[Federal Register: March 6, 2008 (Volume 73, Number 45)]
[Notices]
[Page 12234-12236]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr08-114]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57400; File No. SR-Amex-2007-109]
Self-Regulatory Organizations; American Stock Exchange, LLC;
Order Granting Approval of a Proposed Rule Change as Modified by
Amendment No. 1 Thereto Relating to the Trading of Exchange Traded
Notes (ETNs)
February 29, 2008.
I. Introduction
On October 9, 2007, the American Stock Exchange, LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Section 107 of the Amex Company Guide
(``Company Guide'') to permit certain index-linked securities,
commodity-linked securities, and currency-linked securities to trade
under the rules applicable to exchange-traded funds (``ETFs''). On
January 11, 2008, the Amex submitted Amendment No. 1 to the proposed
rule change. The proposed rule change, as amended, was published for
comment in the Federal Register on January 30, 2008.\3\ The Commission
received no comment letters on the proposal. This order approves 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\ Securities Exchange Act Release No. 57187 (January 23,
2008), 73 FR 5604.
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II. Description of the Proposed Rule Change
The Exchange proposes to amend Sections 107D, 107E and 107F of the
Company Guide to permit certain index-linked securities (``Index-Linked
Securities''), commodity-linked securities (``Commodity-Linked
Securities''), and currency-linked securities (``Currency-Linked
Securities'') (collectively, ``Exchange-Traded Notes'' or ``ETNs'')
that offer a weekly redemption feature to be traded subject to the AEMI
trading rules specific to ETFs.
Background
Securities listed pursuant to Section 107 of the Company Guide
(``Section 107 Securities'') are debt securities of an issuer that
typically provide for a cash payment at maturity, or if available, upon
earlier redemption (such as a weekly redemption feature) at the
holder's option, based on the performance of an underlying index or
asset. Permitted underlying assets for Index-Linked Securities include
domestic and international equity indexes. Commodity-Linked Securities
may be based on a commodity index, basket of commodities, or single
commodity while Currency-Linked Securities may similarly be linked to a
currency index, basket of currencies, or single currency.
Section 107 Securities typically have a term of at least one year
but not greater than 30 years. The issuer may or may not provide for
periodic interest payments to holders. The holder of a Section 107
Security may or may not be fully exposed to the appreciation and/or
depreciation of the underlying asset.
A number of Section 107 Securities based on securities indexes that
are listed and traded on the Exchange provide for a payment amount in a
multiple of the positive index return or performance, subject to a
maximum gain or cap. The Exchange's generic listing standards for
Section 107 Securities
[[Page 12235]]
allow for the multiple performance on the upside but prohibit payment
at maturity based on a multiple of the negative performance of an
underlying asset. Section 107 Securities may or may not provide for a
minimum guaranteed amount to be repaid, i.e., ``principal protection.''
Section 107 Securities do not give the holder a right to receive
the underlying asset or any other ownership right or interest in the
underlying portfolio. The current value of the underlying asset is
required to be widely disseminated at least every 15 seconds during the
trading day. Section 107 Securities are ``hybrid'' securities whose
rates of return are largely the result of the performance of an
underlying asset. In addition, prior to the listing and trading of
Section 107 Securities, the Exchange typically highlights and discloses
the special risks and characteristics of such security in an
Information Circular.
Current Rules
Sections 107D,\4\ 107E,\5\ and 107F \6\ of the Company Guide treat
Index-Linked Securities, Commodity-Linked Securities and Currency-
Linked Securities as equity instruments subject to the Exchange's AEMI
trading rules for equities. The only exception to this requirement is
when a Section 107 Security is listed as a bond or debt (i.e., in
$1,000 denominations). In such a case, the Section 107 Security is
subject to Exchange rules applicable to bond or debt securities.\7\
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\4\ See Securities Exchange Act Release No. 51563 (April 15,
2005), 70 FR 21257 (April 25, 2005) (SR-Amex-2005-001).
\5\ See Securities Exchange Act Release No. 55794 (May 22,
2007), 72 FR 29558 (May 29, 2007) (SR-Amex-2007-45).
\6\ Id.
\7\ Id.
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Because the current Rules deem ETNs and other Section 107
Securities as ``equity instruments,'' the full range of AEMI trading
rules specific to equities apply to all Section 107 Securities
regardless of the particular structure of the Section 107 Security.
Proposal
With respect to an ETN that is continuously-offered with a weekly
redemption option (such as BWV), the Exchange proposes that the AEMI
trading rules applicable to ETFs (rather than equities) should equally
apply to such ETN. In order to qualify, the ETN would be required to
offer a weekly redemption option to holders (``Eligible ETNs''). The
following rules specifically applicable to ETF trading would apply to
the trading of Eligible ETNs:
Rule 108--AEMI(c). The execution of Eligible ETN orders at
the opening would be effected in the same manner as ETFs so that orders
in Eligible ETNs would be executed before any broker-dealer bids or
offers.
Rule 110--AEMI(p). A Registered Trader in ETFs (including
Eligible ETNs) would only actively quote ETFs traded on the same or
contiguous panels for a maximum of three contiguous panels. A
Registered Trader would also not actively quote more than a maximum of
15 ETFs (including Eligible ETNs). A Senior Floor Official of the
Exchange may modify this restriction if a Registered Trader is able to
appropriately fulfill his obligations to the market due to the level of
activity in the ETFs and their proximity.
Rule 128A--AEMI(d)(iv). Any quotation in an ETF entered
into the AEMI platform by the specialist or Registered Trader while
Auto-Ex is enabled that would cause the Amex Published Quote (APQ) to
be locked or crossed would be automatically executed. In the case of a
non-ETF Amex-listed security or a non-Nasdaq UTP equity security,
quotations that are entered into the AEMI platform by the specialist
while Auto-Ex is enabled that would cause the APQ to cross would be
rejected. Therefore, Eligible ETNs would be automatically executed,
rather than rejected, when a specialist or Registered Trader quotation
causes the APQ to be locked/crossed when Auto-Ex is enabled.
Rule 128A--AEMI(f)(iv). AEMI does not automatically
execute non-ETF orders when the automatic execution of an order exceeds
the price change parameters of the ``1%, 2, 1, \1/2\ point'' rule. This
rule does not apply to ETFs and would accordingly not apply to the
trading of Eligible ETNs.
Rule 131--AEMI(o). AEMI rejects ``too marketable'' non-ETF
stop and stop limit orders. ``Too marketable'' is defined as a buy stop
order received during the regular trading session with a stop price
equal to the bid or lower, or a sell stop order received during the
regular trading session with a stop price equal to the offer or higher.
ETF stop orders that are ``too marketable'' are executed by AEMI under
this Rule, and accordingly, Eligible ETN stop orders would similarly be
executed.
Rule 131--AEMI(r). AEMI does not accept electronic cross
orders for non-ETFs and non-Nasdaq UTP securities. As a result,
electronic cross orders are acceptable only for ETFs. As proposed,
electronic cross orders for Eligible ETNs would be acceptable in AEMI.
Rule 154--AEMI(c)(i). The Stop Order Rule requires floor
official approval prior to the specialist electing a stop order by
selling to the bid/buying on the offer. Prior floor official approval
is not required for ETFs and would similarly not apply to Eligible
ETNs.
Rule 154--AEMI(c)(ii). Stop and stop limit orders in ETFs
are elected by a quotation, although such orders in non-ETFs are not.
Accordingly, stop and stop limit orders in Eligible ETNs would
similarly be elected by quotation, pursuant to this rule.
Rule 154--AEMI(e). Maximum price variation requirements
are set forth in Rule 154--AEMI(e) (also known as the ``1%-2, 1, .5
Point Rule). This Rule specifically provides that it does not apply to
the trading of ETFs. Accordingly, Rule 154--AEMI(e) would similarly not
apply to Eligible ETNs.
Commentary .03 to Rule 170--AEMI. A specialist quotation,
made for his own account, should be such that a transaction effected at
his quoted price or within the quoted spread, whether having the effect
of reducing or increasing the specialist's position, would bear a
proper relation, in the case of ETFs or other derivatively-based
securities, to the value of underlying or related securities. Eligible
ETNs would similarly be subject to this requirement.
Commentary .11 to Rule 170--AEMI. Commentary .11 to Rule
170--AEMI specifically exempts ETFs from the stabilization
requirements. Accordingly, Eligible ETNs would similarly be exempt.
Rule 206--AEMI. This Rule prohibits a specialist from
crossing the market for the purpose of electing odd-lots and requires
floor official approval in various circumstances for non-ETFs. The
exemption for ETFs would similarly apply to Eligible ETNs.
Eligible ETNs would also be subject to the same parity allocation
as currently exists for ETFs and other equity-traded products that are
not listed stocks, UTP stocks, or closed-end funds.
III. Discussion
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange \8\ and, in particular, the requirements of Section 6(b) of
the Act \9\ and the rules and regulations thereunder. Specifically, the
Commission finds that the proposal is consistent with Section 6(b)(5)
of the
[[Page 12236]]
Act,\10\ in that the proposal is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transaction 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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\8\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the market price of Eligible ETNs
should exhibit a strong correlation to the performance of the relevant
underlying asset, since holders of such securities will be unlikely to
sell them for less than their redemption value if they have a weekly
right to be redeemed for their full value. This weekly redemption
feature is similar to the daily redemption feature available in ETFs.
In addition, Eligible ETNs are typically continuously offered, on a
daily basis, so that the issuer would have the ability to issue new
securities from time to time at market prices. This process is similar
to the manner in which ETFs are continuously offered via the creation/
redemption process in Creation Unit aggregations (i.e., 50,000 shares).
Accordingly, the Commission believes the proposed rule change is
consistent with the Act in permitting Eligible ETNs to trade subject to
the Exchange's AEMI trading rules for ETFs.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-Amex-2007-109), as modified,
is hereby approved.
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\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4315 Filed 3-5-08; 8:45 am]
BILLING CODE 8011-01-P