process will be applied intra month in the event of a fast entry or exit.
If the stocks weighting between 5 and 10 per cent do not exceed the 40 per cent limit, the first group is not formed in the start of
the month. The group will be formed intra month if the stocks weighting between 5 and 10 percent break the 40 per cent limit.
Daily adjustment:
All stocks breaking either the 10- or 5 per cent limit in their respective groups are reduced in weight until all weight restrictions
are satisfied using a stepwise approach. This procedure is applied once a day, and as a consequence, the weight of the Index
Constituents may exceed the 10 and 5 per cent limits during the day.
Note: The stocks in the two groups can be changed intra month in the event that the total weight in the first group exceeds 40
per cent. If that is the case the stock with the smallest weight is moved to the second group.
On the Copenhagen Stock Exchange the weight restrictions will be imposed in connection with the periodic review of the index
by adjusting the number of shares of the constituents qi,t . Accordingly, a weighting restriction occurs twice a year and, in
between, the weight of an Index Constituent in Index can exceed the 10 per cent weight limit.
e) No
f) No
g) No, this is only listing requirements
h) The Free Float Criteria applies to Stockholmsbörsen Bechmark Index, not to OMX.
Free float criteria
Free float is an important issue when constructing an investible index. Free float is defined as the portion of the share capital of
a company, which is freely available for trading in the market. The objective of introducing free float criteria is to avoid a
distortion in the price of a security and to improve the index’ overall investability.
Portfolio investments such as pension funds, unit trusts (mutual funds) and shares held by insurance companies are generally
not considered to restrict the free float. A low free float will not exclude a company from an index but will restrict the
percentage portion of the outstanding shares, which is included in the Benchmark Index calculation. The free float criterion is
only applied for secondary listings and foreign domicile if the number of shares in the index calculation is based on at least a
majority of the total capital in the stock class.
Free float is measured by identifying the ownership of the ten largest investors. The review is conducted on the basis of figures
64
the first two weeks in November and May. Only publicly available information is used in calculating the free float restriction.
The following ownership is in general considered as restricting free float:
•
Government holdings - Shareholdings owned by governments. This does not include shareholdings owned by a
municipality.
• Controlling shareholders – Shares owned by a private or a public shareholder representing at least 50% of the votes/capital45
are always considered as non-free float. Ownership Stakes exceeding 30% are also considered as non-free float. If one
ownership stake exceeding 10% combined with another ownership stake exceeds 40%, they are considered as non-free
float. If three companies ownership stakes, all exceeding 10%, combined exceeds 50%, they are considered as non-free
float. Shareholdings owned by a company in the same Industry Group exceeding 10% of the votes/capital are always
considered as non-free float.
• Company Insider stakes – Shares owned by persons included in the Insider list from the Financial Supervisory Authority.
Including treasury shares owned by the company itself.
• Cross holdings – Shares owned by an index constituent or a non-constituent. Note: The holdings are only classified as nonfree float if both companies own shares in each other.
Securities with a free float greater than 15% will be included in the index with an inclusion factor equal to their actual free float
(one decimal), rounded up to the closest 5%. Securities with a free float less then 15% will be included in the index with an
inclusion factor equal to their actual free float, rounded down to the closest 1%. The constituent’s free float is generally not
changed between the review dates.
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
a) Index related derivatives are admissible, if the indexes are based on the prices of
1. equity securities or bonds which are listed on or have been admitted to trading on the SWX;
2. foreign equity securities or bonds, insofar as they are listed on or have been approved by the responsible authorities for
trading on an official securities exchange in the country of domicile of the issuer of the underlying instruments or on
some other internationally recognized exchange;
insofar as the respective index is recalculated at regular intervals and published accordingly.
b) No additional requirements (see a.)
c) No limitations.
d) No limitations.
e) No requirement.
f) No requirement.
g) No requirement.
h) No limitations.
a) CFTC rule 41.21 establishes requirements for underlying securities of a security futures product. Paragraph (b) addresses
security futures products based on two or more securities.46 Subsection (b) implements a substantive provision of section 1a of
the CEA, as amended by section 101 of the CFMA, by providing that a futures contract based on an index comprised of two or
more securities may be traded as a security futures product if: (1) the index meets the narrow-based security index definition
65
found in section 1a(25) of the CEA;47 (2) the securities are registered pursuant to section 12 of the Exchange Act; (3) the
securities are common stock or other equity securities as the Commission and the SEC determine appropriate; and (4) the
securities meet the listing standards required by the SEC pursuant to section 6(h) of the Exchange Act.
Section 2(a)(1)(D)(v) of the CEA allows the CFTC and the SEC to jointly modify the criteria of sections 2(a)(1)(D)(i)(I) and
2(a)(1)(D)(i)(III) of the CEA, which specify the requirements for underlying securities.
b) As noted above, CFTC rule 41.21 requires that, among other things, the securities must be registered pursuant to section 12
of the Exchange Act. Therefore, foreign securities may be included as long as they are registered under section 12 of the
Exchange Act.
On August 20, 2001, the Commission and the SEC issued a joint order modifying the requirements regarding securities
underlying security futures products. In that order, pursuant to the authority provided in Section 2(a)(1)(D)(v) of the CEA and
Section 6(h)(4)(A) of the Exchange Act, the Commissions modified the criteria in Section 2(a)(1)(D)(I) and (III) of the CEA
and Sections 6(h)(3)(A) and (D) of the Exchange Act regarding the securities eligible for underlying security futures products.
The order permits a depositary share, as defined in Exchange Act rule 12b-2,48 to underlie a security future and be a component
of a narrow-based security index, provided that two conditions are met: (1) the securities underlying the depositary share are
registered pursuant to Section 12 of the Exchange Act and (2) the depositary share is registered under the Securities Act of 1933
on Form F-6.
Foreign security futures order – In June 2002 the CFTC and SEC issued an order with respect to security index futures
trading on foreign markets that essentially extends the “grandfather” provision in the CEA for foreign broad-based indexes,
which were subject to a CFTC staff “no-action” letter: 49
An index is not a narrow-based security index if: (1) it is traded on or subject to the rules of a foreign board of trade; (2) the
offer and sale in the United States of a contract of sale for future delivery on the index was authorized before the date of the
enactment of the CFMA; and (3) the conditions of such authorization continue to be met.
c) CFTC rule 41.21 applies only to security futures products. Thus, the index must meet the narrow-based security index
definition found in section 1a(25) of the CEA. Section 1a(25) of the CEA defines a narrow-based security index as, among
other things, an index: (i) that is comprised of nine or fewer component securities. See discussion above.
d) Section 1a(25) of the CEA defines a narrow-based security index as, among other things, an index: (ii) in which a component
security comprises more than 30 percent of the index’s weighting; and (iii) in which the five highest weighted component
securities in the aggregate comprise more than 60 percent of the index’s weighting. See also SEC response.
e) The market capitalization of a security is relevant only to the determination of whether a security is one of the 750 securities
with the largest market capitalization, permitting the index of which it is a component to qualify as broad-based under the first
exclusion from the definition of narrow-based security index.50 In a joint rulemaking, the CFTC and SEC adopted rules that,
among other things, set forth a method for determining market capitalization. With respect to the CFTC, CFTC rule 41.11
provides in part:51
(a)
Market capitalization. For purposes of Section 1a(25)(B) of the Act (7 U.S.C. 1a(25)(B)):
66
(1)
On a particular day, a security shall be 1 of 750 securities with the largest market capitalization as of the
preceding 6 full calendar months when it is included on a list of such securities designated by the Commission and the
SEC as applicable for that day.
(2)
In the event that the Commission and the SEC have not designated a list under paragraph (a)(1) of this section:
(i)
The method to be used to determine market capitalization of a security as of the preceding 6 full calendar months is to
sum the values of the market capitalization of such security for each U.S. trading day of the preceding 6 full calendar months,
and to divide this sum by the total number of such trading days.
(ii)
The 750 securities with the largest market capitalization shall be identified from the universe of all reported
securities, as defined in § 240.11Ac1-1, that are common stock or depositary shares
f) Section 1a(25) of the CEA defines a narrow-based security index as, among other things, an index: (iv) in which the lowest
weighted component securities comprising, in the aggregate, 25 percent of the index’s weighting have an aggregate dollar value
of average daily trading volume of less than $50 million or, in the case of an index with 15 or more component securities, $30
million. In a joint rulemaking, the CFTC and SEC adopted rules that set forth guidance for determining the dollar value of
average daily trading volume. See CFTC rule 41.11. 52
g) No CEA or CFTC rules. But see SEC response.
h) No CEA or CFTC rules. But see SEC response.
Securities and Exchange
Commission, USA
a) There is no statutory limitation on the type of security that may be included in an index underlying an index option.
The Index Option Criteria and the Index Warrant Criteria, which are SRO rules, include several limitations on the types of
securities that may be included in an index. Among other things, the Index Option Criteria and the Index Warrant Criteria
specify minimum capitalization and trading volume requirements, and require that all index components be reported securities.53
The SEC reviews proposals to list and trade index options and index warrants that do not satisfy the Index Option Criteria or the
Index Warrant Criteria on a product-by-product basis. In reviewing a proposal to list and trade an index option or index warrant
that does not satisfy the Index Option Criteria or the Index Warrant Criteria, the SEC considers, among other things, the
capitalization and trading volume of index components and, if the index is comprised of U.S. securities, the SEC considers
whether the components are reported securities.54
Securities underlying a narrow-based index future must be registered under Section 12 of the Exchange Act.
b) In reviewing a proposal to list and trade a derivative product based on a stock index, the SEC must find, among other things,
that the proposal is consistent with the Exchange Act, which requires an exchange to have the capacity to enforce compliance
with its rules and the securities laws and to enact rules designed to prevent fraud and manipulation. In making this finding with
respect to a proposal to list and trade a derivative product that includes foreign securities, one factor the SEC evaluates is the
U.S. exchange’s ability to obtain information concerning trading in the component securities of the index. Specifically, the SEC
considers whether the U.S. exchange can obtain appropriate foreign information when necessary to enforce its rules and U.S.
laws and regulations, and protect investors from the effects of inter-market manipulation.
67
The Index Option Criteria and the Index Warrant Criteria, which are SRO rules, provide that the non-U.S. component securities
(stocks or ADRs) of an index that are not subject to comprehensive surveillance sharing agreements may not in the aggregate
represent more than 20% of the weight of the index. The purpose of this requirement is to ensure that the U.S. market has the
ability to obtain information concerning trading in the component securities of the index so that it can satisfy its surveillance
obligations.
c) There is no statutory requirement that indexes underlying derivative products have a minimum number of component
securities.
The Index Option Criteria and the Index Warrant Criteria, which are SRO rules, require a minimum of 10 index components
and nine index components, respectively.
The SEC reviews proposals to list and trade index options and index warrants that do not satisfy the Index Option Criteria or the
Index Warrant Criteria on a product-by-product basis. The SEC has approved the listing and trading of options based on
indexes with fewer than nine components. For example, the SEC approved the listing and trading of options on the Super Cap
Index and the Gold/Silver Index, which had, respectively, five components and seven components.55
d) There is no statutory requirement regarding the weighting of any single component security or group of securities in an index
underlying an option or warrant.
The Index Option Criteria and the Index Warrant Criteria, which are SRO rules, provide that no single component security may
represent more than 25% of the weight of an index and the five highest weighted index components may not in the aggregate
account for more than 50% of an weight of the index (60% of the weight of an index for an index consisting of fewer than 25
component securities).
The SEC reviews proposals to list and trade index options and index warrants that do not satisfy the Index Option Criteria or the
Index Warrant Criteria on a product-by-product basis. The SEC has approved the listing of options on indexes that exceed the
weighting limitations imposed by the Index Option Criteria. For example, the SEC approved the listing and trading of options
on the S&P Retail Index, whose highest-weighted component represented 32% of the weight of the index.56 In addition, the
SEC approved the listing and trading of options on the nine-stock Computer Box Maker Index, in which the top three index
components represented 55% of the weight of the index.57
e) There is no statutory requirement establishing a minimum market capitalization requirement for the component securities of
an index.
The Option Index Criteria and the Index Warrant Criteria, which are SRO rules, provide, among other things, that each index
component must have market capitalization of at least $75 million, except that for each of the lowest weighted components that
in the aggregate account for no more than 10% of the weight of the index, the market capitalization must be at least $50 million.
Nevertheless, the SEC reviews proposals to list and trade index options and index warrants that do not satisfy the Index Option
Criteria or the Index Warrant Criteria on a product-by-product basis.
f) There is no statutory requirement establishing a minimum average daily trading volume requirement for an index’s
component securities.
For an index that is not capitalization-weighted, the Index Option Criteria and the Index Warrant Criteria, which are SRO rules,
require trading volume for each component security of at least one million shares for each of the previous six months, except
that for each of the lowest weighed index components that in the aggregate account for no more than 10% of the weight of the
index, trading volume must have been at least 500,000 shares for each of the previous six months. In a capitalization-weighted
68
Financial Services Authority,
United Kingdom
index, the Index Option Criteria and the Index Warrant Criteria provide that the lesser of the five highest weighted index
components or the highest weighted index components that in the aggregate represent at least 30% of the total number of index
components must have had an average monthly trading volume of at least 2,000,000 shares over the previous six months.
Nevertheless, the SEC reviews proposals to list and trade index options and index warrants that do not satisfy the Index Option
Criteria or the Index Warrant Criteria on a product-by-product basis.
g) There is no statutory requirement that establishes a minimum number of holders for an index’s component securities.
The Index Option Criteria and the Index Warrant Criteria, which are SRO rules, require that component securities accounting
for at least 90% of the weight of the index and at least 80% of the total number of index components satisfy the criteria in the
exchange’s rules for individual underlying equity securities on which the exchange may list options. The options eligibility
rules for individual equities require, among other things, a minimum of 2,000 holders of the underlying security. The SEC
reviews proposals to list and trade index options and index warrants that do not satisfy the Index Option Criteria or the Index
Warrant Criteria on a product-by-product basis.
h) There is no statutory requirement limiting the weighting of affiliated securities in an index. The SEC would treat the
securities of affiliated issuers as a single index component for purposes of considering their weighting in an index. The SEC
believes, generally, that 51% ownership would cause an index’s component securities to be viewed as the securities of affiliated
issuers, although the facts and circumstances concerning the securities might require a different conclusion. In determining
whether government ownership constitutes affiliation, the SEC would consider, among other things, whether the government is
involved in the management of the companies whose shares it holds.
The business of constructing and maintaining indices is not a regulated activity in the UK. FTSE International, the main index
company in the UK, operates on the basis of rules approved by a user group, which includes representatives both of the investor
and exchange communities. These rules establish many of the requirements listed below.
(a) The main indexes include only securities listed on exchanges approved for the purpose by the index provider.
(b) Nothing additional.
(c) Nothing specific.
(d) Nothing specific.
(e) Nothing specific.
(f) Nothing specific.
(g) Nothing specific.
(h) The weighting of index constituents in which other corporates (including other index members), governments or
families hold significant stakes are adjusted to a free float weighting. FTSE rules provide for free float down to a 515% band where the total market value of the relevant securities is the equivalent of at least $5bn.
69
III.
Clearance and Settlement Requirements
15. Please describe the method for calculating the settlement price of the derivative contracts, including the time the cash settlement price of the
product is calculated.
SC2 Members
Response
Australian Securities and
Investments Commission
ASX products
Options and Index LEPOs
From Sept 2002 expiry the expiry date and settlement method of index options and index Index LEPOs will change.
Expiry date is the third Friday of the expiry month, provided this is a trading day (if not a trading day, the expiry date will be the
previous
business
day).
Option and LEPO cntracts remaining open at expiry will still be cash-settled, however the method of calculating the settlement
price will change. The settlement price used will be the ASX Opening Price Index Calculation (OPIC). The OPIC is based on
the first traded price of each constituent stock in the index on the expiry day. If a constituent stock does not trade on expiry day,
the last traded price from the previous trading day will be used. The OPIC calculation is completed using these prices.
The settlement amount is then paid or received net of margins on the next business day.
Note that for options and Index LEPOs expiring in March 2002 or June 2002, the expiry date/last trade date remains unchanged.
However the settlement price will be based upon the OPIC of the underlying S&P/ASX200 Index on the expiry day.
Warrants
Exercise level is expressed in index points (rather than the exercise price), so at settlement if the closing level of the index is
greater than the exercise level, the holder is entitled to a cash payment, therefore
(closing level of the index – exercise level) * index multiplier = $ per warrant
ASXF products
Cash settlement is based on the opening prices of the stocks in the underlying index on the morning of the maturity date. An
index calculation (Opening Price Index Calculation) is made using these opening prices.
SFE products
From contracts specs - SFE SPI 200 index futures – the special opening quotation of the underlying S&P/ASX 200 Index on the
last trading day (at 12pm in March/June/Sept and Dec). Calculated using the first traded price of each component stock in the
index on the last trading day, irrespective of when the stocks first trade in the ASX trading day (ie. First traded price may occur
at any time b/w ASX market open and close (including CSPA).
70
Should any component stock not have traded by ASX market close on the last trading day, the last traded stock price of that
stock will be used to calculate the special opening quotation.
Options on SFE SPI 200 Index Futures – cash settlement price of underlying futures contract.
Brazilian Securities
Commission, CVM
The settlement price is the volume-weighted average of traded prices for the futures contract in the last 30 minutes of the
trading period. Cash settlement is D+1.
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
ƒ Options on the S&P/TSX 60 Stock Index:
Exercised and assigned Index Options are settled in cash at Settlement Time (established by the Corporation) on the Exercise
Settlement Date (the Business Day following the Expiration Date); and
Exercise Settlement Amounts are calculated on the cash difference between Aggregate Current Value (i.e. the level of an Index
at the opening of trading on the Expiration Date of the Option multiplied by CAD $1.00 and by the number of Units of Trading)
and the Aggregate Exercise Price (i.e. the exercise price of an Option multiplied by the number of Units of Trading of the
Underlying interest covered by the Option).
ƒ Futures Contracts on S&P/TSX 60 Stock Index
Settlement of positions held following the close of trading on the last day of trading in a series of Futures is made on the first
Business Day following the last day of trading. Settlement is made by an exchange of cash between the corporation and each of
the short and long clearing Members.
The amount to be paid or received in final settlement of each position opened prior to the last day is the difference between
(i)
the Final Settlement price, i.e. the price determined by the Exchange on which the Futures trade, as being the opening
price of the Stock Index on the day following the last day of trading, and
(ii)
the Settlement price, i.e. the official daily closing price of a Future, of the contract on the business day before the last
trading day,
multiplied by the factor used to calculate the size of the contract as specified by the Exchange (CAD $200 times the S&P/TSX
60 index level).
The amount to be paid or received in final settlement of each position opened on the last trading day is the difference between
(i)
the Final Settlement price, i.e. the price determined by the Exchange on which the Futures trade, as being the opening
price of the Stock Index on the day following the last day of trading, and
(ii)
the Trade price of the open contract, i.e. the price agreed upon for the Future, when the contract is entered into on an
Exchange
multiplied by the by the factor used to calculate the size of the contract as specified by the Exchange (CAD $200 times the
S&P/TSX 60 index level).
ƒ Options on the iUnits S&P/TSX 60 Index Participation Fund-i60:
Exercise of these options is carried out by the Canadian Derivatives Clearing Corporation (CDCC) and delivery is carried out
via The Canadian Depository for Securities Limited (CDS), on the 3rd business day following the exercise date because these
71
options are linked to 100 units of the S&P/TSX 60 Index Participation Fund.
ƒ Futures Contracts on the S&P/TSX Sectorial Stock Index:
ƒ S&P/TSX Canadian Gold Index Futures
ƒ S&P/TSX Canadian Financial Index Futures
ƒ S&P/TSX Canadian Information Technology Index Futures
ƒ S&P/TSX Canadian Energy Index Futures
Same as the above mentioned rules of the Futures Contracts on S&P/TSX 60 Stock Index.
ƒ Sponsored options on:
ƒ Dow Jones EURO STOXX 50 Index
ƒ S&P 500 IndexTM
Commission des Operations
de Bourse, France
Exercised and assigned Sponsored Options are settled in cash at Settlement Time (established by the Corporation) on the
Exercise Settlement Date (the Business Day following the exercise date).
The exercise settlement amount for one sponsored call option is equal to the difference between the closing value of the
underlying on the expiration date and the exercise price (vice versa in the case of a sponsored put option), multiplied by the
conversion ratio and multiplied by the Canadian/foreign exchange rate.
- Futures contracts
At the close of the day's trading session, EURONEXT SA determines the reference price of each maturity ("settlement
price") on which margin calls are based.
The settlement price lies within the range of prices existing at the close (extremes included).
EURONEXT SA can select a price that has not been quoted, in particular for the more distant maturities.
For the front maturity, the settlement price is generally the last traded price, on condition that it is representative of the
price trend at the end of the session.
In principle, the settlement price for other maturities is determined from the settlement price of the front maturity and
observed spreads (for the maturity in question relative to the front maturity) during the trading session.
Spreads for the preceding session can be carried over if other meaningful data is lacking.
- Equity options
The clearing system will be changed very soon. Updated information will be provided in the coming weeks.
Settlement times :
Derivatives contracts
- CAC40 future and options
5:30 pm
- STOXX futures and options
Underlying index
CAC40
5:30 pm
STOXX indexes
72
5:30 pm
- French equity options
5:30 pm
- Foreign equity options
5:30 pm
8:00 pm
French equities
5:30 pm
Foreign equities
Final Settlement:
Bundesastalt fur
Finanzdienstleistungsaufsicht, The final settlement price shall be determined by the Eurex Exchange on the final settlement day for a contract, according to the
value of the underlying index based on the auction prices for the securities included in the underlying index that have been fixed
Germany
by the electronic trading system Xetra during an intra-day auction determined by the Boards of Management of the Eurex
Exchange.
If any changes are made in the calculation of the underlying index or its composition or weighting such that the concept of the
underlying index appears to be no longer comparable with the concept that applied when a futures contract was admitted to
trading, the Boards of Management of the Eurex Exchange may order the termination of trading in such contract as of the last
trading day prior to the change in the underlying index. Open positions shall be settled in cash upon the termination of trading.
The final value of the underlying index, calculated on the basis of the auction prices for the securities included in the underlying
index as fixed by the electronic trading system of the Frankfurt Stock Exchange (Xetra) during an intra-day auction determined
by the Boards of Management of the Eurex Exchange, shall be used.
Terms expiring on the final settlement day of the next, the second succeeding and the third succeeding quarter-end months
(March, June, September, December) are available for trading at the Eurex Exchanges. The longest term of a contract is thus
nine months.
The last trading day of a contract shall be the final settlement day. The final settlement day shall be the third Friday of the
relevant quarter-end month; provided, however, that if such Friday is not an exchange day, the last trading day prior to such
Friday shall be the final settlement day. Trading shall close upon the start of the call phase of the intra-day auction in the
electronic trading system of the Frankfurt Stock Exchange (Xetra) as determined by the Boards of Management of the Eurex
Exchanges.
Daily Settlement
For each contract, profits and losses arising out of open positions on any Exchange day will be determined at the end of the
post-trading period and credited to or debited from the internal cash clearing account. For open positions from the previous
exchange day, the amount to be credited or debited shall equal the difference between the daily settlement prices of the contract
in question on the relevant exchange day and the previous exchange day. For transactions on the relevant exchange day, the
amount to be credited or debited shall equal the difference between the price at which the transaction was concluded and the
daily settlement price for such exchange day.
The daily settlement price shall be determined on the basis of the price of the last transaction entered into during the final 15
minutes of trading on an exchange day. If it is not possible to determine a price pursuant to the above provision, or if the price
so determined does not reflect the true market conditions, Eurex Clearing AG shall determine the settlement price.
73
Securities and Futures
Commission, Hong-Kong
Open positions from the last trading day of a contract shall be balanced on the final settlement day by means of a net payment
credited to or debited from the internal cash clearing account of the clearing member. Such payment shall equal the difference
between the final settlement price of such contract and such contract's daily settlement price on the exchange day preceding the
last trading day.
Determination of the Final Settlement Price:
HSI Futures/Options Contracts & MSCI China Free Index Futures/Options Contracts
The Final Settlement Price for HSI Futures/Options Contracts and MSCI China Free Futures/Options Contracts shall be a
number, rounded down to the nearest whole number, determined by the HKFE Clearing House (“HKCC”) and shall be the
average of quotations of the HSI / MSCI China Free Index taken at five-minute intervals during the last trading day and
compiled, computed and disseminated by HSI Services Ltd./ Morgan Stanley Capital International Inc. However, the Chief
Executive of the HKFE has the power under the Regulations for Trading Stock Index Futures/Options Contracts to determine
the Final Settlement Price under certain circumstances. As a practice, the Final Settlement Price would be announced on the
last trading day shortly after market closes.
Dow Jones Industrial Average Futures/Options Contract
The Final Settlement Price for Dow Jones Industrial Average Futures Contracts is determined by the HKCC and shall be the
Special Opening Quotation (SOQ) of the Dow Jones Industrial Average on the third Friday of the contract month compiled,
computed and disseminated by Dow Jones & Company, Inc. The SOQ is calculated from the opening prices of the constituent
stocks of the Dow Jones Industrial Average. If the underlying market is not open on that day, the Final Settlement Price shall
be the SOQ on the immediately preceding day such underlying market is open. The Chief Executive of the HKFE has the power
under the Regulations for Trading Stock Index Futures Contracts to determine the Final Settlement Price under certain
circumstances. As a practice, the Final Settlement Price would be announced on the last trading day shortly after market closes.
Please refer to Question 16a for Daily Settlement Price.
Commissione Nazionale per le The settlement price of stock index derivatives (futures and options) has to be equal to the value of the index calculated on the
opening auction prices of the index constituent stocks, recorded on the maturity date (9:30 a.m.)
Societa e la Borsa, Italy
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
The settlement price is calculated by the last price after the trading session in accordance with the exchange’s rule.
The final settlement price for the KLSE Composite index (KLSE CI) futures contract is the average value of the KLSE CI in the
last half-hour of the final trading day (which is the last business day of the contract month). The average value is derived from
the arithmetic mean of all the KLSE CI during the last half hour excluding the highest and lowest value during that period.
The KLSE CI option contract is a European-style option and is cash settled upon expiry. The difference between the final
settlement value and the options exercise price is debited/credited from/to the respective buyers’/sellers’ account. The final
settlement value for KLSE CI options contract is derived in the same way as the index futures final settlement price.
Settlement Price for IPC futures will be calculated as follows:
PL = IPCt
74
Where:
PL = Settlement Price.
IPCt = Closing value if IPC on t.
t = Expiration date.
As for the IPC warrants,”intrinsic value” is calculated for settlement:
Call: Max ( 0,Mkt - Stk)
Put: Max ( 0, Stk - Mkt)
Where:
Mkt= Market price
Skt = Strike price
Monetary Authority of
Singapore
Each stock index futures contract has its own prescribed basis or reference price that is used as the final settlement price. The
table below gives the details of the method for determining final settlement price.
Contract
Nikkei
225/300
Futures
Method for Calculating the Final Settlement Price
The final settlement price shall be the Special
Nikkei 225/300 Index Quotation based on the
opening prices of each component issue in the
Nikkei 225/300 Index on the business day
following the last trading day.
MSCI Japan Index Futures
The final settlement price is based on the Special Quotation
calculation applied on the opening prices of the component
stocks of the MSCI Japan Index on the business day
following the last trading day.
MSCI Taiwan Index Futures The final settlement price shall be the official closing price
of the index.
MSCI
Singapore
Index The final settlement price is based on the average value of
Futures
the MSCI Singapore Index taken at 1-minute intervals in
the last one hour of trading together with the Closing MSCI
Singapore Index value on the last trading day, excluding the
highest and lowest index values.
Straits Times Index Futures The final settlement price is based on the average value of
the STI taken at 1-minute intervals in the last one hour of
trading together with the Closing STI value on the last
trading day, excluding the highest and lowest index values.
Single Stock Futures
The final settlement price shall be computed by taking the
Index
75
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
volume weighted average prices of each trade done for the
underlying share during the last one hour of trading on the
Last Trading Day.
S&P Nifty (India) Index The final settlement price is determined by the Official
Futures
Closing Price of the S&P CNX Nifty Index derived from
the average weighted prices of the individual component
stocks of the index during the last 30 minutes of trading.
Settlement at expiration of contracts (up to now, contracts on IBEX-35 Spanish Benchmark Index and S&P Europe) is made by
cash transfer of the difference with the settlement price at expiration. The settlement price is calculated under the following
rules:
Ibex-35 Futures Index:
Daily Settlement Price: Arithmetic average between the best buy and best sale price for each expiration at the close of the
market each day.
Settlement Price at the expiration of the contracts: Arithmetic average of the IBEX-35 Index between 16:15 and 16:45 on the
Expiration Date, taking one value per minute. The Settlement Price at expiration is rounded off to one decimal point.
S&P Europe Index Products: Daily Settlement Price: Arithmetic average between the best bid and offer price for each
expiration at the close of the market each day Settlement Price at expiration is formulated with the opening price of every
single index component on the expiration date.
Rules for the OMX index. Settlement price (average index) is calculated after markets closing on the expiration date which are
every fourth Friday in every month.
4.8.5
CALCULATION OF AVERAGE INDEX
In calculating the average index for a trading day, the price of each
Index Share shall be calculated by reference to the aggregate trading
volume that day on the Exchange, converted, where appropriate, into
Swedish kronor, divided by the corresponding number of such shares
(average price). Conversion from the Index Share's currency into
Swedish kronor takes place continuously throughout the day subject to
the currency fix established by the Exchange applicable from time to
time.
76
When calculating the average price for the Index Share, only Exchange
Transactions which have been carried out in the Exchange’s trading
system for stocks (the SAXESS system) at a price which is within the
range of the highest bid price and the lowest ask price for such stock at
the time of the Exchange Transaction shall be taken into account.
After-hours trades shall not be included in the average price for the
Index share in question.
If the Index Calculator is unable to calculate the average price for an
Index Share on a particular day, because no Exchange Transactions
have been carried out for a certain stock, its price shall be the average
price for such stock on the last trading day on which it is possible to
calculate such average price in accordance with the above paragraph.
If the Index Calculator considers that the price of one or more Index
Shares on a particular trading day has been unduly influenced so that
the average index or average price cannot be calculated in a
representative way, the Index Calculator may ignore that day, or one or
more Exchange Transactions carried out during the day, and use the
average prices for Index Shares for a part of the day or the most recent
prior trading day. Such action may only be undertaken with the prior
approval of the Index Calculator and shall be publicised in an Index
Announcement and notified to the Index Ombudsman.
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
If for whatever reason an average Index is to be calculated for part of a
trading day only, such calculation shall nonetheless be made in line
with the above principles.
Preamble: Derivative instruments traded at SWX Swiss Exchange are non- standardised instruments unlike e.g., Eurex
contracts. Therefore individuel settlement calculation methods may apply. However, settlement prices are typically calculated
within the members trading systems depending of their nature and distributed to the involved counterparties. Simultaneously the
calculated value will be sent to the CSD (SIS) in order to ensure irrevocable DVP.
Broad-based index futures
CFTC Guideline 1 requires for cash-settled contracts that, among other things: 58
A demonstration that cash settlement of the contract is at a price reflecting the underlying cash market, will not be subject to
77
manipulation or distortion, and is based on a cash price series that is reliable, acceptable, publicly available and timely.
Security Futures
Cash settled – the CEA and the Exchange Act stipulate that the listing standards of an exchange or association trading security
futures products shall, among other things, require that trading in the security futures product not be readily susceptible to
manipulation of the price of such security futures products, nor to causing or being used in the manipulation of the price of any
underlying security or option thereon.59
Accordingly, the Commissions proposed amendments to Rule 41.1 and Rule 41.25 under the CEA, and new Rule 6h-1 under
the Exchange Act to generally provide that, among other things, (i) the final settlement price for each cash-settled security
futures product fairly reflect the opening price of the underlying security or securities.
CFTC Rules 41.25(b)(1) and (2) require that cash settlement prices be based on the opening price of a security futures product’s
underlying security or securities, or, if the opening price for one or more securities is not readily available, the final settlement
price of the security futures products must fairly reflect the price of the underlying security or securities during the most recent
regular trading session for such securities or the next available opening price. 60
In adopting these rules, the CFTC explained that “Based on prior analyses and for reasons discussed in the proposing release,
the CFTC previously has determined that opening prices represent reliable indicators of the values of securities and thus are
acceptable for hedging of securities’ positions. In addition, opening prices are established under procedures designed to ensure
that the prices are reflective of prices in the underlying securities market. “61
The requirement that the cash settlement price not be readily susceptible to manipulation is also embodied in CFTC Rule
41.22(f), which states, “Trading in the security futures products is not readily susceptible to manipulation of the price of such
security futures product, nor to causing or being used in the manipulation of the price of any underlying security, option on such
security, or option on a group or index including such securities, consistent with the conditions for trading of §41.25[.]”62
Not cash-settled - Section 2(a)(1)(D)(i)(II) of the CEA provides that, if a security futures product is not cash-settled, the
designated contract market or registered derivatives transaction execution facility must have arrangements with a clearing
agency registered with the SEC for the payment and delivery of the securities underlying the security futures product.
Paragraph (b) of proposed section 41.22 implements this provision by requiring a certification that the designated contract
market or registered derivatives transaction execution facility will comply with this requirement.
Background: Settlement Prices for Cash-Settled Security Futures Products 63
All currently traded index futures and options are cash-settled. When stock index futures and options began trading in the mid1980s, virtually all of these products used closing-price settlement procedures. Closing-price settlement procedures in index
futures and options generally base the index settlement price on the execution prices from the last regular session trades in the
underlying securities. The cash settlement provisions of stock index futures and options contracts facilitated the growth of
sizeable index arbitrage activities by firms and professional traders and made it relatively easy for arbitrageurs to buy or sell the
underlying stocks at or near the market close on expiration Fridays64 in order to "unwind" arbitrage-related positions. These
types of unwinding programs at the close on expiration Fridays often severely strained the liquidity of the securities markets.
Regulators and self-regulators were concerned that the liquidity constraints faced by the securities markets to accommodate
expiration-related buy or sell programs at the market close on expiration Fridays could exacerbate ongoing market swings
78
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
during an expiration and could provide opportunities for entities to anticipate these pressures and enter orders as part of
manipulative or abusive trading practices designed to artificially drive up or down share prices. To reduce such expirationrelated strains on market liquidity, markets trading the most actively-traded futures contracts and many stock index option
contracts moved to opening-price settlement procedures. As discussed in the Proposing Release, opening-price settlement
procedures offered several features that enabled the securities markets to better handle expiration-related unwinding programs.
In view of the experience gained with settlements in cash-settled stock index futures and options in the 1980s and in light of the
potential for manipulation of the underlying securities markets, the Commissions proposed that security futures products that
specify cash settlement in lieu of physical delivery use a final settlement price that fairly reflected the opening price of the
underlying security or securities as the basis for cash settling positions at contract expiration.65
The market that trades an index option determines the method for calculating the settlement price of the option. For example,
the rules of one U.S. options exchange provide, generally, that the value at expiration of an a.m.-settled index option shall be
determined by reference to the reported level of the index as derived from first reported sale (opening) prices of the underlying
securities on that day. However, The Options Clearing Corporation (“OCC”), which is the sole provider of clearance and
settlement services for exchange-traded options and will also provide clearance and settlement services for security futures
traded in the U.S., has broad authority under its by-laws and rules to adjust and set the settlement price of an index option
contract or security future contract if it determines that a price reported to OCC, or that should have been reported to OCC, by
an exchange or a reporting authority is either inaccurate or unavailable.66 Any adjustment made to an index option or security
future contract must be based on its appropriateness for the protection of investors and the public interest and, among other
things, must take into account such factors as fairness to holders and writers of affected options contracts, the maintenance of a
fair and orderly market in such options, consistency of interpretation and practice, and efficiency of premium and exercise
settlement procedures.
The exchange delivery settlement price (EDSP) for index contracts traded on LIFFE is based on the average of the central 57
index readings taken at 15 second intervals during a 20 minute trading period on the last day of trading. In total 81 index
readings are taken during the 20 minutes but the top and bottom 12 readings are excluded from the calculation. The period for
establishing the EDSP is 10.10 –10.30 for indices based on UK securities, and 11.40 – 12.00 for indices based on or including
foreign securities.
79
16. Please describe briefly any specific requirements concerning the clearance and settlement of stock index derivative products, including:
a. any special daily settlement price rules;
b.any special rules at the expiry of the contract;
c. any special requirements for cash-settled contracts.
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
See Q.15
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Please see answer to question 15.
On the expiry date, any open interest is cleared through automatic registering of an inverse position, at a price which reflects the
simple average of the IBOVESPA at the spot market during the last 2 and ½ hours of the trading period. Cash settlement is
D+1.
a) There is no specific requirements.
b) Please refer to appendix “Instruction NI-3-03 : Determination of daily settlement index and final settlement index for
CAC40 options and futures”. Note: some articles are being currently reviewed.
c) There is no specific requirements.
a) For each contract, profits and losses arising out of open positions on any exchange day will be determined at the end of the
Bundesastalt fur
Finanzdienstleistungsaufsicht, post-trading period and credited to or debited from the internal cash clearing account. For open positions from the previous
exchange day, the amount to be credited or debited shall equal the difference between the daily settlement prices of the contract
Germany
in question on the relevant exchange day and the previous exchange day. For transactions on the relevant exchange day, the
amount to be credited or debited shall equal the difference between the price at which the transaction was concluded and the
daily settlement price for such exchange day.
The daily settlement price shall be determined on the basis of the price of the last transaction entered into during the final 15
minutes of trading on an exchange day. If it is not possible to determine a price pursuant to the above provision, or if the price
so determined does not reflect the true market conditions, Eurex Clearing AG shall determine the settlement price.
Open positions from the last trading day of a contract shall be balanced on the final settlement day by means of a net payment
80
Securities and Futures
Commission, Hong-Kong
credited to or debited from the internal cash clearing account of the clearing member. Such payment shall equal the difference
between the final settlement price of such contract and such contract's daily settlement price on the exchange day preceding the
last trading day.
b) The last trading day of a contract shall be the final settlement day. The final settlement day shall be the third Friday of the
relevant quarter-end month; provided, however, that if such Friday is not an exchange day, the last trading day prior to such
Friday shall be the final settlement day. Trading shall close upon the start of the call phase of the intra-day auction in the
electronic trading system of the Frankfurt Stock Exchange (Xetra) as determined by the Boards of Management of the Eurex
Exchanges
c) The index derivative contracts are performed by cash settlement between the clearing members and the Eurex Clearing AG.
Each clearing member is responsible for handling the cash settlements with the non-clearing members served by it and its own
customers; the handling of cash settlements by non-clearing members to their customers is the responsibility of the non-clearing
member.
a) The Daily Settlement Price (which is called the Closing Quotation) is determined by the HKCC.
Futures contracts
In general, prices of futures contracts entered into during the final two minutes of trading prior to the market close will
normally be used by the HKCC to determine the closing quotation for each Futures Contract. The details are stipulated in Rule
2.3.1 of the Clearing House Procedures for Futures/Options Contracts Traded on the Automated Trading System of the
Exchange ("HKATS").
Options contracts
In general, the closing quotations of an option contract shall be calculated by the HKCC using the Black's Model as follows:-
C = e − rT [FN(d 1 ) − XN(d 2 )]
P = e − rT [ XN − d 2 ) − FN ( − d 1 )]
d1 =
ln( F / X ) +
σ T
1
2
σ 2T
d 2 = d1 − σ T
where C and P are the Closing Quotations of the call and put Options
respectively; N(x) is the standard normal distribution
function of x; X is the strike price; T is the time to maturity in a 365-day year; r is the annual risk-free rate; F is the price of the
underlying; and σ is the volatility of the price of the underlying.
The details are stipulated in Rule 2.3.2 of the Clearing House Procedures for Futures/Options Contracts Traded on the HKATS.
b) Please refer to part (c).
c) According to HKFE’s Regulations for Trading Stock Index Futures, stock index futures contracts shall be settled by cash on
the final settlement day, of an amount equal to the difference between the cash settlement value and the contracted value of such
stock index futures contracts.
81
According to HKFE’s Regulations for Trading Stock Index Options, if an option contract is in-the-money at the expiry date, the
contract holder shall be entitled to receive or the contract seller shall be required to pay the final settlement value from/to
HKCC which is equal to the difference between the official settlement price and the strike price of the option contract,
multiplied by a contract multiplier. In addition, all margin payments and variation adjustments made to, received from or owed
to, the HKCC prior to the expiry day, shall be set off against the amount owing to or by the contract holder.
Commissione Nazionale per le In the event that at the maturity date the index settlement price cannot be calculated due to the indetermination of the openingauction price of one or more of the constituent stocks, the exchange fixes the price of these stocks on the basis of the prices
Societa e la Borsa, Italy
recorded in the previous trading day, taking into account any other objective elements that may be available.
So far, however, the settlement price has always been calculated on the basis of the constituent stock opening price, and there
has been no need for the exchange to adopt any extraordinary procedure. In fact, in cases of difficulties in closing the opening
auction, the exchange can postpone the closing of the auction and, if the opening price cannot be fixed, it may widen the auction
price limits to allow the fixing of the settlement price.
Financial Services Agency,
Japan
a) Exchanges conduct clearing daily in the way mentioned Q15. Trading participants (member firms) shall pay or receive the
difference on the next day which is calculated by marking to the market method.
As a trading participant closes out the position before the last trading day, the participant shall pay or receive the difference
between the amount of the position it holds and the amount at the time to close out the position. (T+1)
b) The positions, which have not been closing out by the last trading day, are settled at the Special Quotation on the business
day following the last trading day. Special Quotation is calculated based on the opening prices of component stocks of the index
on the business day following the last trading day.
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
None.
a) 1. Every day MexDer will calculate settlement future prices as follows:
n
PLt =
∑ PiVi
i =1
n
∑Vi
i =1
Where:
PLt = Settlement Price on t rounded to the closest bid.
n = number of trades within the last five minutes.
Pi = Price of the last trade.
Vi = Volume of the last trade.
2. If no trades where registered in the last five minutes, MexDer will calculate settlement prices for each serie as follows:
Where:
82
PLt =
PcVv + PvVc
Vc + Vv
PLt = Settlement Price on t rounded to the closest bid.
PC = Best buying order.
PV = Best selling order.
VC = Volume of best buying order.
VV = Volume of best selling order.
3. If there is not at least one buying and one selling order, settlement price will be the future price of the last trade during
trading hours.
4. If there is not at least one trade, settlement price will be the one resulting of an auction.
5. If in the auction the highest buying price is bigger than the lowest selling price, the settlement price will be the one
resulting of:
PcVv + PvVc
PLt =
Vc + Vv
Where:
PLt = Settlement Price on t rounded to the closest bid.
PC = Best buying order.
PV = Best selling order.
VC = Volume of best buying order.
VV = Volume of best selling order.
6. If no orders were received for the auction, the settlement price will be calculated as follows:
Where:

 M 
PLt = IPCt 1 + itCETE
 
,M 
 360  

PLt = Settlement Price on t rounded to the closest bid.
IPCt = Underlying value of the IPC on t.
itCETE
, M = Yield Rate of Mexican Treasury Bills (CETES) on t,
for the remaining days of the contract, derived from the
discount curve of CETES published by the Bolsa
Mexicana de Valores.
M = Number of remaining days to settlement.
t = Day of valuation or settlement date.
83
Market makers can always ask for an auction to calculate settlement prices if they consider that the previous calculations do not
reflect the closing price.
Daily settlement prices will be calculated at the end of each trading session through bids received between 15:25 and 15:35
hours.
b) Both futures and warrants are cash-settled.
c) For IPC futures, payment is carried out on the next working day of the expiring date, while for the warrants it is carried out
three working days after the exercise date.
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
a) Daily settlement price is based on closing prices.
b) Please see Q15.
c) Not applicable, as all the stock index futures contracts offered by SGX are cash settled.
No requirements.
a) All index options and futures are “Forward styled” that are settled at expiration. Closing prices are used for margin
calculation.
b) At expiration Stockholmsbörsen perform a general exercise for all in-the-money index options. Stockholmsbörsen consider a
call index option to be in-the-money if the expiration price is equal or greater than 2 points of the strike price. For put options
the expiration price should be equal or less than 2 points of the strike price.
c) All contracts are of European style with settlement at expiration.
Options: Strike – Fix = Cash settlement amount
Forwards: Bought/sold Price – Fix = Cash settlement amount
a) Plain vanilla stock index derivatives are cash settled at the price by close of trading (T+3) against payment through a CSD
(SIS). Structured stock index derivatives can have different settlement options (issuer’s choice)
b) Plain vanilla stock index derivatives see a. (although the issuer can set expiration during the last trading day, usually noon).
Certain products are issued with “trigger conditions” (knock-in, knock-out), which results to an immediate expiration and cash
settlement (T+3)
c) none
a)
None.
b)
And c) See 15 (cash settled security futures and rule 41.25(b)).
The SEC and the CFTC recently adopted rules requiring the final settlement price for a cash-settled security futures product to
fairly reflect the opening price of the underlying security or securities. If an opening price for one or more securities underling
a security futures product is not readily available, the final settlement price of the security futures product shall fairly reflect: (i)
the price of the underlying security or securities during the most recent regular trading session for such security or securities; or
(ii) the next available opening price of the underlying security or securities. The rules adopted by the SEC and the CFTC also
84
Financial Services Authority,
United Kingdom
provide that if a clearing agency to which the final settlement price of a security futures product is or would be reported
determines, pursuant to its rules, that such final settlement price is not consistent with the protection of customers and the public
interest, taking into account such factors as fairness to buyers and sellers of the affected security futures product, the
maintenance of a fair and orderly market in such security futures product, and consistency of interpretation and practice, the
clearing organization shall have the authority to determine, under its rules, a final settlement price for the security futures
product.
Nothing specific to index derivative products. In general, exchanges are required to have satisfactory arrangements for securing
the timely discharge of the rights and liabilities of the parties to transactions effected on the exchange.
(a) No. Index futures settle in the same manner as other futures contracts: using a method which has regard to traded prices,
or trade-weighted average prices or mid-point between bids/offers, depending on market activity. (The daily settlement
price is the price used in order to mark open positions for the calculation of daily variation margin whereas the EDSP is
the calculated price of the contract at its expiry on which (in this case, cash) delivery between buyers and sellers is
based.)
(b) Nothing specific
(c) Nothing specific
85
17. Please indicate whether any stock index derivative products are settled by physical delivery and describe briefly any special requirements for
such contracts.
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
No stock index derivative products are settled by physical delivery.
No physical delivery available.
Options on the iUnits S&P/TSX 60 Index Participation Fund-i60 are settled by physical delivery as mentioned in question 15
above. The requirements applicable to these options are similar to the requirements applicable for stock options.
Stock index derivatives are not settled by physical delivery.
Index derivative products are dematerialized. There is thus no settlement by physical delivery.
All stock index futures and options contracts traded on the HKFE are cash-settled.
All derivative warrants on stock indices currently listed on the SEHK are cash-settled to avoid stamp duty. However, once all
structured products are exempted from stamp duty, there will be more physical delivery products.
Holders of the ETF listed on SEHK could exchange their ETF units for securities of the underlying indices (i.e. redemption inkind). In general, fund managers of the ETF are responsible for the creation and redemption of ETF units.
Commissione Nazionale per le No stock index derivative products are settled by physical delivery in Italy.
Societa e la Borsa, Italy
Financial Services Agency,
There are no products that settled by physical delivery.
Japan
Both the KLSE Composite index futures and options contracts are cash-settled.
Securities Commission,
Malaysia
Comision Nacional Bancaria No, all the IPC derivatives are cash-settled.
y de Valores, Mexico
None of the stock index derivatives products require physical delivery of underlying stocks.
Monetary Authority of
Singapore
All Spanish Derivatives contracts traded on Stock Indexes are cash settled.
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden There are none.
86
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
No physical delivery for index stock derivatives.
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
Currently, no stock index derivative products are settled by physical delivery.
However, CFTC rule 41.25(c) requires with respect to physical delivery security futures products that are settled by actual
delivery of the underlying security or securities, payment and delivery of the underlying security or securities must be effected
through a clearing agency that is registered pursuant to section 17A of the Securities Exchange Act of 1934.
None of LIFFE’s stock index derivatives are physically delivered.
87
IV.
Surveillance
18. Please indicate whether there are any audit trail requirements that are designed to facilitate surveillance, and describe any such requirements.
SC2 Members
Response
Australian Securities and
Investments Commission
Reportable positions are a requirement of SFE and ASX futures markets and facilitate surveillance of large positions and the
expiry of index contracts. In addition ASX Surveillance is able to use order records and position information from the Options
Clearing houses for monitoring and investigating trading in index options.
The Brazilian exchanges enforce the most strict audit trail requirements. Final beneficiaries of all transactions must be specified
by D+1 at the spot markets. At the BM&F, specification is on the end of the same day and, since the introduction of the new
Brazilian Payments System earlier this year, some major clients are specified in real time, for risk management issues at the
exchange.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
The Rules of the Bourse de Montréal provide for audit trail requirements that are designed to facilitate surveillance. Among
other things, Bourse de Montréal requires approved participants to keep detailed records of each order received, and all orders
must be time-stamped, although each order sent to the electronic system is registered and time-stamped by the system itself.
In addition, the Rules of the Bourse de Montréal provide for specific position limits applicable to stock index derivative
products. When position limits are exceeded, approved participants must file position reports with the Bourse de Montréal at
least twice a week or more frequently if deemed necessary by the Bourse.
These requirements are supplemental to the surveillance activities performed on a daily basis by the Bourse de Montréal’s
surveillance personnel, who run a number of reports specific to trades.
The Cash and Derivatives Market Operations keeps all the records of trades and orders.
Commission des Operations
de Bourse, France
There is no difference between the supervisory measures designed for index derivative products or other financial instruments.
Bundesastalt fur
Finanzdienstleistungsaufsicht, According to Section 1b of the German Exchange Act (Börsengesetz, short: BörsG), supervision of the options and futures
exchange Eurex lies within the sphere of responsibility of the Exchange Supervisory Authority in the Federal State of Hesse.
Germany
This authority may, to the extent necessary for the fulfillment of its duties and without any specific reason, demand information
and the submission of documents from the exchange, the enterprises and exchange traders admitted to participate in exchange
trading.
The Trading Surveillance Unit (Handelsüberwachungsstellen) monitors trading on the exchange and the settlement of the
transactions and records and evaluates all data regarding options and futures trading.
Stock index futures and options contracts traded on the HKFE:
Securities and Futures
Commission, Hong-Kong
• The Large Open Positions (“LOP”) reports of index futures and options.
• The LOP breakdown by groups
88
• The LOP by omnibus accounts
• The calculated position delta
• Cross reference to the clearing data of index futures and options
• Analysis of changes in LOP
• Try to distinguish the purpose of LOP: hedging or speculation
• Market Surveillance System (MSS) day end capture of all index futures and options transactions
• Clearing data for margin control
Stock index derivatives traded on the SEHK:
The HKSFC is using the SMART System to conduct real time monitoring of the trading of these derivatives. The HKSFC
could also use the SMART System to replicate transactions.
Commissione Nazionale per le Management companies are required by Consob regulation no. 11768/98 to record the transactions carried out in the regulated
markets, by the use of electronic recording procedures. The following information have to be preserved for a period of not less
Societa e la Borsa, Italy
than eight years: the identity of the intermediaries that have concluded the deal, the type of transaction (buy or sell), the
instrument traded, the quantity and the price; g) the date and time of execution of the transaction. For markets that use electronic
trading systems, the individual orders entered into the systems, including those modified, deleted or unfilled, and the date and
time at which they were entered, modified or deleted must be recorded.These information shall be available for inspection only
by the management company and Consob and the procedures shall allow Consob to carry out research at any time on each
individual financial instrument, type of transaction and intermediary participating in the market.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
There are no audit trail requirements that are designed to facilitate surveillance.
Comision Nacional Bancaria
y de Valores, Mexico
The systems used in the derivatives market leave a audit trail at the client’s level to track operations and facilitate surveillance
according to the MexDer’s Procedure Manual.
Monetary Authority of
Singapore
Members are required to keep record of customers’ orders and their transactions under SGX’s rules. This is also found in the
Section 104 of the Securities and Futures Act.
The trading systems of the Kuala Lumpur Stock Exchange (KLSE) and Malaysian Derivatives Exchange (MDEX) capture and
archive relevant details of every single transaction that takes place on their respective exchanges. An audit trail report can be
generated from these records.
In addition, brokers are required to maintain and update records of their recent transactions for a limited period of time. Trading
members or associate members of MDEX are required to record details of their clients’ instructions in an order form prescribed
by the exchange. The form must be dated and time-stamped when clients’ orders are received or revised, executed or cancelled.
The forms are retained for five years in a manner that will enable exchange members to retrieve them conveniently and to have
them properly audited.
89
For futures contracts, SGX’s surveillance focuses on traders’ behaviour in the trading pits (for floor trading) as well as trading
activities conducted via the SGX-DT’s Electronic Trading System. Trading data maintained by SGX and records kept by
member firms are used for surveillance purposes.
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
MEFF has a dual function acting as both the exchange and the clearing house for derivative products in Spain, organising
trading, settlement and clearing. MEFF's guarantee as a Clearing House not only covers the Clearing Members but also their
clients, acting as counterparty with each of them. Moreover, due to the segregation of the open positions in the market there is a
corresponding segregation of client funds. This simplifies the administrative process for the Members and reduces the risk of
the Exchange. Nevertheless, the responsibility of the client positions is shared by the Clearing Members and their clients. So, in
order to exercise its supervising function, the CNMV receives, on real time, information about the all the transactions carried
out on the futures market and about the transfer process from a normal account (transitory) or member’s daily account to the
accounts of the final clients. To simplify the clearing process MEFF members can operate several accounts, either their own or
clients, registering all operations made during a trading session in just two accounts: one for buy positions and another for sell
positions. These two accounts are known as the daily account. Before the end of the trading session, the member must post
operations made during the session to their corresponding accounts.
The Exchange maintains audit trail information in relation to all business executed on the Exchange and is able to access this
information as and when necessary. Those aspects of the audit trail which are not encompassed by the Exchanges systems are
accessed through the provision of information through the member.
Swiss Federal Banking
Commission, Switzerland
The same requirements as for other securities apply. All participants of SWX Swiss Exchange are obliged to file an audit report
to the Surveillance & Enforcement Department. One of the required audit points is the observance of the trading rules.
Therefore the audit reports are facilitating the surveillance tasks.
Commodity Futures Trading
Commission, USA
Yes. Section 2(a)(1)(D)(i)(IX) of the CEA requires that designated contract markets and registered derivatives transaction
execution facilities on which security futures products are traded have audit trails in place to facilitate the coordinated
surveillance required by subclause (VIII). Paragraph (h) of CFTC rule 41.22 implements this requirement. In adopting this
rule, the CFTC stated that “it believes that the audit trails already in place on designated contract markets can serve this
purpose” but observed that “based on future developments of markets for security futures products, modifications may be
appropriate.” 67
With respect to “audit trails already in place,” and as discussed in more detail below, “core principles” under the CEA require
both designated contract markets and derivatives transaction execution facilities to have adequate audit trail capability to allow
for the reconstruction of trades. CFTC staff carries out, on behalf of the CFTC, a program of periodic and ongoing reviews of
exchanges that, among other things, examines exchange market surveillance, audit trail, trade practice surveillance and disciplinary
action programs and exchange financial and sales practice compliance programs.
In addition to such audit trail requirements; market surveillance is supplemented by direct market surveillance by the CFTC,
which is facilitated through a large trader reporting system.
See market surveillance backgrounder at:
http://www.cftc.gov/opa/backgrounder/opasurveill.htm
90
and large trader backgrounder at: http://www.cftc.gov/opa/backgrounder/opa-ltrs.htm
Designated contract markets
Section 5(b)(2) of the CEA specifies as a condition for contract market designation that:
Prevention of Market Manipulation – The board of trade shall have the capacity to prevent market manipulation through
market surveillance, compliance, and enforcement practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade reconstruction.
Section 5(d) of the CEA sets forth “core principles” that a designated contract market must meet on a continuing basis in order
to maintain such designation. Core principle 10 provides that:
Trade Information – The board of trade shall maintain rules and procedures to provide for the recording and safe
storage of all identifying trade information in a manner that enables the contract market to use the information for
purposes of assisting in the prevention of customer and market abuses and providing evidence of any violations of the
rules of the contract market.
In Appendix B to Part 38, the CFTC provided guidance and acceptable practices regarding compliance with “core principles.”
With respect to core principle 10, the application guidance states that:
A designated contract market should have arrangements and resources for recording of full data entry and trade details
and the safe storage of audit trail data. A designated contract market should have systems sufficient to enable the
contract market to use the information for purposes of assisting in the prevention of customer and market abuses
through reconstruction of trading.
The statement of acceptable practices states, in part, that:
An audit trail should include specialized electronic surveillance programs that would identify potentially abusive trades
and trade patterns, including for instance, withholding or disclosing customer orders, trading ahead, and preferential
allocation. An acceptable audit trail must be able to track a customer order from time of receipt through fill allocation
or other disposition. The contract market must create and maintain an electronic transaction history database that
contains information with respect to transactions executed on designated contract markets.
Derivatives transaction execution facilities
Core principle 3 of section 5a(d) of the CEA, “monitoring of trading,” provides with respect to boards of trade seeking to
operate as derivatives transaction execution facilities that:
The board of trade shall monitor trading in the respective contracts of the facility to ensure orderly trading in the contract
and to maintain an orderly market while providing any necessary trading information to the Commission to allow the
Commission to discharge the responsibilities of the Commission under the Act.
Appendix B to Part 37 of the CFTC rules provides guidance on compliance with core principles. The guidance for core
principle 3 states in part that:
Arrangements and resources to detect and deter abuses through effective trade monitoring programs should facilitate, on both
a routine and nonroutine basis, direct supervision of the market….A board of trade operating as a registered derivatives
transaction execution facility should have the authority to collect the information and documents necessary to reconstruct
trading for appropriate market analysis as it carries out its programs to ensure orderly trading and to maintain an orderly
91
Securities and Exchange
Commission, USA
market. The facility also should have the authority to intervene as necessary to maintain an orderly market.
The U.S. options exchanges are in the last stages of implementing a consolidated options audit trail system that will enable the
exchanges to promptly reconstruct the markets, effectively surveil the markets, and enforce order handling, firm quote, trade
reporting, and other rules. When the audit trail is complete, it will provide an accurate, time-sequenced record of electronic and
other orders, quotations and transactions on each options exchange, documenting the life of an order from the receipt of an order
by the exchange through the process of execution, partial execution, or cancellation of that order. The audit trail includes the
following elements:
•
•
Financial Services Authority,
United Kingdom
The synchronization of the time clocks for all trading and supporting systems on the options exchanges;
The merger of the options exchanges’ reported and matched transaction data on a daily basis, which is disseminated
among all options exchanges using a common computer format;
• The incorporation of an exchange’s quotes and the National Best Bid and Offer as displayed in each exchange’s market
with the merged transaction data in such a manner that it can be promptly retrieved and readily merged in the common
computer format with other options exchanges’ merged transactions and quotations data; and
The ability to document the life of an order, beginning with the receipt of an order through the process of execution, partial
execution, or cancellation, which shall be readily retrievable in the common computer format.
All client orders must be recorded on an order slip and time-stamped, once on receipt and again on either execution or
cancellation. The order slip must contain comprehensive and prescribed details of the order, as well as the customer’s identity
and the identity of the person taking the order and submitting it to the trading system. Where clients pass orders by way of
electronic order routing systems, those systems must create ands retain audit trail information equivalent to order slip
requirements. Audit trail data (paper and electronic) must be retained by the member for at least three years from the date of the
transaction.
92
19. Please identify any procedures required for coordinated surveillance among:
a. the market(s) on which the derivative product is traded;
b. the market(s) on which the underlying cash product is traded;
c. any other market(s) on which a related security is traded.
SC2 Members
Response
Australian Securities and
Investments Commission
a) There is a Memorandum of Understanding between ASX and SFE for the purpose of sharing information that assists in the
surveillance of both markets. There is also regular contact between ASX and SFE in the lead up to the expiry of the SPI futures
contract.
b)
c) Other than Intermarket Surveillance Group agreements there no other formal procedures for sharing information between
ASX/SFE and overseas exchanges. Where there is a need to obtain information from overseas markets we rely on the
Intermarket Surveillance Group Memorandum of Understanding. To date we have found the Memorandum of Understanding
effective in obtaining information from other market operators.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
There is no coordinated surveillance procedure.
a) All Canadian derivative products are traded on the same exchange, i.e. the Bourse de Montréal.
b) With regard to the S&P/TSX indices, Bourse de Montréal has entered into an informal agreement with the Toronto
Stock Exchange and Market Regulation Services Inc. (a market regulation SRO) in order to coordinate surveillance
between derivative and cash markets. For the foreign indices, Bourse de Montréal’s market surveillance personnel
perform an on-line and continuous surveillance of the foreign indices provided by Reuters and Bloomberg. There is no
agreement in place for these indices. The exemption order granted by the Ontario Securities Commission requires the
Bourse de Montreal to coordinate surveillance with the TSX.
c) N.a.
There is a coordinated surveillance for products listed on Euronext markets.
Commission des Operations
de Bourse, France
Cooperation in and coordination of surveillance is determined in Section 1b BörsG, under which the Trading Surveillance Unit
Bundesastalt fur
Finanzdienstleistungsaufsicht, may transmit data with respect to the execution of transactions to the Board of Management of the relevant exchange and the
93
Germany
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le
Societa e la Borsa, Italy
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
Trading Surveillance Unit of another exchange to the extent necessary for the fulfillment of the duties of the recipients. The
Trading Surveillance Unit may also transmit data with respect to the execution of transactions to the authorities which are
responsible for monitoring trading on foreign exchanges and receive data from them, to the extent that this is necessary to
ensure the orderly conduct of trading and the settlement of exchange transactions.
a) HKSFC monitors the daily LOP and the MSS transactions data. If unusual LOP changes are detected, the HKSFC will verify
if the changes are due to hedging or arbitrage purposes.
The HKSFC will also use the Consolidated Account Reporting System (CARS) to monitor exchange participants’ positions in
both cash and derivatives markets.
If similar derivatives products are traded in overseas markets, the HKSFC will monitor the price movements and trading of
these overseas derivatives products.
b) In general, HKSFC will monitor if there is unusual movement in share prices of stocks that have heavy weighting in the
index. Also, to monitor the discrepancy between the cash Index and the spot month futures level.
If the underlying cash products are traded in overseas markets, the HKSFC will make use of cooperative arrangements and/or
MOUs to obtain information or seek assistance from the regulators of these overseas markets.
c) The HSI futures and options are not traded in other overseas markets. The HKSFC does not regulate OTC markets of index
and stock options. For Hong Kong stocks traded in London or Hong Kong ADRs traded in the US, the HKSFC will monitor
their price movements.
Both cash and derivative markets are managed by the same company, Borsa Italiana S.p.a.
Stock exchanges establish cooperative relations by concluding MOU with each other.
Formal plans to conduct inter-market surveillance (ie, between the cash and derivatives markets) are being formulated.
Currently, cash and derivative surveillance teams consult each other and share information as and when the situation requires it.
a) There is a strong communication with the derivative exchange and a constant monitoring of operations by the CNBV.
b) The CNBV has systems to obtain and monitor on line all trades from the BMV, as well as the IPC level.
c) CNBV does not have on-line information of Chicago Mercantile Exchange (CME), where IPC Futures are also traded.
However, it can be obtained from our electronic information systems such as Reuters, Bloomberg, etc.
Currently, SGX tracks the respective underlying cash products when it monitors the trading activities of stock index derivatives
products to detect any significant divergence.
For “local” contracts traded on SGX-DT, such as STI and SiMSCI Futures, trade information is exchanged between the
surveillance functions of SGX-ST and SGX-DT.
SGX may disclose information to another exchange (in Singapore or elsewhere), based on information sharing MOUs
concluded between the two exchanges.
94
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Whenever a stress situation may arise on the spot or future price discovery process due to large open interest in derivatives
contracts, exchanges and market members involved are contacted. In such circumstances, supervision efforts are focused on
distortions on the price discovery process in the underlying index stocks.
The procedures required to ensure coordinated surveillance amongst a., b., and c. relate to;
Co - operation
Communication
Reporting
Feedback
between those institutions responsible for the surveillance of each particular product.
The coordination between different products on different markets is done as follows:
• Derivative products traded at Eurex: A partial coordinated surveillance of the same transactions by HÜST (Hessische
Handelsüberwachungsstelle) and ISE. ISE keeps a special view on Eurex-products which are based on Swiss
underlyings.
• Derivative products traded at SWX Swiss Exchange: SVE supervises derivative products as well as the underlying. For
all SMI-shares traded on virt-x, SWX has a full realtime data-access and therefore supervises within the guidelines of
an agreement between SVE and virt-x surveillance (Memorandum of Understanding) both products.
The Integrated Monitoring and Investigation System (IMIS) provides the functionality to fulfil the supervision and surveillance
requirements of a self-regulated exchange. It allows SVE to monitor the market activities, to identify unusual behavior and to
analyze possible irregularities thus ensuring that all trading activities are fair and orderly and in line with the SWX Rules and
Regulations. Moreover, IMIS has been keeping a historical database of the complete market data since the start of electronic
trading in 1996.
Commodity Futures Trading
Commission, USA
Section 2(a)(1)(D)(i)(VIII) of the CEA requires designated contract markets and registered derivatives transaction execution
facilities on which security futures products are traded to coordinate surveillance with markets that trade the underlying security
or any related security, in order to detect manipulation and insider trading.68 This requirement is implemented by paragraph (g)
of CFTC rule 41.22, which requires, in part, that:
Procedures are in place for coordinated surveillance among the board of trade, any market on which any security underlying a
security futures product is traded, and other markets on which any related security is traded to detect manipulation and insider
trading.
In a joint interpretation of this requirement, the CFTC and SEC stated, in part: 69
Because security futures products are surrogates for the securities on which their values are based, such coordinated
surveillance is essential to detection of manipulation and insider trading. As discussed in detail below, the Commissions
interpret the statutory requirement for coordinated surveillance to mean that if an exchange or association is a Full Member of
the Intermarket Surveillance Group (“ISG”)70 or has the ability to obtain all information that a Full Member of the ISG is
currently able to obtain from both current and former members, including, among other things, the ability to obtain market
95
Securities and Exchange
Commission, USA
surveillance reports or information, and information relating to investigations, then that market would meet the statutory
requirement for coordinated surveillance.
For an exchange or association to satisfy the statutory requirement that “procedures be in place for coordinated surveillance,”
the Commissions stated in the Proposing Release that they believed it was “essential that all such exchanges and associations
be Full Members of the ISG.”71 In view of the role that the ISG plays, the Commissions stated their belief that the ISG should
grant full memberships to all national securities exchanges and national securities associations registered pursuant to Section
15A(a) of the Exchange Act72 trading securities futures products, including Security Futures Product Exchanges, upon a goodfaith showing that the entities meet the criteria for full membership.
In the U.S., the exchanges that trade options, as well as the National Association of Securities Dealers, Inc. (“NASD”), are Full
Members of the Intermarket Surveillance Group (“ISG”). The ISG was created in 1983 under the auspices of the SEC as a
forum to ensure that national securities exchanges and national securities associations adequately share surveillance information
and coordinate inquiries and investigations designed to address potential intermarket manipulations and trading abuses. Full
Members of ISG routinely share surveillance and investigatory information.
Futures exchanges and non-U.S. exchanges and associations are Affiliate Members of ISG. The information sharing agreement
among Affiliate Members and the agreement among Affiliate Members and Full Members contain limitations on the
surveillance and investigatory information that must be shared.
The CFMA required that markets trading security futures products have procedures in place for coordinated surveillance with
other markets on which security futures products trade, any market on which any security underlying the security futures
product trades, and other markets on which any related security trades. The SEC and the CFTC recently indicated that the
statutory requirement for coordinated surveillance would be satisfied if a market trading security futures products: (1) were a
Full Member of the ISG or has the ability to obtain all information that a Full Member of the ISG is currently able to obtain
from both current and former members, including, among other things, the ability to obtain market surveillance information and
information relating to investigations; (2) were an Affiliate Member of the ISG and has entered into a supplemental agreement
to share certain additional information with Full Members and other Affiliate Members trading security futures products;73 or
(3) had entered into appropriate bilateral surveillance agreements to detect manipulation and insider trading with each exchange,
association, or market on which security futures products trade, and any market on which any security underlying the security
futures product or related security trades.
The SEC also stated that exchanges and associations that trade securities that are related to security futures must have the same
ability to share information and to coordinate surveillance with markets trading security futures products as they currently have
through ISG with exchanges and associations trading other securities. The SEC indicated that exchanges and associations could
address the limitations on the obligations of Affiliate Members of ISG by, for example, entering into a supplementary
agreement to share additional information among Full and Affiliate Members to address the limitations in the current
agreements. Alternatively, the SEC has stated that exchanges or associations trading securities that are related to security
futures traded by a market that is not a Full Member of ISG could satisfy the requirement to coordinate surveillance by entering
96
Financial Services Authority,
United Kingdom
into bilateral surveillance agreements with the market that is adequate to detect manipulation and insider trading. However,
such bilateral agreements would have to contain essentially the same information sharing obligations that Full Members of ISG
currently have with respect to each other.
In relation to equity products generally, that is including individual equity products, LIFE has in place a formal Information
Exchange Agreement with the London Stock Exchange, and will work closely with them in relation to any cross-exchange
investigations (e.g. insider dealing). In relation to US exchanges, LIFFE’s membership of the Intermarket Surveillance Group
provides an MOU in relation to information sharing. In relation to continental European exchanges, the Exchange has offered to
share any information relevant to the progress of an investigation.
97
20. Please describe the measures adopted when trading in one of the stocks in the index is halted for reasons other than those considered in
question 25 (ie. Price sensitive information, issuer’s failure to comply with listing standards, etc.).
SC2 Members
Response
Australian Securities and
Investments Commission
For example, if trading in the index derivative products is only disrupted at ASX if there are problems with the calculation and
dissemination of indices.
The SFE does have some specific procedures for determining the closing value of its futures contracts at expiry. We understand
that SFE ask S&P to calculate the index based on the opening price of each stock in the index, up until 12:00 on the day of
expiry. See http://www.sfe.com.au/content/bulletins/sfe/2001/sfe2001_115.pdf for more information.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
N.a.
Trading on the Bourse de Montréal in an option on the S&P/TSX indices is halted whenever a Market Supervisor concludes, in
his judgement, that such action is appropriate in the interests of a fair and orderly market. A Market Supervisor must take into
account, among other things, the extent to which trading is not occurring in stocks underlying the index, whether the most
current calculation of the index derived from the current market prices of the stocks is available and whether other unusual
conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. (Rules 6779 and 6788)
For the derivatives based on foreign indices, trading is halted only when the index is not disseminated. Therefore, if the trading
in one of the stocks in the index is halted it will not affect the trading of the derivative as long as long as the index is
disseminated.
When this affects only one of the stocks, no specific measure is taken.
Commission des Operations
de Bourse, France
In accordance with Section 43 para. (1) of the German Exchange Act and Section 25 of the Exchange Rule, the Board of
Bundesastalt fur
Finanzdienstleistungsaufsicht, Management of the respective exchange can suspend the official quotation of admitted securities if orderly trading on the
exchange is temporarily endangered or if the suspension is deemed necessary in the interest of the protection of the public.
Germany
Once the Board of Management has suspended a security from trading it immediately notifies the other exchanges listing the
security. This is usually done on the phone or by fax.
If trading of a particular product is interrupted all connected products are also suspended from trading. If trading in an
underlying security is suspended, the relevant futures trading must be suspended as well. For example, if an interruption in
trading is imposed on a major DAX constituent, DAX futures trading shall be suspended, too.
Trading of the index futures and options will continue if trading of one of the constituent stock of the Index is halted. When the
Securities and Futures
trading in one of the stocks in the index is halted, the calculation and dissemination of the underlying index will continue based
Commission, Hong-Kong
on predetermined methodology of the index calculation agency. As a result, the trading of the stock index derivative products
98
will not be affected.
Commissione Nazionale per le When trading in one or more index constituent shares is halted, index levels are calculated using the price of the last trade
before the trading interruption.
Societa e la Borsa, Italy
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Stock exchanges have the rule of trading halt in order to maintain fair price formation and protect investors. When uncertain
information on a security or an issuer which is judged to be likely to have includes a significant impact on investors’ decision
emerged, or when the stock exchange believes it necessary to inform the public of such information, the stock exchange
conducts trading halt on the stock. In general, the trading of the stock resumes in 60 minutes after the issuer discloses such
information.
The Kuala Lumpur Stock Exchange introduced a circuit breaker in March 2002, which provides a market-wide approach to
manage the downward movement of the KLSE Composite Index by halting trading temporarily. The circuit breaker is triggered
when the KLSE CI declines by 10%, 15% and 20% below its closing level of the previous market day. More information is
available at http://www.klse.com.my/website/trading/cirbreakfaqs.htm.
Comision Nacional Bancaria
y de Valores, Mexico
When one of the stocks that comprise the IPC is halted, the BMV takes the last price of the halted security for its IPC
calculation.
Monetary Authority of
Singapore
SGX-DT will not take special action or halt trading in its stock index futures contracts if one of index components is suspended.
This is subject to the index provider continuing to calculate and disseminate the index, and that the index continues to be
meaningful.
Comision Nacional del
Mercado de Valores, Spain
As one stock of both IBEX-35 and S&P Europe ceases trading indexes continues being calculated using the last available price
for the halted equity. For the IBEX-35 Index, where a security is suspended from trading for whatever reason (takeover bid,
etc.), the valid price to be taken for the calculation of the Index will be the price at which the last transaction was made prior to
the suspension of the security in question. For the S&P Europe, in the event a stock does not open, the previous closing price or
adjusted price in the region will be used.
Where a individual stock is suspended from trading and is an index constituent then the index continues to be traded on the
Exchange. The index uses the last traded price for the suspended stock.
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
At the SWX Swiss Exchange exists neither a Stop trading during the opening nor during the ongoing trading for index
derivatives. In case the underlying falls in a stop trading the derivatives are logically stopped as well.
A stock will be eliminated from an index, if the requirements for inclusion in the SMI are no longer fulfilled, for example when
the stock is no longer listed.
Commodity Futures Trading
Commission, USA
CFTC rule 41.25(a)(2) - regulatory trading halts - requires that the rules of a designated contract market or registered derivatives
transaction execution facility that lists or trades one or more security futures products must include the following provisions:
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(i)
Trading of a security futures product based on a single security shall be halted at all times that a regulatory halt has been
instituted for the underlying security; and
(ii)
Trading of a security futures product based on a narrow-based security index shall be halted at all times that a regulatory
halt has been instituted for one or more underlying securities that constitute 50 percent or more of the market capitalization of
the narrow-based security index.
In adopting this provision the CFTC and SEC explained the rationale for the 50% threshold as follows:74
The Commissions do not believe that trading in a narrow-based security index future should necessarily be halted because a
trading halt has been instituted for only one or several low-weighted component securities. An inappropriately low threshold
could lead to needless and potentially disruptive trading halts in the narrow-based index future. However, as noted in the
Proposing Release, regulatory halts of narrow-based-index component securities could affect a sufficiently large portion of the
index to make continued trading of a security futures product based on that index a means of improperly circumventing
regulatory halts in the underlying component securities. Under these circumstances, trading halt procedures would not be
coordinated, as required by Section 2(a)(1)(D)(i)(X) of the CEA75 and Section 6(h)(3)(K) of the Exchange Act,76 since the
security futures product would continue to trade while investors would be precluded from trading the underlying securities.
Moreover, the SEC believes that continued trading in the security futures product under these circumstances could undercut
key provisions in the securities laws designed to protect investors and promote the fair and orderly operation of the markets.
....
The Commissions believe that while it is not possible to eliminate completely the risk involved in hedging securities with a
future on a narrow-based security index when trading halts are instituted for certain of those underlying securities, the 50
percent threshold reduces such risk. Therefore, the Commissions are adopting a 50 percent threshold because it appears to
appropriately balance the goals of hedging utility with the prevention of improper circumvention of regulatory halts in the
underlying securities. The Commissions also note that the 50 percent threshold is consistent with existing thresholds for reopening trading in broad-based security index futures following a market-wide trading halt in the trading of the underlying
securities.77
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
The Commissions reiterate, however, that their rule is not designed to preclude a market trading futures on narrow-based
security indexes from halting trading when securities representing less than 50 percent of the market capitalization of the index
are halted or for other appropriate reasons, such as operational difficulties being experienced by the market or its automated
systems or concerns over clearance and settlement operations. The Commissions also note that the threshold at 50 percent
provides further discretion to national securities exchanges and national securities associations to establish their thresholds at
lower levels, or to change the thresholds as market conditions or experience warrant. This provides flexibility to the markets to
modify trading halt thresholds, which would not be possible if the Commissions set the threshold at a lower level.
Trading halts are discussed in the response to Question 25. The measures applicable to halting trading in an index option are
the same regardless of the reason for a trading halt in one or more of the index’s component securities.
When the quotation of a component security is suspended, the index provider will normally review the position at the end of the
second trading day following suspension and will normally remove the security from the index if the quotation has not been
100
restored after 10 trading days. The detail of the processes used vary between indices.
101
V.
Reports to Regulators
21. Please describe any requirements to provide regulators with information concerning positions in stock index derivative products or positions
in the component securities of an underlying index.
SC2 Members
Response
Australian Securities and
Investments Commission
In the Corporations Act 2001, there is a general obligation on market licensees to:
"do all things necessary to ensure that the market is a fair, orderly and transparent market"
There is a further obligation on market licensees to give written notice to ASIC if it becomes aware that it may no longer be able
to meet, or has breached this, amongst its many obligations.
ASIC has also signed Memorandums of Understandings with both ASX and SFE, and as part of these agreements ASIC may be
informed by market operators when substantial positions are held in the derivative products.
Trades, open interest and final beneficiaries are reported to the regulator (CVM) on a daily basis.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
There are no requirements to provide regulators with information concerning positions in stock index derivative products or
positions in the component securities of an underlying index unless reporting is required due to size of holdings(for insider or
early warning reporting).
Such information has be made available upon request to regulators. Aggregated open positions on derivatives products are
disclosed every day by the exchange.
No requirements.
In a Memorandum of Understanding between the Hong Kong Securities and Futures Commission (“HKSFC”) and the Hong
Kong Exchanges and Clearing Limited (“HKEx”), the requirements for the HKEx to submit relevant information in respect to
the positions in stock index derivative products or positions in the component securities of an underlying index are set out as the
following:
„ In relation to futures and index options contracts,
• HKEx shall send the following daily reports to the SFC:
i) large open positions report for all futures and index options contracts;
ii) risk concentration report on Hang Seng Index (“HSI”) and Mini-Hang Seng Index (“MHI”) futures and options
contracts;
iii) position delta report in relation to HSI and MHI futures and options contracts showing the running delta
position for those clients of exchange participants with large open position; and
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iv) market report on HSI and MHI futures contracts for the extended sessions.
when HKEx becomes aware that any client of an exchange participant who has failed to meet two or more
successive margin calls or demands for variation adjustment or interest rate cash adjustment which in aggregate
exceed HK$150,000, it shall inform the SFC together with a copy of any related correspondence received by HKEx
from the exchange participant;
„ HKEx shall inform the SFC as and when it initiates an intraday margin call or mark including the time when margin call
or mark is initiated, the number of clearing participants and the amounts involved.
„ As and when any amount in respect of an intraday margin or mark cannot be collected within the period stipulated by
HKEx, HKEx shall inform the SFC the name of the respective clearing participant and the outstanding amount.
In respect of the requirements to provide regulators with information concerning positions in the component securities of an
underlying index, there are no such requirements in Hong Kong at this stage.
Commissione Nazionale per le The Italian Clearing House (Cassa di Compensazione e Garanzia) provides Consob, on a daily basis, with information
concerning open positions held by each clearing members in any derivative products.
Societa e la Borsa, Italy
•
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Therefore, when ordered by the FSA a stock exchange has to provide the FSA with information concerning positions in stock
index derivative products or positions in the component securities of an underlying index. The FSA has the legal authority to
order a stock exchange to report or submit documents regarding business or property of the stock exchange, when the FSA
believes it necessary and appropriate for public interests or the protection of investors.
As a condition to the Securities Commission’s approval of the Malaysian Derivatives Exchange’s KLSE Composite index
futures and options contracts, the exchange is required to provide the commission with weekly reports on daily large position
holdings (based on a pre-specified size), as well as positions that have reached pre-defined limits. These reports are generated
by the exchange’s computerised market surveillance system.
The Kuala Lumpur Stock is not required to provide the Securities Commission with regular reports concerning positions in
Composite index component securities. However, if the market situation warrants it, the commission may request the exchange
to provide data and information on positions regarding certain stocks or groups of stocks.
The regulation applicable to the Mexican derivatives market portrays that the Exchange must maintain available to the
authorities, at any time, information refering to:
a. Number of contracts operated.
b. Number of contracts cleared and settled.
It also describes that the Clearing House must maintain available to the authorities, at any time, information about the number
and balance of future contracts, at the client level.
Monetary Authority of
Singapore
SGX-DT members are required to report daily to SGX all positions held on SGX-DT as well as large positions (i.e. more than
50 lots) held on other exchanges and over-the-counter trades. A summarized large trader report is also provided to MAS on a
weekly basis.
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Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
The CNMV have access to on-line information on every single position and transaction carried out on its supervised derivatives
markets.
The Exchange formally makes Large Position Reports each week and on a more detailed basis each month. These reports
identify any irregular positions and summarise the Exchange’s analysis of such positions. In addition to this the Exchange
adopts Client Position Reporting in relation to certain contracts
Swiss Federal Banking
Commission, Switzerland
At SWX Swiss Exchange SESTA does not require the position keeping, nor the reporting. SWX Swiss Exchange is furthermore
not in a technical position to do so.
But the Data Warehouse systems collects all trade-relevant information from the Exchange System as well as from the SWX
Repo and Eurex system. It processes the data and generates a wide range of standard reports for SWX Swiss Exchange and
Eurex internal purposes and for external customers. In addition, it allows SWX users to query the data pool for ad hoc reports.
The Data Warehouse holds all trade data going back to the start of electronic trading in 1996.
Commodity Futures Trading
Commission, USA
CFTC rule 41.25(a)(1) requires a designated contract market or registered derivatives transaction execution facility to comply
with the large trader reporting requirements of Part 16 of the CFTC rules.
As a part of its market surveillance program, the Commodity Futures Trading Commission (Commission) operates a
comprehensive system of collecting information on market participants. Under rules set out in Parts 15, 16, 17, 18, 19, and 21 of
the regulations under the CEA, the Commission collects market data and position information from exchanges, clearing
members, futures commission merchants (FCMs), foreign brokers, and traders. The Commission has assigned confidential
reporting numbers to reporting firms and traders to ensure the privacy of the information they provide. Except under limited
circumstances, the Commission is prohibited (under §8 of the CEA) from publicly disclosing any person’s positions,
transactions, or trade secrets.
Clearing-Member Data. In addition to providing public data on trading volume, open contracts, futures delivery notices,
exchanges of futures for cash, and prices, exchanges must provide the Commission (under Part 16) with confidential
information on the aggregate positions and trading activity of each of their clearing members. Each day as of the previous day’s
close, exchanges report each clearing member’s open long and short positions, purchases and sales, exchanges of futures for
cash, and futures delivery notices. These data are reported separately by proprietary and customer accounts by futures month
and, for options, by puts and calls by expiration date and strike price. The Commission staff use these data to identify large
cleared positions, in single markets or across many markets and exchanges, to audit large-trader reports, and to identify account
aggregation issues.
Clearing-member data, however, do not identify the beneficial owners of positions. The aggregate customer position reported
for a clearing member may represent a single trader or numerous traders. Moreover, the data also would not reveal a
circumstance where a single trader controls substantial portions of the customer positions at more than one clearing member
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and, therefore, controls a substantial portion of the market. To address these limitations on clearing-member data, the
Commission has at the heart of its market surveillance program a large-trader reporting system.
Large-Trader Data. Market surveillance must assess an individual trader’s activities and potential power in a market and
enforce the limits on speculative positions. To do this in markets characterized by substantial numbers of customers trading
through intermediaries, the Commission and the exchanges employ a comprehensive large-trader reporting system (LTRS).
Under the Commission’s LTRS, clearing members, FCMs, and foreign brokers (collectively called “reporting firms”) file daily
reports with the Commission (under Part 17). Those reports show the futures and option positions of traders that hold positions
at or above specific reporting levels set by the Commission. (A list of current reporting levels can be found in Part 15 of the
Commission’s regulations and at the Commission’s website.) If, at the daily market close, a reporting firm has a trader with a
position at or above the Commission’s reporting level in any single futures month or option expiration, the firm reports that
trader’s entire position in all futures and options expiration months in that commodity, regardless of size.
The aggregate of all large-traders’ positions reported to the Commission usually represents 70 to 90 percent of the total open
interest in any given market. The reporting level for large-trader reports ranges from 25 contracts to 1000 contracts. The level
for any given market is based on the total open positions in that market, the size of positions held by traders in the market, the
surveillance history of the market, and, for the physical-delivery markets, the size of deliverable supplies. From time to time, the
Commission will raise or lower the reporting levels in specific markets to strike a balance between collecting sufficient
information to oversee the markets and minimizing the reporting burden on the futures industry and the public. (The
Commission publishes aggregate data concerning reported positions in its weekly “Commitments of Traders” reports, which are
available at the Commission’s website and the subject of a separate Backgrounder.
Since traders frequently carry futures positions through more than one broker and since individuals sometimes control or have a
financial interest in more than one account, the Commission routinely collects information that enables its surveillance staff to
aggregate related accounts. Specifically, reporting firms must file a CFTC Form 102, to identify each new account that acquires
a reportable position.[2] In addition, once an account reaches a reportable size, the Commission may contact the trader directly
and require that the trader file a more detailed identification report, a CFTC Form 40 (under Part 18). These two forms—the 102
and the 40—allow the Commission to identify the name and address of the account, the person(s) controlling the trading, the
person to contact regarding trading, the nature of the account (e.g., whether it’s an omnibus account for another broker or it’s an
individual account), whether the reported account is related—by financial interest or control—to another account, and the
principal occupation or business of the account owner. These forms also show whether the account is used for hedging cash
market exposure and, if so, which futures/option markets are used and what merchandising or marketing activities are involved.
(Blank copies of the Form 102 and Form 40 are available for viewing and downloading at the CFTC website.)
The Commission staff use this information to determine whether the reported account is a new trader or simply an additional
account of an existing trader. This determines whether the trading activity in the new account needs to be aggregated with that
of other accounts currently being reported or which may be reported in the future. Only by properly identifying and aggregating
105
accounts can the surveillance staff make a thorough assessment of a trader’s potential market impact and a trader’s compliance
with speculative position limits.
The Commission uses various means to ensure the accuracy of its large-trader data. The large-trader positions reported by
clearing members are compared to clearing-member data reported by the exchanges. An inquiry is made if: a) the sum of a
clearing member’s large-trader positions exceeds the member’s open cleared position, or b) a clearing member has a cleared
position many times the reporting level for a given market, but reports little or no large-trader positions. This same procedure is
used to compare large-trader data reported by non-clearing FCMs and foreign brokers to the total positions they are carrying at
other brokers or clearing members. Reporting firms are also subject to on-site audits by exchange and Commission staff.
Through various software, the raw large-trader data are transformed into analytical reports. A Commission economist may view
the largest traders in a specific market, a single trader across several markets, or a trader’s pattern of trading over a specific time
period.
The Commission also has the authority (under Part 18) to require that a trader furnish large-trader data by filing a Form 103
report showing open futures and option positions, purchases and sales, futures deliveries, and option exercises on a daily basis
for a specific period of time. Although this method of obtaining large-trader data is not used frequently, it can be useful where a
trader is trading through a number of reporting firms and there is concern that the normal data-collection process is missing
some important information.
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
As an additional source of information that allows surveillance economists to investigate whether there is a threat of a market
manipulation or other market disorder, the Commission may issue a “special call” to a reporting firm or a trader (under Parts 21
or 18). The special call is designed to gain additional information about a firm’s traders or about a participant’s trading and
delivery activity, including information on persons who control or have a financial interest in the account. A special call may
also request information about positions and transactions in the underlying commodity. This mechanism may be used when a
broker (domestic or foreign) is carrying large open positions but is showing few, if any, reportable accounts. A special call may
also be used when a trader is using too many brokers to be easily monitored through required reports, when the trader holds
positions below the reporting level, or when part of a trader's position is being carried through a foreign broker and the required
information is not received from the broker or customer in a timely fashion or is not readily available for inspection.
The U.S. options exchanges have adopted rules requiring their members to report large options positions to the exchange on a
daily basis. This information may be shared among Full Members of the ISG. The SEC may obtain this information from an
exchange upon request. Positions in security futures will be reported to the CFTC pursuant to the CFTC’s Large Trader
Reporting program.
UK derivative exchanges monitor large positions in derivative contracts and bring to the FSA’s notice positions they consider to
be particularly significant. Positions in the underlying equity are generally more difficult to monitor, but here too an exchange
would take action, and/or inform the FSA, if it had reason to suppose that a position was being established that threatened the
orderliness of the market or was connected with market abuse.
106
107
VI.
Manipulation/Front-running
22. Please indicate whether your jurisdiction has anti-fraud, anti-manipulation, insider trading or takeover laws that apply to trading in index
derivatives and/or the index’s component securities.
SC2 Members
Response
Australian Securities and
Investments Commission
As these products (derivatives and securities) are financial products according to the Corporations Act 2001, they are all subject
to the market misconduct provisions found in Part 7.10 of the Act. The provisions contain prohibitions against:
a.
b.
c.
d.
e.
f.
False trading and market rigging;
Dissemination of information about illegal transactions;
Making false or misleading statements;
Inducing persons to deal;
Dishonest conduct; and
Insider trading.
Takeover provisions apply to component securities.
Market operators also impose equivalent prohibitions through their rules.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
CVM Instruction 8/79 details anti-manipulation provisions which also apply to the derivatives markets.
In Canada, fraud and market manipulation are dealt with through criminal proceedings under the Criminal Code, a federal
statute. The Criminal Code applies to trading in index derivatives and/or the index’s component securities.
In Québec:
Securities legislation in Québec contains provisions on transactions intended to fix or stabilize the market price of a security
(equity and derivative), anti-manipulation, fraud, insider trading and takeover.
In Ontario:
Securities legislation in Ontario contains anti-manipulation and fraud, insider trading and takeover provisions that apply to all
securities. The provisions contained in the Ontario Securities Act, regulations and rules apply to options, as options are defined
as securities under Ontario securities legislation. Futures, however, are regulated under the Commodity Futures Act, which does
not contain such provisions.
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Other:
The Rules of the Bourse de Montréal contain provisions prohibiting approved participants from using manipulative or deceptive
methods of trading.
Index derivatives and index’s component securities are subject to the same antifraud, antimanipulation takeover and insider
Commission des Operations
trading laws as other financial instruments.
de Bourse, France
There are no anti-fraud, anti-manipulation, insider trading or takeover laws which are exclusively applied to trading in index
Bundesastalt fur
Finanzdienstleistungsaufsicht, derivatives. The general provisions and regulations apply to all types of financial instruments.
Germany
For futures and options traded on the HKFE, currently there is no applicable law in relation to market manipulation, insider
Securities and Futures
trading or takeover. However, the Commodities Trading Ordinance prohibits false trading in index derivatives and options.
Commission, Hong-Kong
There are also restrictions on the maximum number of contracts on index derivatives and stock options that an investor can hold
at any single point of time. There is also requirement for clients to report their open positions if they reach certain level.
For the underlying securities, there are applicable laws in relation to market manipulation, insider trading and takeover as stated
in the Securities Ordinance and the Takeover Code.
When the new Securities and Futures Ordinance commences, there will be applicable laws in relation to false trading and price
rigging of both securities and futures/options contracts (section 274 & 275).
Commissione Nazionale per le Anti-manipulation (including dissemination of false information) and insider trading laws apply to any trade on investment
instruments traded on a EEA regulated markets, including index derivatives and/or the index’s component securities.
Societa e la Borsa, Italy
Takeover law applies only to trading in stocks.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
The Securities and Exchange Law (the SEL) prohibits unfair trading acts(Article 157), manipulation(Article 159), and insider
trading(Article 166).
The Futures Industry Act 1993 has a specific chapter on offences which applies to the trading of futures contracts (including
index derivatives) and includes false trading, bucketing, manipulation either on the futures prices or the underlying itself, fraud,
abuse of information obtained in official capacity and providing false or misleading statements.
In addition, the Securities Industry Act 1983 applies to offences in respect of securities (whether or not the securities are the
underlying of a derivatives product, and include index’s component securities) and covers among others insider trading,
manipulations, fraud and false trading.
In respect of takeover, there is the Malaysian Code on Takeovers and Mergers 1998 issued by the Minister under the Securities
Commission Act 1993 which regulates matters relating to takeovers of public companies whether or not the company is listed
on the stock exchange or whose securities are a component of an index.
Comision Nacional Bancaria
y de Valores, Mexico
The SHCP, together with CNBV and Banxico, issued the regulation applicable to derivatives market’s participants.
The mentioned regulation describes as serious faults the following: Giving incorrect information, price manipulation, insider
trading, non authorized executions and outside trading.
There are also prohibitions concerning market concentration, price distortions, trading with oneself, outside trading and insider
trading, among others.
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Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
SGX-DT Rule 415(b) & (e) provide, amongst other things, that it shall be a major offence to be guilty of fraud or any act of bad
faith or of any dishonest conduct, or to manipulate prices or attempt to manipulate prices or to corner or attempt to corner the
market. SGX-ST Bye-Law 12.8 contains provisions in respect of conduct in relation to false market.
Regulations relating to fraud, manipulation and insider trading are also provided for in the Securities and Futures Act.
The same set of rules and regulations governing insider trading, anti-fraud and anti-manipulation on the cash markets are
applicable to derivatives trading on regulated exchanges.
These aspects of Market Abuse are covered by the laws of the Jurisdiction, which apply to these contracts (as well as to any
contracts).
Art. 161bis penal code (manipulation of exchange rates) is applicable to the trading in index derivatives and/or the index’s
component securities. There is also an anti-fraud-rule (Art. 146 penal code). It refers to any kind of misguidance of a person by
another person by pretending or suppressing facts without focusing on the item (ie. shares, derivatives, bonds).
Insider trading (Art. 161 penal code): Regarding the wide range of securities usually representing an index it is diffuclt to
exploit sensitive information. It is only in the case of a heavy weighted security that the impact of a variation in its price has an
influence on the index price. In such cases, insider trading rules could apply.
Commodity Futures Trading
Commission, USA
Yes. The CEA contains provisions prohibiting fraud and manipulation. See e.g., CEA section 4b (prohibiting fraudulent
transactions, including cheating another person, attempting to deceive any person regarding the disposition of an order, or to
“bucket” an order), 4c (prohibiting fictitious trading or trading which would cause the market to reflect a price that is not “true
and bona fide.”) and 6(c) (authorizing CFTC actions against manipulation) and 9(a)(2)(criminal penalties for manipulation). See
e.g., Fenchurch Capital Management http://www.cftc.gov/enf/enffenchurc.htm
Securities and Exchange
Commission, USA
In the U.S., anti-fraud, anti-manipulation, and insider trading laws apply to trading in the index’s component securities, in index
options, and in security futures products. In addition, U.S. laws and regulations that may apply in the context of a takeover
(e.g., tender offer rules, the requirement to report the acquisition of 5% or more of any class of shares of a publicly held
company) apply to trading in an index’s component securities.
The market abuse regime in the UK addresses any actions that may give a false or misleading impression as to the supply and
demand, or price and value, of investments traded on a prescribed market, or any actions that would, or would be likely to,
distort the market in that investment. (Financial Services and Markets Act 2000, s118). The regime potentially bites on
derivatives based transactions which create an ‘abusive squeeze’ (more likely in contracts with non-cash settlement) and
transactions which have the purpose of positioning the price of a qualifying investment or product FSA Handbook: Code of
Market Conduct).
LIFFE reinforces many of the details of the Financial Services and Markets Act and the Code of Market Conduct, both
specifically in its ‘Prohibited Practices’ and also in its general obligations for members.
Financial Services Authority,
United Kingdom
110
23. Please describe how potential inter-market front-running78 is addressed.
SC2 Members
Response
Australian Securities and
Investments Commission
Front running is addressed through the Corporations Act 2001 and the market's operating rules which require priority to be
given to client orders (see section 991B and ASX Business Rule 5.8).
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
There are no specific rules or laws dealing with the inter-market trading.
Close to contract expiry ASX would be in close contact with SFE Surveillance. The joint surveillance of both markets may help
identify inter-market front running during an expiry. Outside of the expiry period, surveillance teams of both exchanges would
rely on unusual patterns to identify trading which required further investigation.
Due to the breadth of the index (ASX/S&P 200) inter-market front running would be unusual, as it requires a large order on
either market to move the index a sufficient amount to justify taking a position in the underlying market ahead of the client
orders. If there was sufficient volatility in an index then it is likely ASX Surveillance would review the trading in order to
understand the reason for the movement.
CVM surveillance division.
Front-running is addressed by the Rules of the Bourse de Montréal, which contain provisions prohibiting front-running
activities.
Front-running is also addressed in the Universal Market Integrity Rules for equity marketplaces. These provisions govern
trading by dealers with knowledge of a client order, prohibiting principal trading of the security or a related security (such as a
derivative) in such circumstances.
N.a.
There are no special laws or regulations for index derivative products. However, front-running is addressed and prohibited by
Section 14 of the German Securities Trading Act (Wertpapierhandelsgesetz, short: WpHG).
For futures and options contracts, the HKSFC will keep track of the premium/discount of index futures to the cash market, the
implied volatilities of the index/stock options, and the changes in open positions in index futures and options, to determine if
any possible inter-market front-running takes place.
For derivative warrants, the HKSFC will use the SMART System to monitor their price movements and implied volatilities to
detect any inter-market front-running.
Commissione Nazionale per le Under the Italian law, inter-market front-running is a specific case of front-running. However, inter market activity has never
raised any particular concerns, as market surveillance on both the cash and the derivative markets is carried out by the same
Societa e la Borsa, Italy
111
entity (see 19).
Financial Services Agency,
Japan
Securities Commission,
Malaysia
The SEL prohibits front-running activity by a securities company, directors of the company, and the employees. (The SEL,
Article 42 )
The Malaysian Derivatives Exchange and Securities Commission examines historical data on market conditions and
performance, such as premia and discounts to the underlying market and to fundamental fair values, changes in open interest
and volume, etc, to examine possible instances of inter-market and intra-market front-running.
Comision Nacional Bancaria
y de Valores, Mexico
All operations in the derivatives market are followed at the client’s level and thus, it is fairly simple to detect when a trader
takes a position in advanced of its client.
Monetary Authority of
Singapore
SGX has surveillance procedures designed to alert them to possible front-running in the event of unusual price or volume
movements in the underlying securities.
Comision Nacional del
Mercado de Valores, Spain
As it is described in question 18, the characteristics of the settlement process in MEFF enables the CNMV to identify the final
client without requiring the member that information. So, the CNMV can detect on the derivatives market any front-running
activity in a short time. Besides, the CNMV can detect inter-market front-running by supervising the possibilities of arbitrage
between the cash and derivatives markets.
Liaison between the Supervision departments of the Cash and Derivatives Market takes place where a trading activity is
identified which may represent front running..
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
At the SWX Swiss Exchange there is no front-running alert. However at the Eurex an observer-alert is programmed, therefore
Market-Making transactions which are executed immediately before a customer order at a better price indicated and evaluated.
Commodity Futures Trading
Commission, USA
The combined surveillance and enforcement efforts of the futures and securities exchanges and the SEC and CFTC would
address any potential inter-market front-running. Our exchanges subscribe to a definition of proprietary inter market front
running developed by the ISG and to the related surveillance programs. See answer 19 above regarding coordinated surveillance
and the SEC response.
Securities and Exchange
Commission, USA
Potential inter-market front-running is addressed through surveillance procedures, SRO policies prohibiting front-running, and
SRO disciplinary actions imposing sanctions for front-running. The U.S. SROs have identified types of conduct that may
constitute front-running and have adopted policies providing that front-running violates SRO rules prohibiting members from
engaging in acts or practices inconsistent with just and equitable principles of trade.
Surveillance procedures provide a means to detect and deter potential inter-market frontrunning. As described more fully
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Financial Services Authority,
United Kingdom
above, the ISG provides a mechanism for sharing surveillance information and coordinating inquiries and investigations
designed to address potential inter-market manipulations and trading abuses, including front-running. In addition, the CFMA’s
coordinated surveillance requirement, described more fully above, should help to address potential inter-market front-running in
the context of security futures.
Inter market front running is addressed through full co-operation between LIFFE and the London Stock Exchange.
113
24. Please identify and describe any index design or surveillance requirements that are designed specifically to prevent or detect manipulation of
an index or its component securities.
SC2 Members
Response
Australian Securities and
Investments Commission
There are no specific provisions in the law that address index design or surveillance requirements.
Index Design Requirements
ASX Surveillance team provides feedback to ASX Business units when significant changes are proposed to derivative contracts.
Surveillance Requirements
ASX Surveillance has an electronic alerting system called SOMA. This system was designed to detect unusual price and
volume in all ASX traded securities. Reportable Positions is one other requirement of Surveillance. Surveillance also comments
on proposed rule changes or suggests rule changes.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
N.a.
Program trades must be designated as such when entered onto an equity exchange.
The policy regarding the capitalization market float and liquidity of the securities comprising the index aims at prevent market
manipulation. The Market Surveillance Division of the COB monitors trading in index derivatives and component securities,
with on a special attention around expiring dates.
There are no special index design or surveillance requirements that are designed specifically to prevent or detect manipulation
Bundesastalt fur
Finanzdienstleistungsaufsicht, of an index or its component securities. However, the regular anti-manipulation surveillance of the securities provides sufficient
protection.
Germany
Please refer to question 23.
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le Under the Market Rules, on the expiration days of future and option contracts on indexes and individual stocks, intermediaries
must enter the orders in the stock market (MTA) for the stocks included in the underlying index or for the stocks underlying
Societa e la Borsa, Italy
those contracts, al least twenty minutes before the end of the opening pre-auction phase. The above obligation must be fulfilled
only if the orders refer to the closing out of arbitrage strategies, volatility trading or hedging strategies.
On those same days, tighter price limits apply (±5%) in order to reduce price volatility. Moreover, the Exchange usually inform
the market, through special press releases, of the forthcoming event and of the possibility of price volatility in the opening
auction.
114
Financial Services Agency,
Japan
Securities Commission,
Malaysia
The FSA and the SESC watch carefully market situations to prevent or detect manipulation. Stock exchanges establishes selfregulatory rules regarding this matter, and the persons in charge of market observance check both derivative markets and the
underlying markets to find factitious tradings.
As a condition for the Securities Commission’s approval of the Malaysian Derivatives Exchange’s contracts, the exchange is
required to provide the commission with weekly reports as outlined in the answer to question 21. Also, see the response to
question 23.
Comision Nacional Bancaria
y de Valores, Mexico
Within the regulation applicable to the derivatives market, it is considered that those who intent to manipulate underlying prices
commit a serious trading fault.
It is also established that client-members’ agreements must settle that manipulation or simulation of prices are considered
serious faults and it provides the fines applicable to clients in case they manipulate or simulate futures prices.
The CNBV monitors online operations and unusual price movements of the securities that comprise the IPC, in order to detect
any manipulation.
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
No explicit requirements. Pls see Q14
The CNMV in order to prevent or detect manipulation of an index or its component securities assesses the possibilities of
arbitrage between the cash market and the derivatives market.
Finansinspektionen, Sweden
The Exchange’s routine monitoring procedure encompasses this manner of manipulation.
Swiss Federal Banking
Commission, Switzerland
Existing IMIS-Reports:
• Cross Trade Report which displays cross trades within the same member organisation
• Member Volume Time Report which displays volume and turnover information by member in time series
• Order History Report which provides the history of each order (trades, deletions etc)
• Order Book Replays
Commodity Futures Trading
Commission, USA
Section 2(a)(1)(D)(i)(VII) of the CEA requires that trading in a security futures product not be readily susceptible to
manipulation of the price of the security futures product, the price of any underlying security, option on such security, or option
on a group or index of including such securities. Rule 41.25 establishes requirements in this regard related to data reporting,
trading halts, position limits, and certain contract design features.
Paragraph (a) of rule 41.25 establishes requirements that are common to all security futures products, while paragraphs (b) and
(c) establish requirements for cash-settled and physical delivery contracts, respectively.
Paragraph (a)(1) of rule 41.25 requires designated contract markets and registered derivatives transaction execution facilities to
comply with Part 16 of the Commission’s regulations regarding the daily reporting of market data. Paragraph (a)(2) is reserved
for the establishment of rules providing for regulatory halts for trading in security futures products, which will be addressed in a
separate rulemaking. Paragraph (a)(3) requires designated contract markets and registered derivatives transaction execution
115
facilities to establish speculative position limits or position accountability rules for security futures products, generally based on
the average daily trading volume of the underlying security during the most recent six-month period.
Specifically, the Commission is requiring boards of trade to adopt speculative position limit or position accountability rules for
listed security futures. The level of the position limit and whether a position limit is required depends upon the trading activity
and capitalization of the security or securities underlying the security future. The speculative position limit level adopted by a
board of trade should be consistent with the obligation in section 2(a)(1)(D)(i)(VII) of the CEA that the designated contract
market or registered derivatives transaction execution facility maintain procedures to prevent manipulation of the price of the
security futures product and the underlying security or securities.
The position limit levels in rule 41.25 are set at levels comparable to the limits that currently apply to options on individual
securities. However, the position limit requirements for security futures differ from individual security option position limit
rules in several ways. In this regard, the limits would only apply to an expiring security futures contract during its five last
trading days. The Commission believes that it is during that time period that the potential for manipulation based on an
extraordinarily large futures position would most likely occur. Further, for security futures contracts based on a security that
has an average daily trading volume greater than 20 million shares, the Commission believes that the threat of manipulation is
sufficiently reduced such that an exchange could substitute a position accountability rule for a fixed position limit. Under such
a rule, a trader holding a position in a security future that exceeded a threshold level determined by the exchange ( e.g., no more
than 22,500 contracts of 100 shares) would agree to provide information to the exchange regarding that position and consent to
halt increasing the position if requested by the exchange.
Paragraph (b) of rule 41.25 relates to security futures products that are cash settled. This paragraph provides that the cashsettlement provisions of security futures products must be reliable and acceptable, reflect the price of the underlying security or
securities, and not be readily susceptible to manipulation
Paragraph (c) of rule 41.25 relates to security futures products that are settled by actual delivery of the underlying security or
securities. This paragraph provides that a board of trade must effect physical delivery through a clearing agency registered
pursuant to section 17A of the Exchange Act. This provision implements section 2(a)(1)(D)(i)(II) of the CEA, which requires
that, if a security futures product is not cash settled, the board of trade on which the product is traded must have arrangements in
place with such a clearing agency for payment and delivery of the underlying securities.
Surveillance –
As noted above (see response 19) Section 2(a)(1)(D)(i)(VIII) of the CEA requires designated contract markets and registered
derivatives transaction execution facilities on which security futures products are traded to coordinate surveillance with markets
that trade the underlying security or any related security, in order to detect manipulation and insider trading. This requirement
is implemented by paragraph (g) of rule 41.22.
Guideline 1 is either referred to for guidance in designing contracts that are consistent with the CEA for certification filings of
both broad-based and narrow based security futures products, or followed and documented explicitly when seeking Commission
approval. Guideline 1’s design criteria are intended to reduce susceptibility to manipulation, for example, by requiring a
demonstration that the cash settlement of the contract is at a price reflecting the underlying cash market, will not be subject to
manipulation or distortion, and must include an analysis of the price series upon which such settlement will be based, including
the series reliability, acceptability, public availability and timeliness, and an analysis of the potential for manipulation or
116
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
distortion of the cash-price series.
Index criteria establishing minimum requirements for index components generally are designed to address manipulation
concerns by ensuring that an index is comprised of highly-capitalized, actively-traded component securities, and that no one
security or group of securities dominates the index. These criteria include: (1) a minimum capitalization requirement for index
components; (2) a minimum trading volume requirement for index components; (3) concentration requirements limiting the
weight in the index of any single index component or group of index components; and (4) requirements establishing a minimum
number of index components. In addition, as discussed more fully above, surveillance sharing procedures between a market
trading an index derivative product and the market(s) that trade the component securities of the index play a critical role in
detecting and deterring potential inter-market manipulations.
In July 1990, an Inter-Markets Working Party was established between the LSE, LIFFE and LTOM(which subsequently merged
with LIFFE, in 1992) to examine the relationships between their markets with a view to reducing the potential for market
disruption and malpractice during the expiry of the FTSE 100 Index Futures and Options Contracts. The working Party
recommended a number of improvements, including enhanced arrangements for the monitoring of trading activity and
information-sharing between the exchanges around expiry. Furthermore, the Working Party proposed, among other things, that
the period for calculating the EDSP of the FTSE 100 contract and the related option contract should be extended from 10 to 20
minutes ; and the EDSP calculation period should be moved from the prevailing tome of 11.10a.m.-11.20 a.m. to an earlier time
in the morning when trading tends to be more active.
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VII.
Volatility
25. Please identify and describe any rules or procedures designed to address volatility in the index derivative product or the component
securities of the index.
SC2 Members
Response
Australian Securities and
Investments Commission
Neither ASX nor SFE have daily price limits or open position restrictions for their index products. To an extent regulators rely
on the Business Rules of each Exchange and the Corporations Act to ensure a fair and orderly market. ASX has Business Rule
2.2.4 (Prevention of Manipulative Trading). The focus has been on the expiry of contracts as this has been associated with more
volatility than other trading periods. ASX tends to take a hands-on role at the expiry by closely monitoring large positions
holders. The Corporations Act and the SFE Rules allow (as a last resort) the SFE to compel a large holder to take certain action.
The BM&F upper and lower volatility limits for all futures contracts, including those on the IBOVESPA. Currently limits are
10% both ways. The BOVESPA spot market, on the other hand, has a circuit breaker at a loss of 10% and another one at 15%
over the value of the index.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
The Rules of the Bourse de Montréal contain provisions relating to the daily price limit of each derivative instrument. The daily
price limit is based either on a percentage of the previous day’s settlement price or on the Circuit-Breaker Policy for Canadian
and American equity-based derivative instruments. The Circuit-Breaker Policy is applied in conjunction with the Toronto Stock
Exchange, which acts in coordination with the New York Stock Exchange following a significant decline in the Dow Jones
Industrial Average.
For derivatives products : there are no specific rules or procedures.
For cash products, there are two trading safeguards:
Volatility interruptions or extensions. If any order entered in the order book is bound to cause the price of any Security to cross
a de-fined threshold, Euronext may in continuous trading tempo-rarely suspend (“freeze”) automated execution of such orders,
for the portion which would be traded outside the threshold, or in auction trading extend the call phase of the auction, as the
case may be. The aforesaid thresholds may be determined by Euronext in reference to a static or dynamic reference price, as set
forth in one or more Notices. They may be defined as mere warning thresholds or as reservation thresholds.
- In continuous trading, the Member who entered the order that triggered the interruption shall be allowed a time window
to confirm the pending balance of its order. Absent such confirmation, such balance shall be cancelled. If the threshold
crossed is a mere warning threshold, continuous trading shall be resumed upon completion of this confirmation process.
If the threshold crossed is a reservation threshold, an auction shall be initiated before continuous trading is resumed.
- In auction mode trading, the volatility extension shall consist of a single limited extension in time of the relevant
auction’s call phase.
Other trading halts. Euronext may suspend trading in any Security in order to prevent or halt disorderly market conditions,
118
either on its own initiative, and in its sole discretion, or at the reasoned request of the relevant Issuer.
In addition, Euronext shall suspend trading in any Security upon the request of the COB or the CMF.
VIII. Index Rebalancing
As used in this questionnaire, the term “rebalancing” includes all changes or adjustments to the composition of an index
underlying a stock index derivative product and any other index used as a benchmark in investment strategies. These changes
include additions and deletions of index component securities, changes in the number of shares outstanding, float adjustments,
and other changes to an index.
(a) Rules and procedures designed to address volatility in the index derivative product:
Bundesastalt fur
Finanzdienstleistungsaufsicht,
The Board of Management of the options and futures exchange Eurex can set position limits in order to ensure orderly options
Germany
and futures trading and to avoid risks for the spot markets. Position limit means that one particular exchange participant or
customer may hold only a maximum number of contracts for his own account. An exchange participant may not for its own
account or for the account of any customer engage in any transactions at the exchange if there is any indication that, as a
consequence of such transactions, such exchange participants or its customer, whether alone or jointly with others, would hold
or control a total position in excess of the position limits set by the Board of Management.
(b) Rules and procedures designed to address volatility in the component securities:
If (at the end of the announcement phase) the potential execution price is outside one of the price ranges (inner price range)
determined by the Board of Management with respect to the reference prices, the price determination will be interrupted due to
volatility (volatility interruption) and the announcement phase extended for a limited period; the announcement phase shall end
when said period has expired. If, immediately prior to the end of the volatility interruption, the potential execution price is
outside an additional price range (middle price range) to be determined by the Board of Management with respect to the
reference price, the volatility interruption will only end at the order of the Board of Management. The Board of Management
may determine for all or specified securities a price range which is again extended compared to the middle price range (outer
price range) with respect to the reference price. If, upon expiry of a period to be determined by the Board of Management, the
potential execution price is outside the outer price range, the volatility interruption shall only end, if the potential execution
price (1) reaches or falls below the outer price range within a period of time to be determined by the Board of Management or
(2) is to be considered as being in line with market conditions on the basis of the criteria to be determined by the Board of
Management. Otherwise, no further prices shall be determined until the end of the Exchange day.
N.a.
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le The provisions referred to in the answer to question 24 have also been designed to prevent price volatility. Moreover, illiquid
stocks, which are more subject to price volatility, are not included in the indexes (see 14e).
Societa e la Borsa, Italy
119
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Stock exchanges have the rules of price limits and “circuit breaker”. When trading conditions of markets fall in abnormal
situations, the stock exchanges have the right to narrow price limits, restrict transactions, and limit new positions. As to
component stocks of stock index derivative products, stock exchanges have the rule of price limits and the right to narrow price
limits and conduct trading halts.
For the KLSE Composite index futures contract, there is a 20% limit on price movements up and down per trading session for
all contract months except the spot month contract. There is no price limit for the spot month contract. There is also no price
limit for the second month contract during the final five business days before expiration.
In addition there are daily upper and lower limits on the movement of individual underlying stock prices. Price movements are
limited to 30% limit up and down per trading session (each trading day has two: 9.30am–12.30pm, 2.30pm–5pm). In other
words, over the course of one trading day, prices could possibly rise or fall by 69%. (See
http://www.klse.com.my/website/trading/tradingsys.htm for further details.)
Comision Nacional Bancaria
y de Valores, Mexico
According to regulation and SRO’s rules, in case of volatility in the IPC, the Clearing house can make a margin call. In case the
money is not sent, the clearing house will close all contracts related to the client which did not cover the margin to support its
position.
Monetary Authority of
Singapore
There are daily price limits and cooling-off periods to moderate and calm panic reactions when market volatility reaches the
prescribed trigger levels.
Comision Nacional del
Mercado de Valores, Spain
On May 14th 2001 a new management of price changes for SIBE traded shares were introduced. This new management is based
on volatility auctions and on static and dynamic ranges. Volatility auctions can occur because of a break in the static range or
the dynamic range, which are calculated with the most recent historic volatility of shares. They are unique by share, taking into
account the specific features of each share on the basis of its most recent performance. These ranges are public and periodically
updated, adjusting to the new features that each share acquires. The static ranges define the maximum variation allowed
(symmetric) with regard to the static price and are expressed in percentage. The static price is the price set at the last auction
(assignment price). The dynamic ranges define the maximum variation allowed (symmetric) with regard to the dynamic price
and are expressed in percentage. The dynamic price is the price set at the last trade.
For derivatives based on indexes, Stockholmsbörsen AB calculates a scanning range for the respective index, just as is done by
Stockholmsbörsen AB for any other underlying instrument.
It is worth noting the following in connection with this approach:
i)
This method is a purely numerical one where a cumulative distribution is generated from historical, actual daily
price movements for each respective instrument over the prior 2 year period.
ii)
We use actual price movements expressed which are expressed in terms of percentage, not returns.
iii)
It is the absolute movements which is investigated. This leads to a symmetric interval, from which a risk parameter
, based on confidence level of 99.2% is calculated and in turn applied in the margining methodology of
Stockholmsbörsen AB . This methodology in turn is relied upon for the automatic daily and intra-day calculation of
Finansinspektionen, Sweden
120
iv)
appropriate levels of required security for the index trades of participants.
The parameters are reviewed and approved by the Stockholmsbörsen AB Risk Committee on a quarterly basis.
Swiss Federal Banking
Commission, Switzerland
Apart from the index weighting formula, no rules or procedures designed to address volatility in the index derivative product or
the component securities of the index exist.
Commodity Futures Trading
Commission, USA
The futures exchanges use circuit breakers, trading halts and price limits to address volatility. The final settlement price rule for
cash settled security futures is intended to reduce expiration related market swings.
Broad Based -- Circuit breaker price limits and trading halts are required. Price limits are set at 10%, 20%, and 30% of index
levels. Trading halts are based on NYSE circuit breaker declaration (when Dow Jones Industrial falls by 10%, 20%, or 30%).
CME rules state a trading halt in the futures contracts occurs if the contract is locked at the price limit and there is a trading halt
declared by NYSE.
Narrow based security futures -- Price limits are not required by law. Trading halts when there is a circuit breaker trading
halt declared or if there is a news-pending trading halt in the underlying stock. The final settlement price rule for cash settled
security futures is intended to reduce expiration related market swings. See response No. 20 for details concerning trading halts
and security futures products (CFTC rule 41.25), and response No. 15 regarding settlement rules.
Circuit breakers79 - Circuit breakers are brief, coordinated cross-market trading halts used by the stock, options, and index
futures markets to mitigate systemic stress when a severe one-day market drop of historic proportions prevents the financial
markets from operating in an orderly manner.80 The CFTC and SEC approved various exchanges' circuit breaker proposals in
response to the October 1987 market break to permit these brief, coordinated cross-market halts to provide opportunities during
a severe market decline to reestablish an equilibrium between buying and selling interests in an orderly fashion, and to help to
provide market participants with a reasonable opportunity to become aware of, and respond to, significant price movements.81
The coordinated cross-market trading halts provided by circuit breaker procedures are designed to operate only during
significant market declines and to substitute orderly, pre-planned halts for the ad hoc and destabilizing halts which can occur
when market liquidity is exhausted.82
The index futures exchanges have adopted circuit breaker halt procedures in conjunction with their price limit rules83 for index
products.84
Price limits - A price limit, in itself, does not halt trading in the futures, but prohibits trading at prices below the pre-set limit
during a price decline. Intraday price limits are removed at pre-set times during the trading session, such as ten minutes after
the thresholds are reached or at 3:30 p.m., whichever is earlier. Daily price limits remain in effect for the entire trading session.
Specific price limits are set for each broad-based stock index futures contract.
Final settlement rule – CFTC rule 41.25 (and Exchange Act rule 6h-1) require in part that the final settlement price for each
cash-settled security futures product fairly reflect the opening price of the underlying security or securities. Opening price
settlement procedures were adopted by exchanges to address the expiration-related strains on market liquidity which were
observed in the 1980s at a time when virtually all stock index futures and options used closing price settlement procedures. See
121
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
discussion of “expiration Friday” effects at 67 Federal Register 36740, 36741 (May 24, 2002).
Measures in the U.S. markets designed to address volatility in index derivative products or the component securities of an index
include circuit breakers, trading halts, and opening price settlement requirements.
Circuit breakers: Circuit breakers are brief, coordinated cross-market trading halts used by the stock, options, and index futures
markets to mitigate systemic stress when a severe one-day drop of historic proportions prevents the financial markets from
operating in an orderly manner. The CFTC and the SEC approved various exchanges’ circuit breaker proposals in response to
the October 1987 market break to permit these brief, coordinated cross-market halts to provide opportunities during a severe
market decline to reestablish an equilibrium between buying and selling interests in an orderly fashion, and to help provide
market participants with a reasonable opportunity to become aware of, and respond to, significant price movements. The
coordinated cross-market trading halts provided by the circuit breaker procedures are designed to operate only during significant
market declines and to substitute orderly, pre-planned halts for the ad hoc and destabilizing halts which can occur when market
liquidity is exhausted. Currently, all U.S. stock exchanges, the NASD, and the options markets have adopted rules or policies to
implement coordinated circuit breaker halts. In addition, the U.S. index futures exchanges have adopted circuit breaker halt
procedures in conjunction with their price limit rules for index products.
Trading halts: The U.S. options markets have adopted rules establishing trading halts for index options when, for example, a
certain percentage of the index’s component securities cease trading, or if a trading halt is appropriate in the interests of a fair
and orderly market and to protect investors. The CFTC and the SEC recently adopted rules requiring markets that trade security
futures products based on narrow-based indexes to halt trading in the security futures product when a regulatory halt85 has been
instituted for securities comprising 50% or more of the market capitalization of the underlying index.
Opening price settlement: The use of opening prices to calculate the settlement value of cash-settled index derivative products
may reduce the volatility associated with the expiration of index derivative products by improving the ability of markets to
alleviate and accommodate large and potentially destabilizing order imbalances associated with the unwinding of index-related
positions. For example, opening price settlement may facilitate the development of contra-side interest to alleviate order
imbalances in underlying markets because market participants providing contra-side interest will have the remainder of the day
to liquidate or trade out of their positions and will not necessarily assume overnight or weekend positions. In addition, if
opening price settlement results in significant change in underlying stock prices, market participants will have the remainder of
the trading day to adjust to those price movements and to determine whether those movements reflect changes in fundamental
values or short-term supply/demand considerations.
Most index options traded in the U.S. use opening price settlement procedures. In addition, as described more fully in the
response to Question 16, the CFTC and the SEC recently adopted rules requiring the final settlement price of a cash-settled
security futures product to fairly reflect the opening price of the underlying securities.
The main controls on volatility in the UK arise from exchange’s automatic trading halts in the underlying securities. London
Stock exchange processes provide for (5-minute) trading halts in order-book securities where the next trade would otherwise
execute more than 5% away from the previous trade.
LIFFE has formal measures for suspending trading in its contracts where the orderliness of the market is threatened. One
instance of this could be the suspension of trading of the underlying but a suspension would not be implemented in the case of
volatile market conditions. However, /LIFFE CONNECT trading system employs automated price limits for all of its products
122
which, pout simply, rejects orders submitted outside a ‘sleeve’ either side of the fair value of the contract.
123
VIII.
Index Rebalancing86
26. Please identify the entity that establishes criteria for rebalancing indexes.
SC2 Members
Response
Australian Securities and
Investments Commission
S&P Australian Index Committee reviews the indices on a quarterly or on an as needs basis when significant corporate events
occur. Quarterly reviews analyse the previous six months market capitalization and liquidity for all companies, which may
result in index deletions, additions and changes to liquidity factors.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
BOVESPA.
The S&P/TSX Index Policy Committee is responsible for setting policy and determining index composition for the S&P
Canadian indices. STOXX Limited and Standard & Poor’s respectively construct and maintain the Dow Jones EURO STOXX
and the Standard & Poor’s indices.
Underlying
CAC40
DAX30 performance
DJ Euro Stoxx 50SM
DJ Stoxx 50SM
DJ Stoxx SM Auto
DJ Stoxx SM 600 Bank
DJ Stoxx SM 600 Energy
DJ Stoxx SM 600 Healthcare
DJ Stoxx SM Media
Entity
Conseil scientifique
des indices
(Indexes
Scientific
Committee)
DBAG’s board of
management
DJ Stoxx
Committee
Comments
- Upon proposal of Euronext index team, this
independent
body
validates
any
modifications of the rules/composition of the
index
Recommendations/advices
by
an
independent Working Committee but all
decisions regarding composition/changes of
the index is the sole responsibility of
DBAG’s board of management
- Any criteria for rebalancing Stoxx indexes
Advisory
is written in the rule book downloadable on
www.stoxx.com.
- Upon proposal from the Index Design
Committee (Stoxx working group) to the
Advisory
Committee,
any
update/modification is validated by Stoxx.
124
DJ Stoxx SM Pharma
DJ Stoxx SM Retail
DJ Stoxx SM 600 Technology
DJ Stoxx SM 600 Telecom
DJ Euro Stoxx SM Bank
DJ Euro Stoxx SM Energy
DJ Euro Stoxx SM Healthcare
DJ Euro Stoxx SM Technology
DJ Euro Stoxx SM Telecom
Dow Jones Industrial Average
Wall Street Journal
(WSJ)
Nasdaq
Senior
Managements
Index Committee
Components are selected at the discretion of
the WSJ editors
Nasdaq 100
Objectives rules can only be modified by
them
Nikkei 225 average
Closed group of academics and professionals
formed to review it
S&P500 composite
S&P Index Committee S&P Internal Working group
The entity that establishes the criteria for rebalancing the relevant German indices is Deutsche Börse AG.
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
The index calculation agencies.
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le Rebalancing criteria are set out by Borsa Italiana S.p.a. for the indexes underlying derivative products traded on the Italian
market. On the other hand, the re-shuffling criteria relating to indexes underlying related products (i.e. covered warrants) that
Societa e la Borsa, Italy
are based on foreign stocks are set by the relevant foreign entities.
Financial Services Agency,
Japan
Calculators of each index set rules for rebalancing. (see 6.)
--- Tokyo Stock Exchange, Nihon Keizai Shimbun, Inc(Nikkei), Standard & Poors,
Dow Jones & Company Inc, Morgan Stanley, FTSE International Limited
Securities Commission,
Malaysia
The index sub-committee of the Kuala Lumpur Stock Exchange (KLSE) is responsible for the construction and establishment of
new indices as directed by the KLSE (management) Committee. There are guidelines for selection criteria and for methodology
of index construction. The sub-committee, which has representation from the fund management industry, futures industry and
academia, meets every quarter to review index components.
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
The BMV is the entity that establishes that criteria.
The entity responsible is the index provider.
125
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
The Sociedad de Bolsas is the entity that establishes criteria for rebalancing indexes.
The index calculator. There are specific rules in the index recalculation rulebook prescribing how the rebalancing should be
performed
SWX Index team after consultation of the Index commission.
The owner or developer of the stock index. See SEC response.
Although an SRO may establish rebalancing requirements (e.g., the requirement in the Index Option Criteria and the Index
Warrant Criteria that an equal-dollar index must be rebalanced at least once every calendar quarter), the entity that develops and
maintains the index generally specifies the details of the rebalancing process. However, in reviewing a proposal to list an index
option or warrant, the SEC considers, among other things, whether the entity that maintains the index will provide adequate
notice of proposed changes to the index, including additions or deletions of index components, and whether there are clearly
articulated and non-arbitrary guidelines for deleting index components and selecting their replacements.
FTSE International is responsible in respect of UK securities indices.
126
27. Please identify any market or regulatory requirements that address index rebalancings, including requirements regarding advance
announcements of index changes.
SC2 Members
Response
Australian Securities and
Investments Commission
There are no provisions in the Corporations Act 2001 or the Corporations Regulations 2001, which address index rebalancings.
Quarterly reviews occur at the end of February, May, August and November, with announcements of changes made on the 15th
of March, June, September and December. Changes are effective on the first business day of the following quarter.
Intra-quarter changes of deletions and additions are made five business days in advance. Changes to liquidity factors as a result
of corporate actions are announced as soon as practicable.
Index methodology is public, so anyone can calculate in advance the new index portfolio, which is rebalanced every 4 months.
BOVESPA publishes a preview a month before the rebalancing and a new one a week before.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
There are no market or regulatory requirements that address index rebalancings. However, the S&P/TSX Index Policy
Committee sets the following rules for index rebalancing:
All shares are updated on a quarterly basis. Any changes causing a constituent's weight to change more than 0.05% will be
implemented when they occur. Announcement of new additions or deletions due to rebalancing are generally announced one
month in advance by way of a news release posted on recognized international wire services.
The Dow Jones EURO STOXX 50 index composition is reviewed annually in September while weights are reviewed quarterly.
Commission des Operations
de Bourse, France
-
Any requirements regarding the timing of index rebalancings are usually written in the index rules book;
Announcements are made after the primary markets close;
Index rebalancings are done at the closing.
Underlying
CAC40
DAX30 performance
DJ Euro Stoxx 50SM
DJ Stoxx 50SM
DJ Stoxx SM Auto
DJ Stoxx SM 600 Bank
DJ Stoxx SM 600 Energy
DJ Stoxx SM 600 Healthcare
Corporate actions
Quarterly review
Annually review
Corporate actions
Annually review
Effective date
(T = announcement date)
T+2 (Euronext notice)
T+1month (press release)
T+6 weeks
T + 2 (press release)
T+1month (press release)
Corporate actions
Quarterly review
T + 2 (press release)
T+1month (press release)
Review
127
DJ Stoxx SM Media
DJ Stoxx SM Pharma
DJ Stoxx SM Retail
DJ Stoxx SM 600 Technology
DJ Stoxx SM 600 Telecom
DJ Euro Stoxx SM Bank
DJ Euro Stoxx SM Energy
DJ Euro Stoxx SM Healthcare
DJ Euro Stoxx SM Technology
DJ Euro Stoxx SM Telecom
Dow Jones Industrial Average
Nasdaq 100
Nikkei 225 average
Exceptional
-
Ongoing
1 to 2 weeks (press release + newspaper
INN)
S&P500 composite
Quarterly review
At least 1 or 2 days before
Index rebalancings are carried out either regularly on fixed dates, or outside the usual schedule in case of particular importance.
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Regular adjustment:
Germany
Regular adjustments are made on a quarterly, half-yearly or yearly basis depending on the respective index, i.e. once every year
in September for the DAX, every six months in March and September for the MDAX and the DAX 100, each quarter in March,
June, September and December for the SDAX and the NEMAX 50.
About 6 weeks before the regular adjustments are carried out, the indices are examined and as a result, additional information is
announced with the monthly ranking list, e.g. per the end of July for the September changing date. On the basis of this
information together with the ranking list, the rebalancing of the indices is predictable.
The “35/35 rule“ for the DAX and the “110/110 rule“ for the MDAX (and thus for the DAX 100) are relevant for the regular
adjustment procedures. The “110/110 rule“ is also relevant for the SDAX selection list, whereas the “60/60 rule“ can be applied
to the NEMAX. As of June 2002 the “60/60 rule” will be applied to the SDAX.
These rules signify that a company
• can be admitted to an index if it fulfills the following conditions:
turnover ranking
≤ 35 (110 or 60) and
market capitalization ranking ≤ 35 (110 or 60)
• can be removed from the index if it fulfills the following conditions:
turnover ranking
> 35 (110 or 60) or
market capitalization ranking > 35 (110 or 60).
Changes to the composition of companies can be made even if only one of these conditions is fulfilled.
Unscheduled adjustment:
128
There are additional rules for changes in those section indices which are not adjusted on a quarterly basis (DAX, MDAX and
thus also DAX 100), which are analogous to the rules for regular examination. They apply, however, only in exceptional cases,
in particular to large issues which should be reflected in the indices relatively soon after they occur (“fast-entry rule“).
In the DAX this is the “25/25 rule“, in the MDAX the “70/70 rule.“ Under the rules, a company can be admitted to the index on
chaining date, not only on the regular dates, if the following applies:
Turnover ranking ≤ 25 (70) and market capitalization ranking ≤ 25 (70).
As regards such cases, the Working Committee on Equity Indices gives a recommendation as to whether a company should be
substituted because of its place in the ranking list and the other criteria, and if so, with which other company.
Irrespective of this fast-entry rule, unscheduled adjustments to the index composition are also carried out under exceptional
circumstances, e.g. in the case of mergers or insolvency. For such cases, the Working Committee on Equity Indices
recommends a suitable replacement candidate on the basis of the aforementioned criteria.
Securities and Futures
Commission, Hong-Kong
Currently, there are no market or regulatory requirements that address index rebalancing. However, in general, index
calculation agencies will disclose their rebalancing criteria to the market, and provide advance announcements of any index
changes.
Though not required by law, in general index calculation agencies will inform the HKSFC of their intention for rebalancing.
Commissione Nazionale per le Stock selection has to take into account the liquidity and the capitalization of eligible stocks. To this aim, in calculating the
ratio (ILC) for each eligible stock, Borsa Italiana S.p.a. considers both their liquidity and capitalization. Only stocks with a high
Societa e la Borsa, Italy
ILC value are included in the index.
It is also required that extraordinary indexes revisions has to be promptly communicated to the market.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
There are no law and rule of stock exchanges regarding rebalancing and announcements of index changes. On the other hand,
calculators set internal rules to announce index changes 6 days before the changes.
None.
Monetary Authority of
Singapore
Advance announcements are given by index providers in accordance with their announcement policies, and SGX will also
inform and remind its members of such announcements.
Comision Nacional del
Mercado de Valores, Spain
The rebalancings of the IBEX-35 resulting from ordinary reviews (every six months) are announced with about one month in
advance.
Also, the IBEX-35 Index is adjusted whenever one of the companies included therein:
The BMV establishes different criteria for rebalancing the IPC. For example, if for any reason some issuer cancels its
registration in the BMV, its shares will be changed for others whose marketability and capitalization value are similar to those
of the canceled shares.
129
- carries out a capital increase with preferential subscription rights. Such adjustments are effective from the day on which
the shares begin to be quoted without any subscription right on the SIBE.
- reduces its capital by canceling shares. Such adjustments are effective or on the day the shares are excluded from the
SIBE.
- reduces the par value of its shares and distributes the resulting amount to the shareholders. Such adjustments are
effective on the day the amount distributed to the shareholders is discounted in the SIBE.
- carries out a share split or a regrouping of shares by altering the par value of its shares. Such adjustments are effective on
the day the transaction is discounted in the SIBE.
- In the event of mergers and absorptions in which the absorbing company is included in the IBEX-35 Index and the
absorbed company is not, the Index is adjusted considering the transaction, where applicable, as a capital increase.
Where the absorbing company is not include in the Index and the absorbed company is, unless otherwise decided by the
Technical Advisory Committee, the Index is adjusted on the date of the absorption to exclude the capitalization of the
absorbed company and include the capitalization of the next most liquid security in the opinion of the Committee.
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
All these adjustments are communicated to the public in advance but there are no specific requirements regarding it.
The OMX index was created during 1986 and implemented 1/10 1986. The OMX has formed the standard for derivatives index
in Sweden. Early announcements of new constituents have always been included in the recalculation rulebook.
Please check Index rules published on the SWX website; the rebalancing is addressed with the following clauses:
2.
Operative Adjustments
2.1
Adjustment of total number of outstanding securities
2.2
Adjustment of the divisor
2.3
Treatment of dividends in SMI® / SMIC
3.
Periodic Adjustment of Securities Basket Composition
3.1
Number of issues
3.2
Ensuring continuity
3.3
Inclusion criteria
3.3.1 Basic requirements
3.3.2 Minimum capitalisation
3.3.3 Liquidity
3.3.4 Computation of ranking and determination of SMI® candidates
3.4
Elimination criteria
3.5
Adjustments outside of established review and acceptance period
No CFTC requirements. See SEC response
See response to Question 26 regarding the establishment of rebalancing criteria.
130
Financial Services Authority,
United Kingdom
No specific regulation. Index providers announce changes to index members or index weightings a number of days in advance
of the changes being implemented.
131
28. Please indicate any requirements regarding the timing of index rebalancings.
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le
Societa e la Borsa, Italy
See Q.27
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Some calculators of the index periodically change component stocks. Other calculators do not change them periodically.
However, both calculators exclude delisted stocks from the indices and rebalance the indices at the timing of the dilisting.
All changes to index composition are announced to the press and posted on the KLSE website at least two weeks before they
take effect. However, one month’s notice is usually given.
Comision Nacional Bancaria
y de Valores, Mexico
Up to now, BMV has rebalanced IPC every 6 months, but starting July 1st, 2002, the index will be rebalanced once a year and
the calculation will exclude dividend payments.
Monetary Authority of
Singapore
Comision Nacional del
This is determined by the index providers in accordance with their policy.
See previous answer.
See response to question 27.
Please refer to the previous table.
See above.
No requirements exist regarding the timing of index rebalancing.
The composition of stock indexes is updated twice a year, in March and in September (ordinary revisions). Extraordinary
revisions may be carried out when a constituent stock is delisted or suspended for more than ten consecutive trading days, or its
level of liquidity or capitalization is significantly reduced. The Exchange may evaluate the opportunity to include in the index
new listed shares if it considers their liquidity and capitalization significant (see also 14f)
The control period for the securities contained in the IBEX-35 is, for ordinary reviews, the six-month interval beginning with
132
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
the seventh month prior to the start of the calendar half-year period. With respect to extraordinary reviews, the control period is
that decided by the Technical Advisory Committee at that time.
The index calculator announces the new constituents at least 3 weeks prior to the rebalancing.
Regular and extraordinary changes based on the Index rules as mentioned above.
No CFTC requirements. See SEC response
The entity that develops and maintains an index generally determines the timing of index rebalancings although, as discussed
above, the Index Option Criteria and the Index Warrant Criteria, which are SRO rules, require that an equal dollar-weighted
index be rebalanced at least once every calendar quarter.
No specific regulation.
133
29. Please describe any laws, regulations, guidelines, or rules (including SRO/market rules) that address confidentiality concerns with respect to
changes in the design or components of an index (e.g., prohibitions on disclosure of non-public information concerning impending changes
to the index or trading restrictions imposed on persons with non-public information regarding additions or deletions of component
securities).
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le
Societa e la Borsa, Italy
Laws govern trading of derivative products and component securities, not concerned with index formation or changes.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
N.a.
We have no specific prohibitions relating to indices. General prohibitions against disclosure of material, confidential (inside)
information apply.
Please refer to the previous table.
Not applicable.
N.a
Index calculation and revision methodology is public and, even if some discretion is left to the Exchange, anyone may predict
new index composition. However, due to the impact that the inclusion or exclusion of stocks may have on volumes and prices,
information on rebalancing is considered price sensitive information and, as such, has to be disclosed to the public (at least
15/20 days in advance of its coming into effect), in order to prevent insiders to misuse confidential price sensitive information.
Dissemination to the public of the new composition of the index cannot take place during the trading hours.
Directors and employees of stock exchanges shall not divulge nor make surreptitious use of confidential information that the
persons have come to know in connection with their business (SEL Article79-11). Calculators also set internal rules for keeping
confidentiality of such information.
None.
There are no such requirements.
134
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
There are no explicit laws or regulation concerning changes in the design or components of a stock index.
Swiss Federal Banking
Commission, Switzerland
There are no specific rules. The usual requirements regarding keeping business secrecy apply.
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
No explicit rules.
Financial Services Authority,
United Kingdom
The decisions of the Technical Advisory Committee are confidential until they are made public through the correspondent
announcement.
The rules covering the procedure for rebalancing are stated in the rulebook and fully disclosed.
Entities that develop and maintain indexes have adopted policies prohibiting the use of material non-public information
concerning index changes. In reviewing a proposal to list options or warrants on an index, the SEC considers whether the entity
that developed and maintains the index has adopted information barriers designed to address the unauthorized transfer and
misuse of material non-public information, including procedures designed to prevent the misuse of material non-public
information regarding changes in the component stocks of an index. In addition, the Index Option Criteria and Index Warrant
Criteria, which are SRO rules, require, among other things, that a broker-dealer that maintains an index establish a firewall
around its personnel who have access to information concerning changes in and adjustments to the index. An entity that
develops and maintains an index also may impose restrictions on its employees with regard to the trading of index components
or the trading of products whose value is derived from the index.
The FSA’s Code of Market Conduct specifically cites changes to the constituents of a securities index comprising securities that
are qualifying investments (i.e. traded on a UK exchange) as ‘announceable information’ and within the scope of the
information abuse provisions of the Code.
135
30. Please indicate whether you have observed any price impact resulting from index rebalancings. Were there short term or long term effects?
SC2 Members
Response
Australian Securities and
Investments Commission
In the Australian market, short term price impact is apparent. For stocks which are to join the index, price increases are
experienced, whilst for stocks which are to be removed, downward price pressure is observed.
Brazilian Securities
Commission, CVM
There was one instance when the Telebras stock (main telecom company before the sector reform and privatizations) left the
index, but no long term impact.
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
There is evidence of volatility around index rebalancing but the effects are generally short term.
We usually do not observe important price changes during the rebalance period but an increase of turnover.
The conclusion of a Case Study conducted in 1995 on this issue87 was the following. Impact of index rebalancing:
- Long term performance: No
(economical characteristics weights more than being an index component)
- Short term performance: Yes
- recovering period: 7 weeks (on average, it takes 7 weeks for economical characteristics to compensate an index
announcement for a stock)
- More price impact on the announcement date than on the effective date
“out of the index” announcements have more impact than “in the index” announcements.
No reliable material available: so far rebalancing did not have price impact that required supervisory action.
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
During the time of rebalancing, the market may experience higher turnover and volatility in the short-term. In general, no
Securities and Futures
significant price impact resulting from the rebalancing was observed.
Commission, Hong-Kong
Commissione Nazionale per le Price impacts on the constituent stock prices have been observed in connection with Domestic indexes rebalancing usually have
short term impact on index constituent stock price: although trading volumes normally increase considerably, only small
Societa e la Borsa, Italy
impacts on short-term volatility can be recorded.
On the other hand, foreign indexes rebalancing have risen concern for their impact on domestic markets (i.e. MSCI indexes
136
rebalancing of November 2001, where a huge number of Italian stocks were affected by price volatility on the last minutes of
the trading session). In fact, in this case any decisions concerning the methodology of the reshuffle is taken by a foreign
calculation agent, and neither the domestic competent authorities nor the markets has any possibilities to coordinate their actions
with them. Nor have they any possibility to adopt effective measures to reduce prices volatility.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
--No significant impact on indices have been recorded. However, the Kuala Lumpur Stock Exchange has studied the impact on
the daily returns of nine component securities that were removed from and 11 that were included in the KLSE Composite index
during 2000–2001. (The stock returns (log price-differences) were market-adjusted, ie, less the return of KLSE CI).
Component stocks removed from the KLSE CI showed negative cumulative average returns of –5.3% from the announcement
date to the date of their removal. They registered negative cumulative average returns of –3% over the 10 days after removal,
but posted positive cumulative average gains of 2.3% in the 20 days following their removal. On the day they were removed,
these stocks registered average returns of –3%.
Stocks added to the KLSE CI showed positive cumulative average returns of 2.3% from the announcement date to the inclusion
date. Subsequently, these stocks registered cumulative negative average returns of –2.3% over 10 days and –2.1% over 20 days
after being included in the index. This particular results differ from some studies of regional markets. These stocks registered
average returns of 0.2% on the date of inclusion.
Comision Nacional Bancaria
y de Valores, Mexico
No significant price impact has resulted from index rebalances because:
a. It is only rebalanced every 6 months. (From July 1st on, it will be once a year)
b. The issuers that compose the index do not change much and the ones that are eliminated from it, have less weight on the
index because they have the lowest market value.
c. The stock index future does not operate much.
Monetary Authority of
Singapore
In the short term, rebalancing may result in price volatilities. We have not observed any significant long term impact on
volatility.
Comision Nacional del
Mercado de Valores, Spain
Yes. The CNMV has observed price impact resulting from index rebalancing. The effects on the prices are short term and not
very significant because the rebalancings, normally, affects the securities with fewer capitalization and less liquidity in the
market. For example, a greater impact has been observed when a security is excluded from the Index as a consequence of a
takeover bid.
No.
No relevant impacts observed.
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
The CFTC has not observed any adverse price impact from rebalancing of indexes. Adjustments to indexes are such that the
index level is unchanged due to an adjustment of the index divisor.
137
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
The rebalancing of an index may have a short-term effect on the underlying index components because funds that track the
index must purchase securities that are added to the index and sell components that are deleted from the index to ensure that
they continue to track the index.
Index rebalancing and changes in index composition tend normally have some impact on the prices of the securities most
directly affected. We have not studied this scientifically.
138
31. Please describe any requirements that address potential price impacts resulting from index rebalancings.
SC2 Members
Response
Australian Securities and
Investments Commission
There are no specific requirements that address potential price impact as a result of index rebalancing, however see Q.22, 23
and 25 for component securities and index/product design.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
CVM surveillance.
We are not aware of any such requirements.
There are no requirements.
Bundesastalt fur
If any changes are made in the calculation of the underlying index or its composition or weighting such that the concept of the
Finanzdienstleistungsaufsicht, underlying index appears to be no longer comparable with the concept that applied when a futures contract was admitted to
trading, the Boards of Management of the Eurex Exchange may order the termination of trading in such contract as of the last
Germany
trading day prior to the change in the underlying index. Open positions shall be settled in cash upon the termination of trading.
The final value of the underlying index, calculated on the basis of the auction prices for the securities included in the underlying
index as fixed by the electronic trading system of the Frankfurt Stock Exchange (Xetra) during an intra-day auction determined
by the Boards of Management of the Eurex Exchange, shall be used.
N.a
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le On the index rebalancing date, tighter price limits apply (±5% instead of the ordinary ±10%) to reduce price volatility.
Moreover, the Exchange informs the market, through special press releases, of the forthcoming event and of the possibility of
Societa e la Borsa, Italy
price volatility in the opening auction.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
None.
None.
There are no requirements, because there are no significant price impacts.
139
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
International index providers are aware of the potential price impacts from rebalancings for both investors in the securities as
well as users of the derivatives product. It is in their own business interest to ensure that they provide ample notice and
introduce major changes in phases.
There are no requirements regarding this point.
New constituents are announced at least 3 weeks ahead of any rebalancing. Old and new constituents are exiting and entering
into the index based on VWAP(Volume Weighted Average Price).
None.
Because the CFTC has not identified any market problems that would warrant special rules, it has not adopted any requirements
to specifically address rebalancing. Existing market surveillance procedures, price limits and circuit breakers as well as general
authority by the futures exchanges and CFTC to halt trading could address any market situations caused by rebalancing.
There are no requirements specifically designed to address potential price impacts resulting from index rebalancings.
There are no specific requirements. But impact should be controlled by the advance notice provided of intended changes and by
exchange provisions, through automatic trading halts, to prevent excessive volatility.
140
IX.
Proposed Changes
32. Please describe any proposed changes in your jurisdiction to the current listing standards for stock index derivative products.
SC2 Members
Response
Australian Securities and
Investments Commission
There are no corporate law changes proposed in relation to the listing standards for stock index derivative products.
ASIC is not aware of any changes proposed by ASX or SFE in relation to their products.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
N.a.
At the moment, there are no proposed changes to the current standards for stock index derivative products.
No changes proposed.
No changes are proposed.
Chapter 15A of the Listing Rules of the SEHK are currently under review (which covers derivatives warrants only) and the
amended Chapter 15A will come into effect on July 1st, 2002.
Effective July 1st 2002, the amended Chapter 15A of the Listing Rules will be extended to cover all structured products
including other stock index derivative products. In general, an applicant is required to obtain the SEHK’s clearance as to its
suitability and the suitability of the derivative warrant for listing before the launch of the warrant. After receiving SEHK’s
clearance, a formal announcement stating the terms and conditions of the product has to be published in newspapers to inform
the public about the offer. Afterwards, the applicant should submit a listing document and list of placees to the SEHK for
approval.
Commissione Nazionale per le No proposed changes at present.
Societa e la Borsa, Italy
None.
Financial Services Agency,
Japan
None.
Securities Commission,
Malaysia
141
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
There are no proposed changes.
There are no proposed changes.
No listing standards for stock index derivatives products are planned to be amended in the near future.
There are none.
None.
None.
SROs may submit proposed rule changes to the SEC at any time to list new stock index derivative products. For example, the
SEC currently is reviewing SRO proposals to list: (1) index options that will not have a strike price when they begin trading;
(2) index options that may have a maximum term of 10 years; and (3) index warrants whose value at expiration will be based
upon the performance of a designated stock, basket, or index against a benchmark stock, basket, or index.
No changes currently planned.
142
33. Please describe any proposed changes in your jurisdiction relating to index rebalancings.
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le
Societa e la Borsa, Italy
There are no corporate law changes proposed in relation to index rebalancing.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
None.
N.a.
The TSX is considering a market-on-close facility that would help reduce volatility at the close and therefore reduce some of the
impact of index rebalancing.
No changes are proposed.
No changes are proposed.
N.a.
Borsa Italiana S.p.a. and Standard&Poor’s have announced plans to launch a new index for the Italian equity market, the
S&P/MIB 45. The new index will cover approximately 80% of Italy's market capitalization. Moreover it will be free-float
adjusted and have the Global Industry Classification Standard (GICS) applied to each of its constituent equities.
None.
As mentioned before, starting July 1st, 2002, IPC will be calculated once a year, excluding dividend payments.
As stated in Q29, there are no rules relating to index rebalancings currently.
No proposed changes. But the CNMV is interested in making public any index rebalancings not only among the brokers/dealers
but also among the investors.
With effect from July 1, 2002: Changes in the Stockholmsbörsen Benchmark Index – SBX. Industry target criteria for selection
is changed from 80 to 85 percent: Within each Industry Group, the election of securities according to ordering the highest free
143
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
float-adjusted market cap first, until at least 85 percent of the industry-Group´s free float-adjusted market cap is reached.
The free float ranges is changed to: Securities with a free float greater than 15 percent will be included in the SBX index with an
inclusion factor equal to their actual free float (one decimal), rounded up to the closest 5 percent. Securities with a free float
less than 15 percent will be included in the index with an inclusion factor to their actual free float, rounded down to closest 1
percent.
None.
None.
No regulatory changes relating to index rebalancings are proposed.
No changes currently planned.
144
34. Please describe any surveillance problems or concerns you have regarding foreign or domestic inter-market coordination related to stock
index derivative products.
SC2 Members
Response
Australian Securities and
Investments Commission
There have not been any coordination problems with other regulated markets.
In the ASX's view, the over-the-counter (OTC) index swaps and OTC index products are an important part of the market.
However, in this market it appears to be more difficult to ascertain whether surveillance problems/concerns exist.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
N.a.
We have no particular surveillance problems or concerns regarding foreign or domestic inter-market coordination related to
stock index derivative products.
No changes are proposed.
No changes are proposed.
•
•
•
•
•
•
The omnibus accounts
Verification of LOP
Late reporting of LOP
Classification of the groupings of clients
Errors in reporting of LOP
Global booking of LOP instead of local booking
Commissione Nazionale per le Only future and option contracts on domestic indexes are traded on the Italian derivative market; therefore the Italian markets
have never faced any problem of coordination with foreign markets. Due to their relatively poor liquidity (if compared to that of
Societa e la Borsa, Italy
futures and options), covered warrant on foreign indexes currently traded in Italy have never caused any problem.
However, the need for closer coordination between market authorities will be taken into consideration if derivatives on foreign
indexes are launched in the future in Italy, liquidity of foreign indexes related products increases or trading on derivatives
contracts on Italian indexes on foreign exchange becomes considerable.
Financial Services Agency,
The FSA has the view that intensifying information exchanges between foreign exchanges and domestic exchanges is
145
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
Financial Services Authority,
United Kingdom
important. Domestic exchanges plan to have more MOUs with foreign exchanges for this purpose.
None.
There are no surveillance problems.
SGX-DT has agreements in place with foreign exchanges where the underlying stocks of our foreign stock index futures are
listed. They stipulate that whenever trading in the “home” exchange is suspended (for any reason eg public holiday, natural
disaster), SGX-DT will also suspend trading in the relevant contact.
No surveillance problems or concerns.
No specific problems exist at present.
Interexchange Supervision Systems – for example between virt-x and Eurex – are missing. Being existent they would facilitate
to investigate for example in hedge transactions between stocks and stock options or index futures.
None.
Generally, in reviewing a stock index option, the SEC considers whether there is a comprehensive information sharing
agreement between the derivatives exchange and the exchange(s) trading the underlying component securities of the index. The
SEC believes that such agreements play a critical role in detecting and deterring manipulation by facilitating the sharing of
regulatory, surveillance, and other information needed to fully investigate a potential manipulation. In the context of security
futures products, the SEC and the CFTC believe that the agencies’ recent interpretation of the CFMA’s coordinated surveillance
requirement, described more fully in the response to Question 19, should help to address concerns regarding surveillance of
trading in security futures products.
No problems or concerns.
146
35. Please describe any proposed changes in your jurisdiction related to the surveillance of stock index derivative products, including changes
relating to domestic or foreign inter-market or cross-border coordination.
SC2 Members
Response
Australian Securities and
Investments Commission
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
There are no corporate law changes proposed in relation to surveillance of stock index derivative products.
N.a.
At the moment, there are no proposed changes related to the surveillance of stock index derivative products.
No changes are proposed.
No changes are proposed.
The HKSFC is proposing changes to address the problems in question 34, including the design of an alert system for real time
monitoring of HSI futures and options.
Currently, the HKSFC could not conduct real time monitoring of the futures and options contracts traded on the HKFE. The
SMART System (which is the surveillance system for the cash market) will be modified and upgraded to provide the function
for real time monitoring of the futures and options contracts traded on the HKFE.
Apart from that, the HKEx is in the process of designing a Common Risk Management System (CRMS) which will link the
clearing systems of the cash and futures markets together and provide a function for overall assessment of the risk in the cash
and futures markets.
Commissione Nazionale per le No proposed changes at present.
Societa e la Borsa, Italy
None.
Financial Services Agency,
Japan
None.
Securities Commission,
Malaysia
Comision Nacional Bancaria There are no proposed changes.
y de Valores, Mexico
The MAS has concluded a number of information sharing MOUs and will continue to actively pursue MOUs with various
Monetary Authority of
147
Singapore
regulators to strengthen cross-border co-ordination. One of the objectives of such MOUs is to facilitate investigations of
suspected inter-jurisdiction market misconduct.
Comision Nacional del
Mercado de Valores, Spain
Most of the problems related to stock index derivatives (mostly, manipulation attempts of spot closing prices) came from Over
The Counter (OTC) products, while derivatives traded on regulated exchanges haven’t generated significant regulatory and
supervision concerns. Exchange of information between the Spanish supervised markets and the CNMV increases close to the
expiration settlement dates, although there has no been any contact with foreign regulators regarding the S&P Europe Index
derivatives contracts listed in MEFF.
Recent changes in the UK resulting from the introduction of the Financial Services and Markets Act have resulted in the Code
of Market Abuse being introduced which specifies what constitutes Market Abuse and the scope of the UK legislation. In
addition this legislation has resulted in the relationship between the UK Regulator (FSA) and the Recognized Investment
Exchanges being formalized through Standard Operating Procedures.
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
An overall “Memorandum of Understanding” between the stock exchange supervision of virt-x and SWX Swiss Exchange
related to “Joint-Investigations” has been signed.
There are attempts under way to coordinate the task sharing between the stock exchange supervision of Eurex Germany and
Eurex Zürich in the stock exchange regulations of Eurex.
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
None.
Financial Services Authority,
United Kingdom
Recent U.S. regulatory changes relating to requirements for coordinated surveillance for security futures products among
markets trading security futures products, securities underlying security futures products, and related products are described in
the response to Question 19.
No specific proposed changes.
148
36. Please describe any proposed changes in your jurisdiction related to transparency with respect to:
i. issuers and trading activity in the component securities of an index;
ii. computation and pricing of indexes;
iii. index rebalancing procedures;
iv. listing standards;
v. price limits and circuit breakers; and
vi. exposure or speculative positions.
SC2 Members
Response
Australian Securities and
Investments Commission
From a corporate law perspective there are no changes proposed in relation to transparency. The law with respect to financial
markets and products was reviewed and amended recently, however, no significant changes relating to transparency of
derivatives and securities were made.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
N.a.
At the moment, there are no proposed changes related to the aforementioned transparency issues.
No changes are proposed.
No changes are proposed.
N.a.
149
Commissione Nazionale per le
Societa e la Borsa, Italy
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
N.a.
None.
None.
i. CNBV is working on new rules regarding information disclosure, better corporate governance and other topics, which will
provide more transparency to investors.
ii. Recently, BMV proposed a new calculation of the IPC which consists on eliminating payment of dividends from the index
calculation. This will take place starting July 1st.
iii. Rebalancing will be made once a year, instead of every 6 months.
iv. No.
v. No.
vi. No
As stated in Q32, issuers of derivative warrants may have to make increased disclosures about financial strength, especially with
regards to their ability to honour obligations resulting from their issued warrants and how they manage their risk exposure.
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
No proposed changes. The CNMV is in favour of greater transparency in all aspects regarding indexes. Some information about
the index (rebalancings, components, management, etc.) should be made public as price sensitive information.
No proposed changes.
i. N.a.
ii. iNAV distribution for trading Exchange traded funds.
iii. n/a
iv. None.
v. SWX Trading Parameters
vi. None.
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
None.
i.
In February 2002, the SEC announced that it intends to propose changes in corporate disclosure rules as the first in a
series of steps designed to improve the financial reporting and disclosure system in the U.S. Specifically, the SEC
intends to propose rules that will: (1) provide accelerated reporting by companies of transactions by company insiders in
company securities, including transactions with the company; (2) accelerate filing by companies of their quarterly and
annual reports; (3) expand the list of significant events requiring current disclosure on Form 8-K; (4) add a requirement
that public companies post their Exchange Act reports on their web sites at the same time they are filed with the SEC;
(5) require disclosure of critical accounting policies in Management’s Discussion and Analysis (“MD&A”) of Financial
Condition and Results of Operations, contained in annual reports. More recently, the SEC proposed a disclosure
150
ii.
iii.
iv.
v.
vi.
Financial Services Authority,
United Kingdom
requirement for companies to include a separately-captioned section regarding the application of critical accounting
policies in the MD&A section of annual reports, registration statements, and proxy and information statements. The
Application of Critical Accounting Policies section would encompass both disclosure about critical accounting estimates
made by the company in applying its accounting policies and disclosure concerning a company’s initial adoption of an
accounting policy.
No changes currently are proposed with regard to transparency in the computation or pricing of indexes. However,
SROs will need to file with the SEC proposed rule changes to implement the requirement, described in the response to
Question 16, that the final settlement price of a cash-settled security futures product fairly reflect the opening price of
the underlying security or securities. These proposed rule changes will be public upon filing with the SEC.
No changes currently are proposed with regard to the transparency of index rebalancing procedures.
No changes currently are proposed with regard to the transparency of listing standards.
No changes currently are proposed with regard to the transparency of price limits or circuit breakers.
No changes currently are proposed with regard to the transparency of positions in narrow-based index futures or index
options.
None proposed.
151
X.
Other
Academic Literature
37. Please identify any studies or analyses relevant to your jurisdiction that discuss the impact of stock index derivatives trading on prices,
volatility, or other aspects of the market.
SC2 Members
Response
Australian Securities and
Investments Commission
Lin, S. , Stevenson, M. , "Wavelet Analysis of Index Prices in Futures and Cash Markets: Implications for the Cost-of-Carry
Model", Quantitative Finance Research Group, University of Technology, Sydney, 11, April, 1999.
http://www.business.uts.edu.au/finance/qfr/rp11.pdf
Turkington, J., and Walsh, D., "Price Discovery and Casualty in the Australian Share Price Index Futures Market", University
of Western Australia, February 1997
http://www.af.ecel.uwa.edu.au/accfin%2FWorkingPapers%2Fpdf%2F98%2D85%2Epdf
Johnson, J., "Some Actions and Beliefs of SPI Futures Traders", University of Western Australia, February 1998
http://www.af.ecel.uwa.edu.au/accfin%2FWorkingPapers%2Fpdf%2F98%2D84%2Epdf
Aitken, M., and Comerton-Forde, C., Price and volume effects associated with changes in the composition of the All Ordinaries
Index, SIRCA Reference no. 99004e, http://www.sirca.org/
Peat, Maurice & McCorry, Michael., Individual share futures contracts: The economic impact of their introduction on the
underlying equity market, SIRCA Reference no. 96002e, http://www.sirca.org/
Aitken, Michael., Ho, Daniel., and Terry Walter, The Impact of a Stock's Inclusion in ASX All Ordinaries Index on the Trading
of Other Stocks Already in the Index, SIRCA Reference no. 2000023e, http://www.sirca.org/
West, Andrew., An Analysis of the Price Impact of Large Trades in the Share Price Index Futures Contract, SIRCA Reference
no. 97021f, http://www.sirca.org/
West, Andrew., Do Stock Index Futures Prices Lead the Stock Index? SIRCA Reference no. 97014f, http://www.sirca.org/
Aitken, Michael, Frino, Alex & McCorry, Michael, Futures market reactions to equity market trading halts: intraday evidence
from Australian financial markets, SIRCA Reference no. 95025f, http://www.sirca.org/
152
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
N.a.
We are not aware of any Canadian studies or analyses that specifically discuss the impact of stock index derivatives trading on
prices, volatility, or other aspects of the market.
N.a.
BAFin does not collect such studies and analyses.
1.
Is Hong Kong stock market more volatile during the expiration day of the Hang Seng Index Futures? (8 December
1999)
Co-written by:
Mr. Kevin Cheng, Head of Economic Research, HKFE
Dr. Louis Cheng, Associate Professor of Finance, Hong Kong Polytechnic University.
2.
Index arbitrage enhance cash and futures market liquidity and stability. (31 March 1999)
Co-written by:
Mr. Kevin Cheng, Head of Economic Research, HKFE
Dr. Joseph Fung, Lecturer, Hong Kong Baptist University.
The above reports are available for download on the website of the Hong Kong Exchanges and Clearing Ltd.
(www.hkex.com.hk)
Commissione Nazionale per le N.a.
Societa e la Borsa, Italy
N.a.
Financial Services Agency,
Japan
None.
Securities Commission,
Malaysia
Comision Nacional Bancaria N.a.
y de Valores, Mexico
N.a.
Monetary Authority of
153
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
No studies or analyses.
No specific studies or analysis related to the impact of stock index derivatives trading on prices, volatility or other aspects of the
market.
N.a.
Research by Campbell, Lettau, Malkiel and Xu (2001) shows that systemic volatility has not increased over the period of 1962
to 1997. Furthermore, empirical research demonstrates that the introduction of equity-based index futures contracts provides
liquidity and market depth for the equity market. Any adverse impact of equity futures trading on market volatility has been
shown to be very small. For example, Harris (1989) reported that S&P equities became statistically more volatile after the
introduction of the S&P 500 futures trading, but the differences between the volatility before and after the index futures trading
is economically insignificant. Edwards (1988) found a small, statistically significant decline in cash volatility, and Schwert
(1990) found that future trading appears not to have significant impact on stock market volatility. Furthermore, Grossman
(1988) suggested that market makers in equity futures markets combined with market makers at the New York Stock Exchange
enhance the overall liquidity of the equity market. Bessembinder and Seguin (1992) found evidences in daily S&P 500 data that
supported the theoretical arguments suggested by Grossman (1988) that the introduction of the equity futures increases market
depth and liquidity of the equity market, hence, decreases stock market volatility.
Campbell, John Y., Martin Lettau, Burton G. Malkeil, and Yexiao Xu (2001): “Have Individual Stocks Become More Volatile?
An Empirical Exploration of Idiosyncratic Risk,” Journal of Finance 56, 3-43.
Bessembinder, H. and Seguin, P.J., (1992):”Futures Trading Activity and Stock Price Volatility,” Journal of Finance, 47, 20152034.
Edwards, F.R., (1988): “Futures Trading and Cash Market Volatility: Stock Index and Interest Rate Futures,” Journal of Futures
Markets 8, 4212-4439.
Grossman, S.J., (1988): “An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and
Dynamic Hedging Strategies,” Journal of Business 61, 275-298.
Harris L., (1989): “S&P 500 Cash Stock Price Volatility,” Journal of Finance 44, 1155-1175.
Schwert, W., (1990): “Stock Market Volatility,” Financial Analyst Journal, May/June, 23-34.
Stock index derivatives have been an extraordinarily popular topic for academic research for many years. There have been
dozens, perhaps hundreds of possibly relevant papers published on stock index derivatives. The fact that the Journal of Futures
Markets frequently has at least one article on the subject, right up to the Martens article listed below in the June 2002 issue,
shows that there is lasting interest in the topic. Researchers have examined the impact of stock index futures on volatility,
prices, price discovery, interrelationships with other markets, and many other topics. Overall, the articles tend to reach positive
conclusions about stock index derivatives, but many issues are far from settled. The list below is only a representative sample
of this voluminous literature.
154
Bessembinder, H., & Seguin, P. J. (1993). Price volatility, trading volume, and market depth: Evidence from futures markets.
Journal of Financial and Quantitative Analysis, 28, 21-39.
Chan, K. (1992). A further analysis of the lead-lag relationship between the cash market and stock index futures market.
Review of Financial Studies, 5, 123-152.
Chan, K., Chan, K.C. & Karolyi, A. G. (1991). Intraday volatility in the stock index and stock index futures markets. Review of
Financial Studies, 4, 637-684.
Chen, N., Cuny, C. J. & Haugen, R.A. (1995). Stock volatility and the levels of the basis and open interest in futures contracts.
Journal of Finance, 50.
Chu, Q. C., Hsieh, W. G. & Tse, Y. (1999). Price discovery on the S&P 500 index markets: An analysis of spot index, index
futures, and SPDRs. International Review of Financial Analysis, 8, 21-34.
Dwyer, G. P., Jr., Locke, P., & Yu, W. (1996). Index arbitrage and nonlinear dynamics between the S&P 500 futures and cash.
Review of Financial Studies, 9, 301-332.
Faff, R. W., & McKenzie, M. D. (2002). The impact of stock index futures trading on daily returns seasonality: A multicountry
study. Journal of Business, 75.
Figlewski, S. (1984). Hedging performance and basis risk in stock index futures. Journal of Finance, 39, 657-669.
Frino, A., & McKenzie, M. D. (2002). The pricing of stock index futures spreads at contract expiration. Journal of Futures
Markets, 22, 451-469.
Kawaller, I. G., Koch, P. D., & Koch, T-W. (1987). The temporal price relationship between S&P 500 futures and the S&P 500
index. Journal of Finance, 42, 1309-1329.
Lee, J. H., & Linn, S. C. (1994). Intraday and overnight volatility of stock index and stock index futures returns. Review of
Futures Markets, 13, 1-30.
Martens, M. (2002). Measuring and forecasting S&P 500 index-futures volatility using high-frequency data. Journal of
Futures Markets, 22, 497-518.
Modest, D. M., & Sundaresan, M. (1983). The relationship between spot and futures prices in stock index futures markets:
Some preliminary evidence. Journal of Futures Markets, 3, 15-41.
155
Monoyios, M., & Sarno, L. (2002). Mean reversion in stock index futures markets: a nonlinear analysis. Journal of Futures
Markets, 22, 285-314.
Puttonen, V. (1995). International transmission of volatility between stock and stock index futures markets. Journal of
International Financial Markets, Institutions & Money, 5.
Randolph, W.L., & Najand, M. (1991). A test of two models in forecasting stock index futures price volatility. Journal of
Futures Markets, 11, 179-190.
Stoll, H. R., & Whaley, R. E. (1990). The dynamics of stock index and stock index futures returns. Journal of Financial and
Quantitative Analysis, 25, 441-468.
Wang, G. H. K., Michaelski, R. J., Jordan, J. V., & Moriarty, E. J. (1994). An intraday analysis of bid-ask spreads and price
volatility in the S&P 500 index futures market. Journal of Futures Markets, 14, 837-859.
Financial Services Authority,
United Kingdom
Yakav, P. K., & Pope, F.P. (1990). Stock index futures arbitrage: International evidence. Journal of Futures Markets, 10, 573603.
N/a.
156
Case Studies
38. If applicable, please provide an example from your jurisdiction of a problem related to n index product that occurred as the result of, e.g.,
ineffective design, oversight, or risk management and any actions taken to address the issues raised.
SC2 Members
Response
Australian Securities and
Investments Commission
On June 29 2001, an index arbitrage participant may have increased volatility and contributed to an unexpected increase in the
price of a number of stocks that comprise the ASX/S&P200 Index. This resulted in an increase in the settlement price of the
Index and consequently, the SFE SPI 200 contract, the settlement price of which was determined by reference to the closing
price of the Index.
In late 2001, the link between the ASX closing price of the index and settlement price of the index futures contract on the SFE
was broken.
For further information refer to attached ASIC media release dated 21 January 2002 and The Sydney Morning Herald
newspaper article dated 22 January 2002.
Brazilian Securities
Commission, CVM
Commission des valeurs
mobilières du Québec &
Ontario Securities
Commission, Canada
Commission des Operations
de Bourse, France
Bundesastalt fur
Finanzdienstleistungsaufsicht,
Germany
Securities and Futures
Commission, Hong-Kong
Commissione Nazionale per le
Societa e la Borsa, Italy
N.a.
Not applicable.
N.a.
No case studies available.
N.a.
Case study no. 1
The choice of the type of settlement price and how it is determined may have an effects on the market. In choosing the way how the
settlement index price is fixed at the expiry, market regulators face a trade-off between liquidity and manipulation risk mitigation.
The use of a settlement price based on the opening prices of the component stocks:
157
a) may facilitate arbitrageurs to close their positions with no risk, as they may enter relevant orders on the stocks in the
opening auction that will be executed at the future settlement price; this method assure the convergence at expiry between
spot and future prices and, in that way, guarantee market liquidity;
b) opening price may be easily manipulated.
Different solutions, such as settlement price calculated as an average price based on the index values of a predefined period or based
on a special quotation, may prevent stock prices to be manipulated.
However, arbitrageurs might not be sure of closing their cash positions at the future settlement price because it represents just a mean
of prices and not a tradable price ) with negative effects on the market liquidity and the success in the derivative contracts.
This dilemma was faced in 1995 by Consob when the first derivative contract – the stock index MIB30 future - was introduced in
Italy88. A settlement price based on the stocks opening prices was adopted and market disruptions were prevented by enforcing the
relevant rules. In particular, we constantly and carefully monitor trades and open positions to reveal in advance any potential interest
in manipulating the settlement price. Moreover, rules forcing arbitrageurs to post market orders at least twenty minutes before the
end of the pre-opening phase has been set, in order to give market players enough time to react and trading halts have been
strengthened (5% ).
This approach proved to be effective, considering that until now only one case of manipulation of the settlement price at expiration,
carried on by a foreign broker, have been recorded.
Case study no. 2
On November 30, 2001, Morgan Stanley Capital International (MSCI) implemented the first step of the Index Enhancing
Methodology, adjusting all its equity indices for free float. On May 31, 2002 the second and final step was implemented.
The rebalancing of MSCI Indexes affected 49 stocks listed on the Italian equity market by an increase in the traded volumes and
volatility. MSCI indexes, in fact, are usually used by foreign portfolio managers (i.e. investments funds, money managers, ) as a
benchmark for the Italian equity market and, therefore, they must rebalance their portfolio, due to the change of the index
composition, with a considerable trading flow on the rebalancing day.
The main concern about MSCI rebalancing was the difficulty to evaluate the impact of such operation on the Italian market, in
terms of volumes and price volatility, due to a lack of information about the event. In particular, even if detailed information
about the new index construction methodology was available on the MSCI website, there were uncertainties about the
rebalancing itself (i.e. stocks prices taken as reference for the rebalancing) until few days before the event. Moreover, even if
the amount of money tracking the MSCI indexes was estimated, rebalancing strategies by portfolio manager were very difficult
to forecast (in term of time of adjusting their portfolio).
Considerable concerns were also due to the rebalancing strategies operated by those portfolio managers who closely track the
indexes and must necessary adjust their portfolio at the rebalancing reference price. In order to carry out their strategies, money
managers use foreign dealers that provide them the proper buys or sells at the rebalancing reference price, hedging any tracking
error risk. This risk is, then, shifted to these dealers, that may take advantage by influencing stocks prices to reduce this risk or
to make a profit. To give an example, lets consider that a money manager needs to buy a certain amount of stocks to rebalance
his portfolio as a consequence of the reshuffle of the benchmark index. The money manager arrange the transaction with his
dealer so that the latter will sell to him the stocks needed at the rebalancing reference price. The dealer will than hedge his short
158
position by buying the stocks into the market before the reshuffle date at the market price. As the average price of the different
buying trades may be different from the price on the basis of which the reshuffle will be performed, the dealer is undertaking a
price risk. This may lead him to influence the reference price in order to minimize this risk or make a profit (i.e. by fixing the
reference price at a level higher than his average buying price).
In order to prevent any possible market abuse, Consob, together with Borsa Italiana, enforced the surveillance on the
rebalancing dates and disclosed any information about the rebalancing and the possible effects on prices and volumes. The
approach adopted proved to be effective: although, on the rebalancing date, volumes were higher than the previous days, no
significant anomalous price movements were recorded.
At the same time, however, MSCI indexes rebalancing showed the need for a tier coordination between global index calculator
and domestic market authorities, that may allowed the latter to adopt any preventative measures to mitigate undue influence on
stocks prices.
Financial Services Agency,
Japan
Securities Commission,
Malaysia
Comision Nacional Bancaria
y de Valores, Mexico
Monetary Authority of
Singapore
Comision Nacional del
Mercado de Valores, Spain
Finansinspektionen, Sweden
N.a.
Swiss Federal Banking
Commission, Switzerland
Commodity Futures Trading
Commission, USA
Securities and Exchange
Commission, USA
N.a.
None.
The main problem related to the IPC future is that it doesn’t operate much because of its high costs.
N.a.
N.a.
No specific problems related to index products that occurred as a result of ineffective design, oversight.
None observed.
When stock index futures and options began trading in the mid-1980s, virtually all of these products used closing-price
settlement procedures. Closing-price settlement procedures in index futures and options generally base the index settlement
price on the execution prices from the last regular session trades in the underlying securities. The cash settlement provisions of
stock index futures and options contracts facilitated the growth of sizeable index arbitrage activities by firms and professional
traders and made it relatively easy for arbitrageurs to buy or sell the underlying stocks at or near the market close on expiration
Fridays89 in order to "unwind" arbitrage-related positions. These types of unwinding programs at the close on expiration
Fridays often severely strained the liquidity of the securities markets.
U.S. regulators and self-regulators were concerned that the liquidity constraints faced by the securities markets to accommodate
expiration-related buy or sell programs at the market close on expiration Fridays could exacerbate ongoing market swings
159
during an expiration and could provide opportunities for entities to anticipate these pressures and enter orders as part of
manipulative or abusive trading practices designed to artificially drive up or down share prices. To reduce such expirationrelated strains on market liquidity, markets trading the most actively-traded futures contracts and many stock index option
contracts moved to opening-price settlement procedures. In addition, as discussed more fully above, the SEC and the CFTC
recently adopted rules requiring that the final settlement price of a cash-settled security futures product to fairly reflect the
opening price of the underlying security or securities.
Financial Services Authority,
United Kingdom
N/a.
160
APPENDIX 1 - FRANCE
Pursuant to Articles 1.3.9 and 1.3.18 of the Organization and Operating Rules of the MONEP (hereafter "MONEP Rules")
Instruction NI-3-03 was previously published in Avis 98-89 of 24 March 1998.
DEFINITIONS
Article 1
The daily settlement index is calculated and disseminated each trading day. It determines the cash amounts to be paid or received on exercised or assigned positions in short-term
PX1 options on the CAC40 index.
Article 2
The closing settlement index is calculated and disseminated at the last trading session of each calendar month. It is the reference for automatic exercise of CAC40 index options
that are in the money on their expiration date.
The closing settlement index determines the amounts to be paid or received to settle:
Assigned positions in CAC40 index options (short-term and long-term) resulting from automatic exercise.
I.
II.
CAC40 futures contracts that are still open at the delivery date.
Article 3
The reference index serves as the hinge point in applying the CAC40's maximum fluctuation range used to calculate the margin required on positions in CAC40 index options
(short-term and long-term).
CALCULATION METHODOLOGY
Article 4
The daily settlement index is the average of all index values calculated and disseminated between 4:40:00 and 5 p.m. (including the last index value, calculated and disseminated
after 5:00:00 p.m.)
Article 5
The closing settlement index is the average of all index values calculated and disseminated between 3:40:00 and 4:00 p.m. on the expiration/delivery date (including the first
index value disseminated after 4:00:00 p.m.)
The average closing settlement index includes only one decimal place.
161
Article 6
The reference index is the index calculated and disseminated at the conclusion of the continuous trading session for CAC40 component stocks, without taking into account the
prices quoted on CAC40 component stocks in the closing call auction.
Article 7
If, because of technical difficulties or exceptional market circumstances during the reference period, the daily settlement index or closing settlement index cannot be calculated in
conformity with the methods prescribed in Articles 4 and 5 above, the alternative methods described in this Instruction's Annexes shall apply.
ANNEX 1 TO INSTRUCTION NI-3-03
This Annex defines the rules used by Monep SA to determine the closing settlement index when index values for the reference period are not available because reservations on
CAC40 stocks (cf. Instruction NI-4-06 "Circuit breaker mechanisms for options and futures on the CAC40 index") have caused the trend indicator (éclaireur de tendance) to be
disseminated in place of the regular index.
INDEX NOT AVAILABLE THROUGHOUT THE ENTIRE REFERENCE PERIOD
When the trend indicator has replaced the regular index for the entire reference period or at the opening of the reference period (see Note below) the closing settlement index is
the average of prices quoted on the second maturity of the CAC40 future between 3:40 and 4 p.m., adjusted for the spread between the daily settlement prices of the two front
maturities on CAC40 futures at the close of the previous session.
Note: The reference to prices quoted on CAC40 futures is maintained when calculation and dissemination of the regular index is resumed before the end of the calculation
period for the closing settlement index.
Example:
Given:
•
At day D-1, the two front maturities of the CAC40 futures contract close the day at a spread of -9.5 points.
•
At day D, the index is not available at the start and throughout the entire reference period.
•
The average of prices quoted on the second CAC40 futures maturity between 3:40 and 4 p.m. amounts to 3558.0.
•
The closing settlement index is equal to this average, adjusted for the spread at the close of the preceding session, i.e. a closing settlement index of 3548.5
(3558.0 - 9.5).
Then:
162
INDEX NOT AVAILABLE FOR PART OF REFERENCE PERIOD
When the shift to the trend indicator occurs during the reference period (see Note below), the closing settlement index is determined partly from the average of the index values
available between 3:40 p.m. and the time of the shift to the trend indicator, and partly from the average of prices quoted on the second maturity of the CAC40 future between the
shift to the trend indicator and 4 p.m. The average calculated on CAC40 futures prices is adjusted for the spread at the previous session close's daily settlement prices of the two
front maturities on CAC40 futures.
The closing settlement index is the average of all index values calculated and disseminated between 3:40:00 and 4:00 p.m. on the expiration/delivery date (including the first
index value disseminated after 4:00:00 p.m.) Accordingly, the full calculation includes 41 values, given that the CAC40 index is disseminated every 30 seconds.
Note: The reference to prices quoted on CAC40 futures is maintained when calculation and dissemination of the regular index is resumed before the end of the calculation
period for the closing settlement index.
Example:
Given:
•
At day D-1, the two front maturities of the CAC40 futures contract close the day at a spread of -9.5 points.
•
At day D, the trend indicator is disseminated in place of the index at 3:45 p.m., after 11 index values averaging 3564.08 are disseminated.
•
The average of prices quoted on the second CAC40 futures maturity between 3:45 and 4 p.m. amounts to 3570.12.
This
average
is
3570.12 - 9.5 = 3560. 62
adjusted
for
the
previous
day's
spread
between
the
two
front
futures
maturities:
Then:
•
The closing settlement index is equal to the weighted average of two averages: 1) the average of the available index values (weighted by N=11), and 2) the
average of the futures prices (weighted by N=30), i.e. 3561.5:
(3564.08 x 11 + 3560.62 x 30) / 41 = 3561.5483, rounded to = 3561.5
NOTE: The rules defined in this Annex for the closing settlement index apply mutatis mutandis to the determination of the daily settlement index when index values for the
reference period are not available because reservations on CAC40 stocks have caused the trend indicator (éclaireur de tendance) to be disseminated in place of the regular index
However, in such a case, the CAC40 futures prices used as a reference to determine the daily settlement index are: the average of the prices quoted on the first CAC40 futures
maturity, adjusted for the last spread (before the shift to the trend indicator) between the index value and the CAC40 futures price.
ANNEX 2 TO INSTRUCTION NI-3-03
163
This Annex defines the rules used by Monep SA to determine the closing settlement index for the maturing contract when trading of the underlying security has been halted as a
result of technical difficulties preventing the calculation and dissemination of the CAC40 index for all or part of the reference period on the expiration/delivery date.
1: CAC40 INDEX NOT AVAILABLE FOR ALL OR PART OF REFERENCE PERIOD, WITH RESUMED TRADING ON THE UNDERLYING MARKET NO
LATER THAN 4:30 P.M.
RESUMED TRADING BEFORE 4 P.M.
The closing settlement index is equal to the average of the CAC40 index values disseminated between 3:40 and 4 p.m. and the re-opening index value taken into account as many
times as necessary to arrive at the number of values (41) normally disseminated during the reference period. The re-opening index value is determined from the re-opening prices
of each of the index component stocks (see Note below).
The closing settlement index is the average of all index values calculated and disseminated between 3:40:00 and 4:00 p.m. on the expiration/delivery date (including the first
index value disseminated after 4:00:00 p.m.) Accordingly, the full calculation includes 41 values, given that the CAC40 index is disseminated every 30 seconds.
Note:
If a stock is not quoted in the re-opening procedure, the last quoted price is used in the calculation of the re-opening index.
Example:
Given:
• At day D, the index becomes unavailable at 3:45 p.m., after 11 index values are disseminated, averaging 3558.55.
• Trading on the underlying market resumes at 3:50 p.m., with a re-opening index of 3556.83.
• Normally, 10 index values would have been disseminated between 3:45 and 3:50 p.m.
• Between 3:50 and 4 p.m., 20 index values are disseminated, averaging 3560.11.
Then:
•
The closing settlement index is calculated as follows:
(3558.55 x 11 + 3566.83 x 10 + 3560.11 x 20) / 41 = 3561.3304, rounded to 3561.3
RESUMED TRADING BEGINS BETWEEN 4 AND 4:30 P.M.
THE TIME FOR RESUMED TRADING ON THE UNDERLYING MARKET IS KNOWN AT 4 P.M.
Scenario: SBF-Paris Bourse disseminates an announcement before 4 p.m., stating that trading on the underlying market will resume no later than 4:30 p.m.
Accordingly, the trading session for CAC40 options and CAC40 futures is extended until the time of resumed quotation on the underlying market, i.e. until no later than
4:30 p.m.
164
The closing settlement index is equal to the average of the CAC40 index values disseminated between 3:40 and 4 p.m. and the re-opening index value taken into account as many
times as necessary to arrive at the normal number of values (41) disseminated during the reference period.
The re-opening index value is determined from the re-opening prices of each of the index component stocks (see Note below).
Note:
If a stock is not quoted in the re-opening procedure, the last quoted price is used in the calculation of the re-opening index.
Example:
Given:
•
•
At day D, the index becomes unavailable at 3:55 p.m., after 31 index values are disseminated, averaging 3555.81.
At 3:57 p.m. (NOTE: before 4 p.m.), SBF-Paris Bourse announces that trading in the underlying market will resume at 4:25 p.m. (NOTE: before
4:30 p.m.), and the trading session in CAC40 options and futures is extended until 4:25 p.m.
•
At 4:25 p.m., the re-opening index is 3557.05.
•
The re-opening index is assigned a weighting of 10 within the 41-value closing settlement index.
Then:
The closing settlement index is calculated as follows:
(3555.81 x 31 + 3557.05 x 10) / 41 = 3556.1124, rounded to 3556.1
THE TIME FOR RESUMED TRADING IS NOT KNOWN AT 4 P.M.
The trading session for CAC40 options and CAC40 futures is extended until 4:30 p.m. if SBF-Paris Bourse is not able, at 4 p.m., to indicate a time for resumed trading on the
underlying market.
In this case, resumed trading on the underlying market does not begin before 4:30 p.m. even if it becomes technically possible to re-open the market sooner.
The closing settlement index is equal to the average of the CAC40 index values disseminated between 3:40 and 4 p.m. and the re-opening index value taken into account as many
times as necessary to arrive at the normal number of values (41) disseminated during the reference period.
The re-opening index value is determined from the re-opening prices of each of the index component stocks (see Note below).
Note:
If a stock is not quoted in the re-opening procedure, the last quoted price is used in the calculation of the re-opening index.
Example:
Given:
• At day D, the index becomes unavailable at 3:50 p.m., after 21 index values are disseminated, averaging 3554.04.
165
• At 4 p.m., SBF-Paris Bourse announces that it is unable to specify a time for resumed trading on the underlying market. The trading session in CAC40 options
and futures is therefore extended until 430 p.m., the time at which trading will resume on the underlying market.
• At 4:30 p.m., the re-opening index is 3552.17. The re-opening index is assigned a weighting of 20 within the 41-value closing settlement index.
Then:
• The closing settlement index is calculated as follows:
(3554.04 x 21 + 3552.17 x 20) / 41 = 3553.1278, rounded to 3553.1
CAC40 INDEX NOT AVAILABLE FOR ALL OR PART OF REFERENCE PERIOD, WITHOUT RESUMED TRADING ON THE UNDERLYING MARKET
BEFORE 4:30 P.M.
The trading session for CAC40 options and CAC40 futures is extended until 5 p.m.
INDEX NOT AVAILABLE FOR PART OF REFERENCE PERIOD WITHOUT RESUMED TRADING
The closing settlement index is determined partly from the average of the index values available between 3:40 p.m. and the time of the trading halt, and partly from the average of
prices quoted on the second CAC40 futures maturity for the same timespan preceding 5 p.m. that the index was unavailable before 4 p.m. The average calculated on CAC40
futures prices is adjusted for the spread at the previous session close's daily settlement prices of the two front maturities on CAC40 futures.
Example:
Given:
• At day D-1, the two front maturities of the CAC40 futures contract close the day at a spread of -9.5 points.
• At day D, the index becomes unavailable at 3:45 p.m., after 11 index values are disseminated, averaging 3554.08. Trading on the underlying market is not
resumed at 4:30 p.m.
• The average of prices quoted on the second CAC40 futures maturity between 4:45 and 5 p.m. amounts to 3560.12.
This
average
is
3560.12 - 9.5 = 3550.62
adjusted
for
the
previous
day's
spread
between
the
two
front
futures
maturities:
Then:
The closing settlement index is equal to the weighted average of two averages: 1) the average of the available index values (weighted by N=11), and 2) the average of the futures
prices (weighted by N=30), i.e. 3551.5:
(3554.08 x 11 + 3550.62 x 30) / 41= 3551.5482, rounded to 3551.5
166
INDEX NOT AVAILABLE THROUGHOUT THE ENTIRE REFERENCE PERIOD WITHOUT RESUMED TRADING
If the event or technical difficulty prevents all calculation and dissemination of the CAC40 index, the closing settlement index is equal to the average of prices quoted on the
second maturity of the CAC40 future between 4:40 and 5 p.m., adjusted for the spread between the daily settlement prices of the two front maturities on CAC40 futures at the
close of the previous session.
Example:
Given:
•
At day D-1, the two front maturities of the CAC40 futures contract close the day at a spread of -9.5 points.
•
At day D, the index is not available at throughout the entire reference period.
•
The average of prices quoted on the second CAC40 futures maturity between 4:40 and 5 p.m. amounts to 3590.0.
Then:
• The closing settlement index is equal to this average, adjusted for the spread at the close of the preceding session, i.e. a closing settlement index of 3580.5
(3590.0 - 9.5).
ANNEX 3 TO INSTRUCTION NI-3-03
This Annex defines the rules used by Monep SA to determine the daily settlement index when exceptional market circumstances affect the closing of the trading session on the
underlying market.
EXTENSION OF THE TRADING SESSION ON THE UNDERLYING MARKET
When the trading session on the underlying market is extended beyond 5 p.m., but no technical difficulties have occurred during the reference period, that day's daily settlement
index is equal to the average of the index values calculated and disseminated in the 20-minute period preceding the actual closing of the market.
SBF-Paris Bourse disseminates an announcement no later than 4:35 p.m., stating that the trading session will be extended and specifying the time of the closing.
CAC40 INDEX NOT AVAILABLE FOR PART OF REFERENCE PERIOD
If, because of a trading halt on the underlying market caused by technical difficulties, the CAC40 index can be calculated for only part of the reference period, Monep SA applies
the following provisions in determining the daily settlement index, consistent with the steps taken by SBF-Paris Bourse for the underlying market.
RESUMED TRADING ON THE UNDERLYING MARKET IN THE FORM OF A CLOSING CALL AUCTION ("FIXING DE CLÔTURE")
The daily settlement index is equal to the average of the CAC40 index values disseminated between 4:40 p.m. and the time when trading was halted as well as the re-opening
index value taken into account as many times as necessary to arrive at the normal number of values (41) disseminated during the reference period.
167
The re-opening index value is determined from the re-opening prices of each of the index component stocks (see Note below).
The closing settlement index is the average of all index values calculated and disseminated between 4:40:00 and 5:00 p.m. on the expiration/delivery date (including the first
index value disseminated after 5:00:00 p.m.) Accordingly, the full calculation includes 41 values, given that the CAC40 index is disseminated every 30 seconds.
Note:
If a stock is not quoted in the re-opening procedure, the last quoted price is used in the calculation of the re-opening index.
Example:
If the incident occurred at 4:45 p.m., i.e. after 10 index values are disseminated, the index resulting from the call auction is assigned a weighting of 31 within the 41-value daily
settlement index.
RESUMED TRADING BY CALL AUCTION ON THE UNDERLYING MARKET AND EXTENSION OF THE SESSION BEYOND 5 P.M.
When continuous trading on the underlying market has resumed following the re-opening procedure and the session close has been extended beyond 5 p.m., the daily settlement
index is equal to the average of the index values calculated before the technical incident as well as for the number of minutes preceding the closing necessary to arrive at the
number of values (41) normally disseminated during the 20-minute reference period.
Example:
• The index becomes unavailable at 4:50 p.m.
• Trading on the underlying market resumes at 5:05 p.m. and continues until 5:20 p.m.
The daily settlement index is equal to the average of the index values disseminated between 4:40 and 4:50 p.m. as well as between 5:10 and 5:20 p.m.
RESUMED TRADING BY CALL AUCTION ON THE UNDERLYING MARKET WITHOUT EXTENSION OF THE SESSION BEYOND 5 P.M.
If the calculation of the daily settlement index covers a period shorter than 20 minutes, then the re-opening index determined from the call-auction prices of each of the index
component stocks (see Note below) is weighted by the number of values necessary to arrive at the number of values (41) normally disseminated during the reference period.
Note:
If a stock is not quoted in the re-opening procedure, the last quoted price is used in the calculation of the re-opening index.
Example:
Given:
• The index is unavailable between 4:40 and 4:50 p.m.
168
• Trading on the underlying market resumes at 4:50 p.m., with a re-opening index of 3556.83.
• Normally, 20 index values would have been disseminated between 4:40 and 4:50 p.m.
• Between 4:50 and 5 p.m., 20 index values are disseminated, averaging 3560.11.
Then:
• The daily settlement index is calculated as follows:
(3566.83 x 20 + 3560.11 x 21) / 41 = 3558.51
NO RESUMED TRADING ON THE UNDERLYING MARKET
In the absence of resumed trading on the underlying market, the daily settlement index is determined partly from the average of the index values available between 4:40 p.m. and
the time of the trading halt, and partly from the average of prices quoted on the first CAC40 futures maturity for the same timespan preceding 5 p.m. that the index was
unavailable before 4 p.m. The average calculated on CAC40 futures prices is adjusted for the spread at the previous session close's daily settlement prices between the two front
maturities on CAC40 futures.
CAC40 INDEX NOT AVAILABLE THROUGHOUT THE ENTIRE REFERENCE PERIOD
If the event or technical difficulty prevents all calculation and dissemination of the CAC40 index during the reference period, Monep SA applies the following provisions in
determining the daily settlement index, consistent with the steps taken by SBF-Paris Bourse for the underlying market.
RESUMED TRADING ON THE UNDERLYING MARKET IN THE FORM OF A CLOSING CALL AUCTION ("FIXING DE CLÔTURE")
The daily settlement index value is determined from the call-auction prices of each of the index component stocks.
RESUMED TRADING BY CALL AUCTION ON THE UNDERLYING MARKET AND EXTENSION OF THE SESSION BEYOND 5 P.M.
The daily settlement index is equal to the average of the CAC40 index values calculated and disseminated in the 20-minute period preceding the actual closing of the market
If the extension is for a period shorter than 20 minutes, then the re-opening index determined from the call-auction prices of each of the index component stocks is weighted by
the number of values necessary to arrive at the number of values (41) normally disseminated during the reference period.
NO RESUMED TRADING ON THE UNDERLYING MARKET
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If the re-opening of the underlying market cannot be accomplished within the same trading day, the daily settlement index determined by Monep SA is equal to the average of the
prices quoted on the first CAC40 futures maturity between 4:40 and 5 p.m., adjusted for the last spread (before the incident causing the trading halt) between the index value and
the CAC40 futures price.
MISCELLANEOUS PROVISIONS
In all the cases delineated above, trading of short-term PX1 options on the CAC40 index continues until the determination of the daily settlement index.
The cut-off time for exercise of PX1 options may be extended.
The Cash Market Operations has to keep trails (historical of trades, declarations from members ...) about some market operations.
The aim is to be able to answer members questions about trades, market or technical problems.
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