Futures products based on “broad-based” securities indices – indices whose holdings are diffuse – are regulated by the Commodity Futures Trading Commission.  Futures products based on “narrow-based” securities indices – indices whose holdings are concentrated in a few securities – by contrast, are regulated jointly by the SEC and CFTC.  The Exchange Act requires that (1) any futures product based on a “narrow-based” securities index be listed on a national securities exchange or national securities association registered under the Exchange Act and (2) any exchange that effects transactions in securities be registered as a national securities exchange or be exempt from registration.

On August 8, 2013, the SEC issued an investigative report under Section 21(a) of the Exchange Act concerning violations of the foregoing requirements by Eurex, a German derivatives exchange, relating to Eurex’s sale of security futures products to U.S. investors.  According to the report, when Eurex first started selling futures on the Euro STOXX Banks Index more than 10 years ago, that index was broad-based and did not trigger SEC oversight of the futures product or Eurex.  When Eurex reviewed the index’s composition in 2011, however, it discovered that the index had become narrow-based about 18 months earlier.  While the SEC did not bring an enforcement action against Eurex, due in part to Eurex’s substantial cooperation and remedial efforts, the SEC admonished exchanges and investment professionals to monitor the compositions of indices on which financial products are based:

“When offering financial instruments based on indices, exchanges and investment professionals should take the appropriate steps to verify that they are in compliance with the federal securities laws, which could include establishing policies and procedures to appropriately monitor the composition of indices on which futures are based to determine if they are offering security futures products. In analogous situations involving security-based swaps, investment professionals who engage in swap transactions similarly are responsible for ascertaining the characteristics of such swaps to ensure that, if such swaps are security-based swaps, the investment professional is appropriately offering the securities to persons in the United States, and meeting all registration and other requirements associated with those securities.”