[Federal Register: February 28, 2008 (Volume 73, Number 40)]
[Notices]
[Page 10839-10844]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28fe08-110]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57365; File No. SR-CBOE-2007-109]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Order Granting Accelerated Approval
of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto,
Adopting Generic Listing Standards for Exchange-Traded Funds Based on
International or Global Indexes or Portfolios, or Indexes or Portfolios
Described in Exchange Rules Previously Approved by the Commission as
Underlying Benchmarks for Derivative Securities
February 21, 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 September 10, 2007, the Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') 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 February 19, 2008, CBOE filed Amendment No. 1 to the
proposed rule change. This order provides notice of the proposal, 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 revise its listing standards, adopted
pursuant to Rule 19b-4(e) under the Act, in CBOE Rules 31.5(L) and
31.5(M) to include generic listing standards for Index Portfolio
Receipts (``IPRs'') and Index Portfolio Shares (``IPSs,'' together with
IPRs, referred to herein with as ``exchange-traded funds'' or ``ETFs'')
that are based on international or global indexes or portfolios, or on
indexes or portfolios described in exchange rules that have been
previously approved by the Commission for the trading of ETFs or other
specified index-based securities.
The text of the proposed rule change is available from the
Exchange's Web site (http://www.cboe.org/Legal), at the principal
office of the Exchange, 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, the Exchange 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 list and trade ETFs pursuant to Rule 19b-
4(e) under the Act \3\ if each of the conditions set forth in CBOE
Rules 31.5(L) or (M) is satisfied. Rule 19b-4(e) provides that the
listing and trading of a new derivative securities product by a self-
regulatory organization (``SRO'') shall not be deemed a proposed rule
change, pursuant to paragraph (c)(1) of Rule 19b-4, if the Commission
has approved, pursuant to Section 19(b) of the Act, the SRO's trading
rules, procedures, and listing standards for the product class that
would include the new derivatives securities product, and the SRO has a
surveillance program for the product class.\4\ This proposed rule
change is based on SR-Phlx-2007-20, which was approved by the
Commission on July 11, 2007.\5\
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\3\ 17 CFR 240.19b-4(e).
\4\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange
begins trading the new derivative securities products. See 17 CFR
240.19b-4(e)(2)(ii).
\5\ See Securities Exchange Act Release No. 56049 (July 11,
2007), 72 FR 39121 (July 17, 2007) (SR-Phlx-2007-20).
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a. Background
CBOE Rules 31.5(L) and (M) provide standards for listing Index
Portfolio Receipts and Index Portfolio Shares, respectively, on CBOE.
An Index Portfolio Receipt is a security that represent an interest in
a unit investment trust that holds securities that comprise a stock
index on which a series of IPR is based.\6\ An Index Portfolio Share is
a security that is issued by an open-end management investment company
and based on a portfolio of stocks or fixed income
[[Page 10840]]
securities designed to provide investment results that correspond
generally to the price and yield performance of a specified foreign or
domestic stock index or fixed income securities index.\7\ Pursuant to
CBOE Rule 1.1.02, IPRs must be issued in a specified aggregate minimum
number in return for a deposit of specified numbers of shares of stock
plus a cash amount. Pursuant to CBOE Rule 1.1.03, IPSs must be issued
in a specified aggregate minimum number in return for a deposit of
specified numbers of shares of stock and/or a cash amount, or a
specified portfolio of fixed income securities and/or a cash amount,
with a value equal to the next determined net asset value (``NAV'').
When aggregated in the same specified minimum number, the ETFs must be
redeemable by the issuer for stock and/or cash, with a value equal to
the next determined NAV. The NAV is calculated once a day after the
close of the regular trading day.
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\6\ The complete definition of IPRs is set forth in CBOE Rule
1.1.02.
\7\ The complete definition of IPSs is set forth in CBOE Rule
1.1.03.
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To meet the investment objective of providing investment returns
that correspond to the price and the dividend and yield performance of
the underlying index, an ETF may use a ``replication'' strategy or a
``representative sampling'' strategy with respect to the ETF
portfolio.\8\ An ETF using a replication strategy will invest in each
stock of the underlying index in about the same proportion as that
stock is represented in the index itself. An ETF using a representative
sampling strategy will generally invest in a significant number, but
not all of the component securities of the underlying index, and will
hold stocks that, in the aggregate, are intended to approximate the
full index in terms of key characteristics, such as price/earnings
ratio, earnings growth, and dividend yield.
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\8\ In either case, an ETF, by its terms, may be considered
invested in the securities of the underlying index to the extent the
ETF invests in sponsored American Depositary Receipts (``ADRs''),
Global Depositary Receipts (``GDRs''), or European Depositary
Receipts (``EDRs'') that trade on exchanges with last-sale reporting
representing securities in the underlying index.
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In addition, an ETF portfolio may be adjusted in accordance with
changes in the composition of the underlying index or to maintain
compliance with requirements applicable to a regulated investment
company under the Internal Revenue Code (``IRC'').
b. Generic Listing Standards For Exchange-Traded Funds
The Commission has previously approved generic listing standards
for ETFs based on indexes that consist of stocks listed on U.S.
exchanges.\9\ In general, the proposed criteria for the underlying
component securities in the international and global indexes are
similar to those for the domestic indexes, but with modifications for
the issues and risks associated with non-U.S. securities.
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\9\ See, e.g., Securities Exchange Act Release No. 44046 (March
7, 2001), 66 FR 15152 (March 15, 2001) (SR-CBOE-00-51); Securities
Exchange Act Release No. 45178 (December 20, 2001), 66 FR 67610
(December 31, 2001) (SR-Phlx-00-68); Securities Exchange Act Release
No. 43912 (January 31, 2001), 66 FR 9401 (February 7, 2001) (SR-
Phlx-00-91).
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In addition, the Commission has previously approved generic listing
standards of exchanges governing the listing and trading of ETFs based
on indexes or portfolios composed of Non-U.S. Component Stocks, as well
as indexes or portfolios based on both non-U.S. Component Stocks and
U.S. Component Stocks.\10\
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\10\ See Securities Exchange Act Release No. 55621 (April 12,
2007), 72 FR 19571 (April 18, 2007) (SR-NYSEArca-2006-86);
Securities Exchange Act Release No. 55269 (February 9, 2007), 72 FR
7490 (February 15, 2007) (SR-NASDAQ-2006-50); Securities Exchange
Act Release No. 55113 (January 17, 2007), 72 FR 3179 (SR-NYSE-2006-
101).
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The Commission has also approved generic listing standards for
index-based derivative securities products based on indexes or
portfolios described in exchange rules that have been previously
approved by the Commission under Section 19(b)(2) of the Act for the
trading of other index-based securities on the condition that all of
the standards set forth in those orders, including surveillance sharing
agreements, continue to be satisfied.\11\
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\11\ See, e.g., Securities Exchange Act Release No. 51563 (April
15, 2005) 70 FR 21257 (April 25, 2005) (SR-Amex-2005-001);
Securities Exchange Act Release No. 52204 (August 3, 2005), 70 FR
46559 (August 10, 2005) (SR-PCX-2005-63).
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The Exchange believes that adopting generic listing standards and
applying Rule 19b-4(e) should fulfill the intended objective of that
rule by allowing those ETFs that satisfy the proposed generic listing
standards to commence trading, without the need for a public comment
period and Commission approval. The proposed rules have the potential
to reduce the time frame for bringing ETFs to market, thereby reducing
the burdens on issuers and other market participants. The failure of a
particular ETF to comply with the proposed generic listing standards
under Rule 19b-4(e) would not, however, preclude the Exchange from
submitting a separate filing pursuant to Section 19(b)(2) requesting
Commission approval to list and trade a particular ETF.
c. Proposed Requirements for Listing and Trading ETFs Based on
International and Global Indexes or Portfolios
ETFs listed pursuant to the proposed generic listing standards or
that are traded pursuant to UTP would be traded, in all other respects,
under the Exchange's existing trading rules and procedures that apply
to ETFs and would be covered under the Exchange's surveillance program
for ETFs.\12\
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\12\ See proposed CBOE Rules 31.5(L).01(g) and (M).01(g).
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To list an ETF pursuant to the proposed generic listing standards
for an international or global index or portfolio, the index or
portfolio would have to satisfy all the conditions contained in
proposed CBOE Rules 31.5(L).01(a)(2) or 31.5(M).01(a)(2). As with the
existing generic standards for ETFs based on domestic indexes or
portfolios, these generic listing standards are intended to ensure that
stocks with substantial market capitalization and trading volume
account for a substantial portion of the weight of the index or
portfolio. While the standards in this proposal are based on the
standards contained in the current generic listing standards for ETFs
based on domestic indexes or portfolios, they have been adapted as
appropriate to apply to international and global indexes or portfolios.
As proposed, CBOE 31.5(L)(e) and 31.5(M)(c) would provide
definitions of the terms U.S. Component Stock and Non-U.S. Component
Stock. These new definitions would provide the basis for the standards
for indexes or portfolios with either domestic or international stocks,
or a combination of both. A ``Non-U.S. Component Stock'' would mean an
equity security that is not registered under Section 12(b) or 12(g) of
the Act,\13\ and that is issued by an entity that (1) is not organized,
domiciled, or incorporated in the United States; and (2) is an
operating company (including a real estate investment trust or income
trust, but excluding an investment trust, unit trust, mutual fund, or
derivative). This definition is designed to create a category of
component stocks that are issued by companies that are not based in the
United States, are not subject to oversight through Commission
registration, and would include sponsored GDRs and EDRs. A ``U.S.
Component Stock'' would mean an equity security that is registered
under Section 12(b) or 12(g) of the Act or an ADR the underlying equity
security of which is registered under Section 12(b)
[[Page 10841]]
or 12(g) of the Act. An ADR with an underlying equity security that is
registered pursuant to the Act is considered a U.S. Component Stock
because the issuer of that security is subject to Commission
jurisdiction and must comply with Commission rules.
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\13\ 15 U.S.C. 78l(b) or (g).
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The Exchange proposes that, to list an IPR or IPS based on an
international or global index or portfolio pursuant to the generic
listing standards, such index or portfolio must meet the following
criteria:
Component stocks that in the aggregate account for at
least 90% of the weight of the index or portfolio each must have a
minimum market value of at least $100 million (proposed CBOE Rules
31.5(L).01(a)(2)(A) and 31.5(M).01(a)(2)(A));
Component stocks representing at least 90% of the weight
of the index or portfolio each must have a minimum worldwide monthly
trading volume during each of the last six months of at least 250,000
shares (proposed CBOE Rules 31.5(L).01(a)(2)(B) and
31.5(M).01(a)(2)(B));
The most heavily weighted component stock may not exceed
25% of the weight of the index or portfolio and the five most heavily
weighted component stocks may not exceed 60% of the weight of the index
or portfolio (proposed CBOE Rules 31.5(L).01(a)(2)(C) and
31.5(M).01(a)(2)(C));
The index or portfolio shall include a minimum of 20
component stocks (proposed CBOE Rules 31.5(L).01(a)(2)(D) and
31.5(M).01(a)(2)(D)); and
Each U.S. Component Stock must be listed on a national
securities exchange and an NMS stock as defined in Rule 600 of
Regulation NMS under the Act, and each Non-U.S. Component Stock must be
listed on an exchange that has last-sale reporting (proposed CBOE Rules
31.5(L).01(a)(2)(E) and 31.5(M).01(a)(2)(E)).
The Exchange believes that these proposed standards are reasonable
for international and global indexes or portfolios, and, when applied
in conjunction with the other listing requirements, would result in the
listing and trading of ETFs that are sufficiently broad-based in scope
and not readily susceptible to manipulation. The Exchange also believes
that the proposed standards would result in ETFs that are adequately
diversified in weighting for any single security or small group of
securities to significantly reduce concerns that trading in an ETF
based on an international or global index could become a surrogate for
the trading in of securities not registered in the United States.
The Exchange further notes that, while these standards are similar
to those for indexes or portfolios that include only U.S. Component
Stocks, they differ in certain important respects and are generally
more restrictive, reflecting greater concerns over portfolio
diversification with respect to ETFs investing in components that are
not individually registered with the Commission. First, in the proposed
standards, component stocks that in the aggregate account for at least
90% of the weight of the index or portfolio each shall have a minimum
market value of at least $100 million, compared to a minimum market
value of at least $75 million for indexes or portfolios with only U.S.
Component Stocks. (Market value is calculated by multiplying the total
shares outstanding by the price per share of the component stock.)
Second, in the proposed standards, the most heavily weighted component
stock cannot exceed 25% of the weight of the index or portfolio, in
contrast to a proposed 30% standard for an index or portfolio comprised
of only U.S. Component Stocks.\14\ Third, in the proposed standards,
the five most heavily weighted component stocks shall not exceed 60% of
the weight of the index or portfolio, compared to a 65% standard for
indexes or portfolios comprised of only U.S. Component Stocks. Fourth,
the minimum number of stocks in the proposed standards is 20, in
contrast to a minimum of 13 in the standards for an index or portfolio
with only U.S. Component Stocks. Finally, the proposed standards
require that each Non-U.S. Component Stock included in the index or
portfolio be listed and traded on an exchange that has last-sale
reporting.
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\14\ See proposed CBOE Rules 31.5(L).01(a)(1)(C),
31.5(L).01(a)(2)(C), 31.5(M).01(a)(1)(C), and 31.5(M).01(a)(2)(C).
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The Exchange also proposes to modify CBOE Rules 31.5(L).01(b)(ii)
and 31.5(M).01(b)(ii) to require that the index value for an ETF listed
pursuant to this proposal be widely disseminated by one or more major
market data vendors at least every 60 seconds during the time when the
ETF shares trade on the Exchange. If the index value does not change
during some or all of the period when trading is occurring on the
Exchange, the last official calculated index value must remain
available throughout Exchange trading hours. In contrast, the index
value for an ETF listed pursuant to the existing standards for domestic
indexes must be disseminated at least every 15 seconds during the
trading day. This modification reflects limitations, in some instances,
on the frequency of intra-day trading information with respect to Non-
U.S. Component Stocks and that, in many cases, trading hours for
overseas markets overlap only in part, or not at all, with Exchange
trading hours.
In addition, CBOE Rules 31.5(L).01(c) and 31.5(M).01(c) would be
modified to define the term ``Intraday Indicative Value'' (``IIV'') as
the estimate of the value of a share of each ETF that is updated at
least every 15 seconds during Normal Market Hours.\15\ CBOE also
proposes to clarify in these rules that the IIV would be updated at
least every 15 seconds during trading in the ETF on the Exchange to
reflect changes in the exchange rate between the U.S. dollar and the
currency in which any component stock is denominated. If the IIV does
not change during some or all of the period when trading is occurring
on the CBOE Stock Exchange (``CBSX''), CBOE's equity trading platform,
then the last official calculated IIV must remain available throughout
CBSX's trading hours.
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\15\ Normal Market Hours are defined in proposed CBOE Rule
52.3(c)(2) as the time period from 8:30 a.m. until 3:15 p.m. Central
Time (``CT'').
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CBOE is proposing that it may designate an ETF for trading during
the trading hours specified in CBOE Rule 51.2(d) \16\ for IPRs and IPSs
as long as the index value and IIV dissemination requirements of CBOE
Rules 31.5(L).01(b)(ii), 31.5(L).01(c), 31.5(M).01(b)(ii), and
31.5(M).01(c) are met.
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\16\ CBOE Rule 51.2(d) provides that the hours during which IPR
transactions may be made on CBSX are 8:15 a.m. until 3:15 p.m. CT,
and that the hours during which IPS transactions may be made on CBSX
are 8:15 a.m. until 3:00 p.m. or 3:15 p.m. CT for each series of
IPSs, as specified by CBSX.
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The Exchange proposes to adopt CBOE Rules 31.5(L).01(g) and
31.5(M).01(g) to specify that CBOE will implement written surveillance
procedures for ETFs. The Exchange also proposes to add new CBOE Rules
31.5(L).01(h) and 31.5(M).01(h) regarding the creation and redemption
process for ETFs and compliance with federal securities laws for ETFs
listed pursuant to the new generic listing standards. These new
subsections would apply to ETFs listed pursuant to CBOE Rules 31.5(L)
and (M), respectively. They would require that the statutory prospectus
or the application for exemption from provisions of the Investment
Company Act of 1940 \17\ for the ETF state that the ETF must comply
with the federal
[[Page 10842]]
securities laws in accepting securities for deposits and satisfying
redemptions with redemption securities, including that the securities
accepted for deposits and the securities used to satisfy redemption
requests are sold in transactions that would be exempt from
registration under the Securities Act of 1933.\18\
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\17\ 15 U.S.C. 80a et seq.
\18\ 15 U.S.C. 77a et seq.
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The Commission has approved generic listing standards providing for
the listing, pursuant to Rule 19b-4(e), of other derivative securities
products based on indexes or portfolios described in rules previously
approved by the Commission under Section 19(b)(2) of the Act.\19\ The
Exchange proposes to include in the generic listing standards for the
listing of ETFs based on indexes or portfolios that have been approved
by the Commission in connection with the listing of options, Index
Portfolio Receipts, Index Portfolio Shares, index-linked securities, or
Index-Linked Exchangeable Notes. The Exchange believes that the
application of this standard to ETFs is appropriate because the
underlying index would have been subject to detailed and specific
Commission review in the context of the approval of listing of those
other derivatives.
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\19\ See supra note 11.
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This new generic standard would be limited to stock indexes or
portfolios, and would require that each component stock be either: (1)
A U.S. Component Stock that is listed on a national securities exchange
and is an NMS stock as defined in Rule 600 of Regulation NMS; or (2) a
Non-U.S. Component Stock that is listed and traded on an exchange that
has last-sale reporting.
The Exchange is also proposing to include additional continued
listing standards relating to ETFs. The Exchange would commence
delisting proceedings if the value of the index or portfolio of
securities on which the ETF is based is no longer calculated or
disseminated.
The Exchange proposes to adopt CBOE Rules 31.5(L)(f) and 31.5(M)(d)
to formalize in the rules existing best practices for providing equal
access to material information about the value of ETFs. Prior to
approving an ETF for listing, the Exchange would obtain a
representation from the ETF issuer that the NAV per share would be
calculated daily and made available to all market participants at the
same time.
Proposed CBOE Rule 52.3(b) provides that the Exchange would halt
trading in a Derivative Securities Product \20\ if the circuit breaker
parameter of CBOE Rule 6.3B has been reached. In exercising its
discretion to halt or suspend trading in a Derivative Securities
Product, the Exchange could consider factors such as the extent to
which trading in the underlying securities is not occurring or whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present, in addition to
other relevant factors.
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\20\ Proposed Rule 52.3(c)(5)(i) defines ``Derivative Securities
Product'' as a series of Equity-Linked Term Notes, Index-Linked
Exchangeable Notes, Index Portfolio Receipts, Index Portfolio
Shares, or Trust Issued Receipts that is based on an underlying
security or index.
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Proposed CBOE Rule 52.3(c) sets forth the trading halt rules that
apply to a Derivative Securities Product that is traded on the Exchange
on a UTP basis. The rule provides that, during the hours for trading of
Derivative Securities Products on the Exchange, if a temporary
interruption occurs in the calculation or wide dissemination of the
Required Value \21\ by a major market data vendor and the listing
market halts trading in the Derivative Securities Product, the
Exchange, upon notification by the listing market of such halt due to
such temporary interruption, also shall immediately halt trading in the
series of Derivative Securities Product. If the Required Value
continues not to be calculated or widely available as of the
commencement of trading on the Exchange on the next business day, the
Exchange shall not commence trading of the series of Derivative
Securities Product that day. If an interruption in the calculation or
wide dissemination of the Required Value continues, the Exchange may
resume trading in the series of Derivative Securities Product only if
calculation and wide dissemination of the Required Value resumes or
trading in such series resumes in the listing market.
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\21\ Proposed Rule 52.3(c)(5)(ii) defines ``Required Value'' as
the value of any security or index underlying a Derivative
Securities Product, as well as the IIV, indicative optimized
portfolio value, or other comparable estimate of the value of a
share of a Derivative Securities Product, updated regularly during
the trading day.
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The Exchange proposes to amend CBOE Rule 31.5 to stipulate that, as
provided by the Commission Rule 12f-5,\22\ the Exchange may extend UTP
to any security, such as an ETF, for which the Exchange has in effect
rules providing for transactions in such class or type of security.\23\
The provision of CBOE Rule 31.5(L) and (M) that governs surveillance
procedures, the provisions of CBOE Rule 54.1 and 54.2 that relate to
information circulars and prospectus delivery, and CBOE Rule 51.2(d)
that governs trading hours for transactions in IPRs and IPSs, would
apply to securities traded on a UTP basis (as does the applicable
proposed trading halt provision of CBOE Rule 52.3(b)). The Exchange
would not, however, apply quantitative listing standards to securities
traded on a UTP basis.
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\22\ 17 CFR 240.12f-5.
\23\ See proposed CBOE Rule 31.5.
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The Exchange is proposing other minor and clarifying changes to
CBOE Rules 31.5(L) and (M). Current CBOE Rules 31.5L.01(b)(i) and
31.5M.01(b)(i) would be deleted, so that an index underlying a series
of IPRs or IPSs need not be calculated according to the methodologies
specified in those rules.\24\ CBOE Rules 31.5(L).01(b)(ii) and
31.5(M).01(b)(ii) would be amended to ensure that an entity that
advises an index provider or calculator and related entities has in
place procedures designed to prevent the use and dissemination of
material non-public information regarding the index underlying the ETF.
CBOE Rules 31.5(L).01(e) and 31.5(M).01(e) would be adopted to clarify
that the minimum increment for bids and offers is set in Rule 51.2(d).
CBOE Rules 31.5(L).01(f) and 31.5(M).01(f) are being adopted to clarify
that the trading hours for IPRs and IPSs, respectively, are set in CBOE
Rule 51.2. CBOE Rules 31.5(L).01(a)(1)(C) and 31.5(M).01(a)(1)(C) would
be amended to change the maximum weighting requirement for the most
heavily weighted component stock from 25% to 30% of the weight of the
index or portfolio for IPRs and IPSs.\25\
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\24\ This is consistent with the rules of other national
securities exchanges. See, e.g., NYSE Arca Equities Rules 5.2(j)(3)
and 8.200.
\25\ This is consistent with the rules of other SROs. See, e.g.,
Securities Exchange Act Release Nos. 44532 (July 10, 2001), 66 FR
37078 (July 16, 2001) (SR-Amex-2001-25).
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The Exchange will closely monitor activity in ETFs to identify and
deter any potential improper trading activity in ETFs. The Exchange
represents that its surveillance procedures are adequate to properly
monitor the trading of ETFs that would be listed or traded pursuant to
UTP. Specifically, CBOE will rely on its existing surveillance
procedures governing equities, options, and ETFs. Additionally, the
Exchange states that it will develop procedures to closely monitor
activity in ETFs and related securities to identify and deter any
potential improper trading activity. In addition, the Exchange has a
general policy prohibiting the dissemination of material, non-public
information by its employees. Finally, the Exchange deems IPRs and IPSs
to be equity securities. Therefore, IPRs and IPSs are subject to
[[Page 10843]]
the Exchange's trading rules that apply to equity securities.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \26\ in general, and furthers the objectives of Section
6(b)(5) of the Act \27\ in particular, in that it is designed to remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the proposal would permit the Exchange
to more efficiently introduce products for trading on CBSX. In
addition, the proposal is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and to foster cooperation and coordination with
persons engaged in facilitating transactions in securities.
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\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change would result in
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 neither solicited nor received comments on the
proposal.
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-CBOE-2007-109 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2007-109. 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 20549-1520 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 CBOE. 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-CBOE-2007-109 and should be
submitted on or before March 20, 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, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\28\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act \29\ in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in 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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\28\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\29\ 15 U.S.C. 78f(b)(5).
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Currently, the Exchange must file a proposed rule change with the
Commission pursuant to Section 19(b)(1) of the Act \30\ and Rule 19b-4
thereunder \31\ to list and trade any ETF based on an index comprised
of foreign securities. The Exchange also must file a proposed rule
change to list and trade any ETF based on an index or portfolio
described in a rule change that has previously been approved by the
Commission as an underlying benchmark for derivative securities.
However, Rule 19b-4(e) provides that the listing and trading of a new
derivative securities product by an SRO will not be deemed a proposed
rule change pursuant to Rule 19b-4(c)(1) if the Commission has
approved, pursuant to Section 19(b) of the Act, the SRO's trading
rules, procedures, and listing standards for the product class that
would include the new derivative securities product, and the SRO has a
surveillance program for the product class. CBOE's proposed rules,
which allow the listing and trading of ETFs pursuant to Rule 19b-4(e)
based on certain indexes or portfolios with components that include
foreign securities or indexes or portfolios described in exchange rules
that have been previously approved by the Commission as underlying
benchmarks for derivative securities, fulfill these requirements. Use
of Rule 19b-4(e) by the Exchange to list and trade such ETFs should
promote competition, reduce burdens on issuers and other market
participants, and make such ETFs available to investors more
quickly.\32\
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\30\ 15 U.S.C. 78s(b)(1).
\31\ 17 CFR 240.19b-4.
\32\ The Commission notes, however, that the failure of a
particular ETF to meet these generic listing standards would not
preclude the Exchange from submitting a separate proposed rule
change to list and trade the ETF.
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The Commission previously has approved generic listing standards
for other exchanges that are substantially similar to those proposed
here by the Exchange.\33\ This proposal does not appear to raise any
novel regulatory issues. Therefore, the Commission finds that CBOE's
proposal is consistent with the Act on the same basis that it approved
the other exchanges' generic listing standards for ETFs based on
international or global indexes or portfolios, or on indexes or
portfolios described in exchange rules that have been previously
approved by the
[[Page 10844]]
Commission as underlying benchmarks for derivative securities.
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\33\ See, e.g., Securities Exchange Act Release No. 56049 (July
11, 2007), 72 FR 39121 (July 17, 2007) (SR-Phlx-2007-20); Securities
Exchange Act Release No. 55269 (February 9, 2007), 72 FR 19571
(February 15, 2007) (SR-NASDAQ-2006-50); Securities Exchange Act
Release No. 55621 (April 12, 2007), 72 FR 19571 (April 18, 2007)
(SR-NYSEArca-2006-86); Securities Exchange Act Release No. 55113
(January 17, 2007), 72 FR 3179 (January 24, 2007) (SR-NYSE-2006-
101); Securities Exchange Act Release No. 54739 (November 9, 2006),
71 FR 66993 (November 17, 2007) (SR-Amex-2006-78).
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Proposed CBOE Rules 31.5(L).01(a)(2) and 31.5(M).01(a)(2) establish
standards for the composition of indexes and portfolios underlying
international ETFs. These requirements are designed, among other
things, to require that components of an index or portfolio underlying
an ETF are adequately capitalized and sufficiently liquid, and that no
one security dominates the index. The Commission believes that, taken
together, these standards are reasonably designed to ensure that
securities with substantial market capitalization and trading volume
account for a substantial portion of any underlying index or portfolio,
and that when applied in conjunction with the other applicable listing
requirements will permit the listing and trading of only ETFs that are
sufficiently broad-based in scope to minimize potential manipulation.
The Commission further believes that the proposed listing standards are
reasonably designed to preclude CBOE from listing and trading ETFs that
might be used as surrogate for trading in unregistered securities. The
requirement that each component security underlying an ETF be an NMS
Stock (in the case of a U.S. Component Stock) or listed on an exchange
and subject to last-sale reporting (in the case of a Non-U.S. Component
Stock) also should contribute to the transparency of the market for
these ETFs.
The proposed generic listing standards also will permit the
Exchange to list and trade an ETF if the Commission has previously
approved an SRO rule change that contemplates listing and trading a
derivative product based on the same underlying index. CBOE would be
able to rely on that earlier approval order, provided that: (1) The
securities comprising the underlying index consist of U.S. Component
Stocks or Non-U.S. Component Stocks; and (2) CBOE complies with the
commitments undertaken by the other SRO set forth in the prior order,
including any surveillance-sharing arrangements with a foreign market.
The Commission believes that CBOE's proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Act,\34\ 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. CBOE's proposal requires the value of the index or
portfolio underlying an ETF based on a global or international index to
be disseminated at least once every 60 seconds during the time when the
ETF shares trade on the Exchange.\35\ CBOE has represented that, if an
underlying index or portfolio value is no longer calculated or
available, it would commence delisting proceedings for the associated
ETF. In addition, an IIV, which represents an estimate of the value of
a share of each ETF, must be updated and disseminated at least once
every 15 seconds during CBOE Normal Market Hours trading session. The
IIV must reflect changes in the exchange rate between the U.S. dollar
and the currency in which any index or portfolio component stock is
denominated. If the IIV does not change during some or all of the
period when trading is occurring on CBOE, then the last official
calculated IIV must remain available throughout CBOE's trading
hours.\36\
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\34\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\35\ See proposed CBOE Rule 31.5(L).01(b)(ii) and
31.5(M).01(b)(ii).
\36\ See proposed CBOE Rules 31.5(L).01(c) and 31.5(M).01(c).
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The Commission believes the proposal is reasonably designed to
preclude trading of ETFs when transparency is impaired. Proposed CBOE
Rule 52.3(b) provides that, when the Exchange is the listing market,
CBOE may halt trading during the day in which the interruption occurs
if the IIV or its equivalent or index value applicable to a Derivative
Securities Product is not disseminated as required. If the interruption
continues, CBOE will halt trading no later than the beginning of the
next trading day. In addition, proposed CBOE Rule 52.3(c) sets forth
trading halt procedures when the Exchange trades the Derivative
Securities Product pursuant to UTP. This proposed rule is substantially
similar to that recently adopted by other exchanges.\37\
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\37\ See supra note 33; see also Securities Exchange Act Release
No. 54997 (December 21, 2006), 71 FR 78501 (December 29, 2006) (SR-
NYSEArca-2006-77).
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The Commission believes that the proposed rules are reasonably
designed to promote fair disclosure of information that may be
necessary to price an ETF appropriately. These generic listing
standards provide that the issuer of an ETF must represent that it will
calculate the NAV and make it available daily to all market
participants at the same time.\38\ CBOE proposed to amend current CBOE
Rules 31.5(L).01(b)(ii) and 31.5(M).01(b)(ii) to make sure that an
entity that advises an index provider or calculator and related
entities has in place procedures designed to prevent the use and
dissemination of material non-public information regarding the index
underlying the ETF.
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\38\ See proposed CBOE Rules 31.5(L)(f) and 31.5(M)(d).
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CBOE has represented that its surveillance procedures are adequate
to properly monitor the trading of the IPRs and IPSs listed pursuant to
the proposed new listing standards or traded on a UTP basis. This
approval is based on that representation.
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
notes that CBOE's proposal is substantially similar to other proposals
that have been approved by the Commission.\39\ The Commission does not
believe that CBOE's proposal raises any novel regulatory issues and,
therefore, that good cause exists for approving the filing before the
conclusion of a notice-and-comment period. Accelerated approval of the
proposal will expedite the listing and trading of additional ETFs by
CBOE, subject to consistent and reasonable standards. Therefore, the
Commission finds good cause, consistent with Section 19(b)(2) of the
Act,\40\ to approve the proposed rule change, as amended, on an
accelerated basis.
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\39\ See supra note 33.
\40\ 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,\41\ that the proposed rule change (SR-CBOE-2007-109), as amended,
be, and it hereby is, approved on an accelerated basis.
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\41\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-3732 Filed 2-27-08; 8:45 am]
BILLING CODE 8011-01-P