[Federal Register: August 31, 2007 (Volume 72, Number 169)]
[Notice]
[Page 50426-50429]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31au07-152]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56324; File No. SR-ISE-2007-72]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change, as Modified by Amendment No. 1 Thereto, To List and Trade
Options on the iShares Emerging Markets Index Fund for a Six Month
Pilot Program
August 27, 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 August 24, 2007, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') 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
ISE. On August 27, 2007, the Exchange filed Amendment No. 1 to the
proposed rule change (``Amendment No. 1''). The Exchange has filed the
proposal pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder,\4\ which renders the proposal effective upon filing
with the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade options on the iShares MSCI
Emerging Markets Index Fund for a six month pilot period. ISE is not
proposing any changes to the rules of the Exchange.
[[Page 50427]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, ISE 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 IV below. ISE 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 this rule change is to obtain approval to list for
trading on the Exchange options on the iShares MSCI Emerging Markets
Index Fund (``Fund'') for a six month pilot period. The Exchange
currently has in place initial listing and maintenance standards set
forth in ISE Rules 502(h) and 503(h), respectively (the ``Listing
Standards''), that are designed to allow the Exchange to list funds
structured as open-end investment companies such as the Fund without
having to file for Commission approval to list for trading options on
the fund.\5\ The Exchange submits that the Fund meets substantially all
of the Listing Standard requirements, and for the requirements that are
not met, sufficient mechanisms exist that would provide the Exchange
with adequate surveillance and regulatory information with respect to
the Fund.
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\5\ ISE Rules 502(h) and 503(h) set forth the initial listing
and maintenance standards for registered investment companies (or
series thereof) organized as open-end management investment
companies, unit investment trusts, or other similar entities that
are traded on a national securities exchange or through the
facilities of a national securities exchange.
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The Fund is an open-end investment company designed to hold a
portfolio of securities that tracks the MSCI Emerging Markets Index
(``Index'').\6\ The Fund employs a ``representative sampling''
methodology to track the Index, which means that the Fund invests in a
representative sample of securities in the Index that have a similar
investment profile as the Index.\7\ Securities selected by the Fund
have aggregate investment characteristics (based on market
capitalization and industry weightings), fundamental characteristics
(such as return variability, earnings valuation, and yield) and
liquidity measures similar to those of the Index. The Fund generally
invests at least 90% of its assets in the securities of the Index or in
American Depositary Receipts (``ADRs'') and Global Depositary Receipts
(``GDRs'') representing such securities. In order to improve portfolio
liquidity, give the Fund additional flexibility to comply with the
requirements of the U.S. Internal Revenue Code and other regulatory
requirements, and to manage future corporate actions and index changes
in smaller markets, the Fund also has the authority to invest the
remainder of its assets in securities that are not included in the
Index or in ADRs and GDRs representing such securities. The Fund may
invest up to 10% of its assets in other MSCI index funds that seek to
track the performance of equity securities of constituent countries of
the Index. The Fund is not permitted to concentrate its investments
(i.e., hold 25% or more of its total assets in the stocks of a
particular industry or group of industries), except that, to the extent
practicable, the Fund will concentrate to approximately the same extent
that the Index concentrates in the stocks of such particular industry
or group of industries. The Exchange believes that these requirements
and policies prevent the Fund from being excessively weighted in any
single security, or small group of securities, and significantly reduce
concerns that trading in the Fund could become a surrogate for trading
in unregistered securities.
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\6\ As provided on the Web site of Morgan Stanley Capital
International Inc. (``MSCI'') (www.msci.com), which is the entity
that created and currently maintains the Index, the Index is a
capitalization-weighted index whose component securities are
adjusted for available float and must meet objective criteria for
inclusion in the Index. The Index aims to capture 85% of the
publicly available total market capitalization in each emerging
market included in the Index. As of August 17, 2007, the Index was
comprised of 839 constituents with the top five constituents
representing the following weights: 3.63%, 2.52%, 2.01%, 1.96%, and
1.40%. The Index is rebalanced quarterly, calculated in U.S. Dollars
on a real time basis, and disseminated every 60 seconds during
market trading hours.
\7\ The Fund is comprised of 284 securities as of July 31, 2007.
POSCO ADR, a South Korean security, has the greatest individual
weight at 4.12%. The aggregate percentage weighting of the top 5,
10, and 20 securities in the Fund are 16.54%, 25.56%, and 40.03%,
respectively.
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Shares of the Fund (``Fund Shares'') are issued in exchange for an
``in kind'' deposit of a specified portfolio of securities, together
with a cash payment, in minimum aggregation size of 150,000 shares
(each, a ``Creation Unit''), as set forth in the Fund's prospectus. The
Fund issues and sells Fund Shares in Creation Unit sizes through a
principal underwriter on a continuous basis at the net asset value per
share next determined after an order to purchase Fund Shares and the
appropriate securities are received. Following issuance, Fund Shares
are traded on an exchange like other equity securities, and equity
trading rules apply. Likewise, redemption of Fund Shares is made in
Creation Unit size and ``in kind,'' with a portfolio of securities and
cash exchanged for Fund Shares that have been tendered for redemption.
The Exchange notes that the maintenance listing standards set forth
in ISE Rule 503(h) for open-end investment companies do not include
criteria based on either the number of shares or other units
outstanding, or on their trading volume. The absence of such criteria
is justified on the ground that since it should always be possible to
create additional shares or other interests in open-end investment
companies at their net asset value by making an in-kind deposit of the
securities that comprise the underlying index or portfolio, there is no
limit on the available supply of such shares or interests. This, in
turn, should make it highly unlikely that the market for listed, open-
end investment company shares could be capable of manipulation, since
whenever the market price for such shares departs from net asset value,
arbitrage will occur. Similarly, since the Fund meets all of the
requirements of the Listing Standards except as described below, the
Exchange believes that the same analysis applies to the Fund.
The Exchange has reviewed the Fund and determined that it satisfies
the Listing Standards except for the requirement set forth in ISE Rule
502(h)(1), which requires the Fund to meet the following condition:
``Any non-U.S. component stocks in the index or portfolio on which the
Fund Shares are based that are not subject to comprehensive
surveillance agreements do not in the aggregate represent more than 50%
of the weight of the index or portfolio.'' The Exchange currently has
in place surveillance agreements with foreign exchanges that cover
45.97% of the securities in the Fund. One of the foreign exchanges on
which component securities of the Fund are traded and with which the
Exchange does not have a surveillance agreement is the Bolsa Mexicana
de Valores (``Bolsa''). The percentage of the weight of the Fund
represented by these securities is 6.53%.
The Exchange understands that the Commission has been willing to
allow an exchange to rely on a memorandum of understanding entered into
between regulators in the event that the exchanges themselves cannot
enter into a surveillance agreement. The Exchange further understands
that the American
[[Page 50428]]
Stock Exchange (``Amex'') has previously attempted to enter into a
surveillance agreement with Bolsa as part of seeking approval to list
and trade options on the Mexico Index.\8\ The Chicago Board Options
Exchange (``CBOE'') has also previously attempted to enter into a
surveillance agreement with Bolsa at or about the time when the CBOE
sought approval to list for trading options on the CBOE Mexico 30 Index
in 1995, which was comprised of stocks trading on Bolsa.\9\ Since, in
both instances, Bolsa was unable to provide a surveillance agreement,
the Commission previously allowed both Amex and CBOE to rely on the
memorandum of understanding executed by the Commission and the CNBV,
dated as of October 18, 1990 (``MOU''). The Commission noted in the
respective Approval Orders that in cases where it would be impossible
to secure an agreement, the Commission relied in the past on
surveillance sharing agreements between the relevant regulators. The
Commission further noted in the respective Approval Orders that
pursuant to the terms of the MOU, it was the Commission's understanding
that both the Commission and the CNBV could acquire information from,
and provide information to, the other, similar to that which would be
required in a surveillance sharing agreement between exchanges; and
therefore, should Amex or CBOE need information on Mexican trading in
the component securities of the Mexico Index or the CBOE Mexico 30
Index, the Commission could request such information from the CNBV
under the MOU.\10\
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\8\ See Securities Exchange Act Release No. 34500 (August 8,
1994), 59 FR 41534 (August 12, 1994).
\9\ See Securities Exchange Act Release No. 36415 (October 25,
1995), 60 FR 55620 (November 1, 1995).
\10\ The Commission has also previously noted if securing an
information sharing agreement is not possible, an exchange should
contact the Commission prior to listing a new derivative securities
product. In such case, the Commission may determine instead that it
is appropriate to rely on a memorandum of understanding between the
Commission and the foreign regulator. See Securities Exchange Act
Release No. 40761 (December 8, 1998), 63 FR 70952 (December 22,
1998).
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The Exchange has also recently contacted Bolsa with a request to
enter into a surveillance agreement. Until such time that the Exchange
is able to secure a surveillance agreement with Bolsa, the Exchange
proposed to rely on the MOU entered into between the Commission and the
CNBV for purposes of satisfying its surveillance and regulatory
responsibilities for the component securities in the Fund that trade on
Bolsa. The Exchange believes this proposal is reasonable in that the
Commission has already acknowledged that the MOU permits both the
Commission and the CNBV to acquire information from and provide
information to the other, similar to that which would be required in a
surveillance sharing agreement between exchanges. This proposal would
otherwise render the Fund compliant with all of the Listing
Standards.\11\
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\11\ The Exchange notes that the component securities of the
Fund change periodically. Therefore, the Exchange may in fact have
in place surveillance agreements that would otherwise cover the
percent weighting requirements set forth in the Listing Standards
for securities not trading on Bolsa. In this event, the Fund would
satisfy all of the Listing Standards and reliance on an approval
order for the Fund would be unnecessary.
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The Exchange proposes to list options on the Fund for a six month
pilot program until February 27, 2008 and rely on the MOU entered into
between the Commission and the CNBV for purposes of satisfying its
surveillance and regulatory responsibilities until the Exchange is able
to secure a surveillance agreement with Bolsa. During this period, the
Exchange agrees to use its best efforts to obtain a comprehensive
surveillance agreement with Bolsa, which shall reflect the following:
(i) Express language addressing market trading activity, clearing
activity, and customer identity; (ii) Bolsa's reasonable ability to
obtain access to and produce requested information; and (iii) based on
the comprehensive surveillance agreement and other information provided
by Bolsa, the absence of existing rules, laws, or practices that would
impede the Exchange from foreign information relating to market
activity, clearing activity, or customer identity, or, in the event
such rules, laws, or practices exist, they would not materially impede
the production of customer or other information. The Exchange also
represents that it will regularly update the Commission on the status
of its negotiations with Bolsa.\12\
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\12\ The Exchange further represents that it is currently
engaged in discussions to enter into information sharing agreements
with certain other exchanges, and that upon signing such agreements,
ISE will no longer need to rely on the Commission's MOU with the
CNBV. See Amendment No. 1.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \13\ in general, and furthers the objectives of
Section 6(b)(5) of the Act, \14\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, 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. Further, this proposed rule
change is similar to proposals previously submitted by Amex and
CBOE.\15\
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
\15\ See Securities Exchange Act Release Nos. 53824 (May 17,
2006), 71 FR 30003 (May 24, 2006) (Approving SR-AMEX-2006-43); 56321
(April 10, 2006), 71 FR 19568 (April 14, 2006) (Approving SR-CBOE-
2006-32).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not 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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule change does not: (1) Significantly
affect the protection of investors or the public interest; (2) impose
any significant burden on competition; and (3) become operative for 30
days after the date of this filing, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act\16\ and Rule 19b-4(f)(6) thereunder.\17\
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\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under 19b-4(f)(6) normally may not
become operative prior to 30 days after the date of filing.\18\
However, Rule 19b-4(f)(6)(iii) \19\ permits the Commission to designate
a shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has requested that the
Commission waive the 30-day operative
[[Page 50429]]
delay, to permit the Exchange to list options on the Fund immediately.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
The proposal is substantially similar to proposals previously submitted
by Amex and CBOE. Also, the Exchange has agreed to use its best efforts
to obtain a comprehensive surveillance agreement with Bolsa during a
six month pilot period in which the Exchange will rely on the MOU for
purposes of satisfying its surveillance and regulatory responsibilities
with respect to the Fund components trading on Bolsa. The Exchange
represents that it will regularly update the Commission on the status
of its negotiations with Bolsa. The Exchange further represents that it
is currently engaged in discussions to enter into information sharing
agreements with certain other exchanges, and that upon signing such
agreements, ISE will no longer need to rely on the Commission's MOU
with the CNBV. The Commission notes that ISE currently has in place
surveillance agreements with foreign exchanges that cover 45.97% of the
securities in the Fund, and that the Index upon which the Fund is based
appears to be a broad based-index. For these reasons, the Commission
designates the proposed rule change to be operative upon filing with
the Commission for a six month pilot period until February 27,
2008.\20\
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\18\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to
the Commission written notice of its intent to file the proposed
rule change, along with a brief description and text of the proposed
rule change, at least five business days prior to the date of filing
of the proposed rule change, or such shorter time as designated by
the Commission. The Exchange has requested the Commission to waive
this five-day pre-filing notice requirement. The Commission hereby
grants this request.
\19 \ Id.
\20\ For the purposes only of waiving the 30-day operative
delay, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such proposed rule
change the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors or otherwise in
furtherance of the purposes of the Act.
IV. 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 Number SR-ISE-2007-72 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2007-72. 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, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
am and 3 pm. Copies of the filing also will be available for inspection
and copying at the principal office of ISE. 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-ISE-2007-72 and should be submitted on
or before September 21, 2007.
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\21\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
Nancy M. Morris,
Secretary.
[FR Doc. E7-17355 Filed 8-30-07; 8:45 am]
BILLING CODE 8010-01-P