Thailand Futures Exchange Pcls Request for No-Action Relief in Connection with the Offer and Sale in the United States of its Futures Contract Based on the SET50 Index Futures Contract.

Summary: Thailand Futures Exchange Pcls Request for No-Action Relief in Connection with the Offer and Sale in the United States of its Futures Contract Based on the SET50 Index Futures Contract.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5120

Facsimile: (202) 418-5524

Office of General Counsel

CFTC Letter No. 08-19

November 26, 2008

No-Action

Office of General Counsel

Kathryn M. Trkla, Esq.

Foley & Lardner LLP

321 North Clark Street, Suite 2800

Chicago, IL 60610-4764

Re:

Thailand Futures Exchange Pcl’s Request for No-Action Relief in Connection

with the Offer and Sale in the United States of its Futures Contract Based on the

SET50 Index Futures Contract

Dear Ms. Trkla:

This is in response to your letters, attachments, facsimiles and electronic mail dated from

February 23, 2007 to April 30, 2008, requesting on behalf of the Thailand Futures Exchange Pcl

(“TFEX”), that the Office of General Counsel (“Office”) of the Commodity Futures Trading

Commission (“Commission” or "CFTC") issue a “no-action” letter concerning the offer and sale

in the United States of TFEX’s futures contract based on the SET50 Index (“SET50” or

“Index”).

We understand the facts to be as follows. TFEX was established on May 17, 2004 as a

subsidiary of the Stock Exchange of Thailand (“SET”). It was formed to be the primary

centralized marketplace in Thailand for financial and non-agricultural derivatives. All trading on

TFEX occurs electronically through an integrated trading and clearing platform. TFEX is

subject to regulation under the Thailand Derivatives Act, B.E. 2546, which is administered by

the Thailand Securities and Exchange Commission (“Thailand SEC”). The Thailand SEC

approved TFEX’s license to operate as a derivatives exchange on February 11, 2005

d non-agricultural derivatives. All trading on

TFEX occurs electronically through an integrated trading and clearing platform. TFEX is

subject to regulation under the Thailand Derivatives Act, B.E. 2546, which is administered by

the Thailand Securities and Exchange Commission (“Thailand SEC”). The Thailand SEC

approved TFEX’s license to operate as a derivatives exchange on February 11, 2005. Subject to

the Thailand SEC’s oversight, TFEX is required to have effective market surveillance and trade

practice surveillance programs in place.1

1 See letter from Kathryn M. Trkla, Foley & Lardner LLP, to Nanette R. Everson, General

Counsel, CFTC, dated February 23, 2007, at 1, 7. In addition, TFEX’s rules and contracts are

subject to approval by the Thailand SEC. In order to obtain approval for a contract, TFEX must

demonstrate to the Thailand SEC that the contract can be used for hedging and price discovery

and meets other standards. In reviewing a contract submission, the Thailand SEC, among other

things, considers the potential price impact of the contract on the underlying cash market, cash

market liquidity, the prevention of price manipulation and, for a cash-settled contract, the

integrity of the cash settlement price calculations. The Thailand SEC determined that the SET50

The SET50 is a broad-based, free-float, market-capitalization-weighted, composite index

of 50 of the most highly capitalized and liquid stocks currently listed for trading on the SET.

Created by the SET in 1995, the SET50 is designed to represent the overall performance of the

Thai stock market

tegrity of the cash settlement price calculations. The Thailand SEC determined that the SET50

The SET50 is a broad-based, free-float, market-capitalization-weighted, composite index

of 50 of the most highly capitalized and liquid stocks currently listed for trading on the SET.

Created by the SET in 1995, the SET50 is designed to represent the overall performance of the

Thai stock market. To be eligible for inclusion in the Index, stocks must have been listed on the

SET for at least six months and rank among the top 200 stocks in terms of market capitalization.2

After eligible stocks have been identified, the top 50 stocks in terms of average daily market

capitalization are chosen for inclusion in the SET50.3 Based on data supplied by TFEX, the total

adjusted market capitalization of the stocks in the SET50 was US$ 137.90 billion as of February

futures contract meets the applicable standards and approved the contract for trading on February

22, 2006. Id. at 7-8.

2 In addition, the monthly turnover value of the stock must be more than 50% of the total average

turnover value per stock for the top 200 stocks listed on the SET in the same month for at least 9

of the 12 months in the evaluation period. Stocks also must maintain their share distribution or

free-float qualification so that ordinary shareholders hold not less than 20% of the capital in the

company. Stocks that have been listed for trading for over 6 months, but less than 12 months,

must have been in the top 200 in terms of market capitalization for the entire time that they were

so listed. A stock is not eligible for inclusion in the Index if it is being delisted due to the

regulations of the SET, the stock is being voluntarily delisted, or trading has been suspended or

might be suspended for an extended period of time. See letter from Kathryn M

t less than 12 months,

must have been in the top 200 in terms of market capitalization for the entire time that they were

so listed. A stock is not eligible for inclusion in the Index if it is being delisted due to the

regulations of the SET, the stock is being voluntarily delisted, or trading has been suspended or

might be suspended for an extended period of time. See letter from Kathryn M. Trkla, Foley &

Lardner LLP, to Julian E. Hammar, Assistant General Counsel, CFTC, dated February 25, 2008,

Appendix F.

3 Id. The SET reviews the Index bi-annually in June and December, and the list of new stocks is

made available as soon as it has been determined during the evaluation month. The new

composition takes effect beginning on the first business day in January and July. If necessary,

ongoing revisions to the Index may occur. If a stock is removed from the Index, it is replaced

with another stock from those ranked 51 through 55 in terms of average daily market

capitalization. Changes are made to the Index when the market value of a component stock

changes for non-market-related reasons, e.g. due to conversion of convertible stocks, exercising

of warrants, issuing of new shares, etc. If a constituent company merges with another company

(constituent or non-constituent) and the free-float proportion of the new company’s shares is at

least 20%, then the new company will be included in the Index after the close of business on the

first trading day after the merger. If the merger is between two constituent companies, the

resulting vacancy will be filled with a non-constituent company on the replacement list. The

SET announces the new Index constituents as soon as possible following the merger

the new company’s shares is at

least 20%, then the new company will be included in the Index after the close of business on the

first trading day after the merger. If the merger is between two constituent companies, the

resulting vacancy will be filled with a non-constituent company on the replacement list. The

SET announces the new Index constituents as soon as possible following the merger.

Under Section 99 of the Thailand Derivatives Act, it is unlawful for directors, employees, agents

or any person working for the stock exchange, stock clearinghouse, derivatives exchange or

derivatives clearinghouse who has possession of material, non-public information to engage in a

derivatives transaction or offer to sell a derivatives transaction in connection with such

information for his own benefit or the benefit of others, or to disclose such information to

another person when he knows or should have known that such person may take advantage of

such information by engaging in a derivatives transaction. See letter from Ms. Trkla to Ms.

Everson, dated Febraury 23, 2007, Appendix I.

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5, 2008.4 The largest single security by weight represented about 19.59%, and the five largest

securities by weight represented about 46.52%, of the SET50.5 The securities comprising the

lowest 25% of the SET50 had an aggregate value of average daily trading volume of about US$

73 million over the six-month period ending February 5, 2008.6 The SET50 is calculated in real

time and disseminated by electronic means through major data vendors.7

TFEX’s futures contract on the SET50 began trading on April 28, 2006. The futures

contract provides for cash settlement. Prices are quoted in Index points with each Index point

equal to Bhat 1,000 per contract. The minimum price fluctuation is one-tenth of one Index point.

TFEX currently lists for trading the nearest four months of the March quarterly cycle

through major data vendors.7

TFEX’s futures contract on the SET50 began trading on April 28, 2006. The futures

contract provides for cash settlement. Prices are quoted in Index points with each Index point

equal to Bhat 1,000 per contract. The minimum price fluctuation is one-tenth of one Index point.

TFEX currently lists for trading the nearest four months of the March quarterly cycle. The

contract is subject to a position limit of 10,000 contracts in any contract month or all months

combined. The last trading day is the business day immediately prior to the last business day of

the contract month. The final settlement price is determined by taking the values of the SET50 at

one-minute intervals from 4:01 p.m. to 4:30 p.m. on the last trading day, discarding the three

highest and three lowest observations, and calculating the simple average of the remaining 24

values rounded to two decimal places.8

The Commodity Exchange Act (“CEA”),9 as amended by the Commodity Futures

Modernization Act of 2000 (“CFMA”),10 provides that the offer or sale in the U.S. of futures

contracts based on a group or index of securities, including those contracts traded on or subject

to the rules of a foreign board of trade, is subject to the Commission's exclusive jurisdiction,11

with the exception of security futures products,12 over which the Commission shares jurisdiction

with the Securities and Exchange Commission (“SEC”).13 Thus, the Commission’s jurisdiction

4 See letter from Ms. Trkla to Mr. Hammar, dated February 25, 2008, at 2 and Appendix C.

5 Id. at 3 and Appendix C.

6 Id. and Appendix H.

7 See letter from Ms. Trkla to Ms. Everson, dated February 23, 2007 at 3.

8 Id. Appendix A (Procedures).

9 7 U.S.C. § 1 et seq.

10 Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000).

11 See CEA Section 2(a)(1)(C)(ii)

4 See letter from Ms. Trkla to Mr. Hammar, dated February 25, 2008, at 2 and Appendix C.

5 Id. at 3 and Appendix C.

6 Id. and Appendix H.

7 See letter from Ms. Trkla to Ms. Everson, dated February 23, 2007 at 3.

8 Id. Appendix A (Procedures).

9 7 U.S.C. § 1 et seq.

10 Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000).

11 See CEA Section 2(a)(1)(C)(ii).

12 A security futures product is defined as a security future or any put, call, straddle, option, or

privilege on any security future. See CEA Section 1a(32). A security future is defined as a

contract of sale for future delivery of a single security or of a narrow-based security index,

including any interest therein or based on the value thereof, with certain exceptions. See CEA

Section 1a(31).

13 See CEA Section 2(a)(1)(D).

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remains exclusive with regard to a futures contract on a group or index of securities that is broad-

based pursuant to CEA Section 1a(25).14

CEA Section 2(a)(1)(C)(iv) generally prohibits any person from offering or selling a

futures contract based on a security index in the U.S., except as permitted under CEA Section

2(a)(1)(C)(ii) or CEA Section 2(a)(1)(D).15 By its terms, CEA Section 2(a)(1)(C)(iv) applies to

futures contracts on security indices traded on both domestic and foreign boards of trade. CEA

Section 2(a)(1)(C)(ii) sets forth three criteria to govern the trading of futures contracts on a group

or index of securities on designated contract markets and registered derivatives transaction

execution facilities (“DTEFs”):

(1)

the contract must provide for cash settlement;

(2)

the contract must not be readily susceptible to manipulation nor to being used to

manipulate any underlying security; and

(ii) sets forth three criteria to govern the trading of futures contracts on a group

or index of securities on designated contract markets and registered derivatives transaction

execution facilities (“DTEFs”):

(1)

the contract must provide for cash settlement;

(2)

the contract must not be readily susceptible to manipulation nor to being used to

manipulate any underlying security; and

(3)

the group or index of securities must not constitute a narrow-based security

index.16

While Section 2(a)(1)(C)(ii) provides that no contract market or DTEF may trade a

security index futures contract unless it meets the three criteria noted above, it does not explicitly

address the standards to be applied to a foreign security index futures contract traded on a foreign

board of trade. This Office has applied those same three criteria in evaluating requests by

foreign boards of trade to allow the offer and sale within the U.S. of their foreign security index

14 See CEA Section 2(a)(1)(C)(ii).

15 CEA Section 2(a)(1)(D) governs the offer and sale of security futures products.

16 The first two criteria under CEA Section 2(a)(1)(C)(ii) were unchanged by the CFMA. With

regard to the third criterion, an index is a “narrow-based security index” under both the CEA and

the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C

14 See CEA Section 2(a)(1)(C)(ii).

15 CEA Section 2(a)(1)(D) governs the offer and sale of security futures products.

16 The first two criteria under CEA Section 2(a)(1)(C)(ii) were unchanged by the CFMA. With

regard to the third criterion, an index is a “narrow-based security index” under both the CEA and

the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et seq., 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 in the aggregate comprise more than 60% of the index’s

weighting; or (4) the lowest weighted component securities comprising, in the aggregate, 25% 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).

See CEA Section 1a(25)(A)(i)-(iv); Exchange Act Section 3(a)(55)(B)(i)-(iv). Thus, an index

that does not have any of these elements is not a narrow-based security index for purposes of

CEA Section 2(a)(1)(C)(ii). See also CEA Section 1a(25)(B); Exchange Act Section

3(a)(55)(C).

4

futures contracts when those foreign boards of trade do not seek designation as a contract market

or registration as a DTEF to trade those products.17

Accordingly, Commission staff has examined the SET50 and TFEX’s futures contract

based thereon, to determine whether the Index and the futures contract meet the requirements

enumerated in CEA Section 2(a)(1)(C)(ii)

tion

3(a)(55)(C).

4

futures contracts when those foreign boards of trade do not seek designation as a contract market

or registration as a DTEF to trade those products.17

Accordingly, Commission staff has examined the SET50 and TFEX’s futures contract

based thereon, to determine whether the Index and the futures contract meet the requirements

enumerated in CEA Section 2(a)(1)(C)(ii). Based on the information noted herein and as set

forth in the letter, attachments, facsimiles and electronic mail cited above, we have determined

that the SET50, and TFEX’s futures contract based thereon, conform to these requirements.18

In determining whether a foreign futures contract based on a foreign security index is not

readily susceptible to manipulation or being used to manipulate any underlying security, one

preliminary consideration is the requesting exchange’s ability to access information regarding

the securities underlying the index. As noted above, all of the stocks underlying the SET 50 are

traded on the SET, TFEX’s parent company. TFEX represents that, because it is a subsidiary of

the SET, the two exchanges share relevant information with one another as necessary and

appropriate to perform their respective market surveillance responsibilities.19 Accordingly,

TFEX should have access to information with respect to the securities underlying the SET50

necessary to detect and deter manipulation. In the event that TFEX is unable to obtain access to

adequate surveillance data in this regard, or is unable, either directly or through the Thailand

SEC, to share such data with the CFTC, this Office reserves the right to reconsider the position

we have taken herein.20

17 With regard to the third criterion, the CFTC and SEC jointly promulgated Rule 41.13 under

the CEA and Rule 3a55-3 under the Exchange Act, governing security index futures contracts

traded on foreign boards of trade

ailand

SEC, to share such data with the CFTC, this Office reserves the right to reconsider the position

we have taken herein.20

17 With regard to the third criterion, the CFTC and SEC jointly promulgated Rule 41.13 under

the CEA and Rule 3a55-3 under the Exchange Act, governing security index futures contracts

traded on foreign boards of trade. These rules provide that “[w]hen a contract of sale for future

delivery on a security index is traded on or subject to the rules of a foreign board of trade, such

index shall not be a narrow-based security index if it would not be a narrow-based security index

if a futures contract on such index were traded on a designated contract market or registered

derivatives transaction execution facility.” CFTC Rule 41.13, 17 C.F.R. § 41.13; Exchange Act

Rule 3a55-3, 17 C.F.R. § 240.3a55-3.

18 In making this determination, Commission staff has concluded that the SET50 does not have

any of the elements of a narrow-based security index as enumerated in CEA Section 1a(25)(A).

Accordingly, the Index would not be a narrow-based security index if traded on a designated

contract market or DTEF.

19 See letter from Ms. Trkla to Ms. Everson, dated February 23, 2007, at 5.

20 TFEX has confirmed that it will share information with the Commission upon request, either

directly or indirectly through the Thailand SEC, to the extent permitted under the Thailand

Derivatives Act. See letter from Ms. Trkla to Ms. Everson, dated February 23, 2007, at 6. In this

regard, TFEX may share non-client information directly with the Commission. Client

information, however, may only be shared through the Thailand SEC. Such information may be

shared through the Multilateral Memorandum of Understanding Concerning Consultation and

Cooperation and the Exchange of Information of the International Organization of Securities

Commissions (“IOSCO MOU”), to which the Thailand SEC and the Commission are signatories.

5

y with the Commission. Client

information, however, may only be shared through the Thailand SEC. Such information may be

shared through the Multilateral Memorandum of Understanding Concerning Consultation and

Cooperation and the Exchange of Information of the International Organization of Securities

Commissions (“IOSCO MOU”), to which the Thailand SEC and the Commission are signatories.

5

6

In light of the foregoing, this Office will not recommend enforcement action to the

Commission based on Sections 2(a)(1)(C)(iv), 4(a), or 12(e) of the CEA, as amended, if TFEX’s

futures contract based on the SET50 is offered or sold in the U.S. Because this position is based

upon facts and representations contained in the letters, attachments, facsimiles and electronic

mail cited above, it should be noted that any different, omitted or changed facts or conditions

might require a different conclusion. This position also is contingent on the continued

compliance by TFEX with all regulatory requirements imposed by the Thailand SEC, and the

applicable laws and regulations of Thailand. In addition, this position may be affected by any

rules that the Commission may adopt regarding futures contracts based on non-narrow-based

security indices.

The offer and sale in the U.S. of TFEX’s futures contract on the SET50 is, of course,

subject to Part 30 of the Commission’s regulations, which governs the offer and sale of foreign

futures and foreign option contracts in the U.S.21

Sincerely,

Terry S. Arbit

General Counsel

The IOSCO MOU is a multilateral mechanism for sharing surveillance information on a bilateral

basis between regulators

t on the SET50 is, of course,

subject to Part 30 of the Commission’s regulations, which governs the offer and sale of foreign

futures and foreign option contracts in the U.S.21

Sincerely,

Terry S. Arbit

General Counsel

The IOSCO MOU is a multilateral mechanism for sharing surveillance information on a bilateral

basis between regulators. Prior to signing the IOSCO MOU, a regulator must establish through a

fair and transparent process that it has the legal capacity to fulfill its terms and conditions.

21 See 17 C.F.R. Part 30.