Appendix III The Shad-Johnson Jurisdictional Accord

Appendix III

The Shad-Johnson Jurisdictional Accord

The Shad-Johnson Jurisdictional Accord is an agreement reached between

Rationale for the

the Chairmen of SEC and CFTC in 1981 to resolve a dispute concerning

Accord

jurisdiction over securities-based derivatives. The dispute was precipitated

by CFTC's 1975 approval of a Chicago Board of Trade (CBT) futures

contract on Government National Mortgage Association pass-through

mortgage-backed certificates. SEC challenged CFTC's decision, asserting

that the contracts for future delivery of these certificates were securities

falling within its regulatory jurisdiction. SEC later approved an option on

the certificates for trading on a securities exchange. CBT subsequently

prevailed in a court challenge of SEC's approval, arguing that the option

was subject to CFTC's exclusive jurisdiction. In 1981, the SEC and CFTC

Chairmen entered into an agreement to clarify each agency's jurisdiction.

This agreement was codified in the Securities Acts Amendments of 1982

and in the Futures Trading Practices Act of 1982 that amended the CEA by,

among other things, adding section 2(a)(1)(B). (See the glossary at the end

of the report for definitions.)

Under the accord, CFTC retained exclusive jurisdiction over all futures

contracts, including futures on securities-based indexes and options on

futures and physical commodities. CFTC was also given jurisdiction over

options on foreign currencies not traded on a national securities exchange

(subject to the limitations imposed by the Treasury Amendment). (See

app. IV on the Treasury Amendment.) Futures and options on futures on

securities indexes were allowed only for contracts settled in cash, not

readily susceptible to manipulation, and derived from a substantial

segment of a publicly traded group or index of equity or debt securities,

called broad-based indexes. Such contracts were also subject to initial SEC

review for compliance with these requirements. If SEC determined that a

proposal did not meet these requirements, CFTC could not approve the

contract for trading. Under the accord, SEC retained jurisdiction over

securities, including options on securities, options on certificates of

deposit, options on securities indexes, and options on foreign currency

traded on a national securities exchange.

Futures contracts on individual securities, other than exempted securities

(such as U.S. Treasuries), were prohibited by the accord. The CFTC

chairman who negotiated the accord stated at the CFTC reauthorization

roundtable that the accord was intended to ban certain stock-based

futures until issues of concern to SEC could be addressed. According to

the legislative history, SEC was concerned that the regulatory scheme

Under the accord, SEC authority applied only to contracts proposed on or after December 9, 1982.

The accord provided that CFTC was to consult with SEC on proposals made before that date.

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