Shad-Johnson Accord restrictions lifted.

In an unanimous decision by the United States Court of Appeals for the Seventh Circuit, the Chicago Board of Trade (CBOT) received permission to trade futures based on the Dow Jones Utilities Average and Dow Jones Transportation Average. This decision overturns a July 1998 decision by the Securities and Exchange Commission (SEC).

For the CBOT this is giant step in its goal of eliminating the restrictions of the Shad-Johnson Accord signed in 1982. The Accord resolved a dispute between the SEC and Commodity Futures Trading Commission (CFTC) over regulation of index trading, granting the SEC the right to regulate stock index options and leaving stock index futures under the CFTC's jurisdiction. However, the SEC was given veto authority over stock index futures. Now, though, the Court of Appeals basically has said that the SEC misinterpreted the Accord.

"The decision is where we want it. This is exactly what John [Shad] and I had intended," says Philip McBride Johnson, the attorney with Skadden, Arps, Slate, Meagher & Flom who helped to write the Accord, "It's a bull's eye."

The Court of Appeals says the number of stocks an index contains should not be the only test when deciding to list an index.

"Historically, the SEC has been inclined to use this as the necessary test rather than looking at the overall risk of the index," Johnson says.

While the CBOT touts this decision as a victory for fund managers, many CTAs say it's too soon to tell.

"It's yet to be seen if there will be liquidity. This is the number one issue," says one CTA.

Room for improvement

The CFTC has proposed rules on the computation, documentation and disclosure of past performance of CTAs. The rule revisions suggest that rate of return (ROR) be computed by dividing net performance by the nominal account size. While a step in the right direction, the revisions have received criticism. Managed Funds Association Chairman George Crapple disagrees with the CFTC's interpretation of nominal funds.

"The CFTC has got this idea that if an account is not fully funded it's not real money," Crapple says. For instance, Crapple says the CFTC views an account of 8100 million as only $20 million if $80 million is in a custodial account at a brokerage firm.

"If the portfolio is $100 million it should be considered 8100 million for purposes of ROR, drawdown and assets under management," Crapple says.