U.S. Allows Futures Trading on Foreign Stock Indexes, Bonds

Federal regulators approved the first U.S. futures contracts on foreign government bonds and foreign stock indexes Tuesday, thereby tightening links between financial markets in Asia, America and Europe.

The Commodity Futures Trading Commission voted unanimously to approve the Chicago Board of Trade’s applications to trade futures contracts on long-term British and Japanese government bonds and the Japanese stock index.

It also endorsed the Chicago Mercantile Exchange’s proposal to trade futures contracts on the Nikkei stock average, another basket of Japanese stocks, and an option on that futures contract.

Futures, which are bets on the future value of commodities, financial instruments or indexes, are largely used by businesses to protect against price changes. Currently, U.S. futures exchanges do not trade any contracts based on foreign instruments.

The new futures contracts on British and Japanese bonds and on the two Japanese stock index futures will allow firms to better hedge against interest rate risk and fluctuations in the value of Japanese stocks during U.S. trading hours.

No Fundamental Flaws

The new contracts were only the third and fourth stock index futures contracts approved by CFTC since the stock market collapsed in October, 1987. The agency put all stock index futures applications on hold after the plunge while government officials assessed damage.

The Securities and Exchange Commission, some members of which have said stock index futures exacerbated the stock market crash, lodged no objections to the two new stock index futures contracts.

CFTC Commissioner Robert Davis said analysis of the crash showed no fundamental flaws in U.S. futures markets or in their relationship to stock markets.

It was not known when the two Chicago exchanges would launch the new contracts.

CFTC Chairman Wendy Gramm said the futures on foreign instruments reflected new, global investment strategies.

“I think these contracts respond to the increasing commercial interest in risk management strategies which address the needs of internationally diversified portfolios in the United States and abroad,” she said.