[Federal Register: January 16, 2008 (Volume 73, Number 11)]
[Notices]
[Page 2964-2967]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16ja08-110]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57115; File No. SR-ISE-2007-103]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Order Granting Accelerated Approval of
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Permit
Trading Pursuant to Unlisted Trading Privileges of Shares of Eight
Funds of the ProShares Trust
January 8, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given
that on October 26, 2007, the International Securities Exchange, LLC
(``Exchange'' or ``ISE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been substantially prepared by
the Exchange. On January 4, 20007, the Exchange filed Amendment No. 1
to the proposed rule change. This order provides notice of the proposed
rule change, as amended, and approves the proposal on an accelerated
basis.
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\1\15 U.S.C. 78s(b)(1).
\2\17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to trade, pursuant to unlisted trading
privileges (``UTP''), shares (``Shares'') of the following eight funds
of the ProShares Trust (``Trust''): (1) Short MSCI Emerging Markets
ProShares; (2) Short MSCI Japan ProShares; (3) Short MSCI EAFE
ProShares; (4) Short FTSE/Xinhua China 25 ProShares; (5) UltraShort
MSCI Emerging Markets ProShares; (6) UltraShort MSCI Japan ProShares;
(7) UltraShort MSCI EAFE ProShares; and (8) UltraShort FTSE/Xinhua
China 25 ProShares (collectively, ``Funds'').
The text of the proposed rule change is available at the Exchange's
principal office, on the Exchange's Web site (http://www.ise.com), and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, ISE included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item 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 Exchange proposes to trade the Shares pursuant to UTP. The
Commission has approved a proposal by the American Stock Exchange LLC
(``Amex'') to list and trade the funds.\3\ The Exchange is submitting
this filing because its current generic listing standards for exchange-
traded funds (``ETFs'') do not extend to ETFs where the investment
objective corresponds to a specified multiple of the performance, or
the inverse performance, of an index that underlies a Fund (each such
index is referred to below as an ``Underlying Index''), rather than
merely mirroring the performance of the index. Currently, the Shares
trade on the Amex and NYSE Arca.\4\
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\3\ See Securities Exchange Act Release No. 56223 (August 8,
2007), 72 FR 45837 (August 15, 2007) (SR-Amex-2007-60).
\4\ See Securities Exchange Act Release No. 56601 (October 2,
2007), 72 FR 51625 (October 10, 2007) (SR-NYSEArca-2007-79).
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Short Funds. Certain Funds seek daily investment results, before
fees and expenses, that correspond to the inverse or opposite of the
daily performance (-100%) of the Underlying Indexes (``Short Funds'').
If such a Fund is successful in meeting its objective, the net asset
value (``NAV'') \5\ of the corresponding Shares should increase
approximately as much (on a percentage basis) as the Underlying Index
loses when the prices of the securities in the Underlying Index decline
on a given day or, alternatively, should decrease approximately as much
as the Underlying Index gains when prices in the Underlying Index rise
on a given day. The Short Funds are: (1) Short MSCI Emerging Markets
ProShares; (2) Short MSCI Japan ProShares; (3) Short MSCI EAFE
ProShares; and (4) Short FTSE/Xinhua China 25 ProShares.
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\5\ NAV per Share of each Fund is computed by dividing the value
of the net assets of such Fund (i.e., the value of its total assets
less total liabilities) by its total number of Shares outstanding.
Expenses and fees are accrued daily and taken into account for
purposes of determining NAV.
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UltraShort Funds
Certain Funds seek daily investment results, before fees and
expenses, that correspond to twice the inverse
[[Page 2965]]
(-200%) of the daily performance of the Underlying Indexes
(``UltraShort Funds''). If such a Fund is successful in meeting its
objective, the NAV of the corresponding Shares should increase
approximately twice as much (on a percentage basis) as the respective
Underlying Index loses when the prices of the securities in the
Underlying Index decline on a given day, or should decrease
approximately twice as much as the respective Underlying Index gains
when such prices rise on a given day. The UltraShort Funds are: (5)
UltraShort MSCI Emerging Markets ProShares; (6) UltraShort MSCI Japan
ProShares; (7) UltraShort MSCI EAFE ProShares; and (8) UltraShort FTSE/
Xinhua China 25 ProShares.
Access to the current portfolio composition of each Fund is
currently available through the Trust's Web site (http://www.proshares.com
). \6\The Underlying Indexes are identified in the
filing authorizing Amex to list and trade the Funds (``Original
Filing'').\7\ The Original Filing states that Amex would disseminate
for each Fund on a daily basis by means of Consolidated Tape
Association (``CTA'') and CQ High Speed Lines information with respect
to an Indicative Intra-Day Value (``IIV''), quotations for and last-
sale information concerning the Shares, the recent NAV, the number of
Shares outstanding, and the estimated cash amount and total cash amount
per Creation Unit. Amex will make available on its Web site the daily
trading volume, closing price, NAV, and final dividend amounts, if any,
to be paid for each Fund. The NAV of each Fund is calculated and
determined each business day at the close of regular trading, typically
4 p.m. Eastern Time (``ET''). The NAV would be calculated and
disseminated at the same time to all market participants.\8\
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\6\The Trust's Web site is publicly accessible at no charge and
contains the following information for each Fund's Shares: (1) The
prior business day's closing NAV, the reported closing price, and a
calculation of the premium or discount of such price in relation to
the closing NAV; (2) data for a period covering at least the current
and three immediately preceding calendar quarters (or the life of a
Fund, if shorter) indicating how frequently each Fund's Shares
traded at a premium or discount to NAV based on the daily closing
price and the closing NAV, and the magnitude of such premiums and
discounts; (3) its prospectus and product description; and (4) other
quantitative information such as daily trading volume. The
prospectus and/or product description for each Fund informs
investors that the Trust's Web site has information about the
premiums and discounts at which the Fund's Shares have traded.
\7\ See supra note 3.
\8\ The Original Filing states that if the IIV is not
disseminated as required, Amex would halt trading in the Shares of
the Funds. If Amex halts trading for this reason, then ISE would
halt trading in the Shares immediately, as set forth in ISE Rule
2123(e).
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The Original Filing states that the daily closing index value and
the percentage change in the daily closing index value for each
Underlying Index would be publicly available on various Web sites such
as http://www.bloomberg.com. The Original Filing further states that
data regarding each Underlying Index is also available from the
respective index provider to subscribers. According to the Original
Filing, several independent data vendors package and disseminate index
data in various value-added formats.
The Original Filing states that the value of each Underlying Index
is updated intra-day on a real-time basis as its individual component
securities change in price, and the intra-day value of each Underlying
Index is disseminated at least every 15 seconds throughout Amex's
trading day by Amex or another organization authorized by the relevant
Underlying Index provider. The IIV is updated to reflect changes in
currency exchange rates and is published via the facilities of the CTA
on a 15-second delayed basis during ISE's trading hours.
To provide updated information relating to each Fund for use by
investors, professionals, and persons wishing to create or redeem
Shares, Amex disseminates through the facilities of the CTA and CQ High
Speed Lines information: (1) Continuously throughout Amex's trading
day, the market value of a Share; and (2) at least every 15 seconds
throughout Amex's trading day, the IIV as calculated by Amex.
Shares would trade on ISE from 9:30 a.m. ET until 4:15 p.m. ET. ISE
will halt trading in the Shares of a Fund under the conditions
specified in ISE Rules 702, 703, and 2123. The conditions for a halt
include a regulatory halt by the listing market. UTP trading in the
Shares will also be governed by provisions of ISE Rule 2123 relating to
temporary interruptions in the calculation or wide dissemination of the
IIV or the value of the Underlying Index. Additionally, ISE may cease
trading the Shares if other unusual conditions or circumstances exist
which, in the opinion of ISE, makes further dealings on ISE detrimental
to the maintenance of a fair and orderly market. ISE will also follow
any procedures with respect to trading halts as set forth in ISE rules.
Prior to the commencement of trading, the Exchange will inform
Equity Electronic Access Members (``Equity EAM'') in a Regulatory
Information Circular (``RIC'') of the special characteristics and risks
associated with trading the Shares. Specifically, the RIC will discuss
the following: (1) The procedures for purchases and redemptions of
Shares in Creation Unit Aggregations (and that Shares are not
individually redeemable); (2) ISE Rule 2123(l), which imposes a duty of
due diligence on Equity EAMs to learn the essential facts relating to
every customer prior to trading the Shares; (3) how information
regarding the IIV is disseminated; (4) the requirement that Equity EAMs
deliver a written description to investors purchasing Shares prior to
or concurrently with a transaction; and (5) trading information. In
addition, the RIC will reference that the Fund is subject to various
fees and expenses described in the Registration Statement. The RIC will
also discuss any exemptive, no-action, and/or interpretive relief
granted by the Commission from the Act and rules under the Act. The RIC
will also disclose that the NAV for the Shares will be calculated after
4 p.m. ET each trading day.
The Exchange intends to utilize its existing surveillance
procedures applicable to equities to monitor trading in the Shares. The
Exchange represents that these procedures are adequate to properly
monitor Exchange trading of the Shares in all trading sessions and to
deter and detect violations of Exchange rules. The Exchange's current
trading surveillance focuses 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. Additionally, the Exchange may obtain information via the
Intermarket Surveillance Group (``ISG'') from other exchanges that are
members or affiliates of the ISG.\9\ The Exchange also has a general
policy prohibiting the distribution of material, non-public information
by employees.
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\9\ For a list of the current members and affiliate members of
ISG, see http://www.isgportal.com.
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2. Statutory Basis
The statutory basis under the Act for this proposed rule change is
found in Section 6(b)(5), \10\ in that the proposed rule change is
designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanisms 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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\10\ 15 U.S.C. 78f(b)(5).
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[[Page 2966]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-ISE-2007-103 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2007-103. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of ISE. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-ISE-2007-103 and should be
submitted on or before February 6, 2008.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
After careful review, 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\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\12\ which
requires that an exchange have rules designed, among other things, 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. The Commission believes that this proposal should benefit
investors by increasing competition among markets that trade the
Shares.
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\11\ In approving this rule change, the Commission notes that it
has considered the proposal's impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
\12\ 15 U.S.C. 78f(b)(5).
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In addition, the Commission finds that the proposal is consistent
with Section 12(f) of the Act,\13\ which permits an exchange to trade,
pursuant to UTP, a security that is listed and registered on another
exchange.\14\ The Commission notes that it previously approved the
listing and trading of the Shares on Amex.\15\ The Commission also
finds that the proposal is consistent with Rule 12f-5 under the
Act,\16\ which provides that an exchange shall not extend UTP to a
security unless the exchange has in effect a rule or rules providing
for transactions in the class or type of security to which the exchange
extends UTP. The Exchange has represented that it meets this
requirement because it deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities.
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\13\ 15 U.S.C. 78l(f).
\14\ Section 12(a) of the Act, 15 U.S.C. 78l(a), generally
prohibits a broker-dealer from trading a security on a national
securities exchange unless the security is registered on that
exchange pursuant to Section 12 of the Act. Section 12(f) of the Act
excludes from this restriction trading in any security to which an
exchange ``extends UTP.'' When an exchange extends UTP to a
security, it allows its members to trade the security as if it were
listed and registered on the exchange even though it is not so
listed and registered.
\15\ See supra note 3.
\16\ 17 CFR 240.12f-5.
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Further, the Commission believes that the proposal is consistent
with Section 11A(a)(1)(C)(iii) of the Act,\17\ which sets forth
Congress' finding that it is in the public interest and appropriate for
the protection of investors and the maintenance of fair and orderly
markets to assure the availability to brokers, dealers, and investors
of information with respect to quotations for and transactions in
securities. Quotations for and last-sale information regarding the
Shares are disseminated continuously throughout ISE's trading day
through the facilities of the CTA. Furthermore, the IIV, updated to
reflect changes in currency exchange rates, is calculated by Amex and
published via the facilities of the CTA and the Consolidated Quotation
System on a 15-second delayed basis throughout ISE's trading hours. As
mentioned above, Amex's Web site provides information relating to the
value of the Shares such as the prior business day's closing NAV, the
reported closing price, and the daily trading volume. The Commission
also believes that the Exchange's trading halt rules are reasonably
designed to prevent trading in the Shares when transparency is
impaired. If the listing market halts trading when the IIV is not being
calculated or disseminated, the Exchange would halt trading in the
Shares pursuant to ISE Rule 2123(e). The Exchange has represented that
it would follow the procedures with respect to trading halts set forth
in ISE Rules 702, 703, and 2123.
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\17\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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The Commission notes that, if the Shares should be delisted by the
listing exchange, the Exchange would no longer have authority to trade
the Shares pursuant to this order.
In support of this proposal, the Exchange has made the following
representations:
1. The Exchange believes that its surveillance procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules.
2. Prior to the commencement of trading, the Exchange would inform
EAMs in a RIC of the special characteristics and risks associated with
trading the Shares.
[[Page 2967]]
3. ISE would require its members to deliver a prospectus or product
description to investors purchasing the Shares prior to or concurrently
with a transaction in the Shares.
This approval order is based on these representations.
The Commission finds good cause for approving this proposal before
the 30th day after the publication of notice thereof in the Federal
Register. As noted previously, the Commission previously found that the
listing and trading of the Shares on Amex is consistent with the Act.
Additionally, the Commission has approved the trading of the Shares
pursuant to UTP on another national securities exchange.\18\ The
Commission presently is not aware of any regulatory issue that should
cause it to revisit those findings or would preclude the trading of the
Shares on the Exchange pursuant to UTP. Therefore, accelerating
approval of this proposal should benefit investors by creating, without
undue delay, additional competition in the market for the Shares.
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\18\ See Securities Exchange Act Release No. 56601 (October 2,
2007), 72 FR 51625 (October 10, 2007) (SR-NYSEArca-2007-79).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-ISE-2007-103), as modified
by Amendment No. 1 thereto, be, and it hereby is, approved on an
accelerated basis.
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\19\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Florence E. Harmon,
Deputy Secretary.
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\20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-646 Filed 1-15-08; 8:45 am]
BILLING CODE 8011-01-P