CFTC and SEC:

Issues Related to the Shad-Johnson Jurisdictional Accord

GGD-00-89: Published: Apr 6, 2000. Publicly Released: Apr 6, 2000.

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Pursuant to a congressional request, GAO reviewed the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) and the issues the two have in relation to the Shad-Johnson Jurisdictional Accord, focusing on: (1) the extent to which U.S. securities, foreign futures, and over-the-counter (OTC) markets trade stock-based derivatives that are economically similar to the futures prohibited from trading by the accord; (2) the potential effect of the accord trading prohibitions on derivatives market participants; (3) concerns about calls to repeal the accord trading prohibitions; and (4) jurisdictional and other approaches to addressing these concerns.

GAO noted that: (1) U.S. securities, foreign futures, and OTC markets trade derivatives that are based on single stocks and stock indexes; (2) however, the Shad-Johnson Jurisdictional Accord precludes U.S. futures exchanges from trading futures on single stocks and certain stock indexes; (3) specifically, U.S. securities exchanges trade options on over 2,600 single stocks; (4) in addition, 9 foreign exchanges trade single stock futures on at least 189 foreign stocks; (5) as of year-end 1998, the equity swaps market worldwide had an estimated total notional value of $146 billion, accounting for a fraction of a percent of the total notional value of the OTC derivatives market worldwide; (6) although investors can use stock-based options and equity swaps to hedge price risk, they cannot use stock-based futures to the same extent because of the accord prohibitions on single stock and certain stock index futures; (7) some futures industry officials have said that the accord prohibitions should be repealed, because they have restricted U.S. futures exchanges from competing with other markets that trade derivatives on single stocks and narrow-based stock indexes; (8) in response to calls to repeal the accord trading prohibitions, SEC, the U.S. securities exchanges, the President's Working Group on Financial Markets, and several members of Congress have expressed concerns about doing so without first resolving applicable differences between securities and commodities laws and regulations; (9) their concerns center on the potential for single stock and certain stock index futures to be used as substitutes for single stocks to circumvent federal securities laws and regulations; (10) according to SEC and securities exchange officials, the prohibited futures could be allowed to trade, if they were regulated as securities; (11) these officials said that such an approach would enable SEC to ensure that stocks and stock-based derivatives were regulated consistently; (12) in response to congressional requests for action, SEC and CFTC have agreed to an approach that would allow single stock futures to be traded on both U.S. securities and future exchanges; and (13) under this approach, the agencies would jointly regulate such futures, the intermediaries that offered them, and the markets that traded them.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendation for Executive Action

    Recommendation: Given the potential benefits of repealing the accord trading prohibitions and the potential for jurisdictional differences to continue to impede such efforts, the Chairman, SEC, and the Chairman, CFTC, should: (1) work together and with Congress to develop and implement an appropriate legal and regulatory framework for allowing the trading of futures on single stocks and all stock indexes; and (2) submit to Congress legislative proposals for repealing the accord trading prohibitions.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC and CFTC agreed on a legal framework to allow for the trading of futures on single stocks and submitted a legislative proposal to Congress. On December 21, 2000, the President signed the Commodity Futures Modernization Act of 2000 which, among other things, lifted the ban on trading futures on single stocks.

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