Single Stock Futures and Cross-Border Access for US Investors
Eric J. Pan
US Commodity Futures Trading Commission
Stanford Journal of Law, Business, and Finance, Vol. 14, No. 1, 2008
Cardozo Legal Studies Research Paper No. 227
In the face of growing demand by US investors for access to foreign markets and pressure to restore US capital markets competitiveness, the Securities and Exchange Commission (SEC) is gradually negotiating mutual recognition arrangements with select foreign markets - arrangements that will allow foreign exchanges and brokers to operate in the United States without direct SEC oversight. The SEC's willingness to even consider such arrangements marks a significant shift in SEC regulatory strategy because it means that the SEC now accepts that certain foreign regulatory standards are comparable or even superior to US standards - standards that the SEC frequently asserts are the highest in the world.
The amount of regulatory energy being expended by the SEC to determine how to agree on comparable standards with foreign regulators is puzzling given the SEC's longstanding antipathy to financial innovation at home and its competitive attitude toward the Commodity Futures Trading Commission. This contradiction is no more apparent than in the case of single stock futures (SSFs).
SSFs are futures contracts based on the shares of individual companies. By purchasing SSFs on foreign company shares, investors will be able to gain exposure to the price movements of a potentially unlimited number of foreign securities on a single exchange, under a single regulatory regime and without many of the costs of transacting in the underlying foreign securities themselves. As a result, SSFs address several of the SEC's concerns associated with mutual recognition: trading of SSFs takes place entirely within the United States on US-regulated exchanges and is handled by US-regulated brokers; contracts are governed by US law and approved by US regulators; and the clearance and settlement of the contracts take place within the United States. By eliminating the need for US investors to access foreign exchanges or place orders with foreign brokers, SSF trading makes it less necessary to seek convergence of foreign regulation with US regulation to permit cross-border access for US investors.
This paper argues that the SEC should recognize the advantages of SSFs to crossborder investment and relinquish its opposition to SSF trading in the United States.
Number of Pages in PDF File: 49
Keywords: Securities Regulation, Futures Regulation, Mutual Recognition, International Finance, SEC, CFTC, Exchange Competition
Date posted: March 18, 2008 ; Last revised: December 5, 2008