[Federal Register: September 2, 2003 (Volume 68, Number 169)]
[Notices]
[Page 52245-52252]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02se03-144]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48398; File No. SR-Amex-2003-75]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange LLC Relating to Eight Series of
the iShares Trust Based on a Specified Fixed Income Index
August 22, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on August 20, 2003, the American Stock Exchange LLC (the
``Amex'' or the ``Exchange'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list under Rule 1000A the following eight
additional series of the iShares Trust (``Trust''), each a ``New
Fund'': (1) iShares Lehman Short U.S. Treasury Bond Fund; (2) iShares
Lehman 3-7 Year U.S. Treasury Bond Fund; (3) iShares Lehman 10-20 Year
U.S. Treasury Bond Fund; (4) iShares Lehman U.S. Treasury Inflation
Protected Securities Fund; (5) iShares Lehman U.S. Credit Bond Fund;
(6) iShares Lehman Intermediate U.S. Credit Bond Fund; (7) iShares
Lehman Intermediate U.S. Government/Credit Bond Fund; and (8) iShares
Lehman U.S. Aggregate Bond Fund.
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 Amex 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 IV below. The Amex 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 the
Statutory Basis for, the Proposed Rule Change
Purpose
Amex Rule 1000A provides standards for listing Index Fund Shares,
which are securities issued by an open-end management investment
company (open-end mutual fund) for Exchange trading. These securities
are registered under the Investment Company Act of 1940 (``1940 Act'')
as well as the Exchange Act. The Commission previously approved
amendments to Rule 1000A to accommodate the listing of Index Fund
Shares based on an index of fixed income securities, and in particular,
series of the iShares Trust based on indexes of fixed income
securities.\3\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 46252 (July 24,
2002), 67 FR 49715 (July 31, 2002) (``Previous Approval Order'').
---------------------------------------------------------------------------
The Exchange proposes to list under Rule 1000A the following eight
additional series of the iShares Trust (``Trust''), each a ``New
Fund'': (1) iShares Lehman Short U.S. Treasury Bond Fund; (2) iShares
Lehman 3-7 Year U.S. Treasury Bond Fund; (3) iShares Lehman 10-20 Year
U.S. Treasury Bond Fund; (4) iShares Lehman U.S. Treasury Inflation
Protected Securities Fund; (5) iShares Lehman U.S. Credit Bond Fund;
(6) iShares Lehman Intermediate U.S. Credit Bond Fund; (7) iShares
Lehman Intermediate U.S. Government/Credit Bond Fund; and (8) iShares
Lehman U.S. Aggregate Bond Fund.
Each New Fund will hold certain fixed income securities
(``Portfolio Securities'') selected to correspond generally to the
performance of a specified U.S. bond index (each, an ``Underlying
Index''), as described in Exhibit A to the Rule 19b-4 filing. Each of
the New Funds intends to qualify as a ``regulated investment company''
(a ``RIC'') under the Internal Revenue Code (the ``Code'').
Barclays Global Fund Advisors (the ``Advisor'' or ``BGFA'') is the
investment adviser to each New Fund. The Advisor is registered under
the Investment Advisers Act of 1940 (the ``Advisers Act''). The Advisor
is a wholly owned subsidiary of Barclays Global Investors, N.A.
(``BGI''), a national banking association. BGI is an indirect
subsidiary of Barclays Bank PLC of the United Kingdom.
SEI Investments Distribution Co. (the ``Distributor''), a
Pennsylvania corporation and broker-dealer registered under the
Exchange Act, is the principal underwriter and distributor of Creation
Unit Aggregations of iShares. The Distributor is not affiliated with
the Exchange or the Advisor.
Administrator/Custodian/Fund Accountant/Transfer Agent/Dividend
Disbursing Agent. The Trust has appointed Investors Bank & Trust Co.
(``IBT'') to act as administrator (the ``Administrator''), custodian,
fund accountant, transfer agent, and dividend disbursing agent for each
of the New Funds. The performance of their duties and obligations will
be conducted within the provisions of the 1940 Act and the rules
thereunder. There is no affiliation between IBT and the Trust, the
Advisor, or the Distributor.
a. Operation of the New Funds
The investment objective of each New Fund will be to provide
investment results that correspond generally to the performance of its
Underlying Index. In seeking to achieve its respective investment
objective, each New Fund will utilize ``passive'' indexing investment
strategies. Each New Fund may fully replicate its Underlying Index, but
currently intends to use a ``representative sampling'' strategy to
track its Underlying Index. A Fund utilizing a representative sampling
strategy generally will hold a basket of the component securities
(``Component Securities'') of its Underlying Index, but it may not hold
all of the Component Securities of its Underlying Index (as compared to
a Fund that uses a replication strategy which invests in substantially
all of the Component Securities in its Underlying Index in the same
approximate proportions as in the
[[Page 52246]]
Underlying Index).\4\ The representative sampling techniques that will
be used by the Advisor to manage the New Funds do not differ from the
representative sampling techniques it uses to manage the Funds that
were the subject of the Commission's June 25, 2002 order under the 1940
Act relating to other series of the iShares Trust indexes of fixed
income securities.\5\
---------------------------------------------------------------------------
\4\ The Trust, Advisor and Distributor (``Applicants'') have
filed with the Commission an Application for an Amended Order
(``Application'') under Sections 6(c) and 17(b) of the 1940 Act for
the purpose of exempting the New Funds of the Trust from various
provisions of the 1940 Act. (File No. 812-13003). A notice of the
Application was issued in Investment Company Act Release No. 26151,
August 15, 2003. The information provided in this Rule 19b-4 filing
related to the New Funds is based on information included in the
Application, which includes additional information regarding the
Trust and the New Funds. The initial Application for additional
series of the iShares Trust based on indexes of fixed income
securities (File No 812-12390) is referred to herein as the
``Original Application.'' The Original Application was approved in
Investment Company Act Release No. 25622, June 25, 2002 (``Order'').
See also, the Previous Approval Order, supra note 3, for additional
information relating to series of the iShares Trust, as described in
the Original Application.
\5\ See In the Matter of iShares Trust, et al., Investment
Company Act Release No. 25622 (June 25, 2002) (relating to the
iShares 1-3 Year Treasury Index Fund, 7-10 Year Treasury Index Fund,
20+ Year Treasury Index Fund, Treasury Index Fund, Government/Credit
Index Fund, Lehman Corporate Bond Fund and GS$ InvesTop Corporate
Bond Fund).
---------------------------------------------------------------------------
When using a representative sampling strategy, the Advisor attempts
to match the risk and return characteristics of a New Fund's portfolio
to the risk and return characteristics of the Underlying Index. As part
of this process, the Advisor subdivides each Underlying Index into
smaller, more homogeneous pieces. These subdivisions are sometimes
referred to as ``cells.'' A cell will contain securities with similar
characteristics. For fixed income indices, the Advisor generally
divides the index according to the five parameters that determine a
bond's risk and expected return: (1) Duration, (2) sector, (3) credit
rating, (4) coupon, and (5) the presence of embedded options. When
completed, all bonds in the index will have been assigned a cell. The
Advisor then begins to construct the portfolio by selecting
representative bonds from these cells. The representative sample of
bonds chosen from each cell is designed to closely correlate to the
duration, sector, credit rating, coupon, and embedded option
characteristics of each cell. The characteristics of each cell when
combined are, in turn, designed to closely correlate to the duration,
sector, credit rating, coupon, and embedded option characteristics of
the Underlying Index as a whole. The Advisor may exclude less liquid
bonds in order to create a more tradable portfolio and improve
arbitrage opportunities.
According to the Original Application, the representative sampling
techniques used by the Advisor to manage fixed income funds do not
materially differ from the representative sampling techniques it uses
to manage equity funds. Due to the differences between bonds and
equities, the Advisor analyzes different information--such as dividend
payments instead of coupon rates, for example.
According to the Original Application, the New Funds' use of the
representative sampling strategy is beneficial for a number of reasons.
First, the Advisor can avoid bonds that are ``expensive names'' (i.e.,
bonds that trade at perceived higher prices or lower yields because
they are in short supply) but have the same essential risk, value,
duration and other characteristics as less expensive names. Second, the
use of representative sampling techniques permits the Advisor to
exclude bonds that it believes will soon be deleted from the Underlying
Index. Third, the Advisor can avoid holding bonds it deems less liquid
than other bonds with similar characteristics. Fourth, the Advisor can
develop a basket that is easier to construct and cheaper to trade,
thereby potentially improving arbitrage opportunities.
From time to time, adjustments may be made in the portfolio of each
New Fund in accordance with changes in the composition of the
Underlying Index or to maintain RIC compliance. For example, if at the
end of a calendar quarter a New Fund would not comply with the RIC
diversification tests, the Advisor would make adjustments to the
portfolio to ensure continued RIC status. The Exchange represents that
the Advisor expects that each New Fund will have a tracking error
relative to the performance of its respective Underlying Index of no
more than five percent (5%).\6\ Each New Fund's investment objectives,
policies and investment strategies will be fully disclosed in its
Prospectus and Statement of Additional Information. Each New Fund
(except the iShares Lehman U.S. Aggregate Bond Fund) will invest at
least 90% of its assets in Component Securities of its respective
Underlying Index. Each of these New Funds may also invest up to 10% of
its assets in bonds not included in its Underlying Index, but which the
Advisor believes will help the New Fund track its Underlying Index, as
well as in certain futures, options and swap contracts, cash and cash
equivalents. For example, these New Funds may invest in securities not
included in the relevant Underlying Index in order to reflect
prospective changes in the relevant Underlying Index (such as future
corporate actions and index reconstitutions, additions and deletions).
---------------------------------------------------------------------------
\6\ Telephone call among Mike Cavalier, Associate General
Counsel, Amex; Marc McKayle, Special Counsel, Division of Market
Regulation (``Division''), Commission; and Jennifer Lewis, Special
Counsel, Division, Commission, on August 20, 2003.
---------------------------------------------------------------------------
According to the Application, with respect to the iShares Lehman
U.S. Aggregate Bond Fund (the ``Lehman Aggregate Fund''), additional
portfolio flexibility would benefit the Fund, while at the same time
permitting it to closely track the performance of its Underlying Index.
The Lehman Aggregate Fund will: (i) seek to track the performance of
that portion of its Underlying Index comprised of U.S. Treasury
securities, U.S. agency securities, corporate bonds, non-corporate
bonds (e.g., bonds issued by supra-national entities such as the
International Monetary Fund), asset-backed securities, and commercial
mortgage-backed securities (approximately 65% of the Underlying Index
as of April 30, 2003) by investing a corresponding percentage of its
net assets (i.e., approximately 65%) in the Component Securities of its
Underlying Index; \7\ and (ii) seek to track the performance of that
portion of its Underlying Index invested in U.S. agency mortgage pass-
through securities (approximately 35% of the Underlying Index as of
April 30, 2003) by investing a corresponding percentage of its net
assets (i.e., approximately 35%) through TBA transactions (as defined
below) on U.S. agency mortgage pass-through securities. Through the
Lehman Aggregate Fund's direct investments in Component Securities of
its Underlying Index and its investments in mortgage pass-through
securities through TBA transactions as described above, the Lehman
Aggregate Fund will have at least 90% of its net assets invested (i) in
Component Securities of its Underlying Index and (ii) in investments
that have economic characteristics that are substantially identical to
the economic characteristics of the Component
[[Page 52247]]
Securities of its Underlying Index (i.e., TBA transactions).
---------------------------------------------------------------------------
\7\ With respect to this portion of its portfolio, the Lehman
Aggregate Fund may invest up to 10% of its portfolio in bonds not
included in its Underlying Index, but which the Adviser believes
will help the Lehman Aggregate Fund track its Underlying Index, as
well as in certain futures, options and swap contracts, cash and
cash equivalents.
---------------------------------------------------------------------------
According to the Application, the Lehman Aggregate Fund needs the
investment flexibility to engage in TBA transactions as described above
primarily because approximately 35% of the securities in the Lehman
Aggregate Fund's Underlying Index are expected to be pools of U.S.
agency mortgage pass-through securities.\8\ As discussed below, it is
easier to trade and obtain intra-day prices of TBAs than it is to trade
and obtain intra-day prices of specific pools of mortgage pass-through
securities. The readily available information about intra-day pricing
of TBAs and the ease with which they can be traded should make it
easier to create and redeem Creation Unit Aggregations and help
maintain the efficiency of the Fund's arbitrage mechanism.
---------------------------------------------------------------------------
\8\ As used herein, the term ``U.S. agency mortgage pass-through
security'' or ``mortgage pass-through security'' refers to a
category of pass-through securities backed by pools of mortgages and
issued by one of several U.S. Government-sponsored enterprises: the
Government National Mortgage Association (``GNMA''), Federal
National Mortgage Association (``FNMA'') or Federal Home Loan
Mortgage Corporation (``FHLMC''). In the basic pass-through
structure, mortgages with similar issuer, term and coupon
characteristics are collected and aggregated into a pool. The pool
is assigned a CUSIP number and undivided interests in the pool are
traded and sold as pass-through securities. The holder of the
security is entitled to a pro rata share of principal and interest
payments (including unscheduled prepayments) from the pool of
mortgage loans. The portion of the Lehman U.S. Aggregate Index
representing the mortgage pass-through segment of the U.S.
investment grade bond market is comprised of multiple pools of
mortgage pass-through securities.
---------------------------------------------------------------------------
The Application states that, although the market for mortgage pass-
through securities is extremely deep and liquid, it is impractical to
trade mortgage pass-through securities on a pool-by-pool basis,
particularly when large dollar amounts are involved. For this reason,
the vast majority of mortgage pools are traded using ``to-be-
announced'' or ``TBA transactions.'' A ``TBA transaction'' essentially
is a purchase or sale of a pass-through security for future settlement
at an agreed upon date.\9\ It has been estimated that 90% of mortgage
pass-through securities (as measured by total dollar volume) are
executed as TBA trades.\10\ TBA transactions increase the liquidity and
pricing efficiency of transactions in mortgage pass-through securities
since they permit similar mortgage pass-through securities to be traded
interchangeably pursuant to commonly observed settlement and delivery
requirements.
---------------------------------------------------------------------------
\9\ ``TBA'' refers to a mechanism for the forward settlement of
agency mortgage pass-through securities, and not to a separate type
of mortgage-backed security. TBA trades generally are conducted in
accordance with widely-accepted ``Good Delivery'' guidelines
published by The Bond Market Association. The Good Delivery
guidelines facilitate transactions in mortgage pass-through
securities by establishing commonly observed terms and conditions
for execution, settlement and delivery. In a TBA trade, the buyer
and seller decide on general trade parameters, such as agency,
coupon, term to maturity, settlement date, par amount, and price.
The actual pools delivered are determined two days prior to
settlement date. TBA transactions promote efficient pricing because
the Good Delivery guidelines permit only a small variance between
the face amount of the pools actually delivered and the nominal
agreed upon amount. Intra-day and end-of-day pricing of TBAs is
available from multiple pricing sources, such as Bloomberg and
Tradeweb. The Bond Market Association publishes standard
notification and settlement dates for TBA trades specifying uniform
settlement dates for specific classes of securities. The most active
trading market for TBA trades is usually for next-month settlement.
See generally TBAs: To-Be-Announced Mortgage Securities
Transactions, The Bond Market Association (1999).
\10\ Id. at 3.
---------------------------------------------------------------------------
The Lehman Aggregate Fund intends to use TBA transactions to
acquire and maintain exposure to that portion of the Lehman U.S.
Aggregate Index comprised of pools of mortgage pass-through securities
in either of two ways. First, and more commonly, the Lehman Aggregate
Fund will enter into TBA agreements and ``roll over'' such agreements
prior to the settlement date stipulated in such agreements. This type
of TBA transaction is commonly known as a ``TBA roll.'' In a ``TBA
roll'' the Lehman Aggregate Fund generally will sell the obligation to
purchase the pools stipulated in the TBA agreement prior to the
stipulated settlement date and will enter into a new TBA agreement for
future delivery of pools of mortgage pass-through securities. Second,
and less frequently, the Lehman Aggregate Fund will enter into TBA
agreements and settle such transactions on the stipulated settlement
date by actual receipt or delivery of the pools of mortgage pass-
through securities stipulated in the TBA agreement. Since intra-day
prices of TBA agreements are more readily available than intra-day
prices on specific mortgage pools and because mortgage pools tend to be
less liquid than TBA agreements, the use of TBA agreements should help
maintain the efficiency of the Fund's arbitrage mechanism. The Lehman
Aggregate Fund will accept actual delivery of mortgage pools only when
the Adviser believes it is in the best interests of the Lehman
Aggregate Fund and its shareholders to do so. In determining whether to
accept actual delivery of mortgage pools, the Adviser will consider,
among other things, the potential impact of such acceptance on the
efficiency of the Lehman Aggregate Fund's arbitrage mechanism and the
Lehman Aggregate Fund's ability to track its Underlying Index. For
these reasons, the Adviser believes that the ability to invest a
significant portion of the Lehman Aggregate Fund's assets through TBA
transactions and to maintain such exposure through the use of TBA rolls
would increase the liquidity and pricing efficiency of the Lehman
Aggregate Fund's portfolio. In addition, since holding a TBA position
exposes the holder to substantially identical market and economic risks
as holding a position in a corresponding pool of mortgage pass-through
securities, the Adviser believes that the use of TBA transactions as
described herein should permit the Lehman Aggregate Fund to closely
track the performance of its Underlying Index.
The use of TBA transactions is not intended to help the Lehman
Aggregate Fund outperform its Underlying Index, but rather to increase
pricing efficiency while at the same time maintaining the Lehman
Aggregate Fund's exposure to its Underlying Index.\11\
---------------------------------------------------------------------------
\11\ Telephone call between Mike Cavalier, Associate General
Counsel, Amex; and Florence Harmon, Senior Special Counsel,
Division, Commission, on August 22, 2003.
---------------------------------------------------------------------------
b. Issuance of Creation Unit Aggregations
The issuance of Creation Unit Aggregations will operate, except as
noted below, in a manner identical to that of the Funds described in
the Previous Approval Order, and in the Original Application. The only
difference between the creation process for the New Funds and that of
the Funds that are the subject of the Order involves the Lehman
Aggregate Fund (discussed below).
1. In General. Shares of each New Fund (the ``iShares'') will be
issued on a continuous offering basis in groups of 50,000 or more.
These ``groups'' of shares are called ``Creation Unit Aggregations.''
The New Funds will issue and redeem iShares only in Creation Unit
Aggregations.\12\ As with other open-end investment companies, iShares
will be issued at the net asset value (``NAV'') per share next
determined after an order in proper form is received. The anticipated
price at which the iShares will initially trade is approximately $100.
---------------------------------------------------------------------------
\12\ Generally, each Creation Unit Aggregation will consist of
50,000 or more iShares and the estimated initial value per Creation
Unit Aggregation will be approximately $5 million.
---------------------------------------------------------------------------
The NAV per share of each New Fund is determined as of the close of
the regular trading session on the Amex on each day that the Amex is
open. The Trust sells Creation Unit Aggregations of
[[Page 52248]]
each New Fund only on business days at the next determined NAV of each
New Fund.
Creation Unit Aggregations will be issued by each Fund in exchange
for the in-kind deposit of a portfolio securities designated by the
Advisor to correspond generally to the price and yield performance of
the New Fund's Underlying Index (the ``Deposit Securities'').
Purchasers will generally be required to deposit a specified cash
payment in the manner more fully described in the Application. Creation
Unit Aggregations will be redeemed by each New Fund in exchange for
portfolio securities of the New Fund (``Fund Securities'') and a
specified cash payment in the manner more fully described herein. Fund
Securities received on redemption may not be identical to Deposit
Securities deposited in connection with creations of Creation Unit
Aggregations for the same day.
The Distributor will act on an agency basis and will be the Trust's
principal underwriter for the iShares in Creation Unit Aggregations of
each New Fund. All orders to purchase iShares in Creation Unit
Aggregations must be placed with the Distributor by or through an
authorized participant (``Authorized Participant''). Authorized
Participants, which are required to be Depository Trust Company
(``DTC'') participants, must enter into a participant agreement with
the Distributor. The Distributor will transmit such orders to the
applicable New Fund and furnish to those placing orders confirmation
that the orders have been accepted. The Distributor may reject any
order that is not submitted in proper form. The Distributor will be
responsible for delivering the prospectus to those persons creating
iShares in Creation Unit Aggregations and for maintaining records of
both the orders placed with it and the confirmations of acceptance
furnished by it. In addition, the Distributor will maintain a record of
the instructions given to the Trust to implement the delivery of
iShares.
2. In-Kind Deposit of Portfolio Securities. Payment for Creation
Unit Aggregations placed through the Distributor will be made by the
purchasers generally by an in-kind deposit with the New Fund of the
Deposit Securities together with an amount of cash (the ``Balancing
Amount'') specified by the Advisor in the manner described below. The
Balancing Amount is an amount equal to the difference between (1) the
NAV (per Creation Unit Aggregation) of the New Fund and (2) the total
aggregate market value (per Creation Unit Aggregation) of the Deposit
Securities (such value referred to herein as the ``Deposit Amount'').
The Balancing Amount serves the function of compensating for
differences, if any, between the NAV per Creation Unit Aggregation and
that of the Deposit Amount. The deposit of the requisite Deposit
Securities and the Balancing Amount are collectively referred to herein
as a ``Portfolio Deposit.''
The Advisor will make available to the market through the National
Securities Clearing Corporation (the ``NSCC'') on each Business Day,
prior to the opening of trading on the Amex (currently 9:30 a.m.
eastern time), the list of the names and the required number of shares
of each Deposit Security included in the current Portfolio Deposit
(based on information at the end of the previous Business Day) for the
relevant New Fund. The Portfolio Deposit will be applicable to a New
Fund (subject to any adjustments to the Balancing Amount, as described
below) in order to effect purchases of Creation Unit Aggregations of
the New Fund until such time as the next-announced Portfolio Deposit
composition is made available.
The identity and number of shares of the Deposit Securities
required for the Portfolio Deposit for each New Fund will change from
time to time. The composition of the Deposit Securities may change in
response to adjustments to the weighting or composition of the
Component Securities in the relevant Underlying Index. These
adjustments will reflect changes, known to the Advisor to be in effect
by the time of determination of the Deposit Securities, in the
composition of the Underlying Index being tracked by the relevant New
Fund, or resulting from rebalance or additions or deletions to the
relevant Underlying Index. In addition, the Trust reserves the right
with respect to each New Fund to permit or require the substitution of
an amount of cash (i.e., a ``cash in lieu'' amount) to be added to the
Balancing Amount to replace any Deposit Security: (1) that may be
unavailable or not available in sufficient quantity for delivery to the
Trust upon the purchase of iShares in Creation Unit Aggregations, or
(2) that may not be eligible for trading by an Authorized Participant
or the investor on whose behalf the Authorized Participant is acting.
The Lehman Aggregate Fund may invest in and hold mortgage pass-
through securities on a TBA basis. Since a TBA transaction is
essentially an agreement for future settlement of a mortgage security,
it is not possible to accept TBAs as part of the Portfolio Deposit.
Instead, the Fund will designate the mortgage pass-through TBAs to be
included in a Portfolio Deposit just as it would any other Deposit
Securities of a Portfolio Deposit, and will accept ``cash in lieu'' of
delivery of the designated mortgage pass-through TBAs. The Lehman
Aggregate Fund will then enter into TBA agreements included as Deposit
Securities in the Portfolio Deposit.\13\ According to the Application,
this will substantially minimize the Lehman Aggregate Fund's
transaction costs, enhance operational efficiencies and otherwise
reduce any operational issues which the acceptance of pools of mortgage
pass-through securities might otherwise present.\14\
---------------------------------------------------------------------------
\13\ Prior to settlement of such TBA transactions, the ``cash in
lieu'' portion of the Portfolio Deposit will be invested in cash
equivalents, including money market mutual funds, and such
investments, along with cash and other liquid assets identified by
BGFA, will be segregated on the books and records of the Fund or its
Custodian in accordance with section 18 of the 1940 Act and
Investment Company Act Release 10666. Since the price of a TBA
transaction includes an assumed rate of return on the cash held in
anticipation of settlement, the Fund's investment in cash
equivalents prior to settlement is not expected to have a material
impact on potential tracking error or the Fund's ability to track
its Underlying Index. In addition, since the interest or dividends
that the Fund accrues on a daily basis on its investment in cash
equivalents will be relatively small and will be included as part of
the Cash Component published on a daily basis according to the
procedures currently used for the Index Funds, Applicants expect
that such dividends and interest will be reflected in the secondary
market trading price of iShares of the Fund. The Commission's June
25, 2002 order relating to fixed income funds of the iShares Trust
(Investment Company Act Release No. 45622) permits acceptance of a
``cash-in lieu'' amount to replace Deposit Securities that are
unavailable for delivery or for other reasons. In addition, prior
iShares orders expressly permit ``cash-only purchases of Creation
Unit Aggregations'' where the Adviser believes such transactions
would ``substantially minimize * * * transactional costs or would
enhance * * * operational efficiencies.'' See Investment Company Act
Release No. 24452 (May 12, 2000).
\14\ Intra-day and end-of-day pricing of TBAs is available from
multiple pricing sources, such as Bloomberg and Tradeweb. In
addition, the fungible nature of TBAs and commonly observed
execution and settlement procedures create significant pricing
efficiencies and market liquidity for TBAs. TBAs typically trade at
very narrow spreads on transactions of up to $300 million or more.
Since intra-day pricing of TBAs is readily available and the market
for mortgage pass-through TBAs is extremely liquid, the designation
of TBAs in the Portfolio Deposit and their inclusion as Fund
Securities should make pricing of the Fund and the Deposit Amount
more efficient and transparent, thus increasing arbitrage
efficiency.
---------------------------------------------------------------------------
c. Availability of Information Regarding iShares and Underlying Indices
On each Business Day, the list of names and amount of each treasury
security, government security or corporate bond constituting the
current Deposit Securities of the Portfolio
[[Page 52249]]
Deposit and the Balancing Amount effective as of the previous Business
Day will be made available. An amount per iShare representing the sum
of the estimated Balancing Amount effective through and including the
previous Business Day, plus the current value of the Deposit
Securities, on a per iShare basis (the ``Intra-day Optimized Portfolio
Value'' or ``IOPV'') will be calculated by an independent third party
(such as Bloomberg L.P.) (``Bloomberg'') every 15 seconds during the
AMEX's regular trading hours and disseminated every 15 seconds by such
third party and by AMEX on AMEX's Consolidated Tape B. The IOPV will be
updated throughout the day to reflect changing bond prices, as well as
TBA prices, using multiple prices from independent third party pricing
sources. Information about the intra-day prices for the Deposit
Securities of each Fund is readily available to the marketplace.\15\
Applicants represent (i) that IOPV will be calculated by an independent
third party; (ii) that IOPV will be calculated using prices obtained
from multiple independent third-party pricing sources (such as broker-
dealers) throughout the day; and (iii) that IOPV will be calculated in
accordance with pre-determined criteria and set parameters so that an
individual bond ``price'' based on an analysis of multiple pricing
sources is obtained for each security in a Portfolio Deposit.\16\
Closing prices of the New Funds' Deposit Securities are readily
available from published or other public sources, such as the Trace
Reporting and Compliance Engine (commonly known as ``TRACE''), or on-
line client-based information services provided by Credit Suisse First
Boston, Goldman Sachs, Lehman Brothers, Merrill Lynch, IDC, Bridge,
Bloomberg, Tradeweb, and other pricing services commonly used by bond
mutual funds.\17\
---------------------------------------------------------------------------
\15\ Authorized Participants and other market participants have
a variety of ways to access the intra-day security prices that form
the basis of the Fund's IOPV calculation. For example, intra-day
prices for treasury securities, agency securities and TBAs are
available from Bloomberg, the Trace Reporting and Compliance Engine
(commonly known as ``TRACE'') and TradeWeb. Intra-day prices for
inflation protected public obligations of the U.S. Treasury
(``TIPS'') are available from Bloomberg and Tradeweb. Intra-day
prices of callable agency securities are expected to be available
from TradeWeb in July or sometime shortly thereafter. Intra-day
prices of corporate bonds are available from TRACE. In addition,
intra-day prices for each of these securities are available by
subscription or otherwise to Authorized Participants and clients of
major U.S. broker-dealers (such as Credit Suisse First Boston,
Goldman Sachs and Lehman Brothers).
\16\ For example, Bloomberg Generic Prices could be used.
Bloomberg Generic Prices are current prices on individual bonds as
determined by Bloomberg using a proprietary automated pricing
program that analyzes multiple bond prices contributed to Bloomberg
by third-party price contributors (such as broker-dealers).
\17\ Applicants understand that Credit Suisse First Boston,
Goldman Sachs, Lehman Brothers, Merrill Lynch, IDC, Bridge, and
Bloomberg provide prices for each type of Deposit Security. Tradeweb
provides prices for each type of Deposit Security except mortgage
backed securities and corporate bonds. TRACE provides prices for
corporate bonds.
---------------------------------------------------------------------------
The Lehman Indices will not be calculated or disseminated intra-
day. The value and return of each Lehman Index is calculated and
disseminated each business day, at the end of the day, by Lehman
Brothers.
Each New Fund will make available through NSCC on a daily basis the
names and required number of shares of each of the Deposit Securities
in a Creation Unit Aggregation, as well as information regarding the
Balancing Amount. The NAV for each New Fund will be calculated and
disseminated daily. The Amex also intends to disseminate a variety of
data with respect to each New Fund on a daily basis by means of CTA and
CQ High Speed Lines; information with respect to recent NAV, shares
outstanding, estimated cash amount and total cash amount per Creation
Unit Aggregation will be made available prior to the opening of the
Amex. In addition, the Web site for the Trust, which will be publicly
accessible at no charge, will contain the following information, on a
per iShare basis, for each New Fund: (a) the prior Business Day's NAV
and the mid-point of the bid-ask price \18\ at the time of calculation
of such NAV (``Bid/Ask Price''), and a calculation of the premium or
discount of such price against such NAV; and (b) data in chart format
displaying the frequency distribution of discounts and premiums of the
Bid/Ask Price against the NAV, within appropriate ranges, for each of
the four previous calendar quarters.\19\
---------------------------------------------------------------------------
\18\ The Bid-Ask Price of a New Fund is determined using the
highest bid and lowest offer on the Exchange as of the time of
calculation of each New Fund's NAV.
\19\ The secondary market for Treasury securities is a highly
organized over-the-counter market. Many dealers, and particularly
the primary dealers, make markets in Treasury securities. Trading
activity takes place between primary dealers, non-primary dealers,
and customers of these dealers, including financial institutions,
non-financial institutions and individuals. Increasingly, trading in
Treasury securities occurs through automated trading systems.
The primary dealers are among the most active participants in
the secondary market for Treasury securities. The primary dealers
and other large market participants frequently trade with each
other, and most of these transactions occur through an interdealer
broker. The interdealer brokers provide primary dealers and other
large participants in the Treasury market with electronic screens
that display the bid and offer prices among dealers and allow trades
to be consummated.
Quote and trade information regarding Treasury securities is
widely available to market participants from a variety of sources.
The electronic trade and quote systems of the dealers and
interdealer brokers are one such source. Groups of dealers and
interdealer brokers also furnish trade and quote information to
vendors such as Bloomberg, Reuters, Bridge, Moneyline Telerate, and
CQG. GovPX, for example, is a consortium of leading government
securities dealers and subscribers that provides market data from
leading government securities dealers and interdealer brokers to
market data vendors and subscribers. Trade Web, another example, is
a consortium of 18 primary dealers that, in addition to providing a
trading platform, also provides market data direct to subscribers or
to other market data vendors.
Real-time price quotes for corporate and non-corporate debt
securities are available to institutional investors via proprietary
systems such as Bloomberg, Reuters and Dow Jones Telerate.
Additional analytical data and pricing information may also be
obtained through vendors such as Bridge Information Systems, Muller
Data, Capital Management Sciences, Interactive Data Corporation and
Barra.
Retail investors have access to free intra-day bellwether
quotes. The Bond Market Association provides links to price and
other bond information sources on its investor Web site at
www.investinginbonds.com. In addition, the transaction prices and
volume data for the most actively-traded bonds on the exchanges are
published daily in newspapers and on a variety of financial Web
sites.
Closing corporate and non-corporate bond prices are also
available through subscription services (e.g., IDC, Bridge) that
provide aggregate pricing information based on prices from several
dealers, as well as subscription services from broker-dealers with a
large bond trading operation, such as Lehman Brothers and Goldman,
Sachs & Co.
---------------------------------------------------------------------------
d. Redemption of iShares
Creation Unit Aggregations of each New Fund will be redeemable at
the NAV next determined after receipt of a request for redemption.
Creation Unit Aggregations of each New Fund will be redeemed
principally in-kind, together with a balancing cash payment (although,
as described below, Creation Unit Aggregations may sometimes be
redeemed for cash). The value of each New Fund's redemption payments on
a Creation Unit Aggregation basis will equal the NAV per the
appropriate number of iShares of such New Fund. Owners of iShares may
sell their iShares in the secondary market, but must accumulate enough
iShares to constitute a Creation Unit Aggregation in order to redeem
through the New Fund. Redemption orders must be placed by or through an
Authorized Participant.
Creation Unit Aggregations of any New Fund generally will be
redeemable on any Business Day in exchange for Fund Securities and the
Cash Redemption Payment (defined below) in effect on the date a request
for redemption is made. The Advisor will publish daily through NSCC the
list of securities which a creator of Creation Unit Aggregations must
deliver to the Fund (the ``Creation List'') and which a
[[Page 52250]]
redeemer will receive from the New Fund (the ``Redemption List''). The
Creation List is identical to the list of the names and the required
numbers of shares of each Deposit Security included in the current
Portfolio Deposit.\20\
---------------------------------------------------------------------------
\20\ Investors redeeming Creation Unit Aggregations of the
Lehman Aggregate Fund will receive cash for any Portfolio Securities
that are mortgage pass-through TBAs.
---------------------------------------------------------------------------
In addition, just as the Balancing Amount is delivered by the
purchaser of Creation Unit Aggregations to the New Fund, the Trust will
also deliver to the redeeming Beneficial Owner in cash the ``Cash
Redemption Payment.'' The Cash Redemption Payment on any given Business
Day will be an amount calculated in the same manner as that for the
Balancing Amount, although the actual amounts may differ if the Fund
Securities received upon redemption are not identical to the Deposit
Securities applicable for creations on the same day. To the extent that
the Fund Securities have a value greater than the NAV of iShares being
redeemed, a cash payment equal to the differential is required to be
paid by the redeeming Beneficial Owner to the New Fund. The Trust may
also make redemptions in cash in lieu of transferring one or more Fund
Securities to a redeemer if the Trust determines, in its discretion,
that such method is warranted due to unusual circumstances. An unusual
circumstance could arise, for example, when a redeeming entity is
restrained by regulation or policy from transacting in certain Fund
Securities, such as the presence of such Fund Securities, on a
redeeming investment banking firm's restricted list.
e. Clearance and Settlement
The Deposit Securities and Fund Securities of each New Fund will
settle via free delivery through the Federal Reserve System for U.S.
Government securities and the DTC for corporate securities and non-
corporate securities (other than U.S. Government securities). The
iShares will settle through the DTC. The Custodian will monitor the
movement of the Deposit Securities and will instruct the movement of
the iShares only upon validation that the Deposit Securities have
settled correctly or that required collateral is in place.
As with the settlement of domestic ETF transactions outside of the
NSCC Continuous Net Settlement System (the ``CNS System''), (i) iShares
of the New Funds and corporate and non-corporate securities (other than
U.S. government securities) will clear and settle through DTC, and (ii)
U.S. government securities and cash will clear and settle through the
Federal Reserve system. More specifically, creation transactions will
settle as follows. On settlement date (T + 3) an Authorized Participant
will transfer Deposit Securities that are corporate and non-corporate
bonds (other than U.S. government securities) through DTC to a DTC
account maintained by the New Funds' Custodian, and Deposit Securities
that are U.S. government securities, together with any Balancing
Amount, to the Custodian through the Federal Reserve system. Once the
Custodian has verified the receipt of all of the Deposit Securities (or
in the case of failed delivery of one or more bonds, collateral in the
amount of 105% or more of the missing Deposit Securities) and the
receipt of any Balancing Amount, the Custodian will notify the
Distributor and the Advisor. The Fund will issue Creation Unit
Aggregations of iShares and the Custodian will deliver the iShares to
the Authorized Participant through DTC. DTC will then credit the
Authorized Participant's DTC account. The clearance and settlement of
redemption transactions essentially reverses the process described
above. After the Trust has received a redemption request in proper form
and the Authorized Participant transfers Creation Unit Aggregations of
iShares to the New Funds' Custodian through DTC, the Trust will cause
the Custodian to initiate procedures to transfer the requisite Fund
Securities and any Cash Redemption Payment. On T + 3, assuming the
Custodian has verified receipt of the Creation Unit Aggregations, the
Custodian will transfer Fund Securities that are corporate and non-
corporate bonds to the Authorized Participant through DTC and Fund
Securities that are U.S. Government securities, together with any Cash
Redemption Payment, through the Federal Reserve system.
iShares of the New Funds will be debited or credited by the
Custodian directly to the DTC accounts of the Authorized Participants.
With respect to domestic equity-based ETFs using the CNS System,
Creation Unit Aggregations of iShares are deposited or charged to the
Authorized Participants' DTC accounts through the CNS System. Since
creation/redemption transactions for iShares of the New Funds will not
clear and settle through the CNS System, the failed delivery of one or
more Deposit Securities (on a create) or one or more Fund Securities
(on a redemption) will not be facilitated by the CNS System. Therefore,
Authorized Participants will be required to provide collateral to cover
the failed delivery of Deposit Securities in connection with an ``in-
kind'' creation of iShares. In case of a failed delivery of one or more
Deposit Securities, the New Funds will hold the collateral until the
delivery of such Deposit Security. The New Funds will be protected from
failure to receive the Deposit Securities because the Custodian will
not effect the Fund's side of the transaction (the issuance of iShares)
until the Custodian has received confirmation of receipt of the
Authorized Participant's incoming Deposit Securities (or collateral for
failed Deposit Securities) and Balancing Amount. In the case of
redemption transactions, the New Funds will be protected from failure
to receive Creation Unit Aggregations of iShares because the Custodian
will not new effect the New Fund's side of the transaction (the
delivery of Fund Securities and the Cash Redemption Payment) until the
Transfer Agent has received confirmation of receipt of the Authorized
Participant's incoming Creation Unit Aggregations. In order to simplify
the transfer agency process and align the settlement of iShares of the
New Funds with the settlement of the Deposit Securities and Fund
Securities, Applicants plan to settle transactions in U.S. Government
securities, corporate bonds, non-corporate bonds and iShares on the
same T + 3 settlement cycle. Amex represents that according to the
Application, the clearance and settlement process will not affect the
arbitrage of Shares in the New Fund.\21\
---------------------------------------------------------------------------
\21\ Telephone call among Mike Cavalier, Associate General
Counsel, Amex; Marc McKayle, Special Counsel, Division, Commission;
and Jennifer Lewis, Special Counsel, Division, Commission, on August
20, 2003.
---------------------------------------------------------------------------
f. Dividends and Distributions
Dividends from net investment income will be declared and paid to
Beneficial Owners of record at least annually by each New Fund. Certain
of the New Funds may pay dividends, if any, on a quarterly or more
frequent basis. Distributions of realized securities gains, if any,
generally will be declared and paid once a year, but each New Fund may
make distributions on a more frequent basis to comply with the
distribution requirements of the Internal Revenue Code and consistent
with the 1940 Act.
Dividends and other distributions on iShares of each New Fund will
be distributed on a pro rata basis to Beneficial Owners of such
iShares. Dividend payments will be made through the Depository and the
DTC Participants to Beneficial Owners then
[[Page 52251]]
of record with amounts received from each New Fund.
The Trust will not make the DTC book-entry Dividend Reinvestment
Service (the ``Service'') available for use by Beneficial Owners for
reinvestment of their cash proceeds, but certain individual brokers may
make the Service available to their clients. The SAI will inform
investors of this fact and direct interested investors to contact such
investor's broker to ascertain the availability and a description of
the Service through such broker. The SAI will also caution interested
Beneficial Owners that they should note that each broker may require
investors to adhere to specific procedures and timetables in order to
participate in the Service and such investors should ascertain from
their broker such necessary details. iShares acquired pursuant to the
Service will be held by the Beneficial Owners in the same manner, and
subject to the same terms and conditions, as for original ownership of
iShares.
g. Other Issues
1. Criteria for Initial and Continued Listing. iShares are subject
to the criteria for initial and continued listing of Index Fund Shares
in Rule 1002A. It is anticipated that a minimum of two Creation Units
(100,000 iShares) will be required to be outstanding at the start of
trading. This minimum number of iShares required to be outstanding at
the start of trading will be comparable to requirements that have been
applied to previously listed series of Portfolio Depositary Receipts
and Index Fund Shares.
The Exchange believes that the proposed minimum number of iShares
outstanding at the start of trading is sufficient to provide market
liquidity and to further the Trust's objective to seek to provide
investment results that correspond generally to the price and yield
performance of the Index.
2. Original and Annual Listing Fees. The Amex original listing fee
applicable to the listing of the New Funds is $5,000 for each Fund. In
addition, the annual listing fee applicable to the Funds under Section
141 of the Amex Company Guide will be based upon the year-end aggregate
number of outstanding iShares in all funds of the Trust listed on the
Exchange.
3. Stop and Stop Limit Orders. Amex Rule 154, Commentary .04(c)
provides that stop and stop limit orders to buy or sell a security
(other than an option, which is covered by Amex Rule 950(f) and
Commentary thereto) the price of which is derivatively priced based
upon another security or index of securities, may with the prior
approval of a Floor Official, be elected by a quotation, as set forth
in Commentary .04(c) (i-v). The Exchange has designated Index Fund
Shares, including iShares, as eligible for this treatment. See Release
No. 34-29063, note 9, (SR-Amex-90-31) regarding Exchange designation of
equity derivative securities as eligible for such treatment under Amex
Rule 154, Commentary .04(c).
4. Rule 190. Rule 190, Commentary .04 applies to Index Fund Shares
listed on the Exchange, including iShares. Commentary .04 states that
nothing in Rule 190(a) should be construed to restrict a specialist
registered in a security issued by an investment company from
purchasing and redeeming the listed security, or securities that can be
subdivided or converted into the listed security, from the issuer as
appropriate to facilitate the maintenance of a fair and orderly market.
5. Prospectus Delivery. The Exchange, in an Information Circular to
Exchange members and member organizations, will inform members and
member organizations, prior to commencement of trading, of the
prospectus or Product Description delivery requirements applicable to
iShares. The Applicants have filed with the Division of Investment
Management a separate request for an exemptive order granting relief
from certain prospectus delivery requirements under section 24(d) of
the 1940 Act. (Investment Company Act Release No. 25595, May 29, 2002).
Any product description used in reliance on a Section 24(d) exemptive
order will comply with all representations made therein and all
conditions thereto.
6. Trading Halts. In addition to other factors that may be
relevant, the Exchange may consider factors such as those set forth in
Rule 918C(b) in exercising its discretion to halt or suspend trading in
Index Fund Shares, including iShares. These factors would include, but
are not limited to, (1) the extent to which trading is not occurring in
securities underlying the index; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present.\22\ In addition, trading in iShares
will be halted if the circuit breaker parameters under Amex Rule 117
have been reached.
---------------------------------------------------------------------------
\22\ See Amex Rule 918C.
---------------------------------------------------------------------------
7. Suitability. Prior to commencement of trading, the Exchange will
issue an Information Circular informing members and member
organizations of the characteristics of the Funds and of applicable
Exchange rules, as well as of the requirements of Amex Rule 411 (Duty
to Know and Approve Customers).
8. Purchases and Redemptions in Creation Unit Size. In the
Information Circular referenced above, members and member organizations
will be informed that procedures for purchases and redemptions of
iShares in Creation Unit Size are described in the Fund prospectus and
Statement of Additional Information, and that iShares are not
individually redeemable but are redeemable only in Creation Unit Size
aggregations or multiples thereof.
9. Surveillance. Exchange surveillance procedures applicable to
trading in the proposed iShares are comparable to those applicable to
other Index Fund Shares currently trading on the Exchange. The Exchange
represents that its surveillance procedures are adequate to properly
monitor the trading of the New Funds. If the issuer or a broker-dealer
is responsible for maintaining (or has a role in maintaining), or
calculating the Underlying Index, it would be required to erect and
maintain a ``Fire Wall'' in a form satisfactory to the Exchange to
prevent the flow of information regarding the Underlying Index from the
index production personnel and index calculation personnel to the sales
and trading personnel. The Exchange will implement surveillance
procedures to monitor and prevent the misuse of material, non-public
information in connection with the indices.\23\
---------------------------------------------------------------------------
\23\ Telephone call among Mike Cavalier, Associate General
Counsel, Amex; Marc McKayle, Special Counsel, Division, Commission;
and Jennifer Lewis, Special Counsel, Division, Commission, on August
20, 2003.
---------------------------------------------------------------------------
10. Hours of Trading/Minimum Price Variation. The New Funds will
trade on the Amex until 4:15 p.m. (eastern time). The minimum price
variation for quoting will be $.01.
Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Exchange Act,\24\ in general, and furthers the
objectives of section 6(b)(5) of the Exchange Act,\25\ in particular,
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 regulating,
clearing, settling, processing information with respect to, and
facilitating transaction in securities, and, in general to protect
investors and the public interest.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
[[Page 52252]]
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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory agency consents, the Commission will:
A. by order approve the proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal is
consistent with the Exchange Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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
Amex. All submissions should refer to File No. SR-Amex-2003-75 and
should be submitted by September 23, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
---------------------------------------------------------------------------
\26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-22234 Filed 8-29-03; 8:45 am]
BILLING CODE 8010-01-P