[Federal Register: October 18, 2007 (Volume 72, Number 201)]
[Notices]
[Page 59123-59125]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc07-84]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56650; File No. SR-Amex-2007-35]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
No. 1 Thereto, Relating to the Criteria for Securities That Underlie
Options Traded on the Exchange
October 12, 2007.
I. Introduction
On April 5, 2007, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend certain rules to permit the initial and
continued listing and trading on the Exchange of options on Index
Multiple Exchange Traded Fund Shares (``Multiple Fund Shares'') and
Index Inverse Exchange Traded Fund Shares (``Inverse Fund Shares'')
(collectively, the ``Fund Shares''). On August 20, 2007, the Exchange
filed Amendment No. 1 to the proposed rule change.\3\ The proposed rule
change, as modified by Amendment No. 1, was published for comment in
the Federal Register on September 6, 2007.\4\ The Commission received
no comment letters on the proposed rule change. This order approves the
proposed rule change as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 superseded and replaced the original filing
in its entirety.
\4\ See Securities Exchange Act Release No. 56336 (August 29,
2007), 72 FR 51281.
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II. Description of the Proposal
The purpose of the proposed rule change is to revise Amex Rules 915
and 916 to enable the listing and trading on the Exchange of options on
Multiple Fund Shares \5\ and Inverse Fund Shares.\6\ Multiple and Index
Fund Shares differ from traditional exchange-traded fund (``ETFs'')
shares in that they do not merely correspond to the performance of a
given index, but rather attempt to match a multiple or inverse of such
underlying index performance. Current Multiple Fund Shares trading on
the Exchange include the ProShares Ultra Funds and Index Inverse Fund
Shares trading on the Exchange include the Short Funds and UltraShort
Funds.\7\
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\5\ Multiple Fund Shares seek to provide investment results,
before fees and expenses, that correspond to a specified multiple of
the percentage performance on a given day of a particular foreign or
domestic stock index.
\6\ Inverse Fund Shares seek to provide investment results,
before fees and expenses, that correspond to the inverse (opposite)
of the percentage performance on a given day of a particular foreign
or domestic stock index by a specified multiple.
\7\ See Securities Exchange Act Release Nos. 52553 (October 3,
2005), 70 FR 59100 (October 11, 2005) (SR-Amex-2004-62) (approving
the listing and trading of the Ultra Funds and Short Funds) and
54040 (June 23, 2006), 71 FR 37629 (June 30, 2006) (SR-Amex-2006-41)
(approving the listing and trading of the UltraShort Funds). The
Ultra Funds are expected to gain, on a percentage basis,
approximately twice (200%) as much as the underlying benchmark index
and should lose approximately twice (200%) as much as the underlying
benchmark index when such prices decline. The Short Funds are
expected to achieve investment results, before fees and expenses,
that correspond to the inverse or opposite of the daily performance
(-100%) of an underlying benchmark index. Lastly, the UltraShort
Funds are expected to achieve investment results, before fees and
expenses that correspond to twice the inverse or opposite of the
daily performance (-200%) of the underlying benchmark index.
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In order to achieve investment results that provide either a
positive multiple or inverse of the benchmark index, Multiple Fund
Shares or Inverse Fund Shares may hold a combination of financial
instruments, including, among other things, stock index futures
contracts; options on futures; options on securities and indices;
equity caps, collars and floors; swap agreements; forward contracts;
repurchase agreements; and reverse repurchase agreements (the
``Financial Instruments''). The underlying portfolios of Multiple Fund
Shares generally will hold at least 85% of their assets in the
component securities of the underlying relevant benchmark index. The
remainder of any assets are devoted to Financial Instruments that are
intended to create the additional needed exposure to such Underlying
Index necessary to pursue its investment objective. Normally, 100% of
the value of the underlying portfolios of Inverse Fund Shares will be
devoted to Financial Instruments and money market instruments,
including U.S. government securities and repurchase agreements (the
``Money Market Instruments'').
Currently, Commentary .06 to Amex Rule 915 provides 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 defined as an ``NMS stock'' under
Rule 600 of Regulation NMS, and that (i) 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; (ii) represent
interest in a trust or other similar entity that holds a specified non-
U.S. currency and/or currencies deposited with the trust or similar
entity when aggregated in some specified minimum number may be
surrendered to the trust by the beneficial owner to receive the
specified non-U.S. currency and/or currencies and pays the beneficial
owner interest and other distributions on the deposited non-U.S.
currency and/or currencies, if any, declared and paid by the trust; or
(iii) represent commodity pool interests principally engaged, directly
or indirectly, in holding and/or managing portfolios or baskets of
securities, commodity futures contracts, options on commodity futures
contracts, swaps, forward contracts and/or options on physical
commodities and/or non-U.S. currency (``Commodity Pool ETFs'').
[[Page 59124]]
The Exchange proposes to amend Commentary .06 to Amex Rule 915 to
expand the type of options to include the listing and trading of
options based on Multiple Fund Shares and Inverse Fund Shares \8\ that
may hold or invest in any combination of securities, Financial
Instruments and/or Money Market Instruments. Multiple Fund Shares and
Inverse Fund Shares will continue to otherwise satisfy the listing
standards in Commentary .06 to Amex Rule 915. In addition, the Exchange
proposes to remove the reference to a ``national securities
association'' in Commentary .06 to Amex Rule 915.
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\8\ See Amex Rule 1000A-AEMI(b)(2).
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As set forth in proposed amended Commentary .06 to Amex Rule 915,
Multiple Fund Shares and Inverse Fund Shares must be traded on a
national securities exchange and must be an ``NMS stock'' as defined
under Rule 600 of Regulation NMS. In addition, Multiple Fund Shares and
Inverse Fund Shares must meet either: (i) The criteria and guidelines
under Commentary .01 to Amex Rule 915; or (ii) be available for
creation or redemption each business day in cash or in kind from the
investment company at a price related to net asset value. In addition,
the investment company shall provide that shares may be created even
though some or all of the securities and/or cash (in lieu of the
Financial Instruments) needed to be deposited have not been received by
the investment company, provided the authorized creation participant
has undertaken to deliver the shares and/or cash 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 fund which underlies the option as described in the prospectus.
The current continuing or maintenance listing standards for options
on Exchange Traded Fund Shares will continue to apply.
The Exchange proposes to amend Commentary .07 to Amex Rule 916 to
indicate that the index or portfolio may consist of securities,
Financial Instruments and/or Money Market Instruments. The Exchange
also seeks to delete references to ``national market securities,''
``national securities association'', and ``national market
association'' set forth in Commentary .07 to Amex Rule 916.
Under the applicable continued listing criteria in Commentary .07
to Amex Rule 916, options on Fund Shares may be subject to the
suspension of opening transactions as follows: (1) Following the
initial twelve-month period beginning upon the commencement of trading
of the Fund Shares, there are fewer than 50 record and/or beneficial
holders of the Fund Shares for 30 or more consecutive trading days; (2)
the value of the index, 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 and/or Financial Instruments on
which the Fund 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 Fund 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 Multiple Fund Shares or Inverse Fund Shares, if the
Shares are halted from trading on their primary market or if the Shares
are delisted in accordance with the terms of Amex Rule 916 or the value
of the index or portfolio on which the Shares are based is no longer
calculated or available.
The Exchange represents that the expansion of the types of
investments that may be held by Multiple Fund Shares or Inverse Fund
Shares under Commentary .06 to Amex Rule 915 will not have any effect
on the rules pertaining to position and exercise limits \9\ or
margin.\10\
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\9\ See Amex Rules 904 and 905.
\10\ See Amex Rule 462.
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In addition, the Exchange also seeks to add ``reverse repurchase
agreements'' within the rule text of Amex Rule 1000A-AEMI(b)(2)(ii) in
order to correct the definition of Financial Instruments.
The Exchange has represented that its existing surveillance
procedures applicable to trading in options are adequate to properly
monitor the trading in Multiple Fund Shares options and Inverse Fund
Shares options.
III. Discussion
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange,\11\ and in particular, the requirements of section 6(b) 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 prevent fraudulent and manipulative acts and
practices, 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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\11\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\12\ 12 15 U.S.C. 78f(b).
\13\ 13 15 U.S.C. 78f(b)(5).
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Surveillance
The Commission notes that the Exchange has represented that its
existing surveillance procedures applicable to trading options are
adequate to properly monitor trading in Multiple Fund Shares options
and Inverse Fund Shares options. In addition, the Exchange represented
that the expansion of the types of investments that may be held by
Multiple Fund Shares or Inverse Fund Shares under Commentary .06 to
Amex Rule 915 will not have any effect on the rules pertaining to
position and exercise limits \14\ or margin.\15\
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\14\ See Amex Rules 904 and 905.
\15\ See Amex Rule 462.
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Listing and Trading Options on Fund Shares
The Commission notes that, pursuant to the proposed rule change,
the Exchange represented that the current continuing or maintenance
listing standards for options on Exchange Traded Fund Shares will
continue to apply. These provisions include requirements regarding
initial and continued listing standards, suspension of opening
transactions, and trading halts. Proposed amended Commentary .06 to
Amex Rule 915, would require that Multiple Fund Shares and Inverse Fund
Shares be traded on a national securities exchange and must be an ``NMS
stock'' as defined under Rule 600 of Regulation NMS.\16\
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\16\ 17 CFR 242.600(b)(47).
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The Commission believes that this proposal is necessary to enable
the Exchange to list and trade options on the shares of the Ultra Fund,
Short Fund and UltraShort Fund of the ProShares Trust. The Commission
believes that the ability to trade options on the Multiple and Inverse
Fund Shares will provide investors with additional risk management
tools. The Commission further believes that the proposed amendment to
the Exchange's listing criteria for options on Exchange Traded Fund
Shares will ensure that the Exchange will be able to list options on
[[Page 59125]]
the Funds of the ProShares Trust as well as other Multiple Fund Shares
or Inverse Fund Shares that may be introduced in the future, thereby
affording investors greater investment choices.
IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-Amex-2007-35), as modified
by Amendment No. 1, be, and hereby is, approved.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-20533 Filed 10-17-07; 8:45 am]
BILLING CODE 8011-01-P