72228 Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 iShares is a registered trademark of Barclays 

Global Investors, N.A.

4The Trust is registered under the Investment 

Company Act. On January 22, 2003, the Trust filed 

with the Commission a Registration Statement for 

the Fund on Form N–1A under the Securities Act 

of 1933, as amended, and under the Investment 

Company Act (File Nos. 333–92935 and 811–09729) 

(as amended, the ‘‘Registration Statement’’). On July 

28, 2004, the Trust filed a Form N–1A to update 

certain Fund information. 

On September 8, 2004, the Trust filed with the 

Commission a Second Amended and Restated 

Application to Amend Orders under Sections 6(c) 

and 17(b) of the Investment Company Act for the 

purpose of exempting the Fund from various 

provisions of the Investment Company Act and the 

rules thereunder (the ‘‘Application’’). See Barclays 

Global Fund Advisors, et al.; Notice of Application,

Investment Company Act Release No. 26597 

(September 14, 2004), 69 FR 56105 (September 17, 

2004) (File No. 812–12936). The Application 

requested that the Commission amend a prior order 

received by the Advisor, the Trust and the 

Distributor on August 15, 2001, as amended (the 

‘‘Prior Order’’) to permit the Trust to offer three new 

International ETFs, including the Fund, and to 

permit the Fund, along with certain other 

International ETFs, to invest in certain depositary 

receipts, as described below. See also In the Matter 

of iShares Trust, et al., Investment Company Act 

Release No. 25111 (August 15, 2001) (File No. 812–

12254); In the Matter of iShares, Inc., et al., 

Investment Company Act Release No. 25623 (June 

25, 2002); In the Matter of iShares Trust, et al., 

Investment Company Act Release No. 26006 (April 

15, 2003) (relating to Prior Order). 

On October 5, 2004, the Commission approved 

the Application. See Barclays Global Fund 

Advisors, et al., Investment Company Act Release 

No. 26626 (October 5, 2004) (‘‘Amended Order’’).

5See Securities Exchange Act Release No. 50505 

(October 8, 2004), 69 FR 61280 (October 15, 2004) 

(SR–NYSE–2004–55).

6Much of the information in this filing was taken 

from the iShares Trust Prospectus dated October 4, 

2004 (‘‘Prospectus’’), and Statement of Additional 

Information dated August 1, 2004 (as revised 

October 5, 2004) (‘‘SAI’’), as well as from the Web 

sites of the NYSE (http://www.nyse.com) and 

iShares (http://www.iShares.com). Fund 

information relating to NAV, returns, dividends, 

component stock holdings and the like is updated 

on a daily basis on these Web sites.

7See also infra note 12.

8See infra note 25 and accompanying text.

9FXI is a Hong Kong incorporated, joint venture 

company between FTSE, the global index company, 

and Xinhua Financial Network.

10Although FXI is not an affiliated person, or an 

affiliated person of an affiliated person of the 

Advisor, an employee of Barclays Global Investors, 

North Asia Limited (‘‘BGIL’’), an affiliate of the 

Advisor, currently serves as one of the 18 members 

of the FTSE/Xinhua Index Committee. Telephone 

conversation between Marija Willen, Associate 

General Counsel, Amex, and Natasha Cowen, 

Attorney, Division, Commission, on November 26, 

2004. The FTSE/Xinhua Index Committee provides 

practitioner input into the construction of the 

FTSE/Xinhua indices and independent oversight to 

ensure that relevant index construction rules are 

being followed. The role of the Index Committee is 

to review the appropriateness of existing 

Underlying Index rules, to provide oversight to 

ensure that Underlying Index rules are properly 

followed and to recommend changes to the rules in 

response to changes in the underlying market that 

the Underlying Index seeks to represent. Input from 

persons or experts (i.e., practitioners) who have 

applicable industry knowledge of the underlying 

market the Underlying Index seeks to represent 

helps ensure that the published Underlying Index

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50800; File No. SR–Amex–

2004–85] 

Self-Regulatory Organizations; Notice 

of Filing and Order Granting 

Accelerated Approval of Proposed 

Rule Change by the American Stock 

Exchange LLC to Trade the iShares

FTSE/Xinhua China 25 Index Fund 

December 6, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on October 

20, 2004 the American Stock Exchange 

LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I and II 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 and is 

approving the proposal on an 

accelerated basis.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Amex proposes to trade, pursuant 

to unlisted trading privileges (‘‘UTP’’), 

shares of the iSharesFTSE/Xinhua 

China 25 Index Fund, which are Index 

Fund Shares under Amex Rule 1000A. 

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 III 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 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Amex Rules 1000A et seq. provide 

standards for listing and trading Index 

Fund Shares, which are securities 

issued by an open-end management 

investment company (open-end mutual 

fund) for exchange trading. These 

securities are generally registered under 

the Investment Company Act of 1940, as 

amended (‘‘Investment Company Act’’), 

as well as the Act. Index Fund Shares 

are defined in Amex Rule 1000A as 

securities based on a portfolio of stocks 

or fixed income securities that seeks to 

provide investment results that 

correspond generally to the price and 

yield of a specified foreign or domestic 

stock index or fixed income securities 

index. The Exchange proposes to trade 

under Amex Rules 1000A et seq., 

pursuant to UTP, shares of the iShares

FTSE/Xinhua China 25 Index Fund 

(‘‘Fund’’),3 a series of the iShares Trust 

(‘‘Trust’’).4

The Fund is listed and traded on the 

New York Stock Exchange, Inc. 

(‘‘NYSE’’)5 and traded in the over-thecounter market. The information below 

is intended to provide a description of 

how the Fund was created, operates and 

is traded.6

As set forth in detail below, the Fund 

will hold certain securities and other 

instruments selected to correspond 

generally to the performance of the 

FTSE/Xinhua China 25 Index 

(‘‘Underlying Index’’). The Fund was 

created to qualify as a ‘‘regulated 

investment company’’ (‘‘RIC’’) under the 

Internal Revenue Code (‘‘Code’’).7

Barclays Global Fund Advisors 

(‘‘Advisor’’ or ‘‘BGFA’’) is the 

investment advisor to the Fund. The 

Advisor is registered under the 

Investment Advisers Act of 1940. The 

Advisor is the 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. 

(‘‘Distributor’’), a Pennsylvania 

corporation and broker-dealer registered 

under the Act, is the principal 

underwriter and distributor of Creation 

Unit Aggregations of iShares.8 The 

Distributor is not affiliated with the 

Exchange or the Advisor. The Trust has 

appointed Investors Bank & Trust Co. to 

act as administrator (‘‘Administrator’’), 

custodian, fund accountant, transfer 

agent, and dividend disbursing agent for 

the Fund. The performance of the 

Administrator’s duties and obligations 

will be conducted within the provisions 

of the Investment Company Act and the 

rules thereunder. There is no affiliation 

between the Administrator and the 

Trust, the Advisor, or the Distributor. 

FTSE/Xinhua Index Ltd. (‘‘FXI’’),9 the 

sponsor and compiler of the FTSE/

Xinhua China 25 Index, is not affiliated 

with the Trust, the Administrator, the 

Distributor, or with the Advisor or its 

affiliates.10 The Fund is not sponsored,

Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 72229

rules and the implementation of such rules 

adequately reflect current developments in the 

underlying market. Any such input would be 

provided in accordance with the published 

Underlying Index rules and methodology. The 

index compilation functions of FXI and the FTSE/

Xinhua Index Committee are, and will remain, 

completely separate and independent of the 

portfolio management functions of BGFA. FXI and 

the FTSE/Xinhua Index Committee have adopted 

policies that prohibit the dissemination and use of 

confidential and proprietary information about the 

Underlying Index and have instituted procedures 

designed to prevent the improper dissemination 

and use of such information. The BGIL employee 

on the FTSE/Xinhua Index Committee is not and 

will not be involved in the operations of the 

Advisor or the Fund, and is and will not be 

involved in any capacity with the Fund’s Board of 

Trustees. BGI and BGIL have adopted policies that 

limit the use of confidential and proprietary 

information about portfolio management decisions 

to those persons whose duties require and permit 

them to have access to such information and have 

instituted procedures designed to prevent the 

improper dissemination and use of such 

information. BGIL and BGFA are separate legal 

entities and do not share employees, office space, 

trading floors or portfolio management systems.

11The information provided herein is based on 

information included in the Application and the 

Prior Order. While the Advisor manages the Fund, 

the Fund’s Board of Directors has overall 

responsibility for the Fund’s operations. The 

composition of the Board is, and would be, in 

compliance with the requirements of Section 10 of 

the Investment Company Act. The Fund is subject 

to and must comply with Section 303A.06 of the 

NYSE Listed Company Manual, which requires that 

the Fund have an audit committee that complies 

with Rule 10A–3 of the Act. 17 CFR 240.10A–3. 

Section 803(a) of the Amex Company guide imposes 

the same requirement on Index Fund Shares listed 

and traded on the Amex pursuant to Amex Rule 

1000A et seq. Telephone conversation between 

Marija Willen, Associate General Counsel, Amex, 

and Natasha Cowen, Attorney, Division, 

Commission, on November 26, 2004.

12 In order for the Fund to qualify for tax 

treatment as a RIC, it must meet several 

requirements under the Code. Among these is a 

requirement that, at the close of each quarter of the 

Fund’s taxable year, (1) at least 50% of the market 

value of the Fund’s total assets must be represented 

by cash items, U.S. government securities, 

securities of other RICs and other securities, with 

such other securities limited for the purpose of this 

calculation with respect to any one issuer to an 

amount not greater than 5% of the value of the 

Fund’s assets and not greater than 10% of the 

outstanding voting securities of such issuer; and (2) 

not more than 25% of the value of its total assets 

may be invested in securities of any one issuer, or 

two or more issuers that are controlled by the Fund 

(within the meaning of Section 851(b)(4)(B) of the 

Code) and that are engaged in the same or similar 

trades or business (other than U.S. government 

securities of other RICs). 

‘‘Other securities’’ of an issuer are considered 

qualifying assets only if they meet the following 

conditions: 

The entire amount of the securities of the issuer 

owned by the company is not greater in value than 

5% of the value of the total assets of the company; 

and the entire amount of the securities of such 

issuer owned by the company does not represent 

more than 10% of the outstanding voting securities 

of such issuer. 

Under the second diversification requirement, the 

‘‘25% diversification limitation,’’ a company may 

not invest more than 25% of the value of its assets 

in any one issuer or two issuers or more that the 

taxpayer controls. 

Compliance with the above referenced RIC asset 

diversification requirements are monitored by the 

Adviser and any necessary adjustments to portfolio 

issuer weights will be made on a quarterly basis or 

as necessary to ensure compliance with RIC 

requirements. When an iShares fund’s underlying 

index itself is not RIC compliant, the Adviser 

generally employs a representative sampling 

indexing strategy (as described in the Prospectus) 

in order to achieve the fund’s investment objective. 

The Prospectus also gives the Fund additional 

flexibility to comply with the requirements of the 

Code and other regulatory requirements and to 

manage future corporate actions and index changes 

in smaller markets by investing a percentage of 

Fund assets in securities that are not included in 

the Underlying Index or in American Depositary 

Receipts (‘‘ADRs’’) and Global Depositary Receipts 

(‘‘GDRs’’) representing such securities.

13For the purposes of this order, ‘‘Depositary 

Receipts’’ are ADRs and GDRs.

14 In addition, the Exchange understands that all 

Depositary Receipts must be sponsored (with the 

exception of certain pre-1984 ADRs that are listed 

but unsponsored because they were grandfathered). 

Telephone conversation between Marija Willen, 

Associate General Counsel, Amex, and Ira 

Brandriss, Assistant Director, Lisa Jones, Special 

Counsel, and Natasha Cowen, Attorney, Division of 

Market Regulation (‘‘Division’’), Commission, on 

November 10, 2004.

15See In the Matter of Master Investment 

Portfolio, et al., Investment Company Act Release 

No. 25158 (September 18, 2001).

16The Fund, as well as any existing iShares fund, 

is permitted to invest in shares of another iShares 

fund to the extent that such investment is 

consistent with the Fund’s investment objective, 

registration statement, and any applicable 

investment restrictions.

offered, or sold by FXI. FXI is not 

affiliated with a broker or dealer.

(a) Operation of the Fund 11

The investment objective of the Fund 

is to provide investment results that 

correspond generally to the price and 

yield performance of the Underlying 

Index. In seeking to achieve its 

investment objective, the Fund utilizes 

‘‘passive’’ indexing investment 

strategies. The Fund may fully replicate 

the 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 of its Underlying 

Index (‘‘Component Securities’’), but it 

may not hold all of the Component 

Securities. The Application states that 

the representative sampling techniques 

to be used by the Advisor to manage the 

Fund do not differ from the 

representative sampling techniques it 

uses to manage the funds that were the 

subject of the Prior Order. 

From time to time, adjustments may 

be made in the portfolio of the Fund in 

accordance with changes in the 

composition of the Underlying Index or 

to maintain compliance with 

requirements applicable to a RIC under 

the Code.12 For example, if at the end 

of a calendar quarter a Fund would not 

comply with the RIC diversification 

tests, the Advisor would make 

adjustments to the portfolio to ensure 

continued RIC status.

The Underlying Index is a theoretical 

financial calculation while the Fund is 

an actual investment portfolio. The 

performance of the Fund and the 

Underlying Index will vary somewhat 

due to transaction costs, market impact, 

corporate actions (such as mergers and 

spin-offs) and timing variances. It is 

expected that, over time, the correlation 

between the Fund’s performance and 

that of the Underlying Index, before fees 

and expenses, will be 95% or better. A 

figure of 100% would indicate perfect 

correlation. Any correlation of less than 

100% is called ‘‘tracking error.’’ The 

Fund’s investment objectives, policies, 

and investment strategies are fully 

disclosed in the Prospectus and SAI. 

The Fund will not concentrate its 

investments (i.e., hold 25% or more of 

its assets) in a particular industry or 

group of industries, except that the 

Fund will concentrate its investments to 

approximately the same extent that the 

Underlying Index is so concentrated. 

For purposes of this limitation, 

securities of the U.S. Government 

(including its agencies and 

instrumentalities), repurchase 

agreements collateralized by U.S. 

Government securities, and securities of 

State or municipal governments and 

their political subdivisions, are not 

considered to be issued by members of 

any industry. 

The Fund will at all times invest at 

least 80% of its assets in Component 

Securities and in depositary receipts 

representing Component Securities 

(‘‘Depositary Receipts’’)13 and at least 

half of the remaining 20% of its assets 

in Component Securities, Depositary 

Receipts, or stocks included in the 

Chinese market, but not included in the 

Underlying Index. To the extent the 

Fund invests in ADRs, they will be 

listed on a national securities exchange 

or Nasdaq. Other Depositary Receipts 

will be listed on a foreign exchange. The 

Fund will not invest in any unlisted 

Depositary Receipts or any listed 

Depositary Receipts that the Advisor 

deems to be illiquid or for which pricing 

information is not readily available.14

The Fund may also invest up to 10% of 

its assets in certain futures, options, and 

swap contracts and cash and cash 

equivalents, including money market 

funds advised by the Advisor 15 and 

other exchange traded funds (including 

other iShares funds).16 For example, the 

Fund may invest in securities not 

included in the Underlying Index to 

reflect prospective changes in the 

72230 Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 

17See infra note 23.

18Telephone conversation between Marija 

Willen, Associate General Counsel, Amex, and Ira 

Brandriss, Assistant Director, Lisa Jones, Special 

Counsel, and Natasha Cowen, Attorney, Division, 

Commission, on November 10, 2004.

19 Information on Underlying Index constituents 

was attached to the proposed rule change as Exhibit 

A, available at the places specified in Item III 

below.

20The information below updates information 

provided by Amex in the proposed rule change as 

filed, pursuant to a telephone conversation between 

Marija Willen, Associate General Counsel, Amex, 

and Natasha Cowen, Attorney, Division, 

Commission, on November 16, 2004.

21Float-adjusted market capitalization includes 

shares available in the market for public 

investment, and reflects free-float adjustments to 

the Underlying Index in accordance with FTSE’s 

free float rules. Additional information regarding 

FTSE’s free float adjustment methodology is 

available on http://www.ftse.com.

22See also supra note 10.

23 ‘‘H’’ Shares—H shares are shares of companies 

incorporated in China and listed and traded on the 

Hong Kong Stock Exchange. They are quoted and 

traded in Hong Kong and U.S. dollars. Like other 

securities trading on the Hong Kong Stock 

Exchange, there are no restrictions on who can 

trade H shares. 

‘‘Red Chip’’ Shares—Red Chip shares are shares 

of companies incorporated in Hong Kong and trade 

on the Hong Kong Stock Exchange. They are quoted 

in Hong Kong dollars. Red Chip companies may be 

substantially owned directly or indirectly by the 

Chinese Government and have the majority of their 

business interests in mainland China. 

H shares and Red Chip shares trade on the Hong 

Kong Stock Exchange, typically on a T + 2 basis, 

through a central book-entry system that effectively 

guarantees settlement of exchange trades by brokerdealers. 

‘‘B’’ Shares—B shares are shares of companies 

incorporated in China and trade on either the 

Shanghai or Shenzhen stock exchanges. They are 

quoted in U.S. dollars on the Shanghai Stock 

Exchange and Hong Kong dollars on the Shenzhen 

Stock Exchange. They can be traded by nonresidents of the People’s Republic of China and also 

residents of the People’s Republic of China with 

appropriate foreign currency dealing accounts. 

There is no true ‘‘delivery versus payment’’

settlement for B shares. B shares settle in the local 

markets and cash settles subsequently in foreign 

depositaries or local banks.

24The Exchange understands that there are no 

foreign ownership limits with the current 

constituents to the FTSE/Xinhua China 25 Index 

and that, as such, the percentage float will be used.

Underlying Index (such as future 

corporate actions and index 

reconstitutions, additions, and 

deletions).

The Fund intends to hold all of the 

securities in the Underlying Index that 

are listed on the Hong Kong Stock 

Exchange. The Fund does not intend to 

hold any B-shares which are listed on 

Chinese markets and included in the 

Underlying Index.17 The Exchange 

understands that the Fund does not 

currently intend to invest in Depositary 

Receipts but reserves the flexibility to 

do so.18 As with the existing iShares 

funds, BGFA represents that the 

expected tracking error of the Fund 

relative to the performance of its 

Underlying Index will be no more than 

5%. 

The Exchange believes that these 

requirements and policies prevent the 

Fund from being excessively weighted 

in any single security or small group of 

securities and significantly reduce 

concerns that trading in the Fund could 

become a surrogate for trading in 

unregistered securities.

(b) Description of the Fund and the 

Underlying Index (FTSE/Xinhua China 

25 Index) 

FXI is a Hong Kong incorporated, 

joint venture company between FTSE, 

the global index company, and Xinhua 

Financial Network (‘‘XFN’’). The 

company was created to facilitate the 

development of real-time indices for the 

Chinese market that can be used as 

performance benchmarks and as a basis 

for derivative trading and index tracking 

funds. FTSE is an independent 

company whose sole business is the 

creation and management of indices and 

associated data services. FTSE 

originated as a joint venture between the 

Financial Times and the London Stock 

Exchange. FTSE calculates over 60,000 

indices daily, including more than 600 

real-time indices. XFN is an 

independent financial information 

provider that focuses on China’s 

markets. XFN is based in Hong Kong 

and Beijing. 

Index Description 

The Underlying Index is designed to 

represent the performance of the largest 

companies in the mainland China 

equity market that are available to 

international investors. The Underlying 

Index includes 25 of the largest and 

most heavily traded Chinese companies. 

Component Securities are weighted 

based on the free-float adjusted total 

market value of their shares, so that 

securities with higher total market 

values generally have a higher 

representation in the Underlying Index. 

Component Securities are screened for 

liquidity and weightings are capped to 

avoid over-concentration in any one 

stock. The inception date of the 

Underlying Index was March 2001. 

As of October 29, 2004, the 

Underlying Index’s top three holdings 

were BOC Hong Kong (Holdings), 

PetroChina, and China Mobile and the 

Underlying Index’s top three industries 

were oil and gas, telecommunications 

services, and banks.19

As of October 29, 2004,20 the FTSE/

Xinhua China 25 Index components had 

a total market capitalization of 

approximately $302 billion and a floatadjusted market capitalization of 

approximately $47 billion.21 The 

average total market capitalization was 

approximately $12.1 billion and the 

average float-adjusted market 

capitalization was approximately $1.9 

billion. The ten largest constituents 

represented approximately 59.8% of the 

Underlying Index weight. The five 

highest weighted stocks, which 

represented 39.7% of the Underlying 

Index weight, had an average daily 

trading volume in excess of 31.4 million 

shares during the past two months. All 

of the Component Securities traded at 

least 250,000 shares in each of the 

previous six months.

Index Methodology 

Component Selection Criteria. The 

FTSE/Xinhua China 25 Index is rulebased and is monitored by a governing 

committee. The FTSE/Xinhua China 25 

Index Committee (‘‘Index Committee’’) 

is responsible for conducting the 

quarterly review of constituents of the 

Underlying Index and for making 

changes to the Underlying Index in 

accordance with the Underlying Index 

procedures.22

Eligibility. Each Component Security 

will be a current constituent of the FTSE 

All-World Index. All classes of equity 

securities in issue are eligible for 

inclusion in the Underlying Index 

subject to conforming with free-float 

and liquidity restrictions. H shares, Red 

Chip shares and B shares are eligible for 

inclusion in the Underlying Index.23 As 

of September 24, 2004, only one 

Component Security was B shares 

(approximately 1% of the Underlying 

Index). FXI expects to eventually 

eliminate B shares from the Underlying 

Index.

Float-Adjusted Market Capitalization. 

When calculating a company’s index 

weights, individual constituents’ shares 

held by governments, corporations, 

strategic partners, or other control 

groups are excluded from the company’s 

shares outstanding. Shares owned by 

other companies are also excluded 

regardless of whether such companies 

are Underlying Index constituents. 

Where a foreign investment limit 

exists at the sector or company level, the 

constituent’s weight will reflect either 

the foreign investment limit or the 

percentage float, whichever is the more 

restrictive.24

Stocks are screened to ensure there is 

sufficient liquidity to be traded. Factors 

in determining liquidity include the 

availability of current and reliable price 

information and the level of trading 

volume relative to shares outstanding. 

Value traded and float turnover are also 

Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 72231

25Each Creation Unit Aggregation consists of 

50,000 or more iShares.

26Telephone conversation between Marija 

Willen, Associate General Counsel, Amex, and Ira 

Brandriss, Assistant Director, Lisa Jones, Special 

Counsel and Natasha Cowen, Attorney, Division, 

Commission, on November 10, 2004.

analyzed on a monthly basis to ensure 

ample liquidity. Fundamental analysis 

is not part of the selection criteria for 

inclusion or exclusion of stocks from 

the Underlying Index. The financial and 

operating conditions of a company are 

not analyzed. 

Index Maintenance and Issue 

Changes. The Index Committee is 

responsible for undertaking the review 

of the Underlying Index and for 

approving changes of constituents in 

accordance with the Underlying Index 

rules and procedures. The FTSE Global 

Classification Committee is responsible 

for the industry classification of 

constituents of the Underlying Index 

within the FTSE Global Classification 

System. The FTSE Global Classification 

Committee may approve changes to the 

FTSE Global Classification System and 

Management Rules. FXI appoints the 

Chairman and Deputy Chairman of the 

Index Committee. The Chairman chairs 

meetings of the Committee and 

represents the Committee in outside 

meetings. Adjustments to reflect a major 

change in the amount or structure of a 

constituent company’s issued capital 

will be made before the start of the 

Underlying Index calculation on the day 

on which the change takes effect. 

Adjustments to reflect less significant 

changes will be implemented before the 

start of the Underlying Index calculation 

on the day following the announcement 

of the change. All adjustments are made 

before the start of the Underlying Index 

calculations on the day concerned, 

unless market conditions prevent this. 

A company will be inserted into the 

Underlying Index at the periodic review 

if it rises to 15th position or above when 

the eligible companies are ranked by 

full market value before the application 

of any investibility weightings. A 

company in the Underlying Index will 

be deleted at the periodic review if it 

falls to 36th position or below when the 

eligible companies are ranked by full 

market value before the application of 

any investibility weightings. Any 

deletion to the Underlying Index will 

simultaneously entail an addition to the 

Underlying Index in order to maintain 

25 Underlying Index constituents at all 

times. 

Revisions to the Float Adjustments. 

The Underlying Index is reviewed 

quarterly for changes in free float. These 

reviews will coincide with the quarterly 

reviews undertaken of the Underlying 

Index as a whole. Implementation of 

any changes will be after the close of the 

Underlying Index calculation on the 

third Friday in January, April, July, and 

October. 

Quarterly Index Rebalancing. The 

quarterly review of the Underlying 

Index constituents takes place in 

January, April, July, and October. Any 

constituent changes will be 

implemented on the next trading day 

following the third Friday of the same 

month of the review meeting. Details of 

the outcome of the review and the dates 

on which any changes are to be 

implemented will be published as soon 

as possible after the Index Committee 

meeting has concluded. 

Index Availability. The Underlying 

Index is calculated in real-time and 

published every minute during the 

Underlying Index period (09:15–16:00 

Local Hong Kong Time) or (17:15–24:00 

U.S. Pacific Daylight Time). It is 

available real-time directly from FTSE 

and from the following vendors: 

Reuters, Bloomberg, Telekurs, FTID and 

LSE/Proquote. The end of day 

Underlying Index value is distributed at 

16:15 (Local Hong Kong Time). Daily 

values will also be made available to the 

Financial Times Asia edition and other 

major newspapers and will be available 

at the FTSE Index Services Web site: 

http://www.ftse.com. The Underlying 

Index uses Hong Kong Stock Exchange 

trade prices and Reuters real-time spot 

currency rates. A total return index 

value that takes into account reinvested 

dividends is published daily at the end 

of day. The Underlying Index is not 

calculated on days that are holidays in 

Hong Kong. 

The daily closing Underlying Index 

value, historical values, constituents’

weighting, constituents’ market 

capitalization and daily percentage 

changes are publicly available from 

http://www.ftsexinhua.com. All 

corporate actions and rules relating to 

the management of the Underlying 

Index are also available from the Web 

site. 

Exchange Rates and Pricing. The 

Underlying Index uses Reuters real-time 

foreign exchange spot rates and local 

stock exchange real-time security prices. 

The Underlying Index is calculated in 

Hong Kong Dollars. Non-Hong Kong 

Dollar denominated constituent prices 

are converted to Hong Kong Dollars to 

calculate the Underlying Index. The 

Reuters foreign exchange rates and Hong 

Kong Stock Exchange prices received at 

the closing time of the Underlying Index 

are used to calculate the final 

Underlying Index levels. 

(c) Issuance of iShares in Creation Unit 

Aggregations 

The Application states that the 

issuance and redemption of Creation 

Unit Aggregations will operate in a 

manner identical to that of the funds 

that are the subject of the Prior Order. 

(i) In General. Shares of the 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 Fund will issue and 

redeem iShares only in Creation Unit 

Aggregations.25

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 NAV per share of the Fund is 

determined as of the close of the regular 

trading session on the NYSE on each 

day that the NYSE is open. The Trust 

sells Creation Unit Aggregations of the 

Fund only on business days at the next 

determined NAV of the Fund. Creation 

Unit Aggregations generally will be 

issued by the Fund in exchange for the 

in-kind deposit of equity securities 

designated by the Advisor to correspond 

generally to the price and yield 

performance of the Fund’s Underlying 

Index (‘‘Deposit Securities’’) and a 

specified cash payment. Creation Unit 

Aggregations generally will be redeemed 

by the Fund in exchange for portfolio 

securities of the Fund (‘‘Fund 

Securities’’) and a specified cash 

payment. 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. 

All orders to purchase iShares in 

Creation Unit Aggregations must be 

placed through an Authorized 

Participant. An Authorized Participant 

must be either a ‘‘Participating Party,’’

i.e., a broker-dealer or other participant 

in the clearing process through the 

National Securities Clearing Corporation 

(‘‘NSCC’’) Continuous Net Settlement 

System, a clearing agency that is 

registered with the SEC, or a Depository 

Trust Company (‘‘DTC’’) participant 

(‘‘DTC Participant’’), and in each case, 

must enter into a Participant Agreement. 

The Exchange understands that the 

Fund is currently imposing transaction 

fees in connection with creation and 

redemption transactions.26

(ii) In-Kind Deposit of Portfolio 

Securities. Payment for Creation Unit 

Aggregations will be made by the 

purchasers generally by an in-kind 

deposit with the Fund of the Deposit 

Securities together with an amount of 

cash (‘‘Balancing Amount’’) specified by 

72232 Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 

27Where the NAV (per Creation Unit 

Aggregation) of the Fund exceeds the Deposit 

Amount, the purchaser pays the corresponding 

Balancing Amount to the Fund. Where, by contrast, 

the Deposit Amount exceeds the NAV (per Creation 

Unit Aggregation) of the Fund, the Balancing 

Amount is paid by the Fund to the purchaser. 

Telephone conversation between Marija Willen, 

Associate General Counsel, Amex, and Natasha 

Cowen, Attorney, Division, Commission, on 

November 23, 2004.

28Telephone conversation between Marija 

Willen, Associate General Counsel, Amex, and 

Natasha Cowen, Attorney, Division, Commission, 

on November 16, 2004.

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 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.27 The deposit of the requisite 

Deposit Securities and the Balancing 

Amount are collectively referred to 

herein as a ‘‘Fund Deposit.’’ The 

Advisor will make available to NSCC 

participants 28 through the NSCC on 

each business day, prior to the opening 

of trading on the NYSE (currently 9:30 

a.m. eastern standard time), the list of 

the names and the required number of 

shares of each Deposit Security 

included in the current Fund Deposit 

(based on information at the end of the 

previous business day) for the Fund. 

The Fund Deposit will be applicable to 

the Fund (subject to any adjustments to 

the Balancing Amount, as described 

below) in order to effect purchases of 

Creation Unit Aggregations of the Fund 

until such time as the next-announced 

Fund Deposit composition is made 

available.

The identity and number of shares of 

the Deposit Securities required for the 

Fund Deposit for the 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 addition, the 

Trust reserves the right 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 that may 

not be available in sufficient quantity 

for delivery or that may not otherwise 

be eligible for transfer. The Trust also 

reserves the right to permit or require a 

‘‘cash in lieu’’ amount where the 

delivery of the Deposit Security by the 

Authorized Participant would be 

restricted under the securities laws or 

where the delivery of the Deposit 

Security to the Authorized Participant 

would result in the disposition of the 

Deposit Security by the Authorized 

Participant becoming restricted under 

the securities laws, or in certain other 

situations. The adjustments described 

above will reflect changes known to the 

Advisor on the date of announcement to 

be in effect by the time of delivery of the 

Fund Deposit, in the composition of the 

Underlying Index or resulting from 

certain corporate actions. 

(d) Availability of Information 

Regarding iShares and the Underlying 

Index 

On each business day the list of 

names and amount of each security 

constituting the current Deposit 

Securities of the Fund Deposit and the 

Balancing Amount effective as of the 

previous business day, per outstanding 

share of the Fund, 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 in U.S. dollars, on a per 

iShare basis (‘‘Intraday Optimized 

Portfolio Value’’ or ‘‘IOPV’’) is currently 

calculated by an independent third 

party (‘‘Value Calculator’’), such as 

Bloomberg L.P., every 15 seconds 

during the NYSE’s regular trading hours 

and disseminated every 15 seconds on 

the Consolidated Tape. 

The IOPV reflects the current value of 

the Deposit Securities and the Balancing 

Amount. The IOPV also reflects changes 

in currency exchange rates between the 

U.S. dollar and the applicable home 

foreign currency.

Since the Fund will utilize a 

representative sampling strategy, the 

IOPV may not reflect the value of all 

securities included in the Underlying 

Index. In addition, the IOPV does not 

necessarily reflect the precise 

composition of the current portfolio of 

securities held by the Fund at a 

particular point in time. Therefore, the 

IOPV on a per Fund share basis 

disseminated during the NYSE’s trading 

hours should not be viewed as a realtime update of the NAV of the Fund, 

which is calculated only once a day. 

While the IOPV disseminated by the 

NYSE at 9:30 a.m. eastern standard time 

is expected to be generally very close to 

the most recently calculated Fund NAV 

on a per Fund share basis, it is possible 

that the value of the portfolio of 

securities held by the Fund may diverge 

from the Deposit Securities values 

during any trading day. In such case, the 

IOPV will not precisely reflect the value 

of the Fund portfolio. 

However, during the trading day, the 

IOPV can be expected to closely 

approximate the value per Fund share of 

the portfolio of securities for the Fund 

except under unusual circumstances 

(e.g., in the case of extensive 

rebalancing of multiple securities in a 

Fund at the same time by the Advisor). 

The Exchange believes that 

dissemination of the IOPV based on the 

Deposit Securities provides additional 

information regarding the Fund that is 

not otherwise available to the public 

and is useful to professionals and 

investors in connection with Fund 

shares trading on the Exchange or the 

creation or redemption of Fund shares. 

Since the trading hours of the Hong 

Kong Stock Exchange do not overlap 

with regular trading hours in the U.S., 

it is expected that the Value Calculator, 

when calculating IOPV, will utilize 

closing prices (in applicable foreign 

currency prices) in the principal foreign 

market for the securities in the Fund 

portfolio (i.e., the Hong Kong Stock 

Exchange), and convert the prices to 

U.S. dollars. 

In addition, FTSE will be 

disseminating a value for the 

Underlying Index once each trading 

day, based on closing prices on the 

Hong Kong Stock Exchange. The NAV 

for the Fund will be calculated and 

disseminated daily. The Fund NAV will 

be calculated by Investors Bank and 

Trust (‘‘IBT’’). IBT will also disseminate 

the information to BGI, SEI, and others. 

The Fund NAV will be published in a 

number of places, including http://

www.iShares.com and on the 

Consolidated Tape. 

The Underlying Index currently uses 

the Reuters foreign exchange rate at the 

close of the index (4 p.m. Hong Kong 

Time) to compute final Underlying 

Index values. The Fund uses Reuters/

WM foreign exchange rates at 4 p.m. 

London Time. There will also be 

disseminated a variety of data with 

respect to the Fund on a daily basis by 

means of CTA and CQ High Speed 

Lines, which will be made available 

prior to the opening of trading on the 

NYSE. 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 NYSE. 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 the Fund: (a) the 

prior business day’s NAV and the midpoint of the bid-ask price at the time of 

calculation of such NAV (‘‘Bid/Ask 

Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 72233

29The Bid-Ask Price of the Fund is determined 

using the highest bid and lowest offer on the NYSE 

as of the time of calculation of the Fund’s NAV.

30See Securities Exchange Act Release No. 29063 

(April 10, 1991), 56 FR 15652 (April 17, 1991) (SR–

Amex–90–31) (regarding Exchange designation of 

equity derivative securities as eligible for such 

treatment under Amex Rule 154, Commentary 

.04(c)).

31See In the Matter of iShares, Inc., et al., 

Investment Company Act Release No. 25623 (June 

25, 2002).

Price’’),29 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.

The closing prices of the Fund’s 

Deposit Securities are readily available 

from, as applicable, the relevant 

exchanges, automated quotation 

systems, published or other public 

sources in the relevant country, or online information services such as 

Bloomberg or Reuters. The exchange 

rate information required to convert 

such information into U.S. dollars is 

also readily available in newspapers and 

other publications and from a variety of 

on-line services. 

(e) Redemption of iShares 

Creation Unit Aggregations of the 

Fund will be redeemable at the NAV 

next determined after receipt of a 

request for redemption. Creation Unit 

Aggregations of the Fund generally will 

be redeemed in-kind, together with a 

balancing cash payment (although, as 

described below, Creation Unit 

Aggregations may sometimes be 

redeemed for cash). The value of the 

Fund’s redemption payments on a 

Creation Unit Aggregation basis will 

equal the NAV per the appropriate 

number of iShares of the 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 Fund. Redemption orders 

must be placed by or through an 

Authorized Participant. 

Creation Unit Aggregations of the 

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 (‘‘Creation 

List’’) and which a redeemer will 

receive from the Fund (‘‘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 Fund 

Deposit. 

In addition, just as the Balancing 

Amount is delivered by the purchaser of 

Creation Unit Aggregations to the 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 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. 

(f) Dividends and Distributions 

Dividends from net investment 

income will be declared and paid to 

beneficial owners of record at least 

annually by the Fund. Distributions of 

realized securities gains, if any, 

generally will be declared and paid once 

a year, but the Fund may make 

distributions on a more frequent basis to 

comply with the distribution 

requirements of the Code and consistent 

with the Investment Company Act. 

Dividends and other distributions on 

iShares of the Fund will be distributed 

on a pro rata basis to beneficial owners 

of such iShares. Dividend payments will 

be made through the DTC and the DTC 

Participants to beneficial owners then of 

record with amounts received from the 

Fund.

The Trust currently does not intend to 

make the DTC book-entry Dividend 

Reinvestment Service (‘‘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. 

Beneficial owners of iShares will 

receive all of the statements, notices, 

and reports required under the 

Investment Company Act and other 

applicable laws. They will receive, for 

example, annual and semi-annual 

reports, written statements 

accompanying dividend payments, 

proxy statements, annual notifications 

detailing the tax status of distributions, 

IRS Form 1099–DIVs, etc. Because the 

Trust’s records reflect ownership of 

iShares by DTC only, the Trust will 

make available applicable statements, 

notices, and reports to the DTC 

Participants who, in turn, will be 

responsible for distributing them to the 

beneficial owners. 

(g) Other Issues 

(1) 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 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.30

(2) Rule 190. Amex Rule 190, 

Commentary .04 applies to Index Fund 

Shares listed on the Exchange, 

including iShares. Commentary .04 

states that nothing in Amex 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. 

(3) Prospectus Delivery. The 

Commission has granted the Trust an 

exemption from certain prospectus 

delivery requirements under Section 

24(d) of the Investment Company Act.31

Any product description used in 

72234 Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 

32See Amex Rule 918C.

33 15 U.S.C. 78f(b).

34 15 U.S.C. 78f(b)(5).

reliance on a Section 24(d) exemptive 

order will comply with all 

representations made therein and all 

conditions thereto. 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 the Fund.

(4) Information Circular. The 

Exchange will distribute an information 

circular to its members in connection 

with the trading of the Fund 

(‘‘Information Circular’’). The 

Information Circular will discuss the 

special characteristics and risks of 

trading this type of security. 

Specifically, the Information Circular 

will discuss, among other things, what 

the Fund is, how Fund shares are 

created and redeemed, the requirement 

that members and member firms deliver 

a prospectus or product description to 

investors purchasing shares of the Fund 

before, or concurrently with, the 

confirmation of a transaction, applicable 

Exchange rules, dissemination 

information, trading information and 

the applicability of suitability rules 

(including Amex Rule 411). The 

Information Circular will also discuss 

exemptive, no-action and interpretive 

relief granted by the Commission from 

Section 11(d)(1) and certain rules under 

the Act, including Rule 10a–1, Rule 

10b–10, Rule 14e–5, Rule 10b–17, Rule 

11d1–2, Rules 15c1–5 and 15c1–6, and 

Rules 101 and 102 of Regulation M 

under the Act. 

(5) Trading Halts. In addition to other 

factors that may be relevant, the 

Exchange may consider factors such as 

those set forth in Amex 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 stocks underlying the index; or (2) 

whether other unusual conditions or 

circumstances detrimental to the 

maintenance of a fair and orderly 

market are present.32 In addition, 

trading in iShares will be halted if the 

circuit breaker parameters under Amex 

Rule 117 have been reached.

(6) Suitability. Prior to 

commencement of trading, the Exchange 

will issue an Information Circular 

informing members and member 

organizations of the characteristics of 

the iShares and of applicable Exchange 

rules, as well as of the requirements of 

Amex Rule 411 (Duty to Know and 

Approve Customers). 

(7) Purchases and Redemptions in 

Creation Unit Aggregations. In the 

Information Circular members and 

member organizations will be informed 

that procedures for purchases and 

redemptions of iShares in Creation Unit 

Aggregations are described in the 

Prospectus and SAI, and that iShares are 

not individually redeemable but are 

redeemable only in Creation Unit 

Aggregations or multiples thereof. 

(8) Surveillance. The Exchange 

represents that its surveillance 

procedures are adequate to properly 

monitor the trading of the iShares. 

Specifically, the Amex will rely on its 

existing surveillance procedures 

governing Index Fund Shares, which 

have been deemed adequate under the 

Act. The Exchange is able to obtain 

information regarding trading in both 

the Fund shares and the Component 

Securities by its members on any 

relevant market; in addition, the 

Exchange may obtain trading 

information via the Intermarket 

Surveillance Group (‘‘ISG’’) from other 

exchanges who are members or affiliates 

of the ISG, including, by way of 

example, the Hong Kong Stock 

Exchange. 

(9) Hours of Trading/Minimum Price 

Variation. The Fund will trade on the 

Exchange until 4:15 p.m. (eastern 

standard time). The minimum price 

variation for quoting will be $.01. 

2. Statutory Basis 

The Exchange believes that the 

proposed rule change is consistent with 

Section 6(b) of the Act 33 in general, and 

furthers the objectives of Section 

6(b)(5)34 in particular, in that it is 

designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 

system, and in general, to protect 

investors and the public interest.

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. 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 rulecomments@sec.gov. Please include File 

No. SR–Amex–2004–85 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

No. SR–Amex–2004–85. 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, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing will also be available for 

inspection and copying at the principal 

office of the Amex. 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 No. SR–Amex–

2004–85 and should be submitted on or 

before January 3, 2005. 

IV. Commission’s Findings and Order 

Granting Accelerated Approval of 

Proposed Rule Change 

The Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 72235

35 In approving this proposal, the Commission has 

considered its impact on efficiency, competition, 

and capital formation. 15 U.S.C. 78c(f).

36 15 U.S.C. 78f(b)(5).

37Pursuant to Section 6(b)(5) of the Act, the 

Commission must predicate approval of exchange 

trading for new products upon a finding that the 

introduction of the product is in the public interest. 

Such a finding would be difficult with respect to 

a product that served no investment, hedging or 

other economic function, because any benefits that 

might be derived by market participants would 

likely be outweighed by the potential for 

manipulation, diminished public confidence in the 

integrity of the markets, and other valid regulatory 

concerns.

38The Commission notes that, as is the case with 

similar previously approved exchange traded funds, 

investors in the Fund can redeem shares in Creation 

Unit Aggregations only. See, e.g., Securities 

Exchange Act Release No. 43679 (December 5, 

2000), 65 FR 77949 (December 13, 2000) (File No. 

SR–NYSE–00–46); Securities Exchange Act Release 

No. 50189 (August 12, 2004); 69 FR 51723 (August 

20, 2004) (File No. SR–Amex–2004–05).

39 15 U.S.C. 78s(b)(2).

40See Securities Exchange Act Release No. 50505 

(October 8, 2004), 69 FR 61280 (October 15, 2004) 

(SR–NYSE–2004–55).

41The FTSE/Xinhua China 25 Index is a free 

float-adjusted market capitalization weighted index 

that is designed to represent the performance of the 

largest companies in the mainland China equity 

market that are available to international investors. 

As of October 12, 2004, its constituents had a total 

market capitalization of approximately $302 billion 

and a float-adjusted market capitalization of 

approximately $47 billion. 

The Commission notes that although one 

employee of an affiliate of the Advisor serves on the 

FTSE/Xinhua Index Committee and provides input 

to help ensure that the published index rules and 

the implementation of such rules adequately reflect 

current developments in the underlying market, 

such employee is not and will not be involved in 

the operations of the Advisor or the Fund or be 

involved in any capacity with the Fund’s Board of 

Trustees. Moreover, the index compilation 

functions of FXI and the FTSE/Xinhua Index 

Committee are, and will remain, completely 

separate and independent of the portfolio 

management functions of BGFA. FXI and the FTSE/

Xinhua Index Committee have adopted policies that 

prohibit the dissemination and use of confidential 

and proprietary information about the Underlying 

Index and have instituted procedures designed to 

prevent the improper dissemination and use of such 

information. BGI and BGIL have adopted policies 

that limit the use of confidential and proprietary 

information about portfolio management decisions 

to those persons whose duties require and permit 

them to have access to such information and have 

instituted procedures designed to prevent the 

improper dissemination and use of such 

information.

42The Exchange states that, to the extent the 

Fund invests in Depositary Receipts, any ADRs will 

be listed on a national securities exchange or 

Nasdaq. Other Depositary Receipts will be listed on 

a foreign exchange. The Fund will not invest in any 

unlisted Depositary Receipts or any listed 

Depositary Receipts that the Advisor deems to be 

illiquid or for which pricing information is not 

readily available. The Fund currently intends to 

hold all of the securities in the Underlying Index 

that are listed on the Hong Kong Stock Exchange.

43See discussion under Section II.A.1(a) 

‘‘Operation of the Fund’’ above.

44The Exchange states that as of October 29, 

2004, the ten largest constituents represented 

approximately 59.8% of the index weight. The 5 

highest weighted stocks, which represented 39.7% 

of the index weight, had an average daily trading 

volume in excess of 31.4 million shares during the 

past two months. All of the Component Securities 

traded at least 250,000 shares in each of the 

previous six months.

45Telephone conversation between Marija 

Willen, Associate General Counsel, Amex, and Ira 

Brandriss, Assistant Director, Lisa Jones, Special 

Counsel, and Natasha Cowen, Attorney, Division, 

Commission, on November 10, 2004.

exchange.35 In particular, the 

Commission finds that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,36 which requires, 

among other things, that the Exchange’s 

rules promote just and equitable 

principles of trade and facilitate 

transactions in securities, and, in 

general, protect investors and the public 

interest.37

The Commission believes that the 

Amex’s proposal should advance the 

public interest by providing investors 

with increased flexibility in satisfying 

their investment needs and by allowing 

them to purchase and sell Fund shares 

at negotiated prices throughout the 

business day that generally track the 

price and yield performance of the 

targeted Underlying Index.38

Furthermore, the Commission 

believes that the proposed rule change 

raises no issues that have not been 

previously considered by the 

Commission. The Fund is similar in 

structure and operation to exchangetraded index funds that the Commission 

has previously approved for listing and 

trading on national securities exchanges 

under Section 19(b)(2) of the Act.39 In 

addition, as noted above, the 

Commission has previously approved a 

substantially similar proposed rule 

change submitted by the NYSE to list 

and trade the iShares.40

The stocks included in the 

Underlying Index are among the stocks 

with the highest liquidity and market 

capitalization in the Chinese markets. 

Further, with respect to each of the 

following key issues, the Commission 

believes that the Fund satisfies 

established standards. 

A. Fund Characteristics 

The Commission believes that the 

proposed Fund is reasonably designed 

to provide investors with an investment 

vehicle that substantially reflects in 

value the performance of the Underlying 

Index.41 Moreover, the Commission 

finds that, although the value of the 

Fund’s shares will be derived from and 

based on the value of the securities and 

cash held in the Fund, the Fund is not 

leveraged. Accordingly, the level of risk 

involved in the purchase or sale of Fund 

shares is similar to the risk involved in 

the purchase or sale of traditional 

common stock, with the exception that 

the pricing mechanism for shares in the 

Fund is based on a portfolio of 

securities. The Commission notes that 

the Fund will at all times invest at least 

80% of its assets in Component 

Securities and in Depositary Receipts 

and at least half of the remaining 20% 

of its assets in Component Securities, 

Depositary Receipts, or in stocks 

included in the Chinese market, but not 

included in the Underlying Index.42 As 

noted above, the Fund will use a 

representative portfolio sampling 

strategy to attempt to track its 

Underlying Index. Although a 

representative sampling strategy entails 

some risk of tracking error, the Advisor 

will seek to minimize tracking error. It 

is expected that the Fund will have a 

tracking error relative to the 

performance of its Underlying Index of 

no more than 5%.

The Advisers to the Fund may 

attempt to reduce tracking error by 

using a variety of investment 

instruments, including futures 

contracts, repurchase agreements, 

options, swaps and currency exchange 

contracts; however, these instruments 

will not constitute more than 10% of the 

Fund’s assets.43

The Commission believes that the 

market capitalization and liquidity of 

the Component Securities is such that 

an adequate level of liquidity exists so 

that the Fund shares should not be 

susceptible to manipulation.44 Also, the 

Commission does not believe that the 

Fund will be so highly concentrated 

such that it becomes a surrogate for 

trading unregistered foreign securities 

on the Exchange.

While the Commission believes that 

these requirements should help to 

reduce concerns that the Fund could 

become a surrogate for trading in a 

single or a few unregistered stocks, if 

the Fund’s characteristics changed 

materially from the characteristics 

described herein, the Fund would not 

be in compliance with standards 

approved herein, and the Commission 

would expect the Amex to file a 

proposed rule change pursuant to Rule 

19b–4 of the Act. In addition, the 

Exchange has represented that it will 

immediately notify the Commission if 

the Exchange becomes aware of any 

changes made in the Fund and not 

represented herein.45

B. Disclosure 

The Exchange represents that it will 

circulate the Information Circular 

detailing applicable prospectus and 

product description delivery 

requirements. The Information Circular 

also will address members’

72236 Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 

46See discussion under Section II.A.1(a) 

‘‘Operation of the Fund,’’ above. The Exchange has 

represented that the Information Circular will also 

discuss exemptive, no-action, and interpretive relief 

granted by the Commission from certain rules under 

the Act.

47The Underlying Index currently uses the 

Reuters foreign exchange rate at the close of the 

index (4 p.m. Hong Kong Time) to compute final 

index values. The Fund intends to use Reuters/WM 

foreign exchange rates at 4 p.m. London Time.

48The Bid-Ask Price of the Fund is determined 

using the highest bid and lowest offer on the NYSE 

as of the time of calculation of the Fund’s NAV.

49Additional information available to investors 

will include data for a period covering at least the 

four previous calendar quarters (or the life of a 

Fund, if shorter) indicating how frequently the 

Fund’s shares traded at a premium or discount to 

NAV based on the Bid-Asked Price and closing 

NAV, and the magnitude of such premiums and 

discounts; the Fund Prospectus and two most 

recent reports to shareholders; and other 

quantitative information such as daily trading 

volume.

50Telephone conversation between Marija 

Willen, Associate General Counsel, Amex, and Ira 

Brandriss, Assistant Director, Lisa Jones, Special 

Counsel, and Natasha Cowen, Attorney, Division, 

Commission, on November 10, 2004.

51 In order to halt the trading of the Fund, the 

Exchange may consider, among others, factors 

including: (1) The extent to which trading is not 

occurring in underlying securities; or (2) whether 

other unusual conditions or circumstances 

detrimental to the maintenance of a fair and orderly 

market are present. In addition, trading in Fund 

shares will be halted if the circuit breaker 

parameters under Amex Rule 117 have been 

reached.

52 15 U.S.C. 78s(b)(2).

53See Securities Exchange Act Release No. 50505 

(October 8, 2004), 69 FR 61280 (October 15, 2004) 

(SR–NYSE–2004–55).

54 15 U.S.C. 78s(b)(5).

responsibility to deliver a prospectus or 

product description to all investors and 

highlight the characteristics of the 

Funds. The Information Circular will 

also remind members and member 

organizations of their suitability 

obligations, including the requirements 

of Amex Rule 411. For example, the 

Information Circular will also inform 

members that Fund shares are not 

individually redeemable, but are 

redeemable only in Creation Unit 

Aggregations or multiples thereof as set 

forth in the Prospectus and SAI.46

C. Dissemination of Fund Information 

With respect to pricing, each day, the 

NAV for the Fund will be calculated 

and disseminated by IBT to various 

sources and made available on http://

www.iShares.com and on the 

Consolidated Tape.47

During each day the Amex is open for 

business, the Exchange states that the 

IOPV of the Underlying Index will be 

disseminated at regular intervals (every 

15 seconds) on the Consolidated Tape. 

The IOPV will be updated throughout 

the Exchange trading day to reflect 

fluctuations in exchange rates between 

the U.S. dollar and the applicable home 

foreign currency. The Underlying Index 

value is available real-time directly from 

FTSE and from the following vendors: 

Reuters, Bloomberg, Telekurs, FTID and 

LSE/Proquote. An end of day closing 

value for the Underlying Index is 

available on http://

www.ftsexinhua.com, along with other 

Underlying Index information such as 

historical values, composition and 

component weighting. The Commission 

believes that this information will help 

an investor to determine whether, and 

to what extent, iShares may be selling 

at a premium or a discount to NAV. 

There will also be disseminated a 

variety of data with respect to the Fund 

on a daily basis by means of CTA and 

CQ High Speed Lines, which will be 

made available prior to the opening of 

trading on the NYSE. 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 NYSE. 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 the Fund: (a) The 

prior business day’s NAV and the midpoint of the Bid-Ask Price 48 at the time 

of calculation of such NAV, 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.

The closing prices of the Fund’s 

Deposit Securities are available from, as 

applicable, the relevant exchanges, 

automated quotation systems, published 

or other public sources in the relevant 

country, or on-line information services 

such as Bloomberg or Reuters. The 

exchange rate information required to 

convert such information into U.S. 

dollars is also readily available in 

newspapers and other publications and 

from a variety of on-line services. In 

addition, the Commission notes that the 

iShares Web site is and will be publicly 

accessible at no charge, and will contain 

the Fund’s NAV as of the prior business 

day, the Bid-Asked Price, and a 

calculation of the premium or discount 

of the Bid-Asked Price in relation to the 

closing NAV.49

The Exchange also represents that it 

will halt trading if the dissemination of 

the Fund’s value ceases and there is no 

readily available source for obtaining 

such information.50

Based on the representations made in 

the proposal, the Commission believes 

that pricing and other important 

information about the Fund is adequate 

and consistent with the Act. 

D. Trading 

The Commission further finds that 

adequate rules and procedures exist to 

govern trading of the Fund’s shares, 

pursuant to UTP. Fund shares will be 

traded pursuant to UTP under Amex 

Rule 1000A and, unless Amex Rules 

1000A et seq. stipulate otherwise, are 

subject to all Amex rules applicable to 

trading on the Exchange, including, 

among others, rules governing trading 

halts.51

E. Surveillance 

The Exchange represents that it will 

rely on its existing surveillance 

procedures governing Index Fund 

Shares currently trading on the 

Exchange. The Exchange also represents 

that it is able to obtain information from 

the NYSE or any third party regarding 

trading in both the Fund shares and the 

Component Securities by its members or 

member organizations on any relevant 

market. In addition, the Exchange 

represents that it may obtain trading 

information via the ISG from other 

exchanges who are members or affiliates 

of the ISG, including, by way of 

example, the Hong Kong Stock 

Exchange. 

F. Accelerated Approval 

The Exchange has requested that the 

Commission approve the proposed rule 

change on an accelerated basis. The 

Commission finds good cause, pursuant 

to Section 19(b)(2) of the Act,52 for 

approving the proposed rule change 

prior to the thirtieth day after the date 

of publication of notice in the Federal 

Register. The Commission has 

previously approved a substantially 

similar proposed rule change submitted 

by the NYSE to list and trade the 

iShares 53 and does not believe that the 

proposed rule change raises novel 

regulatory issues. Consequently, the 

Commission believes that it is 

appropriate to permit investors to 

benefit from the ability to trade these 

products on the Amex as soon as 

possible. Accordingly, the Commission 

finds that there is good cause, consistent 

with Section 6(b)(5) of the Act,54 to 

approve the proposal on an accelerated 

basis.

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act, that the 

proposed rule change (SR–Amex–2004–

Federal Register / Vol. 69, No. 238 / Monday, December 13, 2004 / Notices 72237

55 15 U.S.C. 78s(b)(2).

56 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2The Commission has modified the text of the 

summaries prepared by FICC. 3 15 U.S.C. 78q–1.

4 15 U.S.C. 78s(b)(3)(A)(ii).

5 17 CFR 240.19b–4(f)(2).

85), is hereby approved on an 

accelerated basis.55

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.56

Jill M. Peterson, 

Assistant Secretary.

[FR Doc. 04–27253 Filed 12–10–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50806; File No. SR–FICC–

2004–21] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change to Amend 

the Fee Structure of the Government 

Securities Division of the Fixed Income 

Clearing Corporation 

December 7, 2004. 

Pursuant to section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 notice is hereby given that on 

November 9, 2004, the Fixed Income 

Clearing Corporation (‘‘FICC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change described in Items 

I, II, and III below, which items have 

been prepared primarily by FICC. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested parties.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The proposed rule change consists of 

amendments to the fee structure of the 

Government Securities Division 

(‘‘GSD’’) of FICC to reflect a new pricing 

methodology for GSD’s netting services. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FICC 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. FICC has prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements.2

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

The purpose of the proposed rule 

change is to amend the fee structure of 

the GSD of FICC to reflect a new pricing 

methodology for GSD’s netting services. 

The new methodology was established 

in recognition of the evolution of the 

government securities marketplace and 

the growth of electronic trading which 

have resulted in the GSD processing 

more high-volume/low-dollar trades 

with fewer residual positions to settle. 

FICC believes that the revised fee 

structure more accurately aligns the 

costs of FICC’s services with its risk 

exposure. The changes will go into 

effect on January 1, 2005. 

Under the new methodology, netting 

fees will be calculated based on three 

components. These components consist 

of a fixed charge similar to today’s fee 

and two new variable fees that will give 

FICC the ability to distinguish between 

smaller and larger ticket values and 

their associated risk, as well as capture 

the cost of FICC’s settlement 

infrastructure and risk exposure 

associated with the post-netting 

positions requiring settlement. 

The new netting fee calculation will 

be based on the following charges: 

(1) A reduced fixed charge of $0.43 

per ticket for trades entering the netting 

process (the current charge is $1.00); 

(2) A new charge of $0.012 per $1 

million of par value for trades entering 

the netting process; and 

(3) A new charge of $0.052 per $1 

million of par value for clearance 

obligations created as a result of the 

netting process. 

In addition, effective January 1, 2005, 

the fixed clearance charge will be 

reduced from the current $2.75 per 

obligation created to $2.35 per 

obligation created in order to better 

align clearance revenues with associated 

expenses. The applicable charge for 

comparison services remains 

unchanged. 

FICC believes that the proposed rule 

change is consistent with the 

requirements of Section 17A of the Act 3

and the rules and regulations 

thereunder applicable to FICC because 

the proposed change provides for fees 

that more accurately reflect FICC’s costs 

and risks presented by trades submitted 

to FICC.

(B) Self-Regulatory Organization’s 

Statement on Burden on Competition 

FICC does not believe that the 

proposed rule change will have an 

impact or impose any burden on 

competition.

(C) Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received from 

Members, Participants, or Others 

Written comments relating to the 

proposed rule change have been 

solicited or received. FICC will notify 

the Commission of any written 

comments received by FICC. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective upon filing pursuant to Section 

19(b)(3)(A)(ii) of the Act 4 and Rule 19b–

4(f)(2) 5 thereunder because the 

proposed rule establishes or changes a 

due, fee, or other charge. At any time 

within sixty days of the filing of such 

rule change, the Commission may 

summarily abrogate such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act.

IV. 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 rulecomments@sec.gov. Please include File 

Number SR–FICC–2004–21 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–FICC–2004–21. 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