Board Of Trade Of The City Of Chicago v. Securities And Exchange Commission

The issue in this case is whether the Securities and Exchange Commission (SEC) has authority to regulate trading in options on Government National Mortgage Association mortgage-backed pass-through certificates (GNMA's), given that GNMA's are both "commodities" and "securities." We hold that pending further action by the Commodity Futures Trading Commission (CFTC), all trading of options on GNMA's is prohibited and that the SEC has no jurisdiction of its own to permit trading in GNMA options.

* Last April the Board of Trade of the City of Chicago (Board of Trade) petitioned us to set aside an order of the SEC approving rule changes of the Chicago Board Options Exchange, Incorporated (CBOE). The CBOE rule changes would have allowed trading on the CBOE of exchange-formed off-set options on GNMA's. The underlying instruments, GNMA's or Ginnie Maes, are the product of a program administered by the Government National Mortgage Association, a Government corporation within the Department of Housing and Urban Development. See 12 U.S.C. §§ 1716 et seq.; 24 C.F.R. ch. III. The program is designed to increase liquidity in the secondary mortgage market and attract new private sources of funds into residential loans. Under this program, GNMA certificates are issued by private institutions (primarily mortgage bankers) to represent interests in pools of Government-underwritten residential mortgages. The owner of a GNMA certificate receives a proportion of the income generated as mortgagors in the pool repay their loans, and the timely payment of principal and interest to the GNMA owner is guaranteed by the Government National Mortgage Association. GNMA's, like most securities or commodities, are fully transferable from one investor to another. As the CBOE has advised us, "Institutional investors of all types have been attracted to GNMA's because such investments have favorable yields, good liquidity and a high degree of safety" (Br. 5). Although the regular payments of principal and interest are guaranteed, they are fixed for the life of the pooled mortgages, and consequently GNMA owners bear the risk that mortgage interest rates may fluctuate, making the GNMA certificates more or less valuable. The two derivative instruments at issue here, GNMA options and GNMA futures, allow GNMA traders to transfer the risks associated with value fluctuations to speculators.

The CBOE's proposed market in GNMA options differs from the market in the underlying GNMA's in that when an option contract is traded no GNMA's change hands. The purchaser or "holder" of a GNMA option acquires only the right to buy or sell a specified quantity and quality of GNMA's at a specified price prior to a specified date. Conversely, in return for a premium, the seller or "writer" of the option (here, the CBOE's clearing house) undertakes the obligation of either selling or buying the GNMA's in the event that the holder "exercises" the purchased option. Under the CBOE's proposed rule changes, however, neither party need ever own or deliver any GNMA's in order to profit from the option transaction. The writer of the option may liquidate his position prior to the holder's exercise by purchasing an identical option, in effect transferring the obligation to a new option writer. Likewise, the option holder may recover the value of his option without actually exercising it simply by purchasing an equal but opposite option (an option to buy to match an option to sell, or vice versa). The original option and its opposite, "offsetting" option are then cancelled through the CBOE clearing house. Thus the CBOE's proposed options market could exist and prosper without any of the traders ever exercising the options and buying or selling the GNMA's.

The Board of Trade, a separate market from the CBOE, has since 1975 traded a different GNMA derivative-futures on GNMA's-pursuant to the designation of the other regulatory agency involved in this case, the CFTC. GNMA futures are obligations to make or take delivery of a specified quantity and quality of GNMA's at a particular time in the future and at an agreed price. Both parties to a futures contract are obligated to perform; there is no choice by either party to exercise a right to performance as there is with options. Nevertheless, investors may deal in GNMA futures without ever intending to deliver or take delivery of GNMA's because, like the proposed options, futures contracts may be offset by purchase or sale of an equal and opposite contract. Indeed, futures markets generally are not used to obtain actual delivery of a commodity. Most contracts are fulfilled by entering into an offsetting contract, and fewer than 3% of all futures contracts are fulfilled by taking (or making) actual delivery of the underlying commodity. See Commodity Futures Trading Commission Act of 1974: Hearings on H.R. 11955 Before the House Committee on Agriculture, 93d Cong., 2d Sess. 238 (1974) (statement of Sen. R. Clark); G. Clark, Genealogy and Genetics of "Contract of Sale of a Commodity For Future Delivery" in the Commodity Exchange Act, 27 Emory L.J. 1175, 1176 (1978). The differences between options and futures may be quite technical, see, e.g., Moriarty, Phillips & Tosini, A Comparison of Options and Futures in the Management of Portfolio Risk, Financial Analysts J. 61 (Jan./Feb. 1981), but a complete understanding of the differences has not been necessary to decide this case.1

Important for understanding the motivation behind this and related lawsuits, however, is the great similarity of functions served by the two GNMA derivatives and the tremendous revenue they may generate for the exchanges on which they are traded. Both options and futures allow GNMA traders to shift to speculators the risk of changing mortgage interest rates, Moriarty, Phillips & Tosini, supra, and the volume of risk-shifting and speculation has been tremendous. In 1981, for example, there were approximately 2,293,000 sales of GNMA futures contracts on the Board of Trade, each contract representing $100,000 in unpaid mortgage principal. Thus when the CBOE proposed rule changes with the SEC to accommodate the creation of a market in exchange-formed off-set options on GNMA's, the Board of Trade filed comments criticizing the CBOE proposal.2 The Board of Trade argued to the SEC that the proposed options are prohibited under Section 4c(c) of the Commodity Exchange Act, 7 U.S.C. § 6c(c), and that they fall within the CFTC's exclusive jurisdiction over commodity options under Sections 2(a)(1) and 4c(b) of the Act, 7 U.S.C. §§ 2 and 6c(b).3

The SEC nevertheless approved the proposed rule changes on February 28, 1981, and the Board of Trade filed this petition for review as a person "aggrieved" by the SEC order. Securities Exchange Act of 1934, § 25(a)(1), 15 U.S.C. § 78y(a)(1).4 The Board of Trade's petition reiterates its objections to the SEC order based on the Commodity Exchange Act and various CFTC regulations. In addition, the petition for review urges that even apart from prohibitions of the Commodity Exchange Act, under Sections 3(a)(12), 9(b), and 9(f) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78c(a)(12), 78i(b) and 78i(f), the SEC has no authority to regulate options on GNMA certificates. We will consider the Board of Trade's claims based on the Securities Exchange Act of 1934 although arguably they were not raised before the SEC5 because the SEC has not objected to our consideration of them and because if the claims are correct the SEC has clearly and unambiguously exceeded its statutory jurisdiction. See K.C. Davis, Administrative Law Treatise § 20.00 at 127-128 (Supp.1980) ("No matter how clear the statutory or nonstatutory law may be that exhaustion is required, the reviewing court will not require exhaustion if the agency fails to oppose review on grounds of lack of exhaustion."); First Jersey Securities, Inc. v. Bergen, 605 F.2d 690, 696 (3d Cir. 1979). The Board of Trade's failure to raise these claims is therefore excusable under Section 25(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78y(c)(1). Cf. Sartain v. Securities and Exchange Commission, 601 F.2d 1366, 1375 (9th Cir. 1979) (denial of due process need not have been raised before SEC).6

We permitted the CBOE to intervene as a respondent and have had the further benefit of amicus briefs filed by the CFTC, the North American Securities Administrators Association, the Philadelphia Stock Exchange, and the Securities Investor Protection Corporation. After hearing oral argument from both Government agencies and both exchanges on November 4, 1981, we stayed the SEC order pending our resolution of this dispute.7II

The CFTC and SEC have taken opposite stands with respect to their jurisdiction to regulate GNMA options.8 In its order under review, the SEC has taken the position that the Commodity Exchange Act (CEA) is inapplicable to the trading of options on securities on a national securities exchange such as the CBOE and that it has authority under the Securities Exchange Act of 1934 (SEA) to allow such trading. The CFTC, on the other hand, agrees with the Board of Trade that the attempted SEC designation of commodity options trading is flatly prohibited by Sections 4c(b) and 4c(c) of the CEA. Moreover, the CFTC and Board of Trade argue that the CEA provides a comprehensive and in this instance exclusive regulatory scheme for commodity futures and commodity options transactions. The dispute arises primarily because GNMA's are both "securities" under SEA § 3(a)(10), 15 U.S.C. § 78c(a)(10), and "commodities" under CEA § 2(a)(1), 7 U.S.C. § 2. In disentangling the agencies' jurisdictions, we begin with a review of their respective powers under the CEA.

Expanded Definition of "Commodity"

Before 1974, the Commodity Exchange Act of 1936 applied mostly to agricultural commodities. Essentially all commodity options transactions were prohibited. CEA of 1936, § 4c (current version at § 4c(a), 7 U.S.C. § 6c(a)). In 1974, Congress enacted the Commodity Futures Trading Commission Act, which amended the CEA's definition of "commodity" to include "all other goods and articles, except onions * * *, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in * * *." CEA § 2(a)(1), 7 U.S.C. § 2. By this amendment, literally anything other than onions9 could become a "commodity" and thereby subject to CFTC regulation simply by its futures being traded on some exchange. The legislative history shows that the purpose of the enlarged definition was to allow regulation of futures contracts and other transactions in a growing number of commodities such as coffee, sugar, and foreign currencies that were then being traded on and off commodity exchanges and that had been unregulated under the prior version of the CEA. This language was also meant to encompass futures markets that were expected to be expanded to cover non-traditional goods and services such as GNMA's. See S.Rep.No.1131, 93d Cong., 2d Sess. 19, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5859; H.R.Rep.No.975, 93d Cong., 2d Sess. 41-42, 62 (1974); Philip F. Johnson, The Commodity Futures Trading Commission Act: Preemption as Public Policy, 29 Vand.L.Rev. 1, 25 (1976) ("Congress was well aware, for example, that a futures contract based upon mortgage interest rates was under development in 1973 and 1974."). Under the expanded definition, the SEC concedes that GNMA's became a commodity when the Board of Trade began trading GNMA futures in 1975.

At the same time that Congress expanded the definition of commodity, it gave the CFTC the power to regulate all options transactions involving any of the new commodities. CEA § 4c(b), 7 U.S.C. § 6c(b).10 Section 4c(b) provides that "no person" may trade in the new commodity options except in accordance with the CFTC's rules. Thus "Congress gave the Commission (CFTC) power to extend (the prior prohibition on 'old' commodities) to options involving the previously unregulated commodities and to any 'new' commodities or to allow the offer and sale of these options subject to terms and conditions prescribed by the Commission." S.Rep.No.850, 95th Cong., 2d Sess. 10, reprinted in (1978) U.S.Code Cong. & Ad.News 2087, 2098. In 1976, the CFTC exercised this "plenary rule-making power" to promulgate comprehensive options regulations. British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 486-487 (2d Cir. 1977), certiorari denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297. See 17 C.F.R. Part 32. The new regulations failed to check persistent commodity options abuses, however, and the CFTC reacted in the Spring of 1978 pursuant to its Section 4c(b) power by suspending all commodity options trading indefinitely. 17 C.F.R. § 32.11. Congress ratified the ban on options trading later that year by adding Section 4c(c) to the CEA, 7 U.S.C. § 6c(c). By Section 4c(c), "no person" may enter into "any commodity option transaction involving any" of the new commodities-including GNMA's11-until the CFTC lifts the ban on trading by submitting to Congress for thirty days any proposal for renewed options trading.12

The CFTC has not lifted the ban on GNMA options trading13 and therefore the CBOE cannot trade GNMA options. Moreover, the proposed options trading would not conform with the regulations promulgated by the CFTC pursuant to Section 4c(b) that were in effect at the time of the SEC order,14 and would also violate various of the new CFTC regulations that on a limited basis permit options trading on commodity futures.15 For these reasons, the SEC order under review must be set aside.The CFTC Exclusive Jurisdiction and SEC Savings Clauses

The SEC and CBOE make several arguments that Section 4c(c) and the regulations promulgated under Section 4c(b) do not apply to GNMA options traded on a national securities exchange. The first argument is based upon Congress' attempt in 1974 to divide jurisdiction between the CFTC and SEC with two proviso clauses to Section 2(a)(1) of the CEA, 7 U.S.C. § 2, the "CFTC exclusive jurisdiction" and "SEC savings" clauses:

Provided, That the Commission (CFTC) shall have exclusive jurisdiction with respect to accounts, agreements (including any transaction which is of the character of, or is commonly known to the trade as, an "option", "privilege", "indemnity", "bid", "offer", "put", "call", "advance guaranty", or "decline guaranty"), and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market designated pursuant to section 5 of this Act (7 U.S.C. § 7) or any other board of trade, exchange, or market

And provided further, That except as hereinabove provided, nothing contained in this section shall (i) supersede or limit the jurisdiction at any time conferred on the Securities and Exchange Commission or other regulatory authorities under the laws of the United States or of any State, or (ii) restrict the Securities and Exchange Commission and such other authorities from carrying out their duties and responsibilities in accordance with such laws.

The SEC and CBOE contend that options on GNMA's do not fall within the CFTC exclusive jurisdiction clause and therefore are "saved" from the options ban by the SEC savings clause. The Board of Trade, to the contrary, asserts that because the savings clause is limited by the introductory phrase "nothing contained in this section," any SEC jurisdiction over GNMA options is not saved to the extent it is taken away by other Sections, such as the options ban Sections 4c(b) and 4c(c). The "thing" contained in Section 2(a)(1) of concern to the SEC and CBOE, however, is the expanded definition of "commodity." The SEC and CBOE would have us read Sections 4c(b) and 4c(c) as limited by the breadth of "commodity," which being defined in "this section" (Section 2(a)(1)) cannot be used to derogate from "jurisdiction at any time conferred" on the SEC. We agree with this part of their interpretation; the options ban would not possibly impinge on SEC jurisdiction unless the definition of commodity grew to include "securities" regulated by the SEC. Since the definition of commodity occurs in "this section," the savings clause may indeed limit the options ban. Furthermore, the other limiting introductory phrase-"except as hereinabove provided"-does not except the definition of commodity from the savings clause, although the definition occurs "hereinabove." "(E)xcept as hereinabove provided" refers only to above-mentioned proviso clauses, of which there is but one in Section 2(a)(1), the exclusive jurisdiction clause.16

Thus we interpret the savings clause so that an expanded definition of commodity does not divest the SEC of jurisdiction, via the options ban or otherwise, except where SEC jurisdiction is divested by the CFTC exclusive jurisdiction clause. Our construction of the savings clause does not aid the SEC and CBOE position, however, because we conclude that GNMA options are within the exclusive jurisdiction of the CFTC and also that under the SEA, the SEC has no power to be saved over GNMA options.

The Exclusive Jurisdiction Clause Covers Commodity Options

Since options are among the listed agreements with respect to which the CFTC has exclusive jurisdiction, GNMA options come within the exclusive jurisdiction clause provided they "involv(e) contracts of sale of a commodity for future delivery." CEA § 2(a)(1). The difficulty lies in the word "involve." The SEC and CBOE argue that GNMA options do not "involve" futures contracts because by their interpretation of the exclusive jurisdiction clause, options can "involve" futures contracts only by being on futures contracts. That is, the CFTC would have exclusive jurisdiction for options on futures contracts, but not for options merely on the underlying commodity.

We disagree. Congress understood the difference between "transactions in" and "transactions involving."17 Had Congress meant to limit CFTC exclusive jurisdiction to transactions in commodity futures, it would have said so. See American Stock Exchange, Inc. v. CFTC, 528 F.Supp. 1145, 1151-1152 (S.D.N.Y.1982) (recognizing that commodity options are within CFTC exclusive jurisdiction).

Instead, the legislative history clearly indicates that Congress intended "transactions involving" to import something more than "transactions in" (or options on) commodity futures. Following lobbying led by the Chicago Board of Trade to give a single agency exclusive jurisdiction over commodity transactions, the House Committee on Agriculture revised its draft bill to read: "the Commission (CFTC) shall have exclusive jurisdiction of transactions dealing in, resulting in, or relating to contracts of sale of a commodity for future delivery * * *." Hearings on S. 2485, S. 2578, S. 2837 & H.R. 13,113 Before the Senate Committee on Agriculture & Forestry, 93d Cong., 2d Sess. pt. 1 at 140-141 (1974) (emphasis added). See Johnson, supra, 29 Vand.L.Rev. at 10-11.18 Since "transactions dealing in (and) resulting in" futures contracts cover trading in both futures and options on futures, by including the third category "transactions * * * relating to" futures the House draft would have extended CFTC exclusive jurisdiction to trading of futures-related instruments such as commodity options. Similarly, the Senate committee, whose version of the exclusive jurisdiction clause was adopted by the conference committee19 and enacted, explained that "(a) the Commission's (CFTC's) jurisdiction over futures contract markets or other exchanges is exclusive and includes the regulation of commodity accounts, commodity trading agreements, and commodity options ; (b) the Commission's jurisdiction, where applicable, supersedes State as well as Federal agencies * * *." S.Rep.No.1131, 93d Cong., 2d Sess. 6 (1974), reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5848 (emphasis added).20

One difficulty in searching the legislative history for evidence of an intended distinction between options and options on futures is that the phrase "commodity option" may have been used ambiguously to mean either.21 The only distinction between the two options was made by sponsoring Chairman Poage of the House Committee on Agriculture, who explained that the CFTC was created in order "to fill all regulatory gaps-to regulate trading in futures and in options relating to commodities or commodity futures, because such trading is now poorly regulated if it is regulated at all." 120 Cong.Rec. 34736 (1974) (emphasis added).

We conclude that Congress chose the phrase " 'option' * * * involving contracts of sale of a commodity for future delivery" in order to give the CFTC exclusive jurisdiction over at least some commodity options, although it is less clear how far the exclusive jurisdiction was meant to extend into options on commodities like GNMA's that double as securities. Given the possible expansion of "commodity" to include even corporate securities on which options have traditionally been regulated by the SEC, the CFTC exclusive jurisdiction clause must have some limits.

Congress Did Not Limit Power Over Commodities to Non-Securities

The SEC and CBOE argue that even if a distinction cannot be made between commodity options and options on commodity futures, Congress did not intend to give the CFTC exclusive jurisdiction over transactions involving securities. The SEC and CBOE base their argument upon snippets in the legislative history that purportedly suggest a clean jurisdictional division between commodities and securities. For example, the Senate Committee on Agriculture and Forestry discussed the scope of the CFTC's option authority under Section 4c(b) in these terms:

The Committee intends that options not be traded except on organized exchanges and in conformity with the rules and regulations of the Commission (CFTC). However, the Commission would not have authority to regulate trading in puts and calls for securities. Where traded on exchanges, these puts and calls are regulated by the Securities and Exchange Commission.

S.Rep.No.1131, 93d Cong., 2d Sess. 26, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5866. This passage does not describe CFTC power under the exclusive jurisdiction clause of Section 2(a)(1), although it does describe an important grant of CFTC power regarding options regulation, Section 4c(b). But crucially the passage fails to define what is meant by "securities"; the Senate Committee makes no distinction between traditional, corporate stocks and the extension of "security" here to include non-traditional instruments traded and regulated under the CEA for some six years as "commodities."22 Similarly, a passage such as "The Commission will have exclusive jurisdiction over options trading in commodities (but not in securities)" does not cleave the agencies' jurisdictions but instead perhaps reflects a committee member's belief that commodities and securities could remain mutually exclusive. Id. at 31, (1974) U.S.Code Cong. & Ad.News at 5870. The Senate Committee, of course, had no reason to make subtle distinctions between traditional stocks and their new commodities because in 1974 the SEC had not yet attempted to regulate trading of the latter.23

The dissent argues that Congress did not intend to preempt SEC jurisdiction on national securities exchanges subject to its regulation. There are a few places in the legislative history that could be strained to suggest this interpretation. For example, House Committee Chairman Poage stated:

This grant of exclusive jurisdiction (to the CFTC) is not to be construed as preempting the jurisdiction of the Securities and Exchange Commission over securities, including stock options, traded on any national securities exchange or any other U.S. securities market.

120 Cong.Rec. 34737 (1974) (emphasis supplied). If jurisdiction were to be assigned by market, the dissent does not state how it would then limit the SEC jurisdiction so that the CBOE could not trade wheat options or onion futures, but we need not speculate what the CBOE may do in order to refute the argument. The exclusive jurisdiction clause states specifically that the CFTC has exclusive jurisdiction over the enumerated transactions whenever "traded or executed on a contract market designated pursuant to section 5 of this Act (7 U.S.C. § 7) or any other board of trade, exchange, or market * * *." 7 U.S.C. § 2 (emphasis added). The dissent thus reads the legislative history inconsistently with the clear words of the statute, which divide jurisdiction by transactions rather than markets, and the statute must control. The statute also suggests a more plausible reading of the legislative history: that Congress in 1974 meant to protect SEC jurisdiction over the sorts of corporate stock options then being traded on national securities exchanges. Accordingly, the legislative history's reference to national securities exchanges is only illustrative of the instruments within the SEC's saved jurisdiction and does not compel a division of power according to what market an instrument is traded on.

Our construction of the exclusive jurisdiction clause as including power over at least some commodity/security options is reinforced by subsequent legislative events. In 1975, the SEC attempted to add a provision in the 1975 amendments to the SEA that would have repealed the CFTC's grant of exclusive jurisdiction with respect to all "transactions involving a 'security.' " Hearings on S. 249 Before the Senate Subcommittee on Banking, Housing, and Urban Affairs, 94th Cong., 1st Sess. 244 (1975). SEC Chairman Ray Garrett, Jr. stated in a letter of comment requested by Chairman Harley O. Staggers of the House Committee on Interstate and Foreign Commerce that without the amendment, the CFTC's exclusive jurisdiction "may well call into question the continuing jurisdiction of the Securities and Exchange Commission over options trading, including that on the Chicago Board Options Exchange and the American Stock Exchange, Inc." Id. at 204, 209.24 Congress rejected the proposed reduction of CFTC jurisdiction, and the CFTC retains its exclusive jurisdiction over options that "involve" commodity futures even though the commodities may also be securities.

In 1978, the SEC again attempted to have "securities" withdrawn from CFTC power and also to extend the definition of security in each of the five Federal securities laws. Extend Commodity Exchange Act: Hearings on H.R. 10285 Before the House Subcommittee on Conservation and Credit, 95th Cong., 2d Sess. 181-210 (1978) (testimony of SEC Chairman Harold M. Williams); H.R.Rep.No.1181, 95th Cong., 2d Sess. 12-14 (1978); S.Rep.No.850, 95th Cong., 2d Sess. 20, 21, 52-55, reprinted in (1978) U.S.Code Cong. & Ad.News 2087, 2108, 2109, 2140-2143.25 Congress again rejected the SEC proposals, but added 7 U.S.C. § 4a(g)(2) to the CEA, which directs the CFTC to "maintain communications" with the SEC and other agencies in order to keep "such agencies fully informed of Commission activities" relative to their responsibilities. See Bromberg, Securities Law-Relationship to Commodities Law, 35 Bus.Law. 787, 791 (1980) ("(T)he SEC has never really accepted the (CFTC) exclusive jurisdiction language, and has continued to argue that the language does not say what it pretty obviously does say and what Congress said in 1978 it obviously meant."). As noted above, Congress in 1978 was aware that GNMA's were among the new commodities but made no distinctions when imposing the options ban between GNMA's (or other commodity/securities) and other new commodities. See International Trading, Ltd. v. Bell, 262 Ark. 244, 556 S.W.2d 420, 424-425 (1977) (In Banc) ("The argument that (CFTC exclusive jurisdiction) relates only to regulation of commodities, not securities, is unavailing here because of the clear language of the act bringing commodity options within the purview of the act.").

The above discussion does not mean there are no limits to CFTC power over options on securities but only that we reject (as did Congress) the SEC's and CBOE's contention that the CFTC has no power over options on securities. The need for some limits upon CFTC power, however, remains.

Limits on the Exclusive Jurisdiction Clause

Since this is only the first case construing the extension of CFTC exclusive jurisdiction into options on securities, we have not attempted to divine the limits that a series of cases involving different commodity/securities may better establish. Rather, we have considered several rationales for separating exclusive CFTC jurisdiction from that reserved to the SEC based in the legislative materials and the logic of the overall legislative scheme.

One set of limits for the options aspect of the exclusive jurisdiction clause arises from the 1974 legislative history suggestion that only "traditional" SEC authority over corporate securities was to be preserved. See note 22 supra. GNMA's are not traditional securities; the regular payments of principal and interest that they represent, unlike corporate dividends, are guaranteed by the Government for the life of the certificate. Accordingly, GNMA's are exempted from many of the provisions of the Federal Securities Acts that apply to traditional stocks. See pages 1154, 1159 infra. It would seem then Congress intended non-traditional securities such as GNMA's to be within the CFTC's exclusive jurisdiction once the underlying security became a commodity by the opening of a legitimate futures market.

Another reasoned limitation on the scope of the exclusive jurisdiction clause is based on the purposes for which the commodity future or commodity option is traded. The district court in Mullis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 492 F.Supp. 1345 (D.Nev.1980) took this tack. In summarizing the 1974 legislative history it stated:

The jurisdiction of the CFTC preempts all other agency regulation in the commodities field, even regulation of a security, so long as the dominant purpose for the existence of the security is to trade in commodity futures * * *.

492 F.Supp. at 1350 (emphasis added). During the 1978 amendments to the CEA, the Senate Committee on Agriculture, Nutrition, and Forestry suggested a similar, functional approach:

The committee has followed with interest the changing nature of futures markets. The nature of the underlying commodity is not an adequate basis to divide regulatory authority. Further, the fact that a futures contract market does not fit into the traditional mold where there are both hedging and price-discovery functions should not be the determining factor in whether the contract is to be regulated by the CFTC. So long as the futures contract serves a legitimate function, Congress has vested the Commodity Futures Trading Commission with jurisdiction.

S.Rep.No.850, 95th Cong., 2d Sess. 22, reprinted in (1978) U.S.Code Cong. & Ad.News 2087, 2110 (emphasis added).

None of the parties suggests that GNMA's are not "legitimate" commodities.26 The parties also agree that GNMA futures serve the legitimate and important functions of allowing mortgage bankers to better anticipate changes in mortgage interest rates and to transfer the risks due to fluctuation in mortgage interest rates to speculators willing to assume them. The "dominant purpose" for the existence of GNMA's is not that they be traded as futures, but a sort of converse is correct: "by providing a degree of liquidity for mortgage investments," GNMA futures further the purposes for the existence of the underlying GNMA's. 12 U.S.C. § 1716(a). Indeed, the CBOE proposal under review was greeted with enthusiasm by both mortgage bankers and the Government National Mortgage Association as a new means to facilitate their activities in the housing market. SEA Release No. 17577, at 4-6 (Feb. 26, 1981); SEC Record 327-472. GNMA futures or options are in this respect functionally quite similar to soybean futures or options, in that their trading serves legitimate hedging and price discovery functions, thereby facilitating production of the underlying commodity. See S.Rep.No.850, 95th Cong., 2d Sess. 13 (quoted in note 11 supra).

GNMA futures are not identical to GNMA options, however, and there is some indication that mortgage bankers would prefer to trade in GNMA options.27 Nevertheless, both instruments are claimed to serve more or less the same purposes, and the prices in each market assumedly would affect one another.28 Moreover, the fears that prompted the 1974 and earlier legislation, concerning manipulation of commodity prices by speculators in commodity derivatives, apply equally to both options and futures. 7 U.S.C. § 5; Hearings on H.R. 6772 Before the Senate Committee on Agriculture and Forestry 18-22, 172-173, 182-185, 186-187, 214 (1936); Greenstone, The CFTC and Government Reorganization: Preserving Regulatory Independence, 33 Bus.Law. 163, 177-181 (1977). And the evidence presented to the SEC overwhelmingly indicated that opportunities for manipulation would be increased by addition of a GNMA options market regulated by a separate agency, although the effects of increased attempts at manipulation could not be foreseen. See, e.g., SEC Record 527, 636-640.29 Congress quite clearly intended "to create one federal agency with the expertise to regulate the commodities industry,"30 and its prudent choice should be given effect here. Since GNMA's are not traditional stocks and GNMA options have the character of a legitimate commodity derivative, we hold that the proposed GNMA options "involve" the pre-existing GNMA futures and therefore are within the exclusive jurisdiction of the CFTC.31The Treasury Amendment

The SEC and CBOE make one final argument that the CFTC has no power over GNMA options based upon a clause within Section 2(a)(1) of the CEA, 7 U.S.C. § 2, known as the "Treasury amendment." The Treasury amendment provides that:

Nothing in this Act shall be deemed to govern or in any way be applicable to transactions in foreign currency, security warrants, security rights, resales of installment loan contracts, repurchase options, government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale thereof for future delivery conducted on a board of trade.

The SEC and CBOE argue that GNMA options come within this list of transactions excluded from CFTC power as either "security rights" or "transactions in * * * government securities." The argument fails. "Security rights" might be characterizable as options to purchase securities ("call" options), but there is no similar exclusion from the CEA for the other half of the CBOE proposal, options to sell securities ("put" options). In fact, Congress refused to adopt that part of the Treasury amendment which would have excluded "puts and calls for securities" from the provisions of the Commodity Exchange Act. See S.Rep.No.1131, 93d Cong., 2d Sess. 51, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5889 (draft of the amendment submitted by the Treasury to the Senate Committee on Agriculture and Forestry).32 In effect, the SEC and CBOE are asking us to reinsert language in the Treasury amendment that Congress had before it but deleted prior to passage.

Nor are GNMA options "transactions in * * * government securities." "The option transaction is a long step removed from a transaction in the commodity involved, since the option purchaser, if he or she does nothing more when the specified date arrives, will simply see the option die." Commodity Futures Trading Commission v. American Board of Trade, 473 F.Supp. 1177, 1183 (S.D.N.Y.1979); see also Commodity Futures Trading Commission & State of Georgia v. Sterling Capital Co., 2 Comm.Fut.L.Rep. (CCH) P 21,169, at 24,783-24,784 (N.D.Ga.), modified, 2 Comm.Fut.L.Rep. (CCH) P 21,170 (N.D.Ga.1981). Only when the option holder exercises the option is there a transaction in a government security. Under the CBOE proposal, however, an option holder never has to exercise the option in order to profit from the position. Thus the options market may exist without any transactions in the commodity itself. Accordingly, the Treasury amendment does not affect CFTC power over GNMA options.

On the other hand, if one of the transactions listed in the Treasury amendment included GNMA options, the "unless" clause would apply. As we have already held, the GNMA options "involve" GNMA futures contracts presently being traded on the various contract markets including the Board of Trade. Thus the Treasury amendment does not affect CFTC jurisdiction over GNMA options.33 From the legislative history, it is quite clear that the Treasury amendment was adopted by Congress only to prevent dual regulation by the CFTC and bank regulatory agencies of the banks and other sophisticated institutions that ordinarily trade in the enumerated financial instruments. See S.Rep.No.1131, 93d Cong., 2d Sess. 6, 23, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5848, 5863-5864.34III

Apart from whether GNMA options are within the CFTC's exclusive jurisdiction, we find that the SEC has no power under the SEA to approve the CBOE's proposed rule changes. Therefore the order under review is void for want of jurisdiction and also for violating the options ban of CEA § 4c(c) and 17 C.F.R. § 32.11.35

The SEC first claims that it has plenary power over the trading of securities on stock exchanges, and that GNMA options are securities. Indeed, SEC power is broad. Section 5 of the SEA, 15 U.S.C. § 78e, makes unlawful any exchange trading in any security unless the exchange has been registered under Section 6, 15 U.S.C. § 78f. Section 6, in turn, gives the SEC power to prescribe rules for exchange registration. Other Sections of the SEA give the SEC various powers to require registration of securities to be traded on particular exchanges (Section 12, 15 U.S.C. § 78l ), to prohibit manipulative and deceptive devices (Section 10, 15 U.S.C. § 78j), to regulate brokers and dealers (Section 15, 15 U.S.C. § 78o ), and to investigate and require public disclosures (Sections 21 and 13, 15 U.S.C. §§ 78u, 78m). Such power, however, is with respect to trading in securities, and the exchange-formed off-set GNMA options that would be traded on the CBOE are not securities.

Section 3(a)(10) of the SEA, 15 U.S.C. § 78c(a)(10), defines "security":