[Federal Register: February 20, 2007 (Volume 72, Number 33)]
[Notices]
[Page 7793-7804]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20fe07-35]
[[Page 7793]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55268; File No. SR-NYSE-2007-03]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change and Amendment Nos. 1 and 2 Thereto Regarding CurrencyShares
SM Japanese Yen Trust
February 9, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 9, 2007, the New York Stock Exchange LLC (``NYSE'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II, below, which Items have been prepared by the Exchange.
On January 26, 2007, the Exchange filed Amendment No. 1 to the proposed
rule change.\3\ On February 1, 2007, the Exchange filed Amendment No. 2
to the proposed rule change. The Commission is publishing this notice
to solicit comments on the proposed rule change, as amended, from
interested persons, and is granting accelerated approval to the
proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced the original filing in its
entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to list and trade the following under Rules 1300A
et seq. (``Currency Trust Shares'' or ``Shares''): CurrencyShares
SM Japanese Yen Trust (``Trust''). The Trust issues Shares
that represent units of fractional undivided beneficial interest in and
ownership of the Trust.
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 Exchange included statements
concerning the purpose of and basis for the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange 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 Trust issues Japanese Yen Shares, referred to herein as
``Shares''. Rydex Specialized Products LLC is the sponsor of the Trust
(``Sponsor''), The Bank of New York is the trustee of the Trust
(``Trustee''), JPMorgan Chase Bank, N.A., London Branch, is the
depository for the Trust (``Depository''), and Rydex Distributors, Inc.
is the distributor for the Trust (``Distributor''). The Sponsor,
Trustee, Depository and Distributor are not affiliated with the
Exchange or one another, with the exception that the Sponsor and
Distributor are affiliated. The Exchange currently lists and trades
Shares of the Euro Currency Trust; CurrencyShares SM
Australian Dollar Trust; CurrencyShares SM British Pound
Sterling Trust; CurrencyShares SM Canadian Dollar Trust;
CurrencyShares SM Mexican Peso Trust; CurrencyShares
SM Swedish Krona Trust; and CurrencyShares SM
Swiss Franc Trust (``CurrencyShares Trusts''), all of which have the
same Sponsor, Trustee, Depository and Distributor as the Trust.\4\
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\4\ See Securities Exchange Act Release Nos. 52843 (November 28,
2005), 70 FR 72486 (December 5, 2005) (SR-NYSE-2005-65); and 54020
(June 20, 2006), 71 FR 36579, (June 27, 2006) (SR-NYSE-2006-35).
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According to the Trust's Registration Statement,\5\ the investment
objective of the Trust is for the Shares issued by the Trust to reflect
the price of the Japanese Yen. The Shares are intended to provide
institutional and retail investors with a simple, cost-effective means
of hedging their exposure to Japanese Yen and otherwise implement
investment strategies that involve foreign currency (e.g., diversify
more generally against the risk that the U.S. Dollar (``USD'') will
depreciate).
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\5\ The Sponsor, on behalf of the Trust, filed a Form S-1 for
the Trust on November 21, 2006 (the ``Registration Statement''). See
Registration No. 333-138881.
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Overview of the Foreign Exchange Industry \6\
According to the Registration Statement, the foreign exchange
market is the largest and most liquid financial market in the world.
The Exchange states that, as of April 2004, the foreign exchange market
experienced average daily turnover of approximately $1.88 trillion,
which was a 57% increase (at current exchange rates) from 2001 daily
averages. The foreign exchange market is predominantly an over-the-
counter market, with no fixed location and it operates 24 hours a day,
seven days a week. London, New York and Tokyo are the principal
geographic centers of the worldwide foreign exchange market, with
approximately 58% of all foreign exchange business executed in the
U.K., U.S., and Japan. Other smaller markets include Singapore, Zurich
and Frankfurt.\7\
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\6\ Except as otherwise specifically noted, the information
provided in this Form 19b-4 filing relating to the Shares, foreign
currency markets, movements in foreign currency pricing, and related
information is based entirely on information included in the
Registration Statement.
\7\ For April 2004, the daily average foreign exchange turnover
of the U.S. dollar against the Japanese Yen was approximately $296
billion. See Bank for International Settlements, Triennial Central
Bank Survey, March 2005, Statistical Annex Tables, Table E-2. In
April 2004, the daily average foreign exchange turnover in USD of
the Japanese Yen against all other currencies was approximately $359
billion. See Statistical Annex Tables, Table E-1.
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The Exchange states that there are three major kinds of
transactions in the traditional foreign exchange markets: spot
transactions, outright forwards and foreign exchange swaps. ``Spot''
trades are foreign exchange transactions that settle typically within
two business days with the counterparty to the trade. Spot transactions
account for approximately 35% of reported daily volume in the
traditional foreign exchange markets. ``Forward'' trades, which are
transactions that settle on a date beyond spot, account for 12% of the
reported daily volume, ``Swap'' transactions, in which two parties
exchange two currencies on one or more specified dates over an agreed
period and exchange them again when the period ends, account for the
remaining 53% of volume. There also are transactions in currency
options, which trade both over-the-counter and, in the U.S., on the
Philadelphia Stock Exchange (``Phlx''). Currency futures are
transactions in which an institution buys or sells a standardized
amount of foreign currency on an organized exchange for delivery on one
of several specified dates. Currency futures are traded on a number of
regulated markets, including the International Monetary Market division
of the Chicago Mercantile Exchange (``CME''), the Singapore Exchange
Derivatives Trading Limited (``SGX,'' formerly the Singapore
International Monetary Exchange or SIMEX), and the London International
Financial Futures Exchange (``LIFFE''). Over 85% of currency derivative
products (swaps, options and futures) are traded over-the-counter.\8\
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\8\ See Bank for International Settlements, Triennial Central
Bank Survey of Foreign Exchange and Derivatives Market Activity in
April 2004, September 2004 (Tables 2 and 6).
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[[Page 7794]]
Futures on Japanese Yen are traded on the CME (both exchange pit
trading and GLOBEX trading). Standardized options on the Japanese Yen
trade on Phlx. Phlx also offers more customized options on certain
currency pairs.\9\
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\9\ For the period January through October, 2006, Japanese Yen
and E-mini Japanese Yen futures contract volume on the CME was
15,687,056 and 7,629 contracts, respectively. For the same period,
Japanese Yen options volume on the Phlx was 3,228 contracts.
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According to the Exchange, participants in the foreign exchange
market have various reasons for participating. Multinational
corporations and importers need foreign currency to acquire materials
or goods from abroad. Banks and multinational corporations sometimes
require specific wholesale funding for their commercial loan or other
foreign investment portfolios. Some participants hedge open currency
exposure through off-balance-sheet products.
The Exchange further represents that the primary market
participants in foreign exchange are banks (including government-
controlled central banks), investment banks, money managers,
multinational corporations and institutional investors. The most
significant participants are the major international commercial banks
that act both as brokers and as dealers. In their dealer role, these
banks maintain long or short positions in a currency and seek to profit
from changes in exchange rates. In their broker role, the banks handle
buy and sell orders from commercial customers, such as multinational
corporations. The banks earn commissions when acting as agent. They
profit from the spread between the rates at which they buy and sell
currency for customers when they act as principal.
Typically, banks engage in transactions ranging from $5 million to
$50 million in amount. Although banks will engage in smaller
transactions, the fees that they charge have made the foreign currency
markets relatively inaccessible to individual investors. Some banks
allow individual investors to engage in spot trades without paying
traditional commissions on the trades. Such trading is often not
profitable for individual investors, however, because the banks charge
the investor the spread between the bid and the ask price maintained by
the bank on all purchases and sales. The overall effect of this fee
structure depends on the spread maintained by the bank and the
frequency with which the investor trades. Generally this fee structure
is particularly disadvantageous to active traders.
The Trust's assets will consist only of Japanese Yen on demand
deposit in two Japanese Yen-denominated accounts at JPMorgan Chase
Bank, N.A., London Branch; an interest-bearing primary deposit account
and a non-interest bearing secondary account. The Trust will not hold
any derivative products. Each Share represents a proportional interest,
based on the total number of Shares outstanding, in the Japanese Yen
owned by the Trust, plus accrued and unpaid interest less accrued but
unpaid expenses (both asset-based and non-asset based) of the Trust.
The Sponsor expects that the price of a Share will fluctuate in
response to fluctuations in the price of the Japanese Yen and that the
price of a Share will reflect accumulated interest as well as the
estimated accrued but unpaid expenses of the Trust.
Because the Shares will be traded on the NYSE, investors will be
able to access the Japanese Yen foreign currency market through a
traditional brokerage account which will provide investors with an
efficient means of implementing investment tactics and strategies that
involve Japanese Yen.
Foreign Currency Regulation
Most trading in the global over-the-counter (OTC) foreign currency
markets is conducted by regulated financial institutions such as banks
and broker-dealers. In addition, in the United States, the Foreign
Exchange Committee of the New York Federal Reserve Bank has issued
Guidelines for Foreign Exchange Trading, and central-bank sponsored
committees in Japan and Singapore have published similar best practice
guidelines. In the United Kingdom, the Bank of England has published
the Non-Investment Products Code, which covers foreign currency
trading. The Financial Markets Association, whose members include major
international banking organizations, has also established best
practices guidelines called the Model Code.
Participants in the U.S. OTC market for foreign currencies are
generally regulated by their oversight regulators. For example,
participating banks are regulated by the banking authorities. In
addition, in the U.S., the SEC regulates trading of options on foreign
currencies on the Phlx and the Commodity Futures Trading Commission
(``CFTC'') regulates trading of futures, and options on futures on
foreign currencies on regulated futures exchanges.\10\
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\10\ The CFTC is an independent government agency with the
mandate to regulate commodity futures and options markets in the
United States under the Commodity Exchange Act. In addition to its
oversight of regulated futures exchanges, the CFTC has jurisdiction
over certain foreign currency futures, and options on futures
transactions occurring other than on a regulated exchange and
involving retail customers. Both the SEC and CFTC have established
rules designed to prevent market manipulation, abusive trading
practices and fraud, as do the exchanges on which the foreign
currency products trade.
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The Exchange states that the Phlx and CME have authority to perform
surveillance on their members' trading activities, review positions
held by members and large-scale customers, and monitor the price
movements of options and/or futures markets by comparing them with cash
and other derivative markets' prices.
Foreign Exchange Markets \11\
The Exchange represents that the average daily turnover of the USD
in the foreign exchange market is approximately $1.57 trillion, which
makes it the most-traded currency in the world, accounting for
approximately 89% of global foreign exchange transactions.
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\11\ The primary source of the statistical information in this
section is the Bank of International Settlements Survey, note 7,
supra. Other information came from the websites of the central banks
for the applicable countries and other sources the Sponsor believes
to be reliable.
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The Japanese Yen is the official currency of Japan and the currency
of the Bank of Japan, the central bank of Japan. The average daily
turnover in the foreign exchange markets is approximately $1.9
trillion. Japanese Yen was on one side of 20% of all currency
transactions. The USD/Japanese Yen pair has an average daily turnover
of approximately $296 billion, which makes it the second most traded
currency pair, accounting for approximately 17% of global foreign
exchange transactions. From the beginning of 2002 to the end of 2005,
the Noon Buying Rate for Japanese Yen as reported by the Federal
Reserve Bank of New York ranged from 102.50 on January 14, 2005 to
134.71 on February 8, 2002. As of November 20, 2006, the Noon Buying
Rate for the Japanese Yen was 118.16.
The Sponsor
The Sponsor of the Trust is Rydex Specialized Products LLC, a
Delaware limited liability company that is wholly-owned by PADCO
Advisors II, Inc., a Maryland corporation, a privately-held company
owned by Rydex Holdings, Inc., a Maryland Corporation, which is
[[Page 7795]]
controlled by two irrevocable trusts. The Sponsor and its affiliates
collectively do business as ``Rydex Investments.''
The Sponsor is responsible for establishing the Trust and for the
registration of the Shares. The Sponsor generally oversees the
performance of the Trustee and the Trust's principal service providers,
but does not exercise day-to-day oversight over the Trustee or such
service providers. The Sponsor regularly communicates with the Trustee
to monitor the overall performance of the Trust. The Sponsor, with
assistance and support from Rydex affiliates who also do business as
``Rydex Investments,'' the Trustee and outside professionals, are
responsible for preparing and filing periodic reports on behalf of the
Trust with the SEC.\12\ The Sponsor will designate the auditors of the
Trust and may from time to time employ legal counsel for the Trust.
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\12\ The Sponsor has obtained a no-action letter from the SEC
Division of Corporation Finance with respect to the Euro Currency
Trust pursuant to which the Sponsor's principal executive officer
and principal financial officer will provide any certifications that
are required from a ``registrant's'' principal executive officer and
principal financial officer. See No-Action Letter from Charles Kwon,
Special Counsel, Division of Corporation Finance, Commission, dated
March 22, 2006. The Sponsor will be requesting the same type of no-
action ruling for the Trust.
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The Distributor is assisting the Sponsor in developing a marketing
plan for the Trust, preparing marketing materials on the Shares,
executing the marketing plan for the Trust and providing strategic and
tactical research on the global foreign exchange markets. The Sponsor
will not enter into an agreement with the Distributor covering these
services, because the Distributor is an affiliate and will not be paid
any compensation by the Sponsor for performing these services.
The Sponsor with the Distributor's assistance maintains a public
Web site on behalf of the Trust, http://www.currencyshares.com, which contains
information about the Trust and the Shares, and oversees certain
Shareholder services, such as a call center and prospectus delivery.
The Sponsor may direct the Trustee in the conduct of its affairs,
but only as provided in the Depositary Trust Agreement. For example,
the Sponsor may direct the Trustee to sell Japanese Yen to pay certain
extraordinary expenses, to suspend a redemption order, postpone a
redemption settlement date, or to terminate the Trust if certain
criteria are met. The Sponsor anticipates that, if the market
capitalization of the Trust is less than $300 million for five
consecutive trading days beginning after the first anniversary of the
Trust's inception, then the Sponsor will, in accordance with the
Depositary Trust Agreement, direct the Trustee to terminate and
liquidate the Trust.
The Sponsor's fee accrues daily at an annual nominal rate of 0.40%
of the Japanese Yen in the Trust (including all unpaid interest but
excluding unpaid fees, each as accrued through the immediately
preceding day) and is paid monthly.
The Trustee
The Bank of New York, the Trustee, is generally responsible for the
day-to-day administration of the Trust, including keeping the Trust's
operational records. The Trustee's principal responsibilities include
selling Japanese Yen held by the Trust if needed to pay the Trust's
expenses, calculating the Net Asset Value (``NAV'') of the Trust and
the NAV per Share, receiving and processing orders from Authorized
Participants to create and redeem Baskets (as discussed below) and
coordinating the processing of such orders with the Depository and DTC.
The Trustee will earn a monthly fee that will be paid by the Sponsor.
The Trustee intends to regularly communicate with the Sponsor to
monitor the over-all performance of the Trust. The Trustee, along with
the Sponsor, consults with the Trust's legal, accounting and other
professional service providers as needed. The Trustee assists and
supports the Sponsor with the preparation of all periodic reports
required to be filed with the SEC on behalf of the Trust.
Affiliates of the Trustee may from time to time act as Authorized
Participants, purchase or sell foreign currency, or Shares for their
own account.
The Depository
JPMorgan Chase Bank, N.A., London Branch (the ``Bank'') is the
Depository. The Depository accepts Japanese Yen deposited with it as a
banker by Authorized Participants in connection with the creation of
Baskets. The Depository facilitates the transfer of Japanese Yen into
and out of the Trust through the primary and secondary deposit accounts
maintained with it as a banker by the Trust.
The Depository will pay interest on the primary deposit account.
Interest on the primary deposit account accrues daily at an initial
annual nominal rate of the Bank of Japan Overnight Call Rate minus 27
basis points, and is paid monthly. Each month the Depository will
deposit into the secondary deposit account accrued but unpaid interest.
The Depository will not be paid a fee for its services to the
Trust. The Depository may earn a ``spread'' or ``margin'' over the rate
of interest it pays to the Trust on the Japanese Yen deposit balances.
The Depository is not a trustee for the Trust or the Shareholders.
The Depository and its affiliates may from time to time act as
Authorized Participants or purchase or sell Japanese Yen or Shares for
their own account, as agent for their customers and for accounts over
which they exercise investment discretion.
The Distributor
Rydex Distributors, Inc. is the Distributor. The Distributor is a
registered broker-dealer with the SEC and is a member of NASD.
The Distributor is assisting the Sponsor in developing a marketing
plan for the Trust on an ongoing basis, preparing marketing materials
regarding the Shares, including the content on the Trust's Web site,
http://www.currencyshares.com, executing the marketing plan for the Trust, and
providing strategic and tactical research on the global foreign
exchange market. The Distributor and the Sponsor are affiliates of one
another. There is no written agreement between them, and no
compensation is paid by the Sponsor to the Distributor in connection
with services performed by the Distributor for the Trust.
Description of the Trust
According to the Registration Statement for the Trust, the Trust
will be formed under the laws of the State of New York as of the date
the Sponsor and the Trustee sign the Depositary Trust Agreement and the
Initial Purchaser makes the initial deposit for the issuance of three
Baskets. A Basket is a block of 50,000 Shares. The Trust holds Japanese
Yen \13\ and is expected
[[Page 7796]]
from time to time to issue Baskets in exchange for deposits of Japanese
Yen and to distribute Japanese Yen in connection with redemptions of
Baskets. The investment objective of the Trust is for the Shares to
reflect the price USD of Japanese Yen. The Shares represent units of
fractional undivided beneficial interest in, and ownership of, the
Trust. The Trust is not managed like a business corporation or an
active investment vehicle. Japanese Yen held by the Trust will only be
sold: (1) If needed to pay Trust expenses, (2) in the event the Trust
terminates and liquidates its assets or (3) as otherwise required by
law or regulation. The sale of Japanese Yen by the Trust is a taxable
event to Shareholders.
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\13\ The Exchange notes that, in addition to the CurrencyShares
Trusts (See note 4, supra), the Commission has previously permitted
the listing of securities products for which the underlying was a
commodity or otherwise was not a security trading on a regulated
market. See, e.g., Securities Exchange Act Release Nos. 54013 (June
16, 2006), 71 FR 36372 (June 26, 2006) (approving listing of iShares
[supreg] GSCI Commodity Indexed Trust); 50603 (October 28, 2004), 69
FR 64614 (November 5, 2004) (SR-NYSE-2004-22) (approving listing and
trading on NYSE of StreetTRACKS [supreg] Gold Shares); 19133
(October 14, 1982), 47 FR 46946 (October 21, 1982) (SR-Phlx-81-4)
(approving the listing of standardized options on foreign
currencies); 36505 (November 22, 1995), 60 FR 61277 (November 29,
1995) (SR-Phlx-95-42) (approving the listing of dollar-denominated
delivery foreign currency options on the Japanese Yen); and 36165
(August 29, 1995), 60 FR 46653 (September 7, 1995) (SR-NYSE-94-41)
(approving listing standards for, among other things, currency and
currency index warrants).
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According to the Registration Statement, the Trust is not
registered as an investment company under the Investment Company Act
and is not required to register under such Act.
The Trust's assets will consist only of Japanese Yen on demand
deposit in two Japanese Yen-denominated accounts at JPMorgan Chase
Bank, N.A., London Branch; an interest-bearing primary deposit account
and a non-interest bearing secondary account. The Trust will not hold
any derivative products. Each Share represents a proportional interest,
based on the total number of Shares outstanding, in Japanese Yen owned
by the Trust, plus accrued but unpaid interest, less the estimated
accrued but unpaid expenses (both asset-based and non-asset based) of
the Trust. The Sponsor expects that the price of a Share will fluctuate
in response to fluctuations in the price of Japanese Yen and that the
price of a Share will reflect accumulated interest as well as the
estimated accrued but unpaid expenses of the Trust.
Investors may obtain, 24 hours a day, foreign exchange pricing
information based on the spot price of Japanese Yen from various
financial information service providers. Current spot prices are also
generally available with bid/ask spreads from foreign exchange dealers.
In addition, the Trust's Web site will provide ongoing pricing
information for Japanese Yen spot prices and the Shares. Market prices
for the Shares are available from a variety of sources, including
brokerage firms, financial information Web sites and other information
service providers. One such Web site is hosted by Bloomberg, http://www.bloomberg.com/markets/currencies/asiapac_currencies.html
, and it
regularly reports current foreign exchange pricing information. The NAV
of the Trust is published by the Sponsor on each day that the NYSE is
open for regular trading and will be posted on the Trust's Web site.
The Trust will terminate upon the occurrence of any of the
termination events listed in the Depositary Trust Agreement and will
otherwise terminate on February 1, 2047.
The Sponsor, on behalf of the Trust, will rely on relief previously
granted by the Division of Market Regulation \14\ from certain trading
requirements of the Act.\15\ The Sponsor also intends to request
guidance from the Commission on the application of the certification
rules for quarterly and annual reports adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. In addition, the Trust will not be
subject to the Exchange's corporate governance requirements, including
the Exchange's audit committee requirements.\16\
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\14\ See letter from Racquel L. Russell, Branch Chief, SEC
Division of Market Regulation, to George T. Simon, Foley & Lardner,
dated June 21, 2006 (``June 21, 2006 letter'') (granting relief from
certain rules under the Act for the CurrencyShares Trusts); letter
from James A. Brigagliano, Assistant Director, SEC Division of
Market Regulation to Michael Schmidtberger, Sidley, Austin, Brown &
Wood, dated January 19, 2006 (``January 19, 2006 Letter'') (granting
relief from certain rules under the Act for the DB Commodity Index
Tracking Master Fund). The Sponsor is relying on the June 21, 2006
Letter regarding Rule 10a-1, Rule 200(g) of Regulation SHO, and
Rules 101 and 102 of Regulation M under the Act, and is relying on
the January 19, 2006 Letter regarding Section 11(d)(1) of the Act
and Rule 11d1-2 thereunder.
\15\ See infra note 30.
\16\ See Securities Exchange Act Release No. 48745 (November 4,
2003), 68 FR 64154 (November 12, 2003) (SR-NYSE-2002-33, SR-NASD-
2002-77, et al.) (specifically noting that the corporate governance
standards will not apply to, among others, passive business
organizations in the form of trusts). See also Securities Exchange
Act Release No. 47654 (April 25, 2003), 68 FR 18787 (April 16, 2003)
(noting in Section II(F)(3)(c) that ``SROs may exclude from Exchange
Act Rule 10A-3's requirements issuers that are organized as trusts
or other unincorporated associations that do not have a board of
directors or persons acting in a similar capacity and whose
activities are limited to passively owning or holding (as well as
administering and distributing amounts in respect of) securities,
rights, collateral or other assets on behalf of or for the benefit
of the holders of the listed securities.'')
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Trust's Expenses
The Trust's only ordinary recurring expense is expected to be the
Sponsor's fee. The Sponsor is obligated under the Depositary Trust
Agreement to pay the following administrative and marketing expenses
for the Trust: the Trustee's monthly fee, the Distributor's fee, NYSE
listing fees, SEC registration fees, printing and mailing costs, audit
fees and expenses and up to $100,000 per annum in legal fees and
expenses. The Sponsor is also obligated to pay the costs of the Trust's
organization and the costs of the initial sale of the Shares, including
the applicable SEC registration fees.
The Sponsor's fee accrues daily at an annual nominal rate of 0.40%
of the Japanese Yen in the Trust. Each month, the Trust will first
withdraw Japanese Yen the Trust has earned as interest to pay the
Sponsor's fee and any other Trust expenses that have been incurred. If
that interest is not sufficient to fully pay the Sponsor's fee and
Trust expenses, then the Trustee will withdraw Japanese Yen from the
primary deposit account as needed. If the Trust incurs expenses in USD
(which is not anticipated), Japanese Yen will be converted to USD at
the prevailing market rate at the time of conversion to pay expenses.
In certain exceptional cases the following expenses may be charged
to the Trust in addition to the Sponsor's fee: (1) Expenses and costs
of any extraordinary services performed by the Trustee or the Sponsor
on behalf of the Trust or action taken by the Trustee or the Sponsor to
protect the Trust or interests of Shareholders; (2) indemnification of
the Sponsor; (3) taxes and other governmental charges; and (4) expenses
of the Trust other than those the Sponsor is obligated to pay pursuant
to the Depositary Trust Agreement, including legal fees and expenses
over $100,000. If these additional expenses are incurred, the Trust
will be required to pay these expenses by withdrawing deposited
Japanese Yen and the amount of Japanese Yen represented by a Share will
decline at such time. Accordingly, the Shareholders will effectively
bear the cost of these other expenses, if incurred.
In order to pay the Trust's expenses, the Trustee will first
withdraw Japanese Yen the Trust has earned as interest. In the event
the Sponsor's fee and any other Trust expenses exceed the interest
earned, additional Japanese Yen will be withdrawn from the primary
deposit account as required to cover the expenses. For expenses not
payable in Japanese Yen, the Trustee will direct that Japanese Yen be
converted to USD as necessary for the Trustee to pay the Trust's
expenses. The Trustee will direct that the smallest amount of Japanese
Yen required to purchase amounts of U.S. Dollars sufficient to pay
Trust expenses and the costs of currency conversion be withdrawn from
the Trust.
Liquidity
The amount of the discount or premium in the trading price relative
to the NAV per Share may be influenced
[[Page 7797]]
by non-concurrent trading hours between the major foreign currency
markets and the NYSE. The period of greatest liquidity in the Japanese
Yen market is typically that time of the day when trading in the
European time zones or Japan overlaps with trading in the United
States, which is when OTC market trading in London, New York, and other
centers coincides with futures and options trading on those currencies.
While the Shares will trade on the NYSE until 4:15 p.m. (New York
time), liquidity in the OTC market for the Japanese Yen will be
slightly reduced after the close of the London foreign currency markets
and before the opening of the Tokyo foreign currency market. Because of
the potential for arbitrage inherent in the structure of the Trust, the
Sponsor believes that the Shares will not trade at a material discount
or premium to the value of underlying currency held by the Trust. The
arbitrage process, which in general provides investors the opportunity
to profit from differences in prices of assets, increases the
efficiency of the markets, serves to prevent potentially manipulative
efforts and can be expected to operate efficiently in the case of the
Shares and Japanese Yen. If the price of the Shares deviates enough
from the price of Japanese Yen to create a material discount or
premium, an arbitrage opportunity is created. If the Shares are
inexpensive compared to Japanese Yen, an Authorized Participant, either
on its own behalf or acting as agent for investors, arbitrageurs or
traders, may buy the Shares at a discount, immediately redeem them in
exchange for Japanese Yen and sell Japanese Yen in the cash market at a
profit. If the Shares are expensive compared to Japanese Yen that
underlies them, an Authorized Participant may sell the Shares short,
buy enough Japanese Yen to create the number of Shares sold short,
acquire the Shares through the creation process and deliver the Shares
to close out the short position.\17\ In both instances the arbitrageur
serves efficiently to correct price discrepancies between the Shares
and Japanese Yen.
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\17\ The Exchange notes that the Trust, which will only hold
Japanese Yen as an asset in the normal course of its operations,
differs from index-based exchange-traded funds, which may involve a
trust holding hundreds or even thousands of underlying component
securities, necessarily involving in the arbitrage process movements
in a large number of security positions. See, e.g., Securities
Exchange Act Release No. 46306 (August 2, 2002), 67 FR 51916 (August
9, 2002) (SR-NYSE-2002-28) (approving the UTP trading of Vanguard
Total Market VIPERs based on the Wilshire 5000 Total Market Index).
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Description of the Shares
According to the Registration Statement, the Shares are not a
traditional investment. They are dissimilar from the ``shares'' of a
corporation operating a business enterprise, with management and a
board of directors. Trust Shareholders do not have rights normally
associated with owning shares of a business corporation, including, for
example, the right to bring ``oppression'' or ``derivative'' actions.
Shareholders have only those rights explicitly set forth in the
Depositary Trust Agreement. All Shares are of the same class with equal
rights and privileges. Each Share is transferable, is fully paid and
non-assessable and entitles the holder to vote on the limited matters
upon which Shareholders may vote under the Depositary Trust Agreement.
The Shares do not entitle their holders to any conversion or pre-
emptive rights or, except as provided in the Registration Statement,
any redemption or distribution rights.
Distributions
Each month the Depository will deposit into the secondary deposit
account accrued but unpaid interest and the Trustee will withdraw
Japanese Yen from the secondary deposit account to pay the accrued
Sponsor's fee for the previous month plus other Trust expenses, if any.
In the event the Sponsor's fee and any other Trust expenses exceed the
interest earned on the primary deposit account, additional Japanese Yen
will be withdrawn from the primary deposit account as required to cover
the expenses. In the event that the interest deposited exceeds the sum
of the Sponsor's fee for the prior month plus other Trust expenses, if
any, then the Trustee will direct that the excess be converted into
U.S. Dollars at a prevailing market rate and the Trustee will
distribute the U.S. Dollars as promptly as practicable to Shareholders
on a pro rata basis (in accordance with the number of Shares that they
own).
Fees and Expenses
Under the Deposit Account Agreement, the Depository is entitled to
invoice the Trustee or debit the secondary deposit account for out-of-
pocket expenses. The Trust has also agreed to reimburse the Depository
for any taxes, levies, imposts, deductions, charges, stamp, transaction
and other duties and withholdings in connection with the Deposit
Accounts, except for such items imposed on the overall net income of
the Depository. Except for the reimbursable expenses just described,
the Depository will not be paid a fee for its services to the Trust.
The Depository may earn a ``spread'' or ``margin'' on the Japanese Yen
deposit balances it holds.
Voting and Approvals
Shareholders have no voting rights under the Depositary Trust
Agreement, except in limited circumstances. If the holders of at least
25% of the Shares outstanding for the Trust determine that the Trustee
is in material breach of its obligations under the Depositary Trust
Agreement, they may provide written notice to the Trustee (or require
the Sponsor to do so) specifying the default and requiring the Trustee
to cure such default. If the Trustee fails to cure such breach within
30 days after receipt of the notice, the Sponsor, acting on behalf of
the Registered Owners, may remove the Trustee for the Trust. The
holders of at least 66\2/3\% of the Shares outstanding may vote to
remove the Trustee. The Trustee must terminate the Trust at the request
of the holders of at least 75% of the outstanding Shares.
Book-Entry Form
The Sponsor and the Trustee will apply to DTC for acceptance of the
Shares in its book-entry settlement system. If the Shares are eligible
for book-entry settlement, all Shares will be evidenced by global
certificates issued by the Trustee to DTC and registered in the name of
Cede & Co., as nominee for DTC. The global certificates will evidence
all of the Shares outstanding at any time. In order to transfer Shares
through DTC, Shareholders must be DTC Participants. The Shares will be
transferable only through the book-entry system of DTC. A Shareholder
that is not a DTC Participant will be able to transfer its Shares
through DTC by instructing the DTC Participant holding its Shares.
Transfers will be made in accordance with standard securities industry
practice.
Issuance of the Shares
The Trust creates and redeems Shares in Baskets on a continuous
basis. A Basket is a block of 50,000 Shares. The creation and
redemption of Baskets requires the delivery to the Trust or the
distribution by the Trust of the amount of Japanese Yen represented by
the Baskets being created or redeemed. This amount is based on the
combined NAV per Share of the number of Shares included in the Baskets
being created or redeemed, determined on the day the order to create or
redeem Baskets is accepted by the Trustee.
Authorized Participants are the only persons that may place orders
to create and redeem Baskets. An Authorized
[[Page 7798]]
Participant is a DTC Participant that is a registered broker-dealer or
other securities market participant such as a bank or other financial
institution that is not required to register as a broker-dealer to
engage in securities transactions and has entered into a Participant
Agreement with the Trustee. Only Authorized Participants may place
orders to create or redeem Baskets. Before initiating a creation or
redemption order, an Authorized Participant must have entered into a
Participant Agreement with the Sponsor and the Trustee. The Participant
Agreement provides the procedures for the creation and redemption of
Baskets and for the delivery of foreign currency required for creations
and redemptions. The Participant Agreements may be amended by the
Trustee, the Sponsor and the relevant Authorized Participant.
Authorized Participants pay a transaction fee of $500 to the Trustee
for each order that they place to create or redeem one or more Baskets.
Authorized Participants who make deposits with the Trust in exchange
for Baskets receive no fees, commissions or other form of compensation
or inducement of any kind from either the Sponsor or the Trust. No
Authorized Participant has any obligation or responsibility to the
Sponsor or the Trust to effect any sale or resale of Shares.
Certain Authorized Participants are expected to have the facility
to participate directly in the global foreign exchange market. In some
cases, an Authorized Participant may acquire foreign currency from, or
sell foreign currency to, an affiliated foreign exchange trading desk,
which may profit in these instances. The Sponsor believes that the size
and operation of the foreign exchange market make it unlikely that an
Authorized Participant's direct activities in the foreign exchange and
securities markets will impact the price of Japanese Yen or the price
of Shares. Each Authorized Participant will be registered as a broker-
dealer under the Act and will be regulated by the National Association
of Securities Dealers, Inc., or else will be exempt from being (or
otherwise will not be required to be) so registered or regulated, and
will be qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain
Authorized Participants may be regulated under federal and state
banking laws and regulations. Each Authorized Participant will have its
own set of rules and procedures, internal controls and information
barriers as it determines to be appropriate in light of its own
regulatory regime.
Authorized Participants may act for their own accounts or as agents
for broker-dealers, depositaries and other securities or foreign
currency market participants that wish to create or redeem Baskets. An
order for one or more Baskets may be placed by an Authorized
Participant on behalf of multiple clients.
Creation and Redemption
In order to create a Basket, the Authorized Participant deposits
the applicable Basket Amount with the Depository and orders Shares from
the Trustee.\18\ The Trustee directs DTC to credit Shares to the
Authorized Participant. The Authorized Participant will then be able to
sell Shares to Purchasers on the NYSE or any other market in which the
Shares may trade.
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\18\ The Trustee shall determine the Basket Amount ``as promptly
as practicable'' after the Federal Reserve Bank of New York
announces the Noon Buying Rate on each day that the NYSE is open for
regular trading. Ordinarily, this will occur by 2 p.m. (New York
time). The Basket Amount will be published on the Trust's Web site
every day the NYSE is open for regular trading. The Registration
Statement, the Participant Agreement and the Trust Agreement do not
state a precise time each day for publication of the Basket Amount.
It will be published simultaneously with the NAV. The Sponsor for
the Trust has represented to the Exchange that the NAV and the
Basket Amount for the Trust will be available to all market
participants at the same time.
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On any business day, an Authorized Participant may place an order
with the Trustee to create one or more Baskets. The creation or
redemption of Shares can occur only in a Basket of 50,000 Shares or
multiples thereof. For purposes of processing both purchase and
redemption orders, a ``business day'' means any day other than a day
when the NYSE is closed for regular trading. Purchase orders placed by
4:00 p.m. (New York time) on a business day will have that date as the
purchase order date. By placing a purchase order, an Authorized
Participant agrees to deposit Japanese Yen with the Trust. Before the
delivery of Baskets for a purchase order, the Authorized Participant
must also have wired to the Trustee the non-refundable transaction fee
due for the purchase order.
The total deposit required to create each Basket, called the Basket
Amount, is an amount of Japanese Yen bearing the same proportion to the
number of Baskets to be created as the total assets of the Trust (net
of estimated accrued but unpaid expenses) bears to the total number of
Baskets outstanding on the date that the order to purchase is properly
received. The amount of the required deposit is determined by dividing
the number of units of Japanese Yen held by the Trust (net of estimated
accrued but unpaid expenses) by the number of Baskets outstanding. All
questions as to the composition of a Basket Amount are finally
determined by the Trustee. The Trustee's determination of the Basket
Amount shall be final and binding on all persons interested in the
Trust.
An Authorized Participant who places a purchase order is
responsible for delivering the Basket Amount to the Trust's primary
deposit account with the Depository as directed in the Authorized
Participant's Participant Agreement. Authorized Participants will use
the SWIFT system to make timely deposits through their bank
correspondents in London. Upon receipt of a Japanese Yen deposit from
an Authorized Participant, the Trustee will direct DTC to credit the
number of Baskets ordered to the Authorized Participant's DTC account.
The expense and risk of delivery, ownership and safekeeping of Japanese
Yen until such currency has been received by the Depository shall be
borne solely by the Authorized Participant.
In order to redeem Shares, an Authorized Participant must send the
Trustee a Redemption Order specifying the number of Baskets that the
Authorized Participant wishes to redeem. The Trustee then instructs the
Depository to send the Authorized Participant the Japanese Yen and
directs DTC to cancel the Authorized Participant's Shares that were
redeemed.
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place an order with the
Trustee to redeem one or more Baskets. Redemption orders must be placed
by 4 p.m. (New York time) on a business day. A redemption order so
received will have that day as the order redemption date and will
normally be effective on the date it is received in satisfactory form
by the Trustee. The redemption procedures allow Authorized Participants
to redeem Baskets and do not entitle an individual Shareholder to
redeem any Shares in an amount less than a Basket or to redeem Baskets
other than through an Authorized Participant.
By placing a redemption order, an Authorized Participant agrees to
deliver the Baskets to be redeemed through DTC's book-entry system to
the Depository as directed in the Authorized Participant's Participant
Agreement. Before the delivery of the redemption distribution for a
[[Page 7799]]
redemption order, the Authorized Participant must also have wired to
the Trustee the non-refundable transaction fee due for the redemption
order.
Determination of Redemption Distribution
The redemption distribution from the Trust is a wire transfer, to
an account of the redeeming Authorized Participant identified by the
Authorized Participant, in the amount of Japanese Yen held by the Trust
evidenced by the Shares being redeemed, giving effect to all estimated
accrued but unpaid interest and expenses. Redemption distributions are
subject to the deduction of any applicable tax or other governmental
charges that may be due.\19\ All questions as to the amount of a
redemption distribution are finally determined by the Trustee. The
Trustee's determination of the amount shall be final and binding on all
persons interested in the Trust.
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\19\ Authorized Participants are responsible for any transfer
tax, sales or use tax, recording tax, value added tax or similar tax
or governmental charge applicable to the creation or redemption of
Baskets, regardless of whether or not such tax or charge is imposed
directly on the Authorized Participant, and agree to indemnify the
Sponsor, the Trustee and the Trust if they are required by law to
pay any such tax, together with any applicable penalties, additions
to tax or interest thereon.
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Delivery of Redemption Distribution
The redemption distribution due from the Trust is delivered to the
Authorized Participant as directed in the Authorized Participant's
Participant Agreement.
The Depository wires the redemption amount from the Deposit Account
to an account of the redeeming Authorized Participant identified by the
Authorized Participant. The Authorized Participant and the Trust are
each at risk in respect of Japanese Yen credited to their respective
accounts in the event of the Depository's insolvency.
The Trustee will reject a redemption order if the order is not in
proper form as described in the Participant Agreement or if the
fulfillment of the order, in the opinion of its counsel, might be
unlawful.
Valuation of Japanese Yen, Definition of Net Asset Value and Adjusted
Net Asset Value
The Trustee will calculate, and the Sponsor will publish, the
Trust's NAV each business day. To calculate the NAV, the Trustee will
add to the amount of Japanese Yen in the Trust at the end of the
preceding day accrued but unpaid interest, Japanese Yen receivable
under pending purchase orders and the value of other Trust assets, and
will subtract the accrued but unpaid Sponsor's fee, Japanese Yen
payable under pending redemption orders and other Trust expenses and
liabilities, if any.
The result is the NAV of the Trust for that business day. The
Trustee shall also divide the NAV of the Trust by the number of Shares
outstanding for the date of the evaluation then being made, which
figure is the ``NAV per Share.'' The NAV will be expressed in USD based
on the Noon Buying Rate as determined by the Federal Reserve Bank of
New York. If, on a particular evaluation day, the Noon Buying Rate has
not been determined and announced by 2 p.m. (New York time), then the
most recent Federal Reserve Bank of New York determination of the Noon
Buying Rate shall be used to determine the NAV of the Trust unless the
Trustee, in consultation with the Sponsor, determines that such price
is inappropriate to use as the basis for such valuation. In the event
that the Trustee and the Sponsor determine that the most recent Federal
Reserve Bank of New York determination of the Noon Buying Rate is not
an appropriate basis for valuation of the Trust's Japanese Yen, they
shall determine an alternative basis for such evaluation to be employed
by the Trustee. Such an alternative basis may include reference to
other exchange traded securities that reflect the value of the Japanese
Yen relative to the USD. The use of any alternative basis to determine
NAV would be disclosed on the Trust's Web site. The Trustee also
determines the NAV per Share, which equals the NAV of the Trust divided
by the number of outstanding Shares. The Sponsor will publish the NAV
and NAV per Share on each day that the NYSE is open for regular trading
on the Trust's Web site, http://www.currencyshares.com.
Clearance and Settlement
The Sponsor and the Trustee will apply to DTC for acceptance of the
Shares in its book-entry settlement system. If the Shares are eligible
for book-entry settlement, all Shares will be evidenced by one or more
global certificates that the Trustee will issue to DTC. The Shares will
be available only in book-entry form. Shareholders may hold their
Shares through DTC, if they are DTC Participants, or through Authorized
Participants or Indirect Participants.
If the Shares are eligible for book-entry settlement, individual
certificates will not be issued for the Shares. Instead, global
certificates will be signed by the Trustee and the Sponsor on behalf of
the Trust, registered in the name of Cede & Co., as nominee for DTC,
and deposited with the Trustee on behalf of DTC. The representations,
undertakings and agreements made on the part of the Trust in the global
certificates will be made and intended for the purpose of binding only
the Trust and not the Trustee or the Sponsor individually.
Upon the settlement date of any creation, transfer or redemption of
Shares, DTC will credit or debit, on its book-entry registration and
transfer system, the amount of the Shares so created, transferred or
redeemed to the accounts of the appropriate DTC Participants. The
Trustee and the Authorized Participants will designate the accounts to
be credited and charged in the case of creation or redemption of
Shares.
Beneficial ownership of the Shares is limited to DTC Participants,
Indirect Participants and persons holding interests through DTC
Participants and Indirect Participants. Ownership of beneficial
interests in the Shares will be shown on, and the transfer of ownership
will be effected only through, records maintained by DTC (with respect
to DTC Participants), the records of DTC Participants (with respect to
Indirect Participants) and the records of Indirect Participants (with
respect to Shareholders that are not DTC Participants or Indirect
Participants). A Shareholder is expected to receive from or through the
DTC Participant maintaining the account through which the Shareholder
purchased its Shares a written confirmation relating to the purchase.
DTC may discontinue providing its service with respect to Baskets
or the Shares (or both) by giving notice to the Trustee and the
Sponsor. Under such circumstances, the Trustee and the Sponsor would
either find a replacement for DTC to perform its functions at a
comparable cost or, if a replacement is unavailable, terminate the
Trust.
Risk Factors To Investing in the Shares
An investment in the Shares carries certain risks. The following
risk factors are taken from and discussed in more detail in the
Registration Statement:
The value of the Shares relates directly to the value of
the Japanese Yen held by the Trust. Fluctuations in the price of
Japanese Yen could materially and adversely affect the value of the
Shares.
The Japanese Yen/USD exchange rate, like foreign exchange
rates in general, can be volatile and difficult to predict. This
volatility could materially
[[Page 7800]]
and adversely affect the performance of the Shares.
If interest earned by the Trust does not exceed expenses,
the Trustee will withdraw Japanese Yen from the Trust to pay these
excess expenses which will reduce the amount of Japanese Yen
represented by each Share on an ongoing basis.
If the Trust incurs expenses in USD, the Trust would be
required to sell Japanese Yen to pay these expenses. The sale of the
Trust's Japanese Yen to pay expenses in USD at a time of low Japanese
Yen prices could adversely affect the value of the Shares.
Purchasing activity in the Japanese Yen market associated
with the purchase of Baskets from the Trust may cause a temporary
increase in the price of Japanese Yen. This increase may adversely
affect an investment in the Shares.
The Deposit Accounts are not entitled to payment at any
office of JP Morgan Chase Bank, N.A. located in the United States.
Shareholders will not have the protections associated with
ownership of a demand deposit account insured in the United States by
the Federal Deposit Insurance Corporation or the protection provided
under English law.
Japanese Yen deposited in the Deposit Accounts by an Authorized
Participant will be commingled with Japanese Yen deposited by other
Authorized Participants and will be held by the Depository in either
the primary deposit account or the secondary deposit account of the
Trust. Japanese Yen held in the Deposit Accounts will not be segregated
from the Depository's other assets. If the Depository becomes
insolvent, then its assets might not be adequate to satisfy a claim by
the Trust or any Authorized Participant. In addition, in the event of
the insolvency of the Depository or the U.S. bank of which it is a
branch, there may be a delay and costs incurred in recovering the
Japanese Yen held in the Deposit Accounts.
The Shares are a new securities product. Their value could
decrease if unanticipated operational or trading problems were to
arise.
Shareholders will not have the protections associated with
ownership of shares in an investment company registered under the
Investment Company Act of 1940.
Shareholders will not have the rights enjoyed by investors
in certain other financial instruments.
The Shares may trade at a price that is at, above, or
below the NAV per Share.
The interest rate earned by the Trust, although
competitive, may not be the best rate available. If the Sponsor
determines that the interest rate is inadequate, then its sole recourse
will be to remove the Depositary and terminate the Deposit Accounts.
The Depository owes no fiduciary duties to the Trust or
the Shareholders, is not required to act in their best interest and
could resign or be removed by the Sponsor with respect to the Trust,
triggering early termination of the Trust.
Shareholders may incur significant fees upon the
termination of the Trust.
Redemption orders are subject to rejection by the Trustee
under certain circumstances.
Substantial sales of Japanese Yen by the official sector
could adversely affect an investment in the Shares.
Shareholders that are not Authorized Participants may only
purchase or sell their Shares in secondary trading markets.
The liability of the Sponsor and the Trustee under the
Depositary Trust Agreement is limited; and, except as set forth in the
Depositary Trust Agreement, they are not obligated to prosecute any
action, suit or other proceeding in respect to any Trust property.
The Depositary Trust Agreement may be amended to the
detriment of Shareholders without their consent.
The License Agreement with the Bank of New York may be
terminated by the Bank of New York in the event of a material breach by
the Sponsor. Termination of the License Agreement might lead to early
termination and liquidation of the Trust.
Availability of Information Regarding Foreign Currency Prices
Currently, the Consolidated Tape Plan does not provide for
dissemination of the spot price of a foreign currency over the
Consolidated Tape. However, there will be disseminated over the
Consolidated Tape the last sale price for the Shares, as is the case
for all equity securities traded on the Exchange (including exchange-
traded funds). In addition, there is a considerable amount of foreign
currency price and market information available on public Web sites and
through professional and subscription services. As is the case with
equity securities generally and exchange-traded funds specifically, in
most instances, real-time information is only available for a fee, and
information available free of charge is subject to delay (typically, 15
to 20 minutes).
Investors may obtain on a 24-hour basis foreign currency pricing
information based on the foreign currency spot price of each applicable
foreign currency from various financial information service providers.
Complete real-time data for foreign currency futures and options prices
traded on the CME and Phlx are also available by subscription from
information service providers. The CME and Phlx also provide delayed
futures and options information on current and past trading sessions
and market news free of charge on their respective Web sites.
There are a variety of other public Web sites available at no
charge that provide information on the Japanese Yen and other foreign
currencies underlying CurrencyShares, which service providers include
Bloomberg, (http://www.bloomberg.com/markets/currencies/fxc.html), CBS
Market Watch (http://www.marketwatch.com/tools/stockresearch/globalmarkets),
Yahoo! Finance (http://www.finance.yahoo.com/currency), moneycentral.com,
cnnfn.com and reuters.com, which provide spot price or currency
conversion information about the Japanese Yen and other currencies.
Many of these sites offer price quotations drawn from other published
sources, and as the information is supplied free of charge, it
generally is subject to time delays. In addition, major market data
vendors regularly report current currency exchange pricing for a fee
for the Japanese Yen and other currencies.\20\ Like bond securities
traded in the OTC market with respect to which pricing information is
available directly from bond dealers, current foreign currency spot
prices are also generally available with bid/ask spreads from foreign
currency dealers.\21\
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\20\ There may be incremental differences in the Japanese Yen
spot price among the various information service sources. While the
Exchange believes the differences in the Japanese Yen spot price may
be relevant to those entities engaging in arbitrage or in the active
daily trading of Japanese Yen or derivatives thereon, the Exchange
believes such differences are likely of less concern to individual
investors intending to hold the Shares as part of a long-term
investment strategy.
\21\ See, e.g., Securities Exchange Act Release No. 46252 (July
24, 2002), 67 FR 49715 (July 31, 2002) (SR-Amex-2001-35) (noting
that quote and trade information regarding debt securities is widely
available to market participants from a variety of sources,
including broker-dealers, information service providers, newspapers
and Web sites).
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In addition, the Trust's Web site will provide the following
information: (1) The spot price for Japanese Yen,\22\
[[Page 7801]]
including the bid and offer and the midpoint between the bid and offer
for the Japanese Yen spot price, updated every 5 to 10 seconds,\23\
which is an essentially real-time basis; (2) an intraday indicative
value (``IIV'') per share for the Shares calculated by multiplying the
indicative spot price of the Japanese Yen by the quantity of Japanese
Yen backing each Share, updated at least every 15 seconds; \24\ (3) a
delayed indicative value (subject to a 20 minute delay), which is used
for calculating premium/discount information; (4) premium/discount
information, calculated on a 20 minute delayed basis; (5) the NAV of
the Trust as calculated each business day by the Trustee; (6) accrued
interest per Share; (7) the daily Federal Reserve Bank of New York Noon
Buying Rate; (8) the Basket Amount for the Japanese Yen; and (9) the
last sale price of the Shares as traded in the U.S. market, subject to
a 20-minute delay, as it is provided free of charge.\25\ The Exchange
will provide on its own public Web site (http://www.nyse.com) a link to the
Trust's Web site.
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\22\ The Trust's website's foreign currency spot price will be
provided by FactSet Research Systems (http://www.factset.com). The NYSE
will provide a link to the Trust's website. FactSet Research Systems
is not affiliated with the Trust, Trustee, Sponsor, Depository,
Distributor or the Exchange. In the event that the Trust's website
should cease to provide this foreign currency spot price information
from an unaffiliated source and the intraday indicative value of the
Shares, the NYSE will commence delisting proceedings for the Shares.
\23\ The midpoint will be calculated by the Sponsor. The
midpoint is used for purposes of calculating the premium or discount
of the Shares. For example, assuming a Japanese Yen spot bid of
$.0086 and an offer of $.0087, the mid point would be calculated as
follows: (Japanese Yen spot bid plus ((spot offer minus spot bid)
divided by 2)) or ($.0086 + ($.0087 - $.0086/2)) = $.00865.
\24\ The intraday indicative value of the Shares is analogous to
the intraday optimized portfolio value (sometimes referred to as the
IOPV), indicative portfolio value and the intraday indicative value
(sometimes referred to as the IIV) associated with the trading of
exchange-traded funds. See, e.g., Securities Exchange Act Release
No. 46686 (October 18, 2002), 67 FR 65388 (October 24, 2002) (SR-
NYSE-2002-51) for a discussion of indicative portfolio value in the
context of an exchange-traded fund.
\25\ The last sale price of the Shares in the secondary market
is available on a real-time basis for a fee from regular data
vendors.
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Other Characteristics of the Shares
Set forth below is a table that shows the initial number of
currency units per Share, the number of Shares per Basket and the
number of currency units per Basket:
----------------------------------------------------------------------------------------------------------------
Currency units Shares per Currency units
Trust name per share basket per basket
----------------------------------------------------------------------------------------------------------------
CurrencyShares Japanese Yen Trust............................... 10,000 50,000 500,000,000
----------------------------------------------------------------------------------------------------------------
For the Trust, a minimum of three Baskets, representing 150,000
Shares, will be outstanding at the commencement of trading on the
Exchange.
Trading in Shares on the Exchange will be effected normally until
4:15 p.m. each business day. The minimum trading increment for Shares
on the Exchange will be $0.01.
Listing Fees
The Exchange original listing fee applicable to the listing of the
Trust will be $5,000. The annual continued listing fee for the Trust
will be $2,000.
Continued Listing Criteria
Under the applicable continued listing criteria, the Exchange will
commence delisting proceedings with respect to Shares of the Trust 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 Japanese Yen is no
longer calculated or available on at least a 15-second delayed basis
from a source unaffiliated with the Sponsor, the Trust, the Trustee, or
the Exchange or the Exchange stops providing a hyperlink on the
Exchange's Web site to any such unaffiliated foreign currency value;
(3) the IIV is no longer made available on at least a 15-second delayed
basis; or (4) such other event shall occur or condition exist that, in
the opinion of the Exchange, makes further dealings on the Exchange
inadvisable. In addition, the Exchange will remove Shares from listing
and trading upon termination of the Trust.
Exchange Trading Rules and Policies
The Shares are considered ``securities'' pursuant to NYSE Rule 3
and are subject to all applicable trading rules. Trading in the Shares
will be subject to all provisions of Rules 1300A et seq.\26\ The
Exchange does not currently exempt Currency Trust Shares from the
Exchange's ``Market-on-Close/Limit-on-Close/Pre-Opening Price
Indications'' Policy, although the Exchange may do so by means of a
rule change in the future if, after having experience with the trading
of the Shares, the Exchange believes such an exemption is appropriate.
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\26\ In particular, Rule 1300A provides that Rule 105(m) is
deemed to prohibit an equity specialist, his member organization,
other member, allied member or approved person in such member
organization or officer or employee thereof from acting as a market
maker or functioning in any capacity involving market-making
responsibilities in the applicable non-U.S. currency, options,
futures or options on futures on such currency, or any other
derivatives based on such currency, except as otherwise provided
therein.
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The Exchange has adopted Rule 1301A (``Currency Trust Shares:
Securities Accounts and Orders of Specialists'') to ensure that
specialists handling Currency Trust Shares provide the Exchange with
all necessary information relating to their trading in the applicable
non-U.S. currency, options, futures contracts and options thereon or
any other derivative on such currency.\27\ As a general matter, the
Exchange has regulatory jurisdiction over its member organizations and
any person or entity controlling a member organization. The Exchange
also has regulatory jurisdiction over a subsidiary or affiliate of a
member organization that is in the securities business. A member
organization subsidiary or affiliate that does business only in
commodities would not be subject to NYSE jurisdiction, but the Exchange
could obtain certain information regarding the activities of such
subsidiary or affiliate through reciprocal agreements with regulatory
organizations that are members or affiliates of the Intermarket
Surveillance Group (``ISG'') of which such subsidiary or affiliate is a
member.
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\27\ Rule 1301A also states that, in connection with trading the
applicable non-U.S. currency, options, futures or options on futures
or any other derivatives on such currency (including Currency Trust
Shares), the specialist shall not use any material nonpublic
information received from any person associated with a member or
employee of such person regarding trading by such person or employee
in the applicable non-U.S. currency, options, futures or options on
futures, or any other derivatives on such currency. For purposes of
Rule 1301A, ``person associated with a member'' shall have the same
meaning ascribed to it in section 3(a)(21) of the Act.
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Surveillance
The Exchange's surveillance procedures will be comparable to those
used for Investment Company Units, and streetTRACKS [reg] Gold Shares
and the currently-traded CurrencyShares Trusts and will incorporate and
rely upon existing NYSE surveillance procedures governing equities. The
[[Page 7802]]
Exchange believes that these procedures are adequate to monitor
Exchange trading of the Shares, to detect violations of Exchange rules,
consequently deterring manipulation.
The Exchange's current trading surveillances focus on detecting
securities trading outside their normal patterns. When such situations
are detected, surveillance analysis follows and investigations are
opened, where appropriate, to review the behavior of all relevant
parties for all relevant trading violations. The Exchange is able to
obtain information regarding trading in the Shares, foreign currency
options and foreign currency futures, including Japanese Yen options
and futures, through NYSE members, in connection with such members'
proprietary or customer trades which they effect on any relevant
market. In addition, the Exchange may obtain trading information via
the ISG from other exchanges who are members or affiliates of the ISG.
Specifically, the NYSE can obtain such information from the Phlx in
connection with Japanese Yen options trading on the Phlx and from the
CME in connection with Japanese Yen futures trading on those
exchanges.\28\
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\28\ Phlx is a member of ISG. CME is an affiliate member of ISG.
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The Exchange's surveillance procedures will be comparable to those
used for investment company units currently trading on the Exchange and
will incorporate and rely upon existing NYSE surveillance procedures
governing equities.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading on the Exchange in the Shares may be
halted because of market conditions or for reasons that, in the view of
the Exchange, make trading in the Shares inadvisable. These may include
(1) the extent to which trading is not occurring in Japanese Yen or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Shares is subject to trading halts caused by extraordinary
market volatility pursuant to Exchange's ``circuit breaker'' rule.\29\
If the value of Japanese Yen updated at least every 15 seconds from a
source not affiliated with the Sponsor, Trust or the Exchange; or (2)
the IIV per Share updated every 15 seconds is not being disseminated,
the Exchange may halt trading during the day in which the interruption
to such dissemination occurs. If the interruption to the dissemination
of the value of the Japanese Yen or the IIV persists past the trading
day in which it occurred, the Exchange will halt trading no later than
the beginning of the trading day following the interruption.
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\29\ NYSE Rule 80B.
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Due Diligence
Before a member, member organization, allied member or employee
thereof recommends a transaction in the Shares, such person must
exercise due diligence to learn the essential facts relative to the
customer pursuant to Exchange Rule 405, and must determine that the
recommendation complies with all other applicable Exchange and Federal
rules and regulations. A person making such recommendation should have
a reasonable basis for believing, at the time of making the
recommendation, that the customer has sufficient knowledge and
experience in financial matters that he or she may reasonably be
expected to be capable of evaluating the risks and any special
characteristics of the recommended transaction, and is financially able
to bear the risks of the recommended transaction.
Information Memo
The Exchange will distribute an Information Memo to its members in
connection with the trading in the Shares. The Memo will discuss the
special characteristics and risks of trading this type of security.
Specifically, the Memo, among other things, will discuss what the
Shares are, that Shares are not individually redeemable but are
redeemable only in Baskets of 50,000 shares or multiples thereof, how a
Basket is created and redeemed, applicable Exchange rules, the
indicative price of Japanese Yen and IIV, dissemination information,
trading information and the applicability of suitability rules.\30\ The
Information Memo will also state that the number of units Japanese Yen
required to create a Basket or to be delivered upon redemption of a
Basket may gradually decrease over time in the event that the Trust is
required to withdraw or sell units of foreign currency to pay the
Trust's expenses. The Memo also will reference that the Trust is
subject to various fees and expenses described in the Registration
Statement. The Memo also will reference the fact that there is no
regulated source of last sale information regarding foreign currency,
and that the Commission has no jurisdiction over the trading of foreign
currency. Finally, the Memo also will note to members language in the
Registration Statement regarding prospectus delivery requirements for
the Shares.
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\30\ The Information Memo will discuss exemptive relief granted
by the Commission from certain rules under the Act. See note 14,
supra.
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2. Statutory Basis
The basis under the Act for this proposed rule change, as amended,
is the requirement under section 6(b)(5) of the Act \31\ that an
Exchange have rules that are 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 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.
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\31\ 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
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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 e-mail to rule-comments@sec.gov. Please include File
Number SR-NYSE-2007-03 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.
[[Page 7803]]
All submissions should refer to File Number SR-NYSE-2007-03. 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 will also be available for inspection and copying at the
principal office of the NYSE. 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-NYSE-2007-03 and should be submitted by March 13, 2007.
IV. Commission Findings and Order Granting Accelerated Approval of a
Proposed Rule Change
After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
\32\ and the rules and regulations thereunder applicable to a national
securities exchange.\33\ In particular, the Commission finds that the
proposed rule change, as amended, is consistent with the requirements
of Section 6(b)(5) of the Act,\34\ which requires, among other things,
that the Exchange's rules be designed to promote just and equitable
principles of trade, to remove impediments and to 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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\32\ 15 U.S.C. 78f.
\33\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See U.S.C. 78c(f).
\34\ 15 U.S.C. 78f(b)(5).
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A. Surveillance
The Commission finds that the proposed rule change provides the
NYSE with the tools necessary to monitor trading in the Shares and is
designed to prevent fraudulent and manipulative acts and practices.
Information sharing agreements with markets trading securities
underlying a derivative, or primary markets trading derivatives on the
same underlying instruments, are an important part of a self-regulatory
organization's ability to monitor for trading abuses in derivative
products.\35\ Although an information sharing agreement is not possible
with the OTC foreign exchange market, the Commission believes that the
Exchange's comprehensive surveillance sharing agreements with the Phlx
and CME, by virtue of their memberships in the ISG, together with NYSE
Rules 1301A and 1300A(b), will allow the NYSE to monitor for fraudulent
and manipulative trading practices.\36\
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\35\ See, e.g., Securities Exchange Act Release No. 50603
(October 28, 2004), 69 FR 64614 (November 5, 2004) (approving
proposal by the NYSE to list and trade trust shares that correspond
to a fixed amount of gold).
\36\ The Commission notes that it has previously approved the
listing and trading of foreign currency options and warrants. See,
e.g., Securities Exchange Act Release Nos. 19133 (October 14, 1982),
47 FR 46946 (October 21, 1982) (order approving a Phlx proposal to
accommodate the listing and trading of standardized option contracts
on five foreign currencies, including the British Pound and Swiss
Franc); 22471 (September 26, 1985), 50 FR 40636 (October 4, 1985)
(order approving a proposed rule change by the Chicago Board Options
Exchange, Inc. (``CBOE'') to trade standardized option contracts on
six foreign currencies, including the British Pound, Canadian
Dollar, and Swiss Franc); 23945 (December 30, 1986), 52 FR 633
(January 7, 1987) (order approving a proposal by the CBOE to trade
standardized options on the Australian Dollar); and 35806 (June 5,
1995), 60 FR 30911 (June 12, 1995) (order approving a Phlx proposal
to trade currency warrants based on the value of the U.S. dollar in
relation to the Mexican Peso).
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NYSE Rule 1301A requires that the specialist handling the Shares
provide the Exchange with information relating to its trading in
options, futures or options on futures on the Japanese Yen, or any
other derivatives based on the Japanese Yen. These reporting and
recordkeeping requirements will assist the Exchange in identifying
situations potentially susceptible to manipulation. NYSE Rule 1301A(c)
also prohibits the specialist in the Shares from using any material,
nonpublic information received from any person associated with a member
or employee of such person regarding trading by such person or employee
in the Japanese Yen, or options, futures or options on futures on the
Japanese Yen, or any other derivatives based on the Japanese Yen
(including the Shares). In addition, NYSE Rule 1300A(b) prohibits the
specialist in the Shares from being affiliated with a market maker in
the Japanese Yen, or options, futures or options on futures on the
Japanese Yen, or any other derivative based on the Japanese Yen, unless
information barriers are in place that satisfy the requirements in NYSE
Rule 98.
The Exchange also represents that it can obtain, through its ISG
membership, information from CME regarding the trading of the Japanese
Yen futures, and options on those futures, that trade on CME, and from
Phlx regarding the trading of options on the Japanese Yen that trade on
Phlx. In addition, the Exchange represents that it is able to obtain
information regarding trading in the Shares, and options and futures on
the Japanese Yen, through its members, in connection with such members'
proprietary or customer trades that they effect on any relevant market.
B. Dissemination of Information
The Commission believes that sufficient venues for obtaining
reliable information exist so that investors in the Shares can monitor
the underlying Japanese Yen spot market relative to the NAV of their
Shares. As discussed above, the Exchange represents that there is a
considerable amount of foreign currency price and market information
available 24 hours a day through public Web sites and through
professional and subscription services, including Bloomberg and
Reuters.\37\ The Exchange further represents that major market data
vendors regularly report current currency exchange pricing for a fee
for the Japanese Yen underlying the Shares. In addition, the Exchange
will provide a link to the Trust's Web site on the NYSE's public Web
site. The Trust's Web site will provide, among other things, the
Japanese Yen spot prices,\38\ including the bids and offers and the
midpoints between the bids and offers for the Japanese Yen, updated no
less than every 5 to 10 seconds, and the daily Federal Reserve Bank of
New York Noon Buying Rate.
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\37\ The Exchange notes that, in most instances, real-time
information is available for a fee, and information available free
of charge is subject to delay (typically, 15 to 20 minutes).
\38\ As noted above, the spot price for the Japanese Yen
published on the Trusts' Web site will be provided by FactSet
Research Systems, which is not affiliated with the Trust, the
Trustee, the Sponsor, the Depository, the Distributor or the
Exchange.
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The Commission also notes that the Trust's Web site will contain:
(1) An IIV per Share for the Shares, updated at least every 15 seconds;
(2) a delayed indicative value (subject to a 20 minute delay), which is
used for calculating premium/discount information; (3) premium/
discount information, calculated on a 20 minute delayed basis; (4) the
NAV of the Trust, as calculated
[[Page 7804]]
each business day by the Trustee;\39\ (5) accrued interest per Share;
(6) the Basket Amount for the Japanese Yen; and (7) the last sale price
of the Shares as traded in the U.S. market, subject to a 20-minute
delay, as it is provided free of charge.\40\ Further, the Exchange
represents that real-time information for prices for futures and
options on the Japanese Yen traded on CME and Phlx are available from
information service providers, and that CME and Phlx provide delayed
futures and options information free of charge on their respective Web
sites. The Commission believes that the wide availability of such
information, as described above, will facilitate transparency with
respect to the Shares and diminish the risk of manipulation or unfair
informational advantage.
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\39\ According to the Exchange, the Sponsor has represented to
the Exchange that the NAV for the Trust will be available to all
market participants at the same time. The Exchange further
represents that therefore, no market participant will have a time
advantage in using such data.
\40\ As noted above, the last sale price of the Shares in the
secondary market will be disseminated over the Consolidated Tape.
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C. Listing and Trading
The Commission finds that the Exchange's proposed rules and
procedures for the listing and trading of the proposed Shares are
consistent with the Act. Shares will trade as equity securities subject
to NYSE rules including, among others, rules governing trading halts,
responsibilities of the specialist, account opening, and customer
suitability requirements. In addition, the Shares will be subject to
NYSE listing and delisting rules and procedures governing the trading
of ICUs on the NYSE. The Commission believes that listing and delisting
criteria for the Shares should help to maintain a minimum level of
liquidity and therefore minimize the potential for manipulation of the
Shares. Finally, the Commission believes that the Information Memo the
Exchange will distribute will inform members and member organizations
about the terms, characteristics, and risks in trading the Shares,
including their prospectus delivery obligations.
D. Acceleration
The Commission finds good cause for approving the proposed rule
change, as amended, prior to the 30th day after the date of publication
of the notice of filing thereof in the Federal Register. The Commission
has previously granted approval to a NYSE proposal to adopt NYSE Rules
1300A and 1301A that govern the trading of Currency Trust Shares, and a
proposal to list and trade Euro Shares pursuant to such rules.\41\ The
Shares proposed to be listed and traded in this proposed rule change,
are substantially similar in structure and operation to the Euro
Shares, will be listed and traded pursuant to the same rules, and do
not raise any new issues. Therefore, the Commission finds good cause,
consistent with Section 19(b)(2) of the Act,\42\ to approve the
proposal, as amended, on an accelerated basis.
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\41\ See Securities Exchange Act Release No. 52843, (November
28, 2005), 70 FR 72486 (December 5, 2005), (SR-NYSE-2005-65) (order
granting accelerated approval, after a 15-day comment period, to a
NYSE proposal to list and trade Euro Shares, which represent units
of fractional undivided beneficial interest in and ownership of the
Euro Currency Trust).
\42\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\43\ that the proposed rule change (SR-NYSE-2007-03), as amended, is
approved on an accelerated basis.
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\43\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-2844 Filed 2-16-07; 8:45 am]
BILLING CODE 8011-01-P