News Briefs
by Editorial Staff
Treasury Suspends Thirty-Year Bond Issuance
The Treasury Department on Oct. 31 cancelled an upcoming auction of 30-year Treasury bonds and said it plans to cease issuing debt in this maturity in order to reduce its borrowing costs. Analysts said the move reflects a shift in the government’s borrowing towards shorter-term debt, as well as a long-term reduction in the federal deficit.
“We do not need the 30-year bond to meet the government’s current financing needs, nor those that we expect to face in coming years,” Peter Fisher, the Treasury Department’s Under Secretary for Domestic Finance, told reporters at the agency’s quarterly refunding press conference.
“The 30-year bond no longer maintains a position of significance in the financial markets,” Fisher continued. “Its role and its liquidity have been significantly impaired by the substantial reduction of issuance that has occurred over the last decade. But the markets have functioned smoothly during this period while both activity and attention have shifted to our 10-year offerings.”
The timing of the announcement stunned the markets, driving the price of the 30-year bond up 5-10/32 points to 107-28/32 and knocking the yield down to 4.87 percent, the lowest in nearly three years.
The Chicago Board of Trade issued a statement the same day affirming that it will continue trading futures on the remaining supply of 30-year bonds. The statement also questioned the rationale for Treasury’s decision and emphasized the successful launch of CBOT’s new 10-year swaps futures contract.
Euronext Wins Auction for LIFFE
The London International Financial Futures and Options Exchange, Europe’s second largest futures exchange, said October 29 that it had accepted a takeover offer from Euronext valued at 555 million pounds sterling, or 18.25 pounds per share.
The landmark deal is likely to accelerate the consolidation process among European exchanges and deals a major setback to the London Stock Exchange, analysts said. The deal also will impact the U.S. securities world; Euronext said it is “strongly committed” to LIFFE’s alliance with Nasdaq, which was established earlier this year to trade single stock futures.
Euronext was formed last year through the merger of exchanges in three countries—France, Belgium and the Netherlands—and went public this past July. The combined entity plans to move all of its derivatives business to LIFFE’s Connect electronic trading system. LIFFE’s management, including top executives Brian Williamson and Hugh Freedberg, will remain in place, and London will become the main center for the combined entity’s futures and options activities.
“The combination of Euronext and LIFFE and, in particular, the placing of Euronext’s derivatives operations under the LIFFE umbrella will bring together two major players in the global derivatives exchange market to the benefit of their respective users,” the two exchanges said in a statement.
Clearing will be handled on a product-by-product basis, with the London Clearing House continuing to clear LIFFE products and Clearnet handling Euronext’s equity-based products. Clearnet, a subsidiary of Euronext, uses the Clearing 21 system for both equity and equity-based derivatives.
LCH gains CFTC Approval for Swaps Clearing
The Commodity Futures Trading Commission on October 30 granted regulatory approval to the London Clearing House to operate in the U.S. as a “derivatives clearing organization.”
In practical terms, the decision means that the LCH is now free to provide clearing and settlement services in over-the-counter interest rate swap contracts through its SwapClear facility and in OTC energy derivatives contracts executed through its partner, the InterContinental Exchange.
The CFTC said LCH is the first offshore clearing organization, and only the second overall, to be granted this status since last year, when Congress created a new regulatory structure for exchanges and clearinghouses in the Commodity Futures Modernization Act.
SEC, CFTC Propose Margin Rules for Security Futures
U.S. securities and futures regulators on September 25 proposed a complex set of margin rules for security futures as part of their continuing effort to establish the regulatory framework for the new products.
Among other things, the proposed rules set the initial and maintenance margin at 20 percent of current market value, on the theory that this would be the amount of margin required for comparable stock options.
The proposal also applies the Federal Reserve’s Regulation T, which governs extensions of credit by broker-dealers. This would require all firms to record transactions in security futures in a Reg. T margin account even if the positions were held in a futures account. In effect, this would prevent firms from combining security futures with traditional futures in a single account.
Industry lawyers believe that the rules—as proposed—would require substantial changes in the way that the futures industry establishes and collects margin from its customers. The joint committee set up by the FIA and the Securities Industry Association is preparing to file a response to this proposal during the official comment period, which ends on December 5.
In a separate but related action, both agencies have agreed to issue proposed rules establishing how customer protection rules and certain other regulations will apply to securities futures accounts. Under these rules, firms would be able to choose—or let their customers choose—whether to hold security futures positions in a futures account subject to the segregation requirements of the CEA, or in a securities account subject to Exchange Act Rule 15c3-3 and SIPA.
Congress Completes Action on Money Laundering Legislation
President George W. Bush on October 26 signed into law the USA Patriot Act, a wide-ranging anti-terrorism bill drafted by Congress that includes a number of anti-money laundering provisions. These provisions are aimed primarily at preventing the illicit movement of funds through the banking system, but they will also impose several new regulatory requirements on the securities and futures industries.
For example, all securities firms will be required to report suspicious activity to the federal government by July 1, 2002. The new laws also give Treasury the authority to impose a similar reporting requirement on futures commission merchants, commodity trading advisors and commodity pool operators. However, rather than mandating a requirement by a specific date, Congress only said that Treasury “may prescribe” regulations in consultation with the CFTC, thus giving Treasury some discretion in this area.
The bill contains two other anti-money laundering provisions of interest to the futures industry. First, section 326 will require all financial institutions, including entities regulated by the CFTC, to establish procedures for verifying the identity of any person seeking to open an account. Among other things, financial institutions will have to check names against a confidential “control list” of known or suspected terrorists that will be provided jointly by the regulators. (See October 18 release by the CFTC.) The deadline for compliance is October 2002.
Second, section 352 imposes an obligation on banks and broker-dealers to establish anti-money laundering programs (internal controls and internal reporting protocols), and sets a six-month deadline for compliance. Treasury will prescribe “minimum standards” for compliance with this requirement within that six-month timeframe, but Treasury also has the authority to exempt certain classes of financial institutions from these standards. It is not clear if this obligation will be imposed on the futures industry.
The final text of the entire anti-terrorism bill can be viewed and downloaded by going to the Web site for Congress at http://thomas.loc.gov/ and searching for H.R. 3162. The provisions on money laundering are contained in Title III.
