[Federal Register Volume 69, Number 238 (Monday, December 13, 2004)]
[Notices]
[Pages 72242-72251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50799; File No. SR-PCX-2004-99]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to Listing and Trading iShares[reg] 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 15, 2004, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned subsidiary PCX Equities, Inc. 
(``PCXE''), 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 217 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to amend its rules governing the Archipelago 
Exchange (``ArcaEx''), the equities trading facility of PCXE, to list 
and trade, or trade pursuant to unlisted trading privileges, the 
iShares[reg] FTSE/Xinhua China 25 Index 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 PCX included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange has adopted listing standards applicable to Investment 
Company Units (``ICUs''), which are consistent with the listing 
criteria currently used by the American Stock Exchange LLC and other 
national securities exchanges, and trading standards pursuant to which 
the Exchange may either list and trade ICUs, or trade such ICUs on the 
Exchange on an unlisted trading privileges (``UTP'') basis.\3\ The 
Exchange now proposes to list and trade, or trade on a UTP basis, under 
PCXE Rule 5.2(j)(3), shares of the iShares[reg] FTSE/Xinhua China 25 
Index Fund (``Fund''),\4\ a series of the iShares Trust (``Trust'').\5\ 
Fund shares will be deemed equity securities subject to PCXE rules 
governing the trading of equity securities.\6\ Because the Fund invests 
in non-U.S. securities not listed on a national securities exchange or 
the Nasdaq Stock Market, the Fund does not meet the ``generic'' listing 
requirements of PCXE Rule 5.2(j)(3), Commentary .01, applicable to the 
listing of ICUs pursuant to Rule 19b-4(e) under the Act, and therefore 
cannot be listed on a national securities exchange without a filing 
pursuant to Rule 19b-4 under the Act.
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    \3\ See PCXE Rule 5.2(j)(3).
    \4\ iShares is a registered trademark of Barclays Global 
Investors, N.A.
    \5\ The Trust is registered under the Investment Company Act of 
1940, as amended (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); Barclays Global Fund 
Advisors, et al., Investment Company Act Release No. 25078 (July 24, 
2001), 66 FR 39377 (July 30, 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'').
    \6\ Telephone conversation between Tania J.C. Blanford, Staff 
Attorney, PCX, and Natasha Cowen, Attorney, Division of Market 
Regulation (``Division''), Commission, on December 6, 2004.
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    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

[[Page 72243]]

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.
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    \7\ See also infra note 12.
    \8\ See infra note 24 and accompanying text.
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    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, offered, or sold by FXI. FXI 
is not affiliated with a broker or dealer.
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    \9\ FXI is a Hong Kong incorporated, joint venture company 
between FTSE, the global index company, and Xinhua Financial 
Network.
    \10\ Although 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 19 members 
of the FTSE/Xinhua Index Committee. Telephone conversation between 
Tania J.C. Blanford, Staff Attorney, PCX, and Natasha Cowen, 
Attorney, Division, Commission, on November 17, 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 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.
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(a) Operation of the Fund \11\
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    \11\ The 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 PCXE Rule 5.3(k)(5), which requires that the Fund 
have an audit committee that complies with Rule 10A-3 under the Act.
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    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.
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    \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 Fund's prospectus) in order to achieve 
the fund's investment objective.
    The Fund's 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.
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    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 will be fully disclosed in its prospectus 
(``Prospectus'') and statement of additional information (``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,

[[Page 72244]]

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 
Underlying Index (such as future corporate actions and index 
reconstitutions, additions, and deletions).
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    \13\ For 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 Tania J.C. Blanford, 
Staff Attorney, Regulatory Policy, Ryan Johnson, Listings 
Qualifications Specialist, PCX, Tim Elliott, Regulatory Counsel, 
Archipelago Holdings, LLC, and Ira Brandriss, Assistant Director, 
Lisa Jones, Special Counsel, and Natasha Cowen, Attorney, Division, 
Commission, on November 9, 2004.
    \15\ See In the Matter of Master Investment Portfolio, et al., 
Investment Company Act Release No. 25158 (September 18, 2001).
    \16\ The 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.
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    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%.
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    \17\ See infra note 22.
    \18\ Telephone conversation between Tania J.C. Blanford, Staff 
Attorney, Regulatory Policy, Ryan Johnson, Listings Qualifications 
Specialist, PCX, Tim Elliott, Regulatory Counsel, Archipelago 
Holdings, LLC, and Ira Brandriss, Assistant Director, Lisa Jones, 
Special Counsel, and Natasha Cowen, Attorney, Division, Commission, 
on November 9, 2004.
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    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 December 31, 2003, 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\
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    \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.
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    As of October 12, 2004, the FTSE/Xinhua China 25 Index components 
had a total market capitalization of approximately $155 billion and a 
float-adjusted market capitalization of approximately $42 billion.\20\ 
The average total market capitalization was approximately $6.4 billion 
and the average float-adjusted market capitalization was approximately 
$1.7 billion. The ten largest constituents represented approximately 
60.1% of the Underlying Index weight. The five highest weighted stocks, 
which represented 39.9% of the Underlying Index weight, had an average 
daily trading volume in excess of 56.9 million shares during the past 
three months. All of the Component Securities traded at least 250,000 
shares in each of the previous three months.
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    \20\ Float-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.
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Index Methodology
    Component Selection Criteria. The FTSE/Xinhua China 25 Index is 
rule based 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.\21\
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    \21\ See also supra note 10.
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    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.\22\ As

[[Page 72245]]

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.
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    \22\ ``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 
broker-dealers.
    ``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 non-residents 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.
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    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.\23\
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    \23\ The 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.
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    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 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 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.\24\
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    \24\ Each Creation Unit Aggregation consists of 50,000 or more 
iShares.
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    As with other open-end investment companies, iShares will be issued 
at the net asset value (``NAV'') per share next

[[Page 72246]]

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.\25\
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    \25\ Telephone conversation between Tania J.C. Blanford, Staff 
Attorney, Regulatory Policy, PCX, and Natasha Cowen, Attorney, 
Division, Commission, on November 17, 2004.
---------------------------------------------------------------------------

    (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 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.\26\ 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 \27\ 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.
---------------------------------------------------------------------------

    \26\ Where 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 Tania J.C. Blanford, Staff Attorney, Regulatory 
Policy, PCX, and Natasha Cowen, Attorney, Division, Commission, on 
December 1, 2004.
    \27\ Telephone conversation between Tania J.C. Blanford, Staff 
Attorney, Regulatory Policy, PCX, and Natasha Cowen, Attorney, 
Division, Commission, on November 17, 2004.
---------------------------------------------------------------------------

    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 Exchange's Core Trading 
Session \28\ and disseminated every 15 seconds on the Consolidated 
Tape.
---------------------------------------------------------------------------

    \28\ The Core Trading Session is defined in PCXE Rule 7.34(a). 
Telephone conversation between Tania J.C. Blanford, Staff Attorney, 
Regulatory Policy, PCX, and Natasha Cowen, Attorney, Division, 
Commission, on October 28, 2004.
---------------------------------------------------------------------------

    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 real time 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

[[Page 72247]]

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. Investors Bank and Trust (``IBT'') will calculate 
the Fund NAV. 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, http://www.iShares.com, 
which is 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 mid-point of the bid-ask price at the time 
of calculation of such NAV (``Bid/Ask 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.
---------------------------------------------------------------------------

    \29\ The 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.
---------------------------------------------------------------------------

    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 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.
(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. The 
beneficial owners will hold iShares acquired pursuant to the Service in 
the same manner, and subject to the same terms and conditions, as for 
original ownership of iShares.

[[Page 72248]]

    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) Criteria for Initial and Continued Listing. iShares are subject 
to the criteria for initial and continued listing of ICUs in PCXE Rules 
5.2(j)(3) and 5.5(g)(2). The minimum number of iShares required to be 
outstanding at the start of trading will be comparable to requirements 
that have been applied to previously traded series of ICUs.
    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 Underlying Index.
    (2) Original and Annual Listing Fees. On October 26, 2004 the 
Commission approved modifications to the listing fees for exchange-
traded funds and closed-end funds on the Exchange. Original listing 
fees are: $20,000 for the first fund listed by a fund issuer or 
``family;'' and no fee for subsequent additional funds listed by the 
same fund issuer or ``family.''\30\
---------------------------------------------------------------------------

    \30\ Telephone conversation between Tania J.C. Blanford, Staff 
Attorney, Regulatory Policy, PCX, and Natasha Cowen, Attorney, 
Division, Commission, on December 6, 2004. See also Securities 
Exchange Act Release No. 50593 (October 26, 2004), 69 FR 63427 
(November 1, 2004) (SR-PCX-2004-63).
---------------------------------------------------------------------------

    (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 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, will inform ETP Holders prior to 
commencement of trading, of the prospectus or product description 
delivery requirements applicable to the Fund.
---------------------------------------------------------------------------

    \31\ See In the Matter of iShares, Inc., et al., Investment 
Company Act Release No. 25623 (June 25, 2002).
---------------------------------------------------------------------------

    (4) Information Circular. The Exchange will distribute an 
information circular to ETP Holders 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, among other things, 
will discuss what the Fund is, how Fund shares are created and 
redeemed, the requirement that ETP Holders 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 (PCXE Rule 9.2(a)). 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 order to halt the trading of the Fund, the 
Exchange may consider, among other things, factors such as the extent 
to which trading is not occurring in underlying security(s) and whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. In addition, 
trading in Fund shares is subject to trading halts caused by 
extraordinary market volatility pursuant to PCXE Rule 7.12.
    (6) Due Diligence. The Exchange represents that the information 
circular to ETP Holders will note, for example, Exchange 
responsibilities including that before an ETP Holder, or employee 
thereof recommends a transaction in the Fund, a determination must be 
made that the recommendation is in compliance with all applicable 
Exchange and Federal rules and regulations, including due diligence 
obligations under PCXE Rule 9.2(a)-(b).
    (7) Purchases and Redemptions in Creation Unit Aggregations.\32\ In 
the Information Circular ETP Holders 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.
---------------------------------------------------------------------------

    \32\ Some of the terminology in this Section has been revised 
pursuant to a telephone conversation between Tania J.C. Blanford, 
Staff Attorney, Regulatory Policy, PCX, and Natasha Cowen, Attorney, 
Division, Commission, on November 2, 2004.
---------------------------------------------------------------------------

    (8) Surveillance. Exchange surveillance procedures applicable to 
trading in the proposed iShares are comparable to those applicable to 
other ICUs currently trading on the Exchange. The Exchange represents 
that its surveillance procedures are adequate to properly monitor the 
trading of the Fund. The Exchange's current trading surveillances focus 
on detecting securities trading outside their normal patterns. When 
such situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations. The Exchange 
is able to obtain information regarding trading in both the Fund shares 
and the Component Securities by the ETP Holders 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 
during the hours specified in PCXE Rule 7.34. The minimum price 
variation for quoting will be consistent with PCXE Rule 7.6.
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.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f(b).
    \34\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 on the proposed rule change were solicited or 
received.

[[Page 72249]]

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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#5321263f367e303c3e3e363d2720132036307d343c25"><span class="__cf_email__" data-cfemail="5f2d2a333a723c3032323a312b2c1f2c3a3c71383029">[email protected]</span></a>. Please include 
File No. SR-PCX-2004-99 on the subject line.

Paper Comments

    <bullet> 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-PCX-2004-99. 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 PCX. 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-PCX-2004-99 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 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\
---------------------------------------------------------------------------

    \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).
    \37\ Pursuant 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.
---------------------------------------------------------------------------

    The Commission believes that the PCX'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\
---------------------------------------------------------------------------

    \38\ The 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).
---------------------------------------------------------------------------

    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 exchange-
traded 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\
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78s(b)(2).
    \40\ See Securities Exchange Act Release No. 50505 (October 8, 
2004), 69 FR 61280 (October 15, 2004) (SR-NYSE-2004-55).
---------------------------------------------------------------------------

    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%.
---------------------------------------------------------------------------

    \41\ The 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 $155 billion and a float-adjusted market 
capitalization of approximately $42 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

[[Page 72250]]

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.
---------------------------------------------------------------------------

    \42\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \43\ See discussion under Section II.A.1(a) ``Operation of the 
Fund'' above.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \44\ The Exchange states that as of October 12, 2004, the ten 
largest constituents represented approximately 60.1% of the index 
weight. The five highest weighted stocks, which represented 39.9% of 
the index weight, had an average daily trading volume in excess of 
56.9 million shares during the past three months. All of the 
Component Securities traded at least 250,000 shares in each of the 
previous three months.
---------------------------------------------------------------------------

    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 the standards approved herein, and the 
Commission would expect the PCX 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 of any changes made in 
the Fund and not represented herein.\45\
---------------------------------------------------------------------------

    \45\ Telephone conversation between Tania J.C. Blanford, Staff 
Attorney, Regulatory Policy, Ryan Johnson, Listings Qualifications 
Specialist, PCX, Tim Elliott, Regulatory Counsel, Archipelago 
Holdings, LLC, and Ira Brandriss, Assistant Director, Lisa Jones, 
Special Counsel, and Natasha Cowen, Attorney, Division, Commission, 
on November 9, 2004.
---------------------------------------------------------------------------

B. Disclosure

    The Exchange represents that it will circulate an Information 
Circular detailing applicable prospectus and product description 
delivery requirements. The Information Circular also will address ETP 
Holders' responsibility to deliver a prospectus or product description 
to all investors and highlight the characteristics of the Funds. The 
Information Circular will also remind ETP Holders of their suitability 
obligations, including PCXE Rule 9.2(a)). For example, the Information 
Circular will also inform ETP Holders 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\
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    \46\ See 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.
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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\
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    \47\ 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 index values. The Fund intends to use Reuters/WM 
foreign exchange rates at 4 p.m. London Time.
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    During each day the PCX 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 PCX 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 mid-point 
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.
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    \48\ The 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.
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    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\
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    \49\ Additional 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.
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    The Exchange also represents that it will halt trading and/or 
delist the shares if the dissemination of the Fund's value ceases and 
there is no readily available source for obtaining such 
information.\50\
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    \50\ Telephone conversation between Tania J.C. Blanford, Staff 
Attorney, Regulatory Policy, Ryan Johnson, Listings Qualifications 
Specialist, PCX, Tim Elliott, Regulatory Counsel, Archipelago 
Holdings, LLC, and Ira Brandriss, Assistant Director, Lisa Jones, 
Special Counsel, and Natasha Cowen, Attorney, Division, Commission, 
on November 9, 2004.

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[[Page 72251]]

    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. Listing and Trading

    The Commission further finds that adequate rules and procedures 
exist to govern the listing and trading, or trading pursuant to UTP, of 
the Fund's shares. The Exchange has represented that Fund shares will 
be deemed equity securities subject to PCXE rules governing the trading 
of equity securities, including, among others, rules governing trading 
halts.\51\
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    \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 is subject to trading halts caused by 
extraordinary market volatility pursuant to PCXE Rule 7.12.
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    In addition, the Exchange states that iShares are subject to the 
criteria for initial and continued listing of ICUs in PCXE Rules 
5.2(j)(3) and 5.5 (g)(2). The Commission believes that the listing and 
delisting criteria for Fund shares should help to ensure that a minimum 
level of liquidity will exist in the Fund to allow for the maintenance 
of fair and orderly markets.

E. Surveillance

    The Exchange represents that it will rely on its existing 
surveillance procedures governing ICUs 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 the ETP Holders 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 PCX 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.
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    \52\ 15 U.S.C. 78s(b)(2).
    \53\ See 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).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-PCX-2004-99) is hereby approved on an 
accelerated basis.\55\
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    \55\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-27252 Filed 12-10-04; 8:45 am]
BILLING CODE 8010-01-P


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