CFTC Staff Grants No-Action Relief to Korean Stock Indices

Commentary by Nihal Patel

The CFTC Division of Market Oversight ("DMO") granted no-action relief to Korea Exchange, Inc. ("KRX") to permit the sale of futures contracts linked to the Korea Composite Stock Price Index ("KOSPI") during the period in which the index transitions from being "narrow-based" to "broad-based."

The letter comes in response to concerns that KOSPI has bounced back and forth between being a broad-based and narrow-based index. As relevant for purposes of the letter, futures on narrow-based security indices are subject to joint SEC-CFTC jurisdiction and may only be sold to qualified institutional buyers, whereas qualified institutional buyer status is not required for sales of futures on broad-based security indices.

The letter provides relief during the relevant transition period to permit the futures to continue to be sold to QIBs pursuant to the SEC-CFTC requirements until the CFTC certifies the index for broad-based index futures pursuant to CFTC Regulation 30.13 ("Commission certification"). The relief is subject to KRX (i) submitting a material request for certification to the CFTC on the effective date, (ii) cooperating with the CFTC throughout the review process and (iii) abiding by all provisions set forth in CFTC Regulation 30.13 pending certification review. The letter would permit the purchase and sale of any contracts listed on or after the effective date of October 24, 2022. The relief will continue until the earliest of (i) the affirmation, termination or denial of the request for certification of the contracts or (ii) April 24, 2023.

CFTC Commissioner Summer K. Mersinger supported the relief, but lamented the fact that the CFTC is issuing a second no-action relating to this index in less than a year and said that the CFTC should instead amend Regulation 30.13 to provide a permanent fix instead of relying on "temporary band-aids and work-arounds" to make "unworkable or extremely unwieldly" rules work in practice.

Commentary

This is a wonderful example of the absurdity of the CFTC-SEC jurisdictional divide. The same security index bounces between being widely available and available only to institutional investors for reasons that have nothing to do with risk or customer protection. (It is hard to agree with Ms. Mersinger that it is worth the CFTC's time and resources to amend this particular rule because the statute limits the ability to really deal with this inanity without getting the SEC involved too.)

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