UPDATE 1-U.S. SEC says Eurex made missteps in handling of its futures index
By Sarah N. Lynch
WASHINGTON Aug 8 (Reuters) - The U.S. Securities and Exchange Commission on Thursday accused the Germany-based futures exchange Eurex with violating federal securities laws related to sales to U.S. investors, but said it decided not to formally charge Eurex's operator, Deutsche Boerse, with any wrongdoing.
In deciding not to charge Deutsche Boerse, the SEC said it was due in part to the exchange's "substantial and timely cooperation."
However, the SEC said it was issuing an investigative report outlining the findings of its inquiry to serve as a warning to all foreign exchanges.
According to the SEC's report, Eurex failed to seek permission before letting U.S. investors buy contracts on the Euro STOXX Banks Index, a narrow-based security futures index.
Under U.S. law, any securities futures index comprised of more than nine securities is considered "broad-based" and subject to oversight by the Commodity Futures Trading Commission, the U.S. regulator which oversees the vast majority of the futures market.
But if the index has fewer than nine securities and its five highest-weighted securities comprise more than 60 percent, it is considered narrow-based and falls to the SEC.
The SEC has long had oversight over narrow security futures indices because they are more prone to potential market manipulation or insider-trading violations.
The SEC's report said that when Eurex first started selling futures on the Euro STOXX Banks Index more than 10 years ago, the index was broad-based and the exchange got the proper permission from the CFTC.
At that time, the SEC said the index consisted of stocks from 44 issuers in 10 European countries, including Italy, Greece, Spain, Germany, Ireland, and Belgium, among others.
However, in October 2011, Eurex reviewed the composition of the index for the first time after the CFTC asked it to confirm it was still broad-based.
During the review, the exchange discovered that in April 2010, it had transitioned into a narrow index because the five highest-weighted securities exceeded the 60 percent threshold.
From the time it transitioned into a narrow-based index until the problem was discovered, Eurex sold 6 million futures contracts through 79 foreign broker-dealers, some of whom in turn sold to U.S. investors.
Eurex self-reported the problem to both the SEC and CFTC.
"Eurex took notice of the SEC report. As market operator, we share the commission's view that market integrity is essential and has to be protected," said Heiner Seidel, spokesman for Eurex.
"We are in constant dialogue with all relevant regulatory bodies. With regard to the SEC report, there has been and will be no further enforcement or other action by the commission in this matter."
The SEC's investigative report marks the latest in a series of high-profile actions against exchanges, as part of a broader crackdown by the agency's enforcement division into market structure concerns.
Since 2011, the SEC has taken enforcement actions against exchanges including Direct Edge, NYSE Euronext, Nasdaq OMX and the Chicago Board Options Exchange on a wide variety of alleged violations.
Its action against Eurex is the least serious because it does not entail civil charges.
Instead, it involves an enforcement tool known as a "21(a)" report of investigation, named for a section in U.S. securities laws.
Such reports are not as common as filing civil charges against defendants, though in the past year the SEC has been increasingly using public reports of investigation as a way to make an example of companies or highlight areas of concern.
"As the compositions of exchange indices fluctuate, it is critically important for exchanges to have policies and procedures in place to effectively monitor the composition of their indices and ensure that they are appropriately offering securities based on those indices to U.S. investors," said Daniel Hawke, the head of the SEC Enforcement Division's Market Abuse Unit, which has been spearheading the focus on market structure enforcement cases.
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