[Federal Register: July 9, 2007 (Volume 72, Number 130)]
[Notices]
[Page 37298-37301]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy07-130]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55951; File No. SR-Phlx-2007-35]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change and Amendment No. 1 Thereto Relating to Options on
Commodity Pool ETFs
June 25, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 18, 2007, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been substantially prepared by the Exchange.
On May 23, 2007, Phlx filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice and order to
solicit comments on the proposed rule change, as amended, from
interested persons and to approve the proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3 \ Amendment No. 1 is incorporated in this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to amend certain rules to permit the listing and
trading of options on equity interests issued by trust issued receipts
(``Commodity TIRs''), partnership units, and other entities (referred
herein to as ``Commodity Pool ETFs'') that hold or
[[Page 37299]]
invest in commodity futures products. The text of the proposed rule
change is available on Phlx's Web site at http://www.phlx.com, at
Phlx's principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Phlx included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Phlx has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to enable the listing
and trading on the Exchange of options on interests in Commodity Pool
ETFs that trade directly or indirectly commodity futures products. As a
result, Commodity Pool ETFs are subject to the Commodity Exchange Act
due to their status as a commodity pool,\4\ and therefore, are
regulated by the Commodity Futures Trading Commission (``CFTC'').\5\
Commodity Pool ETFs may hold or trade in one or more types of
investments that may include any combination of securities, commodity
futures contracts, options on commodity futures contracts, swaps, and
forward contracts.
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\4\ A ``commodity pool'' is defined in CFTC Regulation
4.10(d)(1) as any investment trust, syndicate, or similar form of
enterprise operated for the purpose of trading commodity interests.
CFTC regulations further provide that a ``commodity interest'' means
a commodity futures contract and any contract, agreement or
transaction subject to Commission regulation under section 4c or 19
of the Act. See CFTC Regulation 4.10(a).
\5\ The manager or operator of a ``commodity pool'' is required
to register, unless applicable exclusions apply, as a commodity pool
operator (``CPO'') and commodity trading advisor (``CTA'') with the
CFTC and become a member of the National Futures Association.
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Currently, Commentary .06 to Phlx Rule 1009 provides that
securities deemed appropriate for options trading shall include shares
or other securities (``Exchange-Traded Fund Shares'') that are
principally traded on a national securities exchange or through the
facilities of a national securities association and reported as a
national market system security, and that represent an interest in a
registered investment company organized as an open-end management
investment company, a unit investment trust or a similar entity which
holds securities constituting or otherwise based on or representing an
investment in an index or portfolio of securities.
The Exchange proposes to amend Commentary .06 to Rule 1009 to
expand the type of options to include the listing and trading of
options based on shares of Commodity Pool ETFs (the ``Shares'') that
may hold or invest directly or indirectly in commodity futures
products, including but not limited to, commodity futures contracts,
options on commodity futures contracts, swaps, and forward contracts.
As part of this revision to Commentary .06 to Rule 1009, the Exchange
proposes to add subsection (b)(iv) requiring for Commodity Pool ETFs
that a comprehensive surveillance sharing agreement be in place with
the marketplace or marketplaces with last sale reporting that
represent(s) the highest volume in such commodity futures contracts
and/or options on commodity futures contracts on the specified
commodities or non-U.S. currency, which are utilized by the national
securities exchange where the underlying Commodity Pool ETFs are listed
and traded.
As set forth in proposed amended Commentary .06 to Rule 1009,
Commodity Pool ETFs must be traded on a national securities exchange or
through the facilities of a national securities association and must be
reported as a national market security. In addition, shares of
Commodity Pool ETFs must meet either: (i) The criteria and guidelines
under Commentary .01 to Rule 1009; or (ii) be available for creation or
redemption each business day in cash or in kind from the commodity
pool, trust, or similar entity at a price related to net asset value.
In addition, the commodity pool, trust or other similar entity shall
provide that shares may be created even though some or all of the
securities needed to be deposited have not been received by the
commodity pool, trust or other similar entity, provided the authorized
creation participant has undertaken to deliver the shares as soon as
possible and such undertaking has been secured by the delivery and
maintenance of collateral consisting of cash or cash equivalents
satisfactory to the commodity pool, trust, or other similar entity
which underlies the option as described in the prospectus.
New Commentary .08 to Rule 1010 defines ``Partnership Units.'' The
definition tracks the definition that recently has been proposed by the
Chicago Board Options Exchange (``CBOE'') in its proposal to list and
trade Commodity Pool ETFs, and approved by the Commission.\6\ The
proposed definition of ``Partnership Units'' includes a broad universe
of securities, including those of entities that invest in physical
commodities. However, the current filing proposes to list and trade
options only on Commodity Pool ETFs that invest in a combination of
commodity derivative products, and not in physical commodities.
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\6\ See SR-CBOE-2007-21, Amendment No. 1. CBOE explained in its
proposed rule change that the American Stock Exchange (``Amex'') had
filed a proposed rule change seeking to add ``Commodity Pool ETFs''
to the types of securities on which it lists equity options, and
that in Section 1(a) of Amex's filing, the term ``Commodity Pool
ETFs'' is defined to include, but is not limited to, Trust Issued
Receipts, Partnership Units and other entities. See Securities
Exchange Act Release No. 55187 (January 29, 2007), 72 FR 5467
(February 6, 2007) (Notice of Filing of Proposed Rule Change
Relating to Options Based on Commodity Pool ETFs). CBOE noted that
it did not have a definition of Partnership Units and was proposing
to add one, as Phlx is doing now. The definition Phlx is proposing
to add is the same as that proposed by CBOE. CBOE's proposal was
approved in Securities Exchange Act Release No. 55630 (April 16,
2007), 72 FR 19993 (April 20, 2007).
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Under the applicable continued listing criteria in Commentary .08
to Phlx Rule 1010, the Shares may be subject to delisting as follows:
(1) Following the initial twelve-month period beginning upon the
commencement of trading of the Shares, there are fewer than 50 record
and/or beneficial holders of the Shares for 30 or more consecutive
trading days; (2) the value of the index or, pursuant to new language
being added to the Commentary by this proposed rule change, the value
of the non-U.S. currency, portfolio of commodities including commodity
futures contracts, options on commodity futures contracts, swaps,
forward contracts and/or options on physical commodities, or portfolio
of securities on which the Shares are based is no longer calculated or
available; or (3) such other event occurs or condition exists that in
the opinion of the Exchange makes further dealing on the Exchange
inadvisable. Additionally, the Shares shall not be deemed to meet the
requirements for continued approval, and the Exchange shall not open
for trading any additional series of option contracts of the class
covering such Shares, if the Shares are halted from trading on their
primary market, or if the Shares are delisted in accordance with the
terms of Phlx Rule 1010, or the value of the index or portfolio on
which
[[Page 37300]]
the Shares are based is no longer calculated or available.
The Exchange further proposes to amend Phlx Rule 1022 to ensure
that the specialist and Registered Options Traders handling the Shares
provide the Exchange with all necessary information relating to their
trading in the applicable physical commodities, physical commodity
options, commodity futures contracts, options on commodity futures
contracts, any other derivatives based on such commodity. In addition,
the revision to Phlx Rule 1022 will prohibit a specialist or Registered
Options Trader from engaging in trading activities in physical
commodities, physical commodity options, commodity futures contracts,
options on commodity futures contracts, any other derivatives based on
such commodity from trading in an account which has not been reported
to the Exchange.
The Exchange also proposes to amend Commentary .02 to Rule 1022 to
require Specialists and Registered Options Traders in commodity futures
contracts, options on commodity futures contracts or any other
derivatives based on such commodity, to make available to the Exchange
such books, records or other information pertaining to transactions in
the applicable physical commodity, physical commodity options,
commodity futures contracts, options on commodity futures contracts, or
any other derivatives on such commodity, as may be requested by the
Exchange.
This proposal is necessary to enable the Exchange to list and trade
options on an expanding range of Commodity Pool ETFs currently approved
for trading. The Exchange notes that The DB Commodity Index Tracking
Fund (the ``DBC Fund''), the United States Oil Fund, L.P. (the ``Oil
Fund''), and the PowerShares DB G10 Currency Harvest Fund (the ``DBV
Fund'') are listed and traded on the American Stock Exchange. The DBC
Fund is a Commodity TIR and tracks the performance of the Deutsche Bank
Liquid Commodity Index TM--Excess Return, while the Oil Fund is a
Partnership Unit and tracks the spot price of West Texas Intermediate
light, sweet crude oil delivered to Cushing, Oklahoma.
The DBC Fund is a ``feeder fund'' that invests substantially all of
its assets in the DB Commodity Index Tracking Master Fund, and the
Master Fund in turn maintains a portfolio of exchange-traded futures on
aluminum, gold, corn, wheat, heating oil and light, sweet crude oil.
The Index is derived from the prices of those futures contracts. The
Master Fund's portfolio is managed on an ongoing basis by DB Commodity
Services LLC, a registered CPO and CTA, so that the value of the
portfolio closely tracks the value of the Index over time.
The DBV Fund is a ``feeder fund'' that invests substantially all of
its assets in the PowerShares DB G10 Currency Harvest Master Fund, and
the Master Fund in turn maintains a portfolio of exchange-traded
futures on foreign currencies that comprise the G-10 countries. The
Index is derived from the prices of those futures contracts. The Master
Fund's portfolio is managed on an ongoing basis by DB Commodity
Services LLC, a registered CPO and CTA, so that the value of the
portfolio closely tracks the value of the Index over time.
Unlike the DBC and DBV Funds, the Oil Fund does not invest through
a master-feeder structure but rather trades directly in futures on
crude and heating oil, natural gas, gasoline and other petroleum-based
fuels, options on such futures contracts, forward contracts on oil and
other over-the-counter derivatives based on the price of oil, other
petroleum-based fuels, the futures contracts described above, and the
indexes based on any of the foregoing. The Oil Fund's portfolio is
managed by Victoria Bay Asset Management LLC with the aim of tracking
the West Texas Intermediate light, sweet crude oil futures contract
listed and traded on the New York Mercantile Exchange.
The Exchange believes that it is reasonable to expect other types
of Commodity Pool ETFs to be introduced for trading in the near future
and also believes that the proposed amendment to the Exchange's listing
criteria for options on Commodity TIRs and Partnership Units is
necessary to ensure that the Exchange will be able to list options on
Commodity Pool ETFs that have been recently launched as well as any
other similar Commodity Pool ETFs that may be listed and traded in the
future.
The Exchange represents that it has an adequate surveillance
program in place for options based on Commodity Pool ETFs. The Exchange
may obtain trading information via the Intermarket Surveillance Group
(``ISG'') from other exchanges who are members or affiliates of the ISG
and expects that it will enter into numerous comprehensive surveillance
sharing agreements with various commodity futures exchanges worldwide.
Prior to listing and trading options on Commodity Pool ETFs, the
Exchange represents that it will either have the ability to obtain
specific trading information via ISG or through a comprehensive
surveillance sharing agreement with the primary exchange or exchanges
where the particular commodity futures and/or options on commodity
futures are traded.
The Exchange also added rule text relating to the prevention of
misuse of material nonpublic information. Under the proposed rules,
members and member organizations must establish, maintain and enforce
written policies and procedures reasonably designed, taking into
consideration the nature of the member's business, to prevent the
misuse of material nonpublic information relating to, among other
things, options on Commodity Pool ETFs.
The addition of Commodity Pool ETF options will not have any effect
on the rules pertaining to position and exercise limits \7\ or
margin.\8\
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\7\ See Phlx Rules 1001 and 1002.
\8\ See Phlx Rule 722.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-Phlx-2007-35 on the subject line.
[[Page 37301]]
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2007-35. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Phlx. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2007-07 and should be submitted on or before July
30, 2007.
IV. Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and rules
and regulations thereunder applicable to a national securities exchange
\11\ and, in particular, the requirements of Section 6 of the Act.\12\
Specifically, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\13\ which requires, among
other things, that the rules of a national securities exchange be
designed to remove impediments to and perfect the mechanism of a free
and open market and a national market system and, in general, to
protect investors and the public interest.
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\11\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(5).
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Surveillance
The Commission notes that the Exchange has represented that it has
an adequate surveillance program in place for options based on
Commodity Pool ETFs. The Exchange may obtain trading information via
the ISG from other exchanges who are members or affiliates of the ISG
and expects that it will enter into numerous comprehensive surveillance
sharing agreements with various commodity futures exchanges worldwide.
Prior to listing and trading options on Commodity Pool ETFs, the
Exchange represented that it will either have the ability to obtain
specific trading information via ISG or through a comprehensive
surveillance sharing agreement with the primary exchange or exchanges
where the particular commodity futures and/or options on commodity
futures are traded. In addition, the Exchange represented that the
addition of Commodity Pool ETF options will not have any effect on the
rules pertaining to position and exercise limits \14\ or margin.\15\
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\14\ See Phlx Rules 1001 and 1002.
\15\ See Phlx Rule 722.
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Listing and Trading of Options on Commodity Pool ETFs
The Commission notes that, pursuant to the proposed rule change, a
Commodity Pool ETF will be subject to the provisions of Exchange Rules
1009 and 1010. These provisions include requirements regarding initial
and continued listing standards, as well as the creation/redemption
process for Commodity Pool ETFs. All Commodity Pool ETFs must be traded
through a national securities exchange or through the facilities of a
national securities association and reported as a national market
system security.
The Commission believes that this proposal is necessary to enable
the Exchange to list and trade options on an expanding range of
Commodity Pool ETFs currently approved for trading and that it is
reasonable to expect other types of Commodity Pool ETFs to be
introduced for trading in the future. This proposal would help ensure
that the Exchange will be able to list options on Commodity Pool ETFs
that have been recently launched, as well as any other similar
Commodity Pool ETFs that may be listed and traded in the future thereby
offering investors greater option choices.
Acceleration
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\16\ for approving the proposed rule change, as modified by
Amendment No. 1, prior to the thirtieth day after the date of
publication of notice in the Federal Register. The Commission notes
that the proposal is consistent with previously approved proposals to
enable the listing and trading of options on interests in Commodity
Pool ETFs that trade directly or indirectly commodity futures
products.\17\ Therefore, the Commission does not believe that the
proposed rule change, as amended, raises novel regulatory issues.
Consequently, the Commission believes that it is appropriate to permit
investors to benefit from the flexibility afforded by trading these
products without delay.
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\16\ 15 U.S.C. 78s(b)(2).
\17\ See Securities Exchange Act Release Nos. 55547 (March 28,
2007), 72 FR 16388 (April 4, 2007) (SR-Amex-2006-110); 55630 (April
13, 2007), 72 FR 19993 (April 20, 2007) (SR-CBOE-2007-21); and 55635
(April 16, 2007), 72 FR 19999 (April 20, 2007) (SR-ISE-2007-16).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-Phlx-2007-35), as amended, is hereby
approved on an accelerated basis.\18\
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
Florence E. Harmon,
Deputy Secretary.
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\19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E7-13155 Filed 7-6-07; 8:45 am]
BILLING CODE 8010-01-P