FUTURES AND OPTIONS TRADING FOR PENSION PLANS

Transcription

1 FUTURES AND OPTIONS TRADING FOR PENSION PLANS This paper provides an overview of how financial futures and options may be used by employee benefit plans subject to the fiduciary responsibility requirements of the Employee Retirement Income Security Act of 1974 ( ERISA ). 1 The number of pension fund investment managers utilizing financial futures and options has increased dramatically in recent years. 2 Many such managers employ these investments in order to remain fully invested, hedge against downside risk, to adjust equity exposure, to more easily allocate funds between asset classes and to enhance returns through various strategies. LEGAL REQUIREMENTS Governmental agencies regulating futures and options trading by qualified plans include the Department of Labor (which regulates fiduciary standards), Internal Revenue Service (tax aspects), Commodity Futures Trading Commission (futures and options on futures), and the Securities and Exchange Commission (options on securities). Additionally, state banking, securities and insurance laws may apply to investments made by employee benefit plans. STATUS AS A "FIDUCIARY" When a plan invests in futures or options contracts, one of the most important issues is which a person or persons will be deemed to be an ERISA fiduciary as a result of such investment, because ERISA imposes high standards on fiduciary conduct and prohibits fiduciaries from representing parties with whom the plan deals. Often, a futures commission merchant (FCM) who executes trades on behalf of a plan will try to avoid designation as an ERISA fiduciary in order to prevent an inadvertent violation of ERISA s requirements for fiduciaries. A person is a fiduciary with respect to a plan to the extent the person: 1. Exercises any discretionary authority or control respecting the plan's management or exercises any authority or control respecting management or disposition of its assets; 2. Renders investment advice for direct or indirect compensation with respect to plan property, or has any authority or responsibility to do so. One renders investment advice when one advises the plan as to the value of property or the advisability of investing in property, and either has discretionary authority or control with respect to plan investments or renders such advice pursuant to an understanding that the advice will ser ve as a primary basis for the plan s investment decisions; or 1 Title I of ERISA applies generally to written trusteed arrangements known as both employee pension benefit plans (ERISASec.3(2)) and qualified pension, profit-sharing or stock bonus plans (26C.F.R ). The following entities are not subject to all the provisions of Title I and thus are beyond the scope of this paper: governmental plans, church plans (unless an alternative election is made), individual retirement accounts that are not employer-sponsored, Keogh plans with no common law employees, corporate plans whose only participant is a 100% shareholder, and employee welfare benefit plans. See, e.g., 29 C.F.R (1984). 2 See, e.g., Pension Fund Managers Gaze Once More Upon Futures Market, Bloomberg News, February 26, 1997; Appeal of Derivatives Widens, Financial Times, April 18, 1995, 24.

2 3. Has any discre t i o n a ry authority or re s p o n s i b i l i t i e s in the administration of the plan. 3 In 1982 the Labor Department ruled that the assets held by an FCM to fund a plan s initial andmaintenance margin account are not plan assets for purposes of ERISA s fiduciary requirements and, therefore, that an FCM would not be deemed to be a fiduciary solely by reason of holding futures margin. (Futures margin is in the nature of a performance deposit made by both parties to a futures contract.) The Labor Department also ruled that an FCM generally would not be a plan fiduciary solely because it either acted pursuant to instructions of an independent fiduciary, or liquidated the futures contracts in order to pay off losses in the account. 4 FIDUCIARY DUTIES ERISA and the related Labor Department regulations require a fiduciary to discharge his or her duties with respect to the plan in accordance with the following four rules: 1. Prudent Expert. A fiduciary is required to act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with such matters would use in the conduct of a similar enterprise. This prudence rule departs from the traditional trust rule of prudence in certain respects. The prudence of an investment decision by an ERISA fiduciary should be judged with regard to the role that the proposed investment or investment course of action plays within the overall portfolio. The relative riskiness of a specific investment does not render such investment either per se prudent or per se imprudent, and the Labor Department avoided the creation of a legal list of permissible investments in connection with the prudence rule. A Labor Department safe harbor requires a fiduciary to determine that the particular investment course of action is reasonably designed as part of the plan portfolio (or that portion of the portfolio for which the fiduciary has investment duties) to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain associated with the investment course of action: 2. Exclusive Benefit. A fiduciary must act solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan (Internal Revenue Code (IRC) Section 401 (a) has a similar requirement): 3. Diversification. A fiduciary generally must diversify the investments of a plan so as to minimize the risk of large losses, unless it is clearly prudent not to do so: and 3 ERISA 3(21); 29 C.F.R (1984). 4 Department of Labor, Advisory Opinion 82-49A, 9 Pens. Rep. (BNA) 1394 (1982).

3 4. Plan Documents. A fiduciary must act in accordance with the documents governing the plan insofar as such documents are consistent with ERISA. 5 investments be diversified so as to minimize the risk of large losses, 8 and that a plan manager who does not hedge could be considered imprudent under certain circumstances. In its issuance of prudent investor regulations in 1979, the Labor Department (1) indicated that the common law of trusts should not be mechanically applied to employee benefit plans and (2) appeared to espouse the whole portfolio approach of evaluating the prudence of an investment decision rather than the common law approach of evaluating each individual investment without regard to the makeup of the portfolios. 6 Prior to the passage of ERISA and the issuance of the 1979 regulations, it was thought that the common law might disapprove of commodity futures and options transactions by employee benefit plans because such transactions often are highly leveraged and often are not income-producing. Since the 1980s, however, particularly taking into account the growth and maturation of the financial futures and options markets, many authorities have indicated that investments by employee benefit plans in financial futures and options are not inherently either prudent or imprudent; such investments should be judged with regard to the role they play in the plan s portfolio. 7 It may be argued that futures and options hedging strategies can greatly aid a plan in meeting the ERISA requirement that a plan s PROHIBITED TRANSACTIONS BY FIDUCIARIES A plan fiduciary generally is prohibited from (1) dealing with plan assets in his or her own interest, (2) acting for a party with a competing or adverse interest in the plan transaction, or (3) receiving compensation regarding plan transactions from any party other than the plan. 9 The aforesaid prohibitions raise practical problems for fiduciaries in futures or options transactions in the following circumstances: 1. Cross-Trades and Self-Dealing. A Commodity Futures Trading Commission (CFTC) regulation allows one floor broker to engage in a cross-trade, that is, to represent both sides of a futures or options trade on behalf of different customers at the market price under certain specified conditions. 10 Although the FCM has a duty to both customers to achieve the best execution possible, a cross-trade might be disallowed by the self-dealing provisions of ERISA. 5 ERISA 404(a); 29 C.F.R a-1(1984). See also Comptroller of the Currency Trust Banking Circular No. 15 (July 13, 1979) Fed. Banking L. Rep. (CCH) 59, U.S.C (1998). 7 See, e.g., Comptroller of the Currency, Trust Banking Circular No. 2 (Rev.) (Dec Comptroller of the Currency Trust Banking Circular No.14 (Rev.)(Oct. 16, 1981). 8 ERISA 404(a)(1)(C). 9 ERISA 406(b); Internal Revenue Code 4975(c)(1). 10 Commodity Exchange Act 4b; 17 C.F.R (1984). See, e.g., Chicago Mercantile Exchange Rule 533.

4 2. Multiple Services. A fiduciary (such as perhaps an FCM) may not cause the plan to pay an additional fee to itself or its affiliates; and a fiduciary may not be paid for rendering more than one service to the plan unless such payment is exempt. Thus an FCM acting as a fiduciary may not charge both an investment advisory fee and commissions, and an FCM with investment discretion may not execute trades through itself or an affiliated FCM. Under certain circumstances, Labor Department exemption allows a securities broker who serves as fiduciary to perform clearance, settlement, custodial, or other functions that are incidental to securities transactions Incentive Fees. Commodity trading advisors often receive performance-based or incentive compensation, which is not prohibited by the Commodity Exchange Act. On the other hand, under certain circumstances both ERISA 12 and the Investment Advisers Act of can prohibit incentive fees because of the potential for a conflict of interest by the money manager. Both the Labor Department and the Securities and Exchange Commission have issued interpretations regarding performance-based fees and soft dollar arrangements. 14 In order to avoid the aforesaid problems with prohibited transactions by fiduciaries, it may be advisable for an FCM, options broker, or Commodity Trading Advisor (CTA) to take steps to ensure that it does not become an ERISA fiduciary. 15 PROHIBITED TRANSACTIONS WITH PARTIES IN INTEREST Fiduciaries also generally are prohibited from causing a plan to engage in certain transactions with parties in interest, 16 including (1) extensions of credit, (2) performance of multiple services, and (3) transfers of money or plan assets for the use of or benefit of parties in interest (with the exception of reasonable compensation for services). 17 In regard to the prohibition on the provision of multiple services, the performance of several functions might be definable as a single service in order to avoid the prohibition. Also, an exemption allows a party in interest to provide extra services which are necessary for the operation of the plan, if requested to do so by an independent plan fiduciary and if no more than reasonable compensation is paid for the services, and if the plan may terminate the arrangement for services on reasonably short notice without penalty. 18 Variation margin payments between a plan and the FCM should be required to be made promptly in order to avoid an extension of credit issue. Among the prohibited transaction class exemptions (PTCEs), 11 Department of Labor, Prohibited Transaction Class Exemption (Nov. 18, 1986), Pens. Plan Guide (CCH) 16, In a Nov. 3, 1980, Opinion Letter, the Department of Labor indicated that certain incentive fee arrangements could violate ERISA 406(b). Wash. Service Bureau File # However, compare Pension and Welfare Benefits Administration, Opinion Letters No A and No A (Aug. 29, 1986). 13 Section 205(l); 17 C.F.R ERISA Technical Release No (May 22,1986); 17 C.F.R (1986); and letter of Richard G. Ketchum to Charles Lerner, July 25, In the interest of avoiding co-fiduciary liability, plans may insist that any such party who wishes to be a fiduciary, be identified in plan documents as a named fiduciary, or be appointed an investment manager. See ERISA 3(38) and (405). 16 The term party in interest is defined in ERISA 3(14) to include any fiduciary including but not limited to, any trustee, officer of the plan, as well as any other person providing services to the plan, and several other specified types of persons. The definition of disqualified person in IRC 4975(e)(2) is substantially similar. An FCM can become a party in interest merely by providing trading services to a plan. 17 ERISA 406(a). See also IRC 4975 for provisions regarding excise taxes on prohibited transactions. 18 ERISA 408(b)(2); IRC 4975(d)(2): 29 C.F.R b-2 (1984). See also Department of Labor, Letter to the Futures Industry Association, Inc., regarding Exemption Application No. D-3006, Aug. 16, 1985.

5 which the Department of Labor has granted in order to provide conditional relief, are the following: (1) PTCE 75-1, exemption for agency transactions and services, underwritings, etcetera; (2) PTCE 90-1, exemption for transactions by insurance-companypooled separate accounts; (3) PTCE 80-26, exemption for interest-free loans; (4) PTCE 91-38, exemption for transactions by bank collective investment funds; and (5) PTCE 84-14, exemption for transactions negotiated by qualified professional asset managers (QPAMs), and PTCE 96-23, exemption for transactions negotiated by certain in-house asset managers (INHAMS). 19 CUSTODY OF ASSETS Prior to 1982, there was uncertainty as to how qualified plans investing in futures could comply with the different custodial requirements of both the pension and the commodity futures rules. The pension rules generally require that all plan assets, other than insurance contracts, be held in trust, 20 while the commodity rules require an FCM to segregate and separately account for customer funds and to have access to those funds upon demand. 21 In order to comply with both the pension and commodities laws, pension funds and FCMs have set up custodial accounts for futures margin at third-party banks. A CFTC interpretive statement 22 asserted that in a proper third-party safekeeping account an FCM must have the absolute right to liquidate open positions in an account that goes into deficit and also must have the right to withdraw funds from the account upon demand if certain conditions are met. The third-party account may not be located at an affiliate or a fiduciary of the pension fund. Futures and options trading generally is certificateless, that is, an investor in futures or options usually will receive a confirmation of a trade (but not a certificate of ownership) from its FCM or broker. In 1982 the Labor Department opined that (1) the assets held by an FCM to fund a plan's margin account are not plan assets for purposes of the fiduciary requirements of ERISA; (2) when a plan engages in a futures transaction, its assets are the rights embodied by the futures contract as evidenced by a written confirmation and outlined in its agreement with its FCM, including such rights as the plan may have to make withdrawals from the account; and (3) the trust requirement of ERISA Section 403 generally would be satisfied, with respect to the holding of futures margin, if the FCM maintains the account, including any agreements, confirmations, etc., relating to the account, in the name of the plan s trustees, as trustees. 23 This 1982 opinion eliminated the absolute need for a third-party custodial account. A fiduciary still has the responsibility to make reasonable arrangements for the withdrawal of excess margin in light of all re l e vant facts and circ u m s t a n c e s Department of Labor, Prohibited Transaction Class Exemptions 75-1 (Oct. 31, 1975) (Jan. 29, 1990) (April 29, 1980), (June 12, 1991), (March 13, 1984), an (April 10, 1996) Pens. Plan Guide (CCH) 16601, 16,633, 16618, 16,634, 16628, and 16, ERISA 403: 29 C.F.R a Commodity Exchange Act 4d(2); 17 C.F.R Commodity Futures Trading Commission, Division of Trading and Markets Financial and Segregation Interpretation No Sec. Reg. & L. Rep. (BNA) 993 (1984). 23 Department of Labor, Advisory Opinion 82-49A, 9 Pens. Rep. (BNA) 1394 (1982). 24 Department of Labor, Letter to the Futures Industry Association, Inc., regarding Exemption Application No. D-3006, Aug. 16, 1985.

6 INVESTMENT AUTHORITY ERISA Section 403 provides generally that only named fiduciaries, trustees, insurance companies, banks and investment advisers registered under the Investment Advisers Act of 1940 may exercise managerial discretion and control over the assets of the plan. The Labor Department has stated that a person, who is registered as a commodity trading advisor (CTA) under the Commodity Exchange Act and who renders advice solely with respect to futures transactions, may still exercise managerial control over plan assets if the person is also an investment adviser registered under the 1940 Investment Advisers Act. UNRELATED BUSINESS TAXABLE INCOME Trusts forming parts of qualified plans usually are exempt from federal income tax. 25 However, in order to prevent organizations from using their tax-exempt status to compete unfairly with taxpaying entities in businesses or trades that are outside the normal scope of trust investment, the Internal Revenue Code imposes a tax on unrelated business taxable income (UBTI), which is defined generally to mean the gross income derived from any unrelated trade or business regularly carried on by the organization, less any appropriate deductions; the word unrelated means not substantially related to the exercise or performance of the organization's purposes and functions. 26 The IRS has held that income generated by a plan by reason of its futures transactions will not constitute UBTI, 27 because IRC Section 512(b)(5) excludes from the definition of UBTI all gains and losses from the disposition of property, other than (1) stock in trade or other property which would be properly includable in inventory, or (2) property held primarily for sale to customers in the ordinary course of the trade or business. This exclusion appears to apply to most futures and options strategies, and particularly hedging strategies. Also excluded from UBTI is certain option premium income received on the lapse of an option to buy or sell securities, which are defined to include stock and evidences of indebtedness. 28 UBTI includes net income with respect to debtfinanced property, which term includes property held to produce income and which has an unpaid amount of indebtedness incurred by the organization in acquiring or improving such property. The IRS has ruled that entering into a futures contract by a plan will not constitute debt-financed income because a futures contract is in the nature of an executory contract to acquire property at a future date IRC 401(a), 501(a). 26 IRC 511, 512, and Private Letter Ruling , 343 IRS Letter Rulings Reports (CCH). June 24, Private Letter Rulings may not be cited as precedent, but do tend to indicate the IRS position on a particular subject. 28 IRC 512(b)(5). 29 Private Letter Ruling , 343 IRS Letter Ruling Reports (CCH), June 24, 1983; Private Letter Ruling , 211 IRS Letter Ruling Reports (CCH), Dec. 15,1980. See also Revenue Ruling , C.B. 305.

7 POOLING OF ASSETS OF MULTIPLE PLANS For administrative convenience and the possibility of improved investment performance with lower transaction costs, the investment manager of a qualified plan may wish to place plan assets in a pooled investment vehicle such as a mutual fund, common trust fund, master trust, or collective investment (group) trust. 30 If a plan uses a pooled investment vehicle, it may be advisable to determine whether or not the underlying assets are also considered to be plan assets for purposes of the fiduciary requirements of ERISA. 31 In order to facilitate transactions by pooled investment vehicles, the Labor Department has granted Prohibited Transaction Class Exemptions for certain transactions by insurance-company-pooled separate accounts and bank collective investment funds, and transactions negotiated for pooled investment vehicles by qualified professional asset managers ( QPAMS ). 32 All ERISA pooled investment vehicles and contributory defined contribution plans that invest in futures contracts may be required to comply with the CFTC's rules for commodity pool operators (CPOs). In general, the aforesaid ERISA plans may receive an exclusion from the definition of CPO if they provide the CFTC and National Futures Association with a signed notice of eligibility stating that the plan: 1. Will use futures and commodity options solely for bona fide hedging purposes or, with respect to non-hedging positions, the aggregate initial margin and premiums (less the in-the-money amount of an option) will not exceed 5 percent of the liquidation value of the entity's assets; 2. Will not be marketing participations to the public as a vehicle for trading in futures or commodity options markets; 3. Will disclose in writing to each prospective participant the purpose of and the limitations on the scope of trading (in some cases the disclosure merely could be made available to the participants); and 4. Will submit to special calls made by the CFTC For the laws and rules that may apply to such entities, see Investment Company Act of l940; IRC 584, 401(a), and 5Ol(a); IRS Revenue Ruling 8l-100; and the Comptroller of the Currency's regulations codified at 12 C.F.R. 9.18(1984). 31 For a description of what assets constitute plan assets, see ERISA 401(b) 32 PTCE 90-1 (Jan. 29, 1990), PTCE (June 12, 1991), and PTE (March 13, 1984), Pens. Plan Guide 16,634, and 16, C.F.R. 4.5

8 COMPLIANCE CHECKLIST Following is a checklist which may be used as a guide 34 to the major issues involved in setting up a futures or options trading program: 4. Policies and Objectives. Specific policy objectives could be spelled out in a policy manual. 1. Applicable Law. ERISA and its underlying regulations provide the major rules applying to investments by employee benefit plans. State banking, securities, and insurance laws also may apply in certain cases. A plan and its trustee may wish to obtain a legal opinion as to the permissibility of futures and options activities under applicable laws. 5. Recordkeeping, Accounting and Valuation. Specific procedures should be established, taking into account the Statement of Financial Standards Number 80, Accounting for Futures Contracts, which was issued by the Financial Accounting Standards Board in August Official transaction ledgers should be maintained. 2. Governing Instruments. The plan and trust should be reviewed to ensure that futures and options investments are permitted. The agreement with the FCM should specify whether or not the FCM will render investment advice for a fee Authorization. Proper written authorization for engaging in futures and options activities should be given by the board of directors of the trustee and the plan sponsor's investment committee. 6. Internal Controls, Audits, Separation of Functions, and Review. Dollar limitations often are set for each account and each type of activity. 7. Reports. Internal reports and reports to regulators (such as the CFTC's Form 40) may be required. 34 For more detailed checklists, see, e.g., Comptroller of the Currency, Trust Banking Circular No. 14 (Rev.) (Oct. 16, 1981) Board of Governors of the Federal Reserve System, Letters Regarding Trust Department Uses of Options and Futures Contracts, SR 83-2(SA) and SR 83-39(SA), (Jan. 11, 1983 and Dec. 2, 1983) Fed. Banking L. Rep. (CCH) 35,318 and 35, See the prior discussion about multiple services, and FCMs acting as both a fiduciary and a broker.

9 STRATEGIES AND EXAMPLES REMAINING FULLY INVESTED IN EQUITIES A pension plan may have numerous investment firms managing the equity portion of the plan assets. These managers may hold a portion of the portfolio assets in cash or short term money market instruments and not be fully invested in equities. In aggregate, this build-up of cash may be leading to underweighting and under-performance of the plan s equity portfolio because of drag on returns from the cash component. The plan administrator or investment manager may aggregate this cash and overlay it with equity index futures, such as S&P 500 futures. Portfolio objective: Invest $25 million of cash held by the plans managers. Action: Purchase 91 S&P 500 index futures contracts with the underlying cash remaining invested in money market instruments. Result: Portfolio is fully invested in equities while maintaining liquidity. How to determine the proper number of futures contracts: REBALANCING PLAN ASSETS As markets move, the mix of plan assets may drift from the plan s stated objective. For example, a $1 billion plan s strategic allocation may be 60% equities and 40% fixed income. As equities have increased in value, the current allocation may be 70% equities and 30% fixed income. Rather than taking assets from equity managers who have been performing well and adding value, the plan could sell stock index futures such as the S&P 500 to bring the asset allocation back into line with the stated target allocation. Portfolio Objective: Bring asset allocation back to within objectives by reallocating $100 million. Action: Sell 364 S&P 500 index futures contracts and buy fixed income futures. Results: Synthetically reallocated portfolio back to desired asset mix without disrupting existing managers or portfolios. $100,000,000 x S&P x $250 futures contracts Value of portfolio x Beta of portfolio = # of contracts Index level x Contract multiplier Example: $25,000,000 x S&P x $250 futures contracts

10 PORTFOLIO TILTING Within the equity portfolio, a common strategy is tilting the portfolio toward a different market capitalization or sector. A plan sponsor may want to allocate investments toward midcap stocks from large capitalization stocks but can not complete a manager search and fund the midcap managers in a timely manner. Rather than liquidating what may be core holdings or managers, the plan administrator or investment manager may reallocate their exposure without incurring the cost to buy and sell all the underlying stocks, or terminating managers. Portfolio objective: Reallocate $25 million to increase exposure to midcap stocks and reduce exposure to large-cap stocks. Action: Buy 143 S&P MidCap 400 index futures and sell 91 S&P 500 index futures. Result: Tilted equity portfolio towards midcap exposure from large cap without incurring the cost of purchasing or selling underlying stock holdings. HEDGING A plan sponsor may feel the market is overvalued in the near term and wants to protect the value of the equity holdings. Rather than liquidate assets or terminate managers, the plan or its manager could sell S&P 500 index futures to protect the portfolio. Another way of obtaining the downside protection would be to buy puts on S&P 500 futures. Options in this case would work like an insurance policy in which the fund would pay for the protection via the option premium. Portfolio Objective: Protect $25 million in equity exposure. Action: Sell 91 S&P 500 futures or purchase puts on S&P 500 futures options. Result: $25 million in equity exposure protected by selling S&P 500 futures or by purchasing puts on S&P 500 futures options. How to determine the proper number of futures contracts: Example: $25,000,000 x MidCap x $500 futures contracts $25,000,000 x S&P 500 1, x $250 futures contracts

11 MAINTAINING EXPOSURE DURING MANAGER TRANSITIONS Plan sponsors change money managers for any number of reasons, such as a shift in asset allocation or asset classes, performance, or other factors. Until the new manager is hired and funded, the plan may want to maintain its investment in the asset class rather than forego the returns in the market. For example, if an equity manager with $25 million in equities has been terminated and the portfolio liquidated, rather than leave the exposure in cash, the plan can maintain its exposure to the equity market by overlaying index futures. Portfolio objective: Maintain $25 million equity exposure for the terminated commitment. Action: Buy 91 S&P 500 futures contracts. Result: $25 million exposure to the equity market maintained in an unleveraged fashion until new equity manager is hired and funded.

12 CONCLUSION Financial futures and options are valuable tools that can significantly aid a pension plan manager s investment strategies. The flexibility of financial futures allows pension plan manager s to obtain and reach their investment objectives in the most cost effective manner. Among the potential benefits of futures and options are added liquidity, lower transaction costs, yield enhancement, and risk management. FOR FURTHER INFORMATION The Chicago Mercantile Exchange has several publications available for anyone interested in stock index futures and options products. Copies of the following can be obtained by contacting your broker or the CME: Using S&P 500 Futures and Options Equity Index Futures & Options Information Guide This paper has been compiled by the Chicago Mercantile Exchange for general information purposes only. Although every attempt has been made to ensure the accuracy of the information in this paper, the Chicago Mercantile Exchange assumes no responsibility for any errors, omissions, or changes in the applicable laws and regulations. All examples in this paper are hypothetical fact situations, used for explanation purposes only, and should not be considered investment advice or the results of market experience. Each institution will have different needs and concerns relating to its futures and options activities and should seek the advice of counsel with respect to those activities. All matters pertaining to rules and specifications herein are made subject to and are superseded by the official, current Chicago Mercantile Exchange Rules. S&P, Standard & Poor s and S&P 500 are trademarks ofthe McGraw-Hill Companies, Inc. and have been licensed for use by the Chicago Mercantile Exchange. Chicago Mercantile Exchange and CME also are registered trademarks. Copyright Chicago Mercantile Exchange 1998 G38.8/3M/998