Effective July 1, 2020, the KRX300 (a Korean Large-Cap Index) Futures Contract will no longer be considered a broad-based security index futures contract and instead will be subject to joint regulation by the CFTC and SEC as a foreign security futures contract.
The Korea Exchange (KRX) announced on May 19 a change in the US regulatory status of the KRX300 futures contract. KRX received US Commodity Futures Trading Commission (CFTC) certification of the KRX300 futures contract in March 2019, allowing KRX to offer and sell this contract as a broad-based security index to persons located within the United States. However, in light of changes in the market values of certain components of the index, the index will be considered a narrow-based security index effective July 1, 2019. As a result, the US regulatory status of the futures on the KRX300 will also change because of the index’s new characterization. KRX has advised those US persons who are not permitted to hold positions in non-US narrow-based security index futures to liquidate their positions by the close of trading on June 30, 2020. KRX experienced a similar recharacterization with the KOSPI 200 futures contract in April 2020.
As a result of the change in regulatory status, futures on the KRX300 will now be “security futures contracts,” with a number of consequences for US persons (including funds) that trade futures on the KRX300. Security futures are deemed to be both securities and futures, subject to joint jurisdiction and regulation by the CFTC and the US Securities and Exchange Commission (SEC.) A US person that wishes to trade this foreign security futures product must comply with the relevant SEC order and CFTC advisory, and a CFTC registrant must comply with the CFTC/NFA rules relating to offer and sale of security futures.
If a US person continues to trade the KRX300 futures contract, it should consider the following points:
US persons that engage in KRX300 futures contracts should take steps to confirm that they will qualify after June 30 or liquidate their positions before the status of the futures contract changes. To the extent that US persons continue to trade KRX300 futures contracts once these contracts are considered security futures, they should confirm that they are in compliance with SEC and CFTC requirements and take any necessary steps to become compliant with regulatory obligations ahead of the July 1 effective date.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Katherine Dobson Buckley
Thomas V. D’Ambrosio
 SEC Order under Section 36 of the Securities Exchange Act of 1934 Granting an Exemption from Exchange Act Section 6(h)(1) for Certain Persons Effecting Transactions in Foreign Security Futures and under Exchange Act Section 15(a)(2) and Section 36 Granting Exemptions from Exchange Act Section 15(a)(1) and Certain Other Requirements, Release No. 34-60194 (Jun. 30, 2009); Division of Clearing and Intermediary Oversight Advisory Concerning the Offer and Sale of Foreign Security Futures Products to Customers Located in the United States, See Division of Clearing and Intermediary Oversight Advisory Concerning the Offer and Sale of Foreign Security Futures Products to Customers Located in the United States (Jun 8, 2010).