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i

Capital Markets, Derivatives, and the Law

ii
iii

Capital Markets, Derivatives,

and the Law
P OSI T I VI T Y AND P REPA RAT ION

Third Edition

Alan N. Rechtschaffen

1
Capital Markets, Derivatives, and the Law. Alan N. Rechtschaffen.
© Alan N. Rechtschaffen 2019. Published 2019 by Oxford University Press.
1
Oxford University Press is a department of the University of Oxford. It furthers the University’s
objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is
a registered trademark of Oxford University Press in the UK and certain other countries.

Published in the United States of America by Oxford University Press

198 Madison Avenue, New York, NY 10016, United States of America.

© Alan N. Rechtschaffen 2019

First Edition published in 2009

Second Edition published in 2014

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, without the prior permission in writing of
Oxford University Press, or as expressly permitted by law, by license, or under terms agreed
with the appropriate reproduction rights organization. Inquiries concerning reproduction
outside the scope of the above should be sent to the Rights Department, Oxford University Press,
at the address above.

You must not circulate this work in any other form

and you must impose this same condition on any acquirer.

Library of Congress Cataloging-​in-​Publication Data

Names: Rechtschaffen, Alan N., author.
Title: Capital markets, derivatives, and the law : positivity and preparation / Alan N. Rechtschaffen.
Description: Third edition. | New York : Oxford University Press, [2019] | Includes
bibliographical references and index.
Identifiers: LCCN 2018048101 | ISBN 9780190879631 ((hardback) : alk. paper)
Subjects: LCSH: Financial instruments—United States. | Derivative securities—
Law and legislation—United States. | Capital market—Law and legislation—United States. |
Securities industry—Law and legislation—United States.
Classification: LCC KF1070 .R42 2019 | DDC 346.73/096—dc23
LC record available at https://lccn.loc.gov/2018048101

9 8 7 6 5 4 3 2 1

Printed by Sheridan Books, Inc., United States of America

Note to Readers
This publication is designed to provide accurate and authoritative information in regard to the subject
matter covered. It is based upon sources believed to be accurate and reliable and is intended to be
current as of the time it was written. It is sold with the understanding that the publisher is not engaged
in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is
required, the services of a competent professional person should be sought. Also, to confirm that the
information has not been affected or changed by recent developments, traditional legal research
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(Based on the Declaration of Principles jointly adopted by a Committee of the

American Bar Association and a Committee of Publishers and Associations.)

You may order this or any other Oxford University Press publication
by visiting the Oxford University Press website at www.oup.com.
v

B’H

Thank you for Miera, Ronit, Evie, Sarah, Emunah, my mother, my father,
and my teachers. Thank you to Miera for more things than I could ever say.

Thank you Josh, Tevi, Jason, and R. Green for your friendship.

And thank you to my students who are an unstoppable source

of inspiration and positivity.

Alan Rechtschaffen
vi
vi

Contents

Acknowledgments xix
Preface xxiii
Introduction xxv

1. The Financial Crisis: The Seeds of New Regulation 1

I. Origins of the Great Recession 5
II. Subprime Lending 6
III. Government-​Sponsored Entities 6
IV. Legislative Reforms 9
A. Multiple Guarantor Model 10
B. Multiple Insurer Model 11

2. The Liquidity Crisis and Government Reaction 13

I. Buildup to Crisis 13
II. Providing Liquidity and Stabilizing the Financial Markets 18
III. Regulatory Reaction at the Height of the Crisis 19
A. The Emergency Economic Stabilization Act 19
B. American Recovery and Reinvestment Act 21
IV. Dodd-​Frank 23

3. Dodd-​Frank and the Regulation of Depository Institutions Capital Requirements 25

I. The Volcker Rule and “Too Big to Fail” 26
II. Bank Holding Companies and Systemically Significant Nonbanks 29
III. Living Wills, Credit Exposure Reports, and Concentration Limits 32
IV. Other Prudential Standards 35

vii
vi

viii Contents
4. Using Financial Instruments 37
I. Goal-​Oriented Investing 37
A. Using Financial Instruments to Hedge Risk 39
B. Using Financial Instruments to Enhance Yield 39
C. The Economy’s Impact on Financial Instruments 40
II. Achieving Investment Goals 41
A. The Investor’s Perspective 41
B. Financial Instrument Objectives 43
III. Managing Risk 45

5. Financial Instruments and the Capital Markets 47

I. The Capital Markets 48
A. Primary versus Secondary Markets 49
B. Long-​Term versus Short-​Term Marketplaces 50
C. Case Study: The Auction Rate Securities (ARS) Market 50
II. Financial Instruments 51
A. Types of Financial Instruments 51
1. Equity-​Based Financial Instruments 51
2. Debt-​Based Financial Instruments 52
3. Derivatives 53
4. Cryptocurrency and Digital Assets 54
B. Distinction between Debt and Equity 54
C. Federal Regulation 57
III. The Role of the Attorney 61
A. Competent Representation 61
B. Duty to Advise Client 61
C. Drafting Financial Instruments 62
D. Regulatory Compliance 62
E. Opinion Letters 63

6. Bureau of Consumer Financial Protection 65

I. Structure 66
II. Roles and Function of the BCFP 68
A. The Bureau’s Regulatory Authority 68
B. The Bureau’s Supervisory Authority 69
C. The Bureau’s Enforcement Authority 70
III. Significant Changes in Financial Consumer Protection by the BCFP 70
A. The Judicial Review of BCFP’s Power 71
IV. B CFP under President Trump’s Administration 73
ix

Contents ix
V. The Judicial BCFP Structures under President Trump’s Administration 77
A. Constitutionality of the Bureau 77
B. Single Directorship 77
VI. Ongoing Enforcement Action Status 78
A. Wells Fargo Case 78

7. Understanding Interest Rates and the Economy 81

I. Background 82
A. The Federal Reserve 82
B. The Federal Reserve Banking System 83
1. Composition 84
2. Purpose 84
3. Responsibilities 85
II. Economic Indicators and Interest Rates 86
A. Key Economic Statistics 86
1. Statistics 88
B. Monetary Policy Objectives 92
C. Inflation Targeting 95
III. Monetary Policy: The Financial Crisis and Beyond 96
IV. Quantitative Easing 97
A. Balance Sheet Normalization 104
B. Fiscal Considerations 106
V. FOMC Minutes 107

8. Asset Valuation 111

I. The Use of Interest Rates in Asset Valuation 111
II. Interest Rate Yield Curve 112
A. Types of Yield Curves 113
B. Why the Yield Curve May Be Flat or Inverted 117
1. Increase in Market Demand for Long-​Term Securities 117
2. Long-​Term Yield Affected by Federal Reserve Monetary Policy 118

9. United States Treasury Securities 121

I. Purpose and Goals 122
A. Risk-​Free Nature 123
B. Primary Dealers 124
II. Description of U.S. Treasury Securities 125
A. Types of Treasury Securities 125
1. Treasury Bills 125
x

x Contents
2. Treasury Notes and Bonds 126
B. Pricing 126
1. Discounts and Premiums 126
2. Factors Affecting Yield 127
III. Bond Auctions and Price 128
A. Interruption of Supply: SEC v. Davis et al. 129
B. Manipulation of the Auction Process: United States v. Salomon
Brothers 130
IV. Interest Rates 132
A. Fixed-​versus Floating-​Rate Securities 132
B. Treasury Inflation-​Protected Securities (TIPS) 132
V. STRIPS 134
A. Description 134
B. Valuation 134
C. Uses 135
D. Abuses: In the Matter of Orlando Joseph Jett 136

10. Debt Securities 139

I. Description 140
A. Features of Bonds 140
B. Types of Bonds 141
C. The Indenture 142
II. Bond-​Rating Agencies 142
A. Independence and Conflicts of Interest 144
B. Regulation of Bond-​Rating Agencies 146
III. Special Types of “Debt” Instruments 146
A. Repos 146
1. Description 146
2. Orange County Case Study 147
B. Mortgage-​Backed Securities 149
1. Mortgage-​Backed Bonds 150
2. Pass-​Through Securities 150
3. Collateralized Mortgage Obligations and Real Estate Mortgage Investment
Conduits 151
4. Stripped Mortgage-​Backed Securities (SMBS) 151
5. Subprime Mortgage Crisis 151
IV. Securities Act Registration 152
A. Government Securities 153
B. Government Agency Securities 153
xi

Contents xi
C. Municipal Securities 154
1. SEC Disclosure Requirements 154
2. MSRB Disclosure Requirements 154
D. Corporate Debt Securities 155
1. Securities Act Requirements 155
2. Trust Indenture Act Requirements 155
E. Private Placements of Debt Securities 156

11. Derivatives 157

I. Introduction 158
A. Description 158
B. Counterparty Credit Risk 158
C. Over-​the-​Counter versus Exchange-​Traded Derivatives 161
D. Exchange-​Traded versus OTC Derivatives 162
II. Shifting Risk 163
A. The Concept of Leverage 163
B. Basis Risk 164
C. Market Risk 164
D. Effective Tools of Risk Management 165
III. Types of Derivatives 165
A. Forwards 165
B. Futures 166
1. Reduction of Counterparty Risk 167
2. Suitability as Hedging Instruments 167
C. Distinction between Forwards and Futures 168
D. Foreign Exchange Forwards and Futures 169
E. Options 170
F. Swaps 172
1. Characteristics of Swaps 172
2. The ISDA Master Agreement 173
G. Credit Derivatives 174
Appendix CME Filing: Self-​Certification for the initial listing of the Bitcoin
Futures Contract 176

12. Types of Swaps 199

I. “Plain Vanilla” Interest Rate Swaps 200
II. Currency Swaps 202
III. Credit-​Default Swaps 203
A. Purpose and Function 204
xi

xii Contents
B. ISDA Master Agreement 206
C. Importance of Clearly Defined Terms 206
1. Credit Event 207
2. Reference Entity 209
D. Collateralized Debt Obligations 214
E. OTC Derivatives and the Financial Crisis 215
IV. The Move toward Regulatory Reform 220
A. The Central Clearing Model 221
B. The OTC Model 222
C. Confidence in the New Regulatory Regime: The Case of MF Global 223

13. Options 231

I. Characteristics of Options 232
II. How Options Work 233
A. Calls and Puts 234
1. Call Option 234
2. Put Option 235
B. Case Study: Levy v. Bessemer Trust 235
1. Facts 235
2. Theories of Liability in Levy 236
III. The Black-​Scholes Model and Option Pricing 238
A. Assumptions 238
B. Required Data 238
C. Volatility 239
1. Types of Volatility 239
2. Measures of Volatility 240
D. Authority of the Black-​Scholes Model 241
IV. Delta Hedging 242
A. Contracts That Are Economically Options 244
B. OTC versus Exchange-​Traded Options 245
C. Regulation of Options 246
V. Option Strategies 247
A. Synthetic Call 248
B. Covered Call 248
C. Collar 248

14. Regulation of Swaps 249

I. The Dodd-​Frank Regulatory Regime 250
A. Dodd-​Frank and Derivatives Trading 250
B. Jurisdiction and Registration 252
xi

Contents xiii
C. Clearing Requirements, Exchange Requirements, and the End-​User
Exemption 254
D. Capital and Margin Requirements 259
E. Reporting Requirements 260
1. Commodity Position Limits 261
F. Futures Commission Merchants, Dodd-​Frank, and Regulation 1.25 262
1. Title VII Enforcement 263
2. Updated Enforcement Advisory on Self-​Reporting and Full
Cooperation 263
3. Enforcement Actions for Data Reporting Violations 265
4. Action for Failure to Submit Accurate Large-​Trader Commodity Swap
Reports 266
5. Increase of CFTC’s Enforcement Actions following the Change of CFTC
Chairman 267
6. Reduction of Counterparty and Systemic Risk 267
a. Counterparty Risk 268
b. Systemic Risk 270
G. Rationale behind Exemptions and Exclusions 271
1. The End-​User Exemption 271
2. Physical Settlement Exclusion 273
3. Customization Exceptions 273
H. The Lincoln Rule 274
1. Futures Commission Merchants 275
I. Criticisms of Dodd-​Frank’s Derivatives Trading Provisions 276
1. Concentration of Systemic Risk in Clearinghouse and “Too Big to Fail” 276
2. Exceptions Swallowing the Rule: Incentivizing of Customization and De
Minimis Exceptions 277
3. Lack of Global Harmonization 278
4. The Impact of the Change of U.S. Administration 279
5. The Change of CFTC Chairman 279
a. CFTC’s New Priorities 280
b. Improving SEF rules 280
c. Fixing Data Reporting 280
d. Achieving Cross-​Border Harmonization 281
e. Project KISS 281
6. Recent Actions of the CFTC and Announcements of Further Actions
to Come 282
a. Amendment of Swap Trading Rules 282
b. Review of Swap Dealers De Minimis Threshold 283
xvi

xiv Contents
c. Review of Position Limits 283
d. Improvement of Clearinghouse Stress Testing 283
7. Propositions of Reforms from the U.S. Treasury Report on Capital
Markets 284

15. Securities Regulation 287

I. Regulatory Overview 288
A. The Securities and Exchange Commission 288
1. Jurisdiction 288
B. What Constitutes a Security 290
1. Stocks 290
2. Notes 292
3. Investment Contracts—​The Howey Test 298
a. Control and Splitting the Transaction 304
b. Prepurchase Efforts 307
c. State Regulation and the Hawaii Market Test 308
C. Sellers’ Representations 310
D. Consequences of Securities Violations 311
1. Preliminary Injunction 312
2. Disgorgement 313
3. Permanent Injunction 313
4. Antifraud Statutes 314
5. Attorney’s Potential Liability 314
E. Hedge Funds 315
1. Post-​crisis Hedge Fund Regulation 319
2. Other Regulations 320
II. Derivatives Regulation: The SEC after Dodd-​Frank 321
Appendix A: Implementing the Dodd-​Frank Wall Street Reform and Consumer
Protection Act 323
Appendix B: Checklist for Stocks, Notes, and Investment Contracts 323

16. Suitability 325

I. The Suitability Doctrine 326
A. Suitability Duty 326
B. Scope and Applicability 327
C. Control and Enforceability 327
D. Investment Advisors 328
1. Rule: A Fiduciary Standard 328
E. Scope and Applicability 329
xv

Contents xv
F. Control and Enforceability 330
G. Basis of the Suitability Doctrine 331
H. Special Circumstances 333
I. FINRA and Self-​Regulated Organizations (SROs) 334
1. Financial Industry Regulatory Authority Creation of the Agency 334
J. Rule: A Suitability and Know-​Your-​Customer Duty 335
K. Scope and Applicability 336
L. Control and Enforceability 337
M. NYSE Know-​Your-​Customer Rule 337
1. Consumer Financial Protection Bureau 339
2. Scope and Applicability 340
3. Control and Enforceability 341
4. Department of Labor 342
a. Employee Retirement Income Security Act 342
5. Scope and Applicability 343
a. The Antifraud Provisions of the Federal Securities Laws—​Section 10b
Cause of Action 343
II. Futures and Options: Suitability 345
A. Commodity Futures Trading Commission Disclosure Rules 345
1. Commodity Futures Trading Commission 345
a. Commodity Exchange Act 345
b. Rule: A Suitability and Fair-​Dealing Duty 346
c. Scope and Applicability 348
d. Control and Enforceability 348
B. National Futures Association 349
1. Rule: Suitability and Know-​Your-​Customer Duty 349
a. Scope and Applicability 350
b. Control and Enforceability 350
C. CEA Antifraud Provision 351
D. Municipal Securities Rule-​Making Board 351
Appendix A: Various Suitability Rules and Diagrams of Applicability 352
Appendix B: Survey of Rules Adopted by the SEC under Dodd-​Frank​  360

17. The History of the CFTC 367

I. Role of the CFTC 369
II. Structure 369
III. Disciplinary Action 370
IV. Regulatory Background 371
A. Commodity Exchange Act (CEA) of 1936 371
xvi

xvi Contents
B. Commodity Futures Modernization Act (CFMA) of 2000 372
C. Jurisdictional Disputes 373
D. The Commodity Futures Modernization Act 373
E. Exclusions 374
F. Forwards 375
G. Options 376
H. Futures 376
I. Regulatory Distinctions between Forwards and Futures 378
J. Swaps 381
K. Hybrid Instruments 383
L. Foreign Exchange Products 384
1. The Treasury Amendment 384
2. CFTC Reauthorization 385
Appendix A: Enforcement Case Study: CFTC v. Amaranth Advisors, LLC 388
Appendix B: Case Study: CFTC v. Zelener 391
Appendix C: Structure of CFTC 393
Appendix D: Case Study: CFTC v. Patrick McDonnell 394

18. Fiduciary Obligation to Manage Risk 397

I. Controlling Risk 398
A. Duty to Manage Risk 398
1. Risk Management for Financial and Non-​financial Institutions 400
B. Financial Risk 401
C. Quantifying Financial Risk 402
1. Value at Risk 402
2. Volatility Risk 403
3. Stress Testing 403
D. Portfolio Dynamics 405
II. Operational Risk Management 405
A. Directors’ and Officers’ Understanding of Financial Instruments 406
B. Risk Policy 407
C. Reporting Lines and Audit Techniques 408
D. Empowering Board Members 409
E. Reporting Structures 410
F. Information Flow 411
1. Daily Exception Report 411
2. Red Flags 412
G. Ethical Concerns 412
xvi

Contents xvii
1. Compensation 412
2. Code of Conduct 413
3. Free Flow of Information 414
H. Flexibility 414
III. Executive Protection 414
A. Responsibility for Risk Management 415
B. Business Judgment Rule 415
C. Education at Financial Institutions 416
D. Disclosure under Sarbanes-​Oxley Act 416
1. Disclosures in Management’s Discussion and Analysis (MD&A) 416
2. Off-​Balance-​Sheet Transactions 417
Appendix A: Case Study: JPMorgan and the London Whale 419

19. Litigation Issues 423

I. Federal Securities Laws 424
A. The Retail Investor: Broker-​Dealers and Investment Advisers 424
B. Securities Exchange Act of 1934 Rule 10b-​5 Claim 426
C. Securities Act of 1933 428
D. Liability under the Commodity Exchange Act 430
1. Antifraud Provision 430
2. Disclosure 431
II. Common Law Theories 432
A. Breach of Fiduciary Duty 435
B. Common Law Fraud 438
C. Shingle Theory 438
D. Tort Theory 439
E. Contract Theory 439
III. State Blue Sky Laws 439
IV. Swaps Case Study 440

20. Synthesis and Conclusion 443

I. Synthesis 443
II. Structured Note Case Study: Securities and Exchange Commission v. Goldman,
Sachs & Co. & Fabrice Tourre 445
III. Historical Example: Erlanger “Cotton” Bonds 447
IV. Range Notes 450
V. Internal Leverage and Market Risk 452
VI. Risks Involved 455
xvi

xviii Contents
A. Interest Rate Risk 455
B. Liquidity Risk 455
C. Reinvestment Risk 456
D. OCC Warning 456

Index 459
xi

Acknowledgments

Capital Markets, Derivatives and the Law: Positivity and Preparation

explains complex financial and legal information in a way that is easy to grasp. While
regulation is rapidly evolving, understanding the building blocks of capital market
trading activities is valuable far beyond a survey of the latest legal structures.
For more than twenty years, I have taught students at New York University School
of Law and at Fordham University. A number of my finest students helped me write
and update this book to describe innovation, regulation, and capitulation within the
global economy.
We would like to thank each of them for their contribution, and acknowledge
their fine work:

Ying-​Tien Chen earned both Bachelor’s and Master’s degrees at National

Taiwan University and works as an attorney in Taiwan. Tina’s knowledge of
the law is broad, having worked internationally in civil, criminal, and domestic
relations litigation, including real estate and contract disputes, breach of fidu-
ciary duty claims, fraud, and family law.
Melanie de Marnix, who contributed portions relating to suitability and
standards of care, attended NYU Law School after having been an attorney for
five years in Brussels, specializing in corporate and finance law. Her experience
in advising clients in the Belgian public markets gave her valuable insight into
European surveillance authorities and their expected standards of care.
Another random document with
no related content on Scribd:
 The cocking hook is an ingenious device found on American
shotguns and many variations of it are, of course, used on the
different makes of arms. The Parker gun is provided with a hook
working a slide, thus pulling the hammers to cock. In the Baker, a
bent arm is pivoted to the breech to serve the same purpose.
Another example of American ingenuity may be noted in the lug-
cocking devices used on the Ithaca and Fox guns. This simple
arrangement is made by connecting the toe of the hammer directly
with the lug, which is an integral part of the barrel. The hammer is
thus made to act as its own lever, for as the toe portion rises when
the barrel is opened, the striker falls back until it is caught in the
notch of the sear.
To guard against the possibility of accidental discharge of the
hammerless gun, in which type of gun the hammer must be always
at full cock, a safety trigger bolt is utilized. This bolt is affixed in the
frame in a vertical position by pivoting it, and to the upper part of the
lever is attached a slide placed on top of the tang immediately back
of the top lever which opens the barrels. As this safety slide is
pushed, the lower end of the lever is brought close up against the
triggers, blocking them, and thus prevents them from moving while
the safety is in the “on” position. To discharge the gun, the slide must
be pushed forward to the “off” position, which moves the lower end
away from the triggers. This type of safety is of the nonautomatic
variety and can only block the triggers when the slide is operated by
the shooter.
The automatic type of safety consists of a block, or bar, fitted in
the frame and extending from the safety bolt to the post of the top
lever. When the top lever is pushed to one side to open the barrels,
this block, or bar, pushes the safety bolt over the triggers,
automatically blocking them and preventing accidental discharge.
The triggers must be pressed to withdraw the automatic safety bar.
 The Rotary Bolt, an American Invention, Is Strongest Device Known for
Locking the Barrels to the Frame

To make the shotgun less likely to go off in the hands of the

careless gunner, the tumbler safety has been incorporated into the
mechanism of a few American weapons. The tumbler safety is a bar,
automatically operated by the triggers, and interposed between the
strikers and their firing pins. This device makes it impossible for the
arm to be discharged by the hammer jarring off when dropped, for
the tumbler bar occupies its position between the strikers and firing
pins until the triggers are pulled.

The Three-Bolt Mechanism Is One Form of the Rotary-Bolting Principle Used

by Many Gun Builders

The practical value of both the automatic safety and the tumbler
type of bolt is questioned by practically all experienced gunners. Its
presence is designed to make the arm less dangerous in the hands
of careless and ignorant sportsmen. This it may serve to do, but
since there should be no excuse for tolerating the latter, most
handlers of the scatter gun fail to see the utility of the former. The
novice should lose no time in acquiring the knack of handling his
chosen weapon, and if he will but exercise a little care, he will find
the hand-operated safety quite sufficient, for he will not be troubled
through accidental discharge of his gun. By far the larger portion of
accidents occur through careless handling of the gun and by the
untimely pulling of the trigger, either by dragging the gun through the
brush or by nervousness, and it is impossible to make use of a
safety device to prevent the accidental discharge.

The Fore End Is an Extension of the Stock beyond the Triggers and the
Frame

The Barrels of a Shotgun

Between 15 and 20 years ago shotgun barrels were made by

combining bars of iron and steel and welding them together to form
barrels of the proper diameter or bore. When these strips of metal
were twisted to make a spiral tube they were welded together to
make the familiar “twist,” “laminated,” and “Damascus” barrels.
Sometimes three, four, and five strips of iron and steel were twisted
together to make the “three-stripe,” “four-stripe,” and “five-stripe”
Damascus barrels. This old type of a barrel was strong and flexible,
but being comparatively soft, it was easily damaged by denting.
 The Comparative Sizes of a 20-Gauge and a 12-Gauge Repeating Shotgun

The modern compressed-steel barrels are fashioned from solid

drawn steel, are very hard, will stand much higher pressure than the
Damascus type, and since the process of manufacture is simpler, a
first-class steel barrel may be produced at one-quarter the cost of
the old type. The several manufacturers have adopted trade names
to distinguish the various grades of steel barrels. Various trade
names come from abroad, and those of American manufacture are
labeled “nitro-steel,” “armor steel,” “high-pressure steel,” etc. While
differences very likely exist in the quality of the different barrels sold
under the several names, all the barrels used by reputable gun
builders will be found amply strong to resist any pressure exerted by
ordinary charges of powder, hence the cheaper guns are perfectly
safe and will stand many years of hard shooting.

Locking the Barrels to the Frame

In the early models of the breech-loader the barrels were locked to

the frame with a bolt operated by a lever placed under the fore end.
All modern guns have the top-lever action. In this device a “lump” is
fastened to the under side of the barrels near the breech, forming a
hinged joint to which the fore end is attached when fitting the barrel
and stock together. When closed, the breech end of the barrels is
held down to the action and tight up against the breech by a slide, or
bolt, which fits into the “lump” attached underneath the barrels.
Different makers use various forms of top-lever bolting devices, as
the “hook rib” or “extension rib,” otherwise known as the “doll’s
head,” and the cross bolt first used by Greener, the celebrated
English gun builder. All of these devices are satisfactory on a good
grade of gun, but the strongest mechanism is an American invention,
known as the Smith rotary bolt. This rotary bolt is tapered and is
pushed through an opening in the rib by means of a strong spring.
Mechanically this locking device is all that can be desired, and it
cannot loosen through manipulation, because of its compensating
feature, that is, the spring forces the bolt farther in as the bearings
become worn through much service. Many of our well-known
builders use this splendid fastening.

Shotgun Stocks

Walnut is exclusively used for gunstocks, and the several grades

are termed plain American walnut, fine American walnut, English
walnut, selected English walnut, fine English walnut, Italian walnut,
and Circassian walnut. The plain American walnut is simply a
common quality of black walnut, oiled and varnished, and fitted on
the cheaper guns. Fine American walnut is of better quality, darker in
color, and of better grain. It is strong and durable, and when well
oiled and polished by hand, it makes a neat stock for the inexpensive
gun. The selected English walnut is of good color and with good
grain. When oiled and hand-polished it makes an attractive stock for
the knockabout gun. Fine English walnut is usually fitted to guns
selling at a higher price, and is generally made to order. Italian
walnut is a dark wood with a fine grain and is usually supplied to
order on the finest guns. Circassian walnut is the finest wood
obtainable, of a rich dark color and a fine curly grain. It is therefore
expensive and only finished to order and fitted to the most expensive
guns.

The Fore End

The fore end is an extension of the stock beyond the triggers and
frame and affords a grip for the extended hand—protecting it from
the hot barrel—serves to lock the barrel to the frame, and likewise
holds the ejector mechanism. The Deely & Edge, and Snal fore ends
are both used on American guns, and they are so well designed and
made that it is practically impossible for the modern types to loosen
even when the arm has been subjected to long, hard service. Hence
this detail of the shotgun need not be considered when selecting an
arm.

Self-Ejector Mechanism

Although a great many shooters do not use the self-ejector, this

handy device will many times prove of great value in the field, for
when the birds are coming fast and the shooter happens to score a
miss, the self-ejector throws out the empty shell and enables him to
shove in a fresh load to bring down the following bird. The
nonejecting arm is plenty good and quick enough for trap use, for
when shooting “clays,” plenty of time is given each man to reload
between shots, but for upland-bird and for duck shooting, the
automatic ejector is a desirable addition to the double-barreled gun.

Repeating and Automatic Shotguns

While a good double-barreled gun in the hands of the average

shot will very likely bag as many birds as the shooter is entitled to—
and it may be depended on to do this when fitted with a good
automatic ejector—many shooters prefer the repeating gun. The
hand-operated, sliding fore arm, trombone-action, or pump gun is so
well-known that no recommendation is needed. It will suffice to
mention that it will do everything that a double-barreled gun can
perform, and considering that every pump gun is self-ejecting, and
its cost less than an equal grade of double gun equipped with an
ejecting device, it is not difficult to understand its popularity. So far as
accuracy is concerned, the repeater will shoot rather more steadily
than the double-barreled gun in the hands of the average man, and
after two shots have been fired, there remain four more in the
magazine. Rapid firing is not always an advantage, of course, but
when after ducks, the third shot is often wanted in the interval that is
required to load the double-barreled gun.
The Shells are Started About One-Quarter Inch in the Regular Way Before the
Ejector Kicks Them Out

The automatic, or self-loading, shotgun is the logical development

of the repeater, and while its mechanism is necessarily more
complicated, it has some merits peculiarly its own. The devotee of
the double barrel is inclined to believe that the repeater and the
automatic shotgun do not balance so well as his favorite weapon,
and the man who swears by the pump gun is inclined to think that
the automatic arm is balanced like a club and prone to get out of
order. Both factions can put up plenty of argument to support their
opinions, but to the unprejudiced gunner, both the repeater and the
self-loader will prove very fine guns after the shooter has become
familiar in handling them. The double-barrel is a mighty fine gun, so
is the repeater and again the automatic; so let the gunner pick out
the type he likes best.

The Automatic Ejector Mechanism Enables the Gunner to Shove in a Fresh

Load for the Following Bird
 A Self-Loading Shotgun in the Positions of the Action Open and Closed

How to Select a Shotgun

The Measurements are Taken of the Drop at the Comb and Heel, and of the
Stock from the Butt to the Forward Trigger

That the shooter may not be handicapped by using a misfit gun, it

is well to make a selection at one of the larger dealers’ where guns
of various sizes, weights and lengths, as well as drops in stocks,
may be tried until one is found that fits the gunner the best. A good
shot can pick up almost any gun and do fairly accurate shooting with
it, but he can do better work with a gun fitting him properly. The chief
measurements of a gunstock are the length and drop of the stock,
and the drop and shape of the comb. The ordinary thickness of the
grip will suit the average hand, but in the case of unusually large or
small hands, this must be taken into consideration. For the average
man these measurements will probably be about right: Length of
stock, from forward trigger to center of butt plate, A-A, 14 to 14¹⁄₂ in.,
drop at comb, B-B, 1¹⁄₂ to 1⁷⁄₈ in., which will give corresponding drop
at the heel, C-C, from 2¹⁄₂ to 3 in. A fairly straight stock of good
length may be reckoned an advantage for trap shooting, but for use
in the field, a somewhat crooked stock with more drop at the comb,
say, 1⁵⁄₈ in. with 2⁵⁄₈-in. drop at the heel, will more fully meet the
average shooter’s idea of a well-balanced gun. However, as men
differ, and there are as many faces and eyes as there are men,
every shooter must decide this question for himself. So far as the
circumference of the grip is concerned, the size of the shooter’s
hand and the length of his fingers will decide this detail. For a small
hand, a 7-in. grip is about right, while a grip of 7¹⁄₂ in. will probably fit
the large hand well. The question of straight or pistol grip is purely a
matter of personal taste, for one is as good as the other so far as
accurate handling of the gun is concerned.
 A Repeating Shotgun and the Position of Its Different Parts When Cocked
and After Firing

The Gauge, or Size of Bore

The 10-gauge may be occasionally useful for long-range duck and

goose shooting, but for ordinary duck and upland use the 12-gauge
is plenty large enough. The larger the gauge the greater will be the
killing zone, and up to their ranges the small bores may, for all
practical purposes, be regarded as shooting quite as accurately and
with as much power as the heavier gauges, that is, the small bores
will shoot to kill if held correctly. The standard 12-gauge gun is fitted
with 30-in. barrels, weighs 7 to 8 lb., and the standard load for the
field is 3 dr. of powder and 1¹⁄₈ oz. of shot. This gives a killing range
up to 40 yd. The standard 16-gauge, with 30-in. barrels, weighs from
6¹⁄₂ to 7¹⁄₄ lb., and the standard load is 2¹⁄₂ dr. of powder and 1 oz. of
shot, with a killing range up to 35 yd. The standard 20-gauge, with
28-in. barrels, weighs from 5 to 6¹⁄₂ lb. and the standard load is 2¹⁄₄
dr. of powder and ⁷⁄₈ oz. of shot. Best killing range up to 30 yards.
For an all-purpose gun, suitable for wild fowling as well as upland
shooting, the 12-gauge is the best choice although the 16-gauge will
be found a hard-hitting weapon. For the good shot, the 20-gauge will
prove a fine little arm for upland work, only the gunner must shoot
well with the small bore to kill his bird clean. Contrary to the notion,
the large bore, not the small gauge, will bring the most game to the
novice’s bag.
 Mission Candlestick
Even though a candlestick is one of the simplest of the smaller
household furnishings, it nevertheless can be made a very attractive
feature.
For the illustrated mission design, a base, 4 by 4 by ⁷⁄₈ in., should
be provided. This is cut, with the grain, for a ¹⁄₂-in.-wide groove, ¹⁄₄ in.
deep and extending from one side to within ¹⁄₂ in of the opposite
side. In this groove is to fit the handle, which is made from a piece of
¹⁄₂ by 2¹⁄₄ by 3³⁄₄-in. stock. It is provided with a finger-grip hole ³⁄₄ by
1¹⁄₄ in. at one end. Its upper edge should be marked off from the
center pedestal and fitted to it. The pedestal can be made from stock
1⁷⁄₈ by 1⁷⁄₈ by 5 in. A tenon, ¹⁄₄ in. long by 1¹⁄₄ in. square, is formed
on the lower end. This tenon is to fit a mortise in the center of the
base. A slot ¹⁄₂ in. wide is cut centrally in the pedestal, and 2 in.
above the lower end, to fit the handle. The upper end of the pedestal
is cut straight for ¹⁄₄ in. and squared off to 1¹⁄₈ in. This is to serve as a
tenon to fit a corresponding mortise in the ¹⁄₂ by 2-in. square top. The
sides of the pedestal are evenly tapered off from the 1⁷⁄₈-in. square
base to the lower end of the 1¹⁄₈-in. square tenon, at the top.
 Mission Candlestick of Pleasing Design, That will Appear Well with Other
Furniture of This Class

The parts, before assembling, should be thoroughly sandpapered,

as considerable difficulty would otherwise be experienced. No nails
or screws need be used, as good glue will keep the parts together
equally well. When completely assembled, a hole should be drilled
through the top and into the pedestal, to fit the size of candle to be
used. A carefully applied mission stain and varnish will give a proper
finish to the candlestick.—Contributed by G. Crossley, Erie, Pa.
Pin Setter for the Home Tenpins
All the Tenpins are Quickly Set, and Each in Its Proper Place
 Bowling with a set of small tenpins, which can be purchased at a
department store, is a very interesting game. The chief drawback,
however, is the setting of the pins. With a little rack like the one
shown in the illustration, the interest in the game may be increased
considerably. It not only helps in setting the pins rapidly, but insures
a good setting with the proper spacing between the pins. It is very
simple to make, as it consists of a triangular piece of wood with ten
holes bored into it at the proper places, the dimensions of which will
be governed by the size of the pins, and three supports. The pins are
dropped in the holes and the rack lifted from them.—Contributed by
F. K. Howard, Los Angeles, California.
 Magically Naming a Written Card
This experiment consists in requesting anyone of a company of
spectators to name a card and write it on a piece of paper,
whereupon the performer instantly names the card written.
Two persons are necessary, the performer and his assistant. The
performer leaves the room while the spectator writes the name of the
card on the paper, the assistant supplying the paper and pencil.
When the name of the card is written, the paper is folded by the
spectator and handed to the assistant with the pen or pencil. The
assistant lays the pencil and paper on a table in certain positions to
designate the name of the card. Previous to this test, the performer
and the assistant must have the positions of the paper and pencil
mentally fixed in their minds. Referring to the sketch, the four sides
of the table represent the card suits, viz., spades, hearts, clubs, and
diamonds; and an imaginary circle divided into twelve parts indicates
the number of the card, 1 standing for ace, 2 for deuce, and so on.
The Markings are Memorized so That Only Positions of Pencil and Paper will
be Seen

The assistant, knowing what has been written on the paper, places
the paper to indicate the suit, and the pencil is laid so that it points to
the number on the imaginary circle, or dial. The one shown in the
sketch is designating the four of hearts.
 Dry-Cleaning Mixture
An emulsion of gasoline and water is much used by dry cleaners
for removing grease, tar, and paint spots from clothing. It is in the
form of a thick, white sirup, which evaporates entirely and is not
injurious to any fabric or color. The directions for preparing this
emulsion should be followed out carefully.
Dissolve, in 1 qt. of boiling water, ¹⁄₂ oz. of pure castile soap, and
¹⁄₄ oz. of gum arabic. Allow this to cool, and then add 1 oz. glycerin,
1 oz. strong aqua ammonia, 1¹⁄₂ oz. chloroform, and 2 oz. sulphuric
ether. Shake well, and pour enough of the mixture into a quart bottle
to fill it for ³⁄₄ in. On top of this, pour not more than ¹⁄₄ in. of gasoline,
and shake until creamy. Repeat the addition of gasoline, shaking
each time, until full. The cleaning mixture will then be ready for use,
and may be applied with a rag, or small brush.
If, on adding the first lot of gasoline and shaking, the mixture does
not become emulsified, it proves that too much gasoline has been
added. In this case, allow it to stand for a few minutes, and pour off
the excess gasoline which comes to the top. Shake well, and add a
smaller quantity of gasoline. When the bottle is half full, larger
quantities of gasoline may be added at a time.
It is interesting to note that the more gasoline is added, the thicker
the emulsion becomes, and if the addition of gasoline and shaking is
prolonged, a semisolid jelly is formed, which will not run from a
bottle.—Contributed by H. E. Zschiegner, Wellsville, N. Y.