Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices 12233 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 55213 

(January 31, 2007), 72 FR 5768 (‘‘Notice’’). 

4 In Amendment No. 2, the Exchange (1) Updated 

its proposal to reflect the migration of ETF shares 

from Amex’s legacy platform to the AEMI platform 

and (2) represented that an ETF based on a fixed 

income index or combination index would be 

covered under the Exchange’s existing surveillance 

program for ETFs and that all products listed under 

the proposed generic listing standards would be 

subject to the full panoply of Amex rules and 

procedures that now govern the trading of ETFs on 

Amex. 

5 In Amendment No. 3, the Exchange revised 

proposed Commentary .06(g) to Rule 1000–AEMI 

and proposed Commentary .05(g) to Rule 1000A–

AEMI to clarify that Rule 1000–AEMI and Rules 

1001 through 1006 as well as Rule 1000A–AEMI 

and Rules 1001A through 1005A apply to the listing 

and trading of fixed income and combination index 

ETFs. 

6 17 CFR 240.19b–4(e). 

7 15 U.S.C. 78s(b)(2). 

8See proposed Commentary .04 to Amex Rule 

1000–AEMI and Commentary .03 to Amex Rule 

1000A–AEMI (permitting the Exchange to list and 

trade an ETF pursuant to Rule 19b–4(e) provided 

that the portfolio or index ‘‘has been reviewed and 

approved for the trading of options, Portfolio 

Depository Receipts, Index Fund Shares, IndexLinked Exchangeable Notes or Index-Linked 

Securities by the Commission under Section 

19(b)(2) of the Securities Exchange Act of 1934 and 

rules thereunder and the conditions set forth in the 

Commission’s approval order, continue to be 

satisfied. * * *’’). 

4. Before a Fund may rely on the 

order, the Commission will have 

approved, pursuant to rule 19b–4 under 

the Exchange Act, an Exchange rule 

requiring Exchange members and 

member organizations effecting 

transactions in ETF Shares to deliver a 

Product Description to purchasers of 

ETF Shares. 

5. On an annual basis the Board of 

each Fund, including a majority of 

Disinterested Trustees, must determine, 

for each Fund, that the allocation of 

distribution expenses among the classes 

of Conventional Shares and ETF Shares 

in accordance with the Multi-Class 

Distribution Formula is in the best 

interests of each class and of the Fund 

as a whole. Each Fund will preserve for 

a period of not less than six years from 

the date of a Board determination, the 

first two years in an easily accessible 

place, a record of the determination and 

the basis and information upon which 

the determination was made. This 

record will be subject to examination by 

the Commission and its staff. 

6. Applicants’ Web site, which is and 

will be publicly accessible at no charge, 

will contain the following information, 

on a per ETF Share basis, for each Fund: 

(a) The prior business day’s closing 

NAV and the midpoint of the bid-asked 

spread at the time the Fund’s NAV is 

calculated (‘‘Bid-Asked Price’’) and a 

calculation of the premium or discount 

of the Bid-Asked Price in relation to the 

closing NAV; and (b) data for a period 

covering at least the four previous 

calendar quarters (or the life of a Fund, 

if shorter) indicating how frequently 

each Fund’s ETF 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. In addition, the Product 

Description for each Fund will state that 

applicants’ Web site has information 

about the premiums and discounts at 

which the Fund’s ETF Shares have 

traded. 

7. The ETF Shares Prospectus and 

annual report will include, for each 

Fund: (a) The information listed in 

condition 6(b), (i) In the case of the ETF 

Shares Prospectus, for the most recently 

completed calendar year (and the most 

recently completed quarter or quarters, 

as applicable), and (ii) in the case of the 

annual report, for no less than the 

immediately preceding five fiscal years 

(or the life of the Fund, if shorter); and 

(b) the cumulative total return and the 

average annual total return for one, five 

and ten year periods (or the life of the 

Fund, if shorter) of (i) an ETF Share 

based on NAV and the Bid-Asked Price 

and (ii) the Fund’s Target Index. 

For the Commission, by the Division of 

Investment Management, pursuant to 

delegated authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–4721 Filed 3–14–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55437; File No. SR–Amex–

2006–118] 

Self-Regulatory Organizations; 

American Stock Exchange LLC; Notice 

of Filing of Amendment Nos. 2 and 3 

to Proposed Rule Change Relating to 

Generic Listing Standards for Series of 

Portfolio Depositary Receipts and 

Index Fund Shares Based on Fixed 

Income Indexes and Accelerated 

Approval of Proposed Rule Change as 

Amended 

March 9, 2007. 

I. Introduction 

On December 22, 2006, the American 

Stock Exchange LLC (‘‘Amex’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change 

relating to generic listing standards for 

series of portfolio depositary receipts 

(‘‘PDRs’’) and index fund shares 

(‘‘IFSs’’), together referred to as 

‘‘exchange-traded funds’’ (‘‘ETFs’’), 

based on fixed income indexes. On 

January 26, 2007, the Exchange filed 

Amendment No. 1. The proposed rule 

change, as amended, was published for 

comment in the Federal Register on 

February 7, 2007 for a 15-day comment 

period.3 The Commission received no 

comments on the proposal. On March 2, 

2007, Amex filed Amendment No. 2 to 

the proposed rule change 4 and on 

March 7, 2007, Amex filed Amendment 

No. 3 to the proposed rule change.5 This 

order provides notice of the proposed 

rule change as modified by 

Amendments No. 1, 2, and 3 and 

approves the proposed rule change as 

amended on an accelerated basis. 

II. Description of the Proposal 

The Exchange proposes to revise 

Amex Rules 1000–AEMI and 1000A–

AEMI to include generic listing 

standards to permit the listing and 

trading of ETFs that are based on 

indexes or portfolios consisting of fixed 

income securities (‘‘Fixed Income 

Indexes’’) or both fixed income and 

equity securities (‘‘Combination 

Indexes’’) pursuant to Rule 19b–4(e) 

under the Act.6 Specifically, the 

Exchange proposes to add 

Commentaries .04, .05, and .06 to Amex 

Rule 1000–AEMI and Commentaries .03, 

.04, and .05 to Amex Rule 1000A–AEMI 

and to revise the definitions of PDR and 

IFS, in Amex Rules 1000–AEMI(b)(1) 

and 1000A–AEMI(b)(1), respectively, to 

include ETFs based on Fixed Income 

Indexes and Combination Indexes. 

The proposed rule change will enable 

the Exchange to list and trade an ETF 

pursuant to Rule 19b–4(e) under the Act 

without a rule filing if each of the 

conditions set forth in either 

Commentaries .04 and .05 to Rule 1000–

AEMI or Commentaries .03 and .04 to 

Rule 1000A–AEMI, as applicable, is 

satisfied. The proposed listing standards 

will apply to certain Fixed Income 

Indexes and Combination Indexes that 

the Commission has yet to review, as 

well as those Fixed Income Indexes 

described in exchange rules that have 

previously been approved by the 

Commission under Section 19(b)(2) of 

the Act 7 for the trading of ETFs, 

options, or other index-based 

securities.8

A. Generic Listing Standards 

Rule 19b–4(e) under the Act provides 

that the listing and trading of a new 

derivative securities product by a selfVerDate Aug<31>2005 14:20 Mar 14, 2007 Jkt 211001 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 E:\FR\FM\15MRN1.SGM 15MRN1

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12234 Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices 

9 17 CFR 240.19b–4(c)(1). 10 15 U.S.C. 78s(b). 11See Securities Exchange Act Release No. 40761 

(December 8, 1998), 63 FR 70952 (December 22, 

1998) (‘‘New Products Release’’). 

12See Securities Exchange Act Release Nos. 

54739 (November 9, 2006), 71 FR 66993 (November 

17, 2006) (for ETFs based on global and 

international indexes); and 42787 (May 15, 2000), 

65 FR 33598 (May 24, 2000) (for ETFs based on 

indexes comprised of U.S. stocks). 

13See Securities Exchange Act Release No. 50355 

(September 13, 2004), 69 FR 56252 (September 20, 

2004) (approving generic listing standards for trust 

certificates linked to portfolios of investment-grade 

debt securities, securities of government-sponsored 

entities, and U.S. Treasury securities). 

14See Amex Company Guide Section 107D 

(Index-Linked Securities); Securities Exchange Act 

Release No. 51563 (April 15, 2005), 70 FR 21257 

(April 25, 2005). Such listing standards permit the 

listing—pursuant to Rule 19b–4(e) under the Act—

of such securities where the Commission had 

previously approved the trading of specified indexbased derivatives on the same index, on the 

condition that all of the standards set forth in the 

original order are satisfied by the exchange 

employing generic listing standards. 

15See Securities Exchange Act Release Nos. 

46252 (July 24, 2002), 67 FR 49715 (July 31, 2002) 

(approving the listing and trading of funds based on 

U.S. Treasury or corporate bond indexes); 46738 

(October 29, 2002), 67 FR 67666 (November 6, 2002) 

(approving the listing and trading of FITRs); and 

52870 (December 1, 2005), 70 FR 73039 (December 

8, 2005) (approving the trading on a UTP basis of 

the iShares Lehman TIPS Bond Fund). 

16See Securities Exchange Act Release Nos. 

41334 (April 27, 1999), 64 FR 23883 (May 4, 1999) 

(approving the listing and trading of Bond Indexed 

Term Notes); 46923 (November 27, 2002), 67 FR 

72247 (December 4, 2002) (approving the listing 

and trading of trust units linked to a basket of 

investment-grade fixed income securities); and 

48484 (September 11, 2003), 68 FR 54508 

(September 17, 2003) (approving the listing and 

trading of trust certificates linked to a basket of up 

to five investment-grade fixed income securities 

plus U.S. Treasury securities). 

17The failure of a particular ETF to comply with 

the proposed generic listing standards would not 

preclude the Exchange from submitting a separate 

rule change pursuant to Section 19(b)(2) of the Act 

to list and trade the ETF. 

18 15 U.S.C. 80a. 

19Trust-preferred securities are undated 

cumulative securities issued from a special purpose 

trust in which a bank or bank holding company 

owns all of the common securities. The trust’s sole 

asset is a subordinated note issued by the bank or 

bank holding company. Trust preferred securities 

are treated as debt for tax purposes so that the 

distributions or dividends paid are a tax-deductible 

interest expense. 

20Supranational debt represents the debt of 

international organizations such as the World Bank, 

the International Monetary Fund, regional 

multilateral development banks, and multilateral 

financial institutions. Examples of regional 

multilateral development banks include the African 

Development Bank, Asian Development Bank, 

European Bank for Reconstruction and 

Development, and the Inter-American Development 

Bank. In addition, examples of multilateral 

financial institutions include the European 

Investment Bank and the International Fund for 

Agricultural Development. 

21Under the Section 3(a)(11) of the Act, 15 U.S.C. 

78c(a)(11), a convertible security is an equity 

security. However, for the purposes of the proposed 

generic listing criteria, Amex believes that defining 

a convertible security (prior to its conversion) as a 

Fixed Income Security is consistent with the 

objectives and intention of the generic listing 

standards for fixed-income-based ETFs as well as 

the Act. 

regulatory organization shall not be 

deemed a proposed rule change, 

pursuant to paragraph (c)(1) of Rule 

19b–4,9 if the Commission has 

approved, pursuant to Section 19(b) of 

the Act,10 the self-regulatory 

organization’s trading rules, procedures, 

and listing standards for the product 

class that would include the new 

derivatives securities product, and the 

self-regulatory organization has a 

surveillance program for the product 

class.11

The Exchange already has 

Commission-approved generic listing 

standards for ETFs based on indexes 

that consist of stocks listed on U.S. and 

non-U.S. exchanges,12 for trust 

certificates linked to certain Fixed 

Income Securities,13 and for other 

index-based derivatives.14 The 

Commission has also approved for 

listing and trading on the Exchange 

ETFs based on certain Fixed Income 

Indexes 15 and structured notes linked to 

a basket or index of Fixed Income 

Securities.16 This proposal seeks to 

adopt listing standards, trading rules, 

and procedures, including surveillance, 

for ETFs based on Fixed Income and 

Combination Indexes that generally 

reflect existing generic listing standards 

for ETFs based on equities, but are 

tailored for the fixed income markets.17

B. Exchange-Traded Funds 

Amex Rules 1000–AEMI and Rules 

1001 et seq. allow for the listing and 

trading on the Exchange of PDRs. A PDR 

represents an interest in a unit 

investment trust registered under the 

Investment Company Act of 1940 (the 

‘‘1940 Act’’) 18 that operates on an openend basis and holds the securities that 

comprise an index or portfolio. Amex 

Rules 1000A–AEMI and 1001A et seq. 

provide standards for listing IFSs, 

which are securities issued by an openend management investment company 

(i.e., an open-end mutual fund) based on 

a portfolio of securities that seeks to 

provide investment results that 

correspond generally to the price and 

yield performance or total return 

performance of a specified foreign or 

domestic stock index or fixed income 

index. Pursuant to these rules, ETF 

shares must be issued in a specified 

aggregate minimum number in return 

for a deposit of specified securities and/ 

or a cash amount, with a value equal to 

the next-determined net asset value 

(‘‘NAV’’). When aggregated in the same 

specified minimum number, ETF shares 

must be redeemed by the issuer for the 

securities and/or cash, with a value 

equal to the next-determined NAV. 

Consistent with Amex Rules 1002 and 

1002A, the NAV is calculated once a 

day after the close of the regular trading 

day. 

To meet the investment objective of 

providing investment returns that 

correspond to the performance of the 

underlying index, an ETF may use a 

‘‘replication’’ strategy or a 

‘‘representative sampling’’ strategy with 

respect to the ETF portfolio. An ETF 

using a replication strategy invests in 

each component security of the 

underlying index in about the same 

proportion as that security is 

represented in the index itself. An ETF 

using a representative sampling strategy 

generally invests in a significant 

number, but perhaps not all, of the 

component securities of the underlying 

index, and holds securities that, in the 

aggregate, are intended to approximate 

the full index in terms of certain key 

characteristics. In the context of a fixed 

income index, such characteristics may 

include liquidity, duration, maturity, 

and yield. 

In addition, an ETF portfolio may be 

adjusted in accordance with changes in 

the composition of the underlying index 

or to maintain compliance with 

requirements applicable to a regulated 

investment company under the Internal 

Revenue Code (‘‘IRC’’). 

C. Listing and Trading of ETFs Based on 

Fixed Income Indexes or Fixed Income 

Securities 

Proposed Commentary .04 to Amex 

Rule 1000–AEMI and Commentary .03 

to Amex Rule 1000A–AEMI define the 

term ‘‘Fixed Income Securities’’ to 

include notes, bonds (including 

convertible bonds), debentures, or 

evidence of indebtedness that include, 

but are not limited to, U.S. Treasury 

securities (‘‘Treasury Securities’’), 

securities of government-sponsored 

entities (‘‘GSE Securities’’), municipal 

securities, trust-preferred securities,19

supranational debt,20 and debt of a 

foreign country or subdivision thereof. 

For purposes of the proposed definition, 

a convertible bond is deemed to be a 

Fixed Income Security until it is 

converted into its underlying common 

or preferred stock.21 Once converted, 

the equity security may no longer 

continue as a component of a fixed 

income index under the proposed rules 

and, accordingly, would have to be 

removed from such index for the ETF to 

remain listed pursuant to proposed 

Commentary .04 to Amex Rule 1000–

AEMI or Commentary .03 to Amex Rule 

1000A–AEMI. 


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22The Exchange noted in its proposal that the 

index criteria are loosely based on the standards 

contained in Commission and Commodity Futures 

Trading Commission (‘‘CFTC’’) rules regarding the 

application of the definition of narrow-based 

security index to debt security indexes. See 

Securities Exchange Act Release No. 54106 (July 6, 

2006), 71 FR 39534 (July 13, 2006) (File No. S7–

07–06) (the ‘‘Joint Rules’’). 

23This is virtually identical to the corresponding 

standard in Section 107E(a)(x) of the Amex 

Company Guide for trust certificates. 

24This is consistent with the standard for U.S. 

equity ETFs set forth in Commentary .03(a)(A) to 

Amex Rule 1000–AEMI and Commentary .02(a)(A) 

to Amex Rule 1000A–AEMI and the standard set 

forth by the Commission and the CFTC in the Joint 

Rules. See note 22 supra. 

25The required number of unaffiliated issuers 

parallels the diversification requirement applicable 

to U.S. equity ETFs as set forth in Commentary 

.03(a)(A) to Amex Rule 1000–AEMI and 

Commentary .02(a)(A) to Amex Rule 1000A–AEMI. 

26The Exchange notes that this proposed 

standard is consistent with a similar standard in the 

Joint Rules and is designed to ensure that the 

component fixed income securities have sufficient 

publicly available information. 

27 15 U.S.C. 78m and 78o(d). 

28 15 U.S.C. 78c(a)(12). 

29See Joint Rules, supra note 22, 71 FR at 30537. 

30 In its proposal, the Exchange stated its view 

that the minimum principal amount outstanding 

requirement of $100 million, coupled with the 

proposed concentration requirements, would 

reduce the likelihood that an ETF listed under the 

proposal would be readily susceptible to 

manipulation. 

31See proposed Commentary .05 to Amex Rule 

1000–AEMI and Commentary .04 to Amex Rule 

1000A–AEMI. 

Fixed Income Index Criteria 

To list an ETF pursuant to the 

proposed generic listing standards for 

Fixed Income Indexes, the index 

underlying the ETF must satisfy all the 

conditions contained in proposed 

Commentary .04 to Amex Rule 1000–

AEMI (for PDRs) or proposed 

Commentary .03 to Amex Rule 1000A–

AEMI (for IFSs). As with existing 

generic listing standards for ETFs based 

on domestic and international or global 

indexes, these listing criteria are 

designed to ensure that securities with 

substantial market distribution and 

liquidity account for a substantial 

portion of the weight of a Fixed Income 

Index.22

To list an ETF based on a Fixed 

Income Index pursuant to the proposed 

generic listing standards, the index must 

meet the following criteria: 

• The index or portfolio must consist 

of Fixed Income Securities; 

• Components that in aggregate 

account for at least 75% of the weight 

of the index or portfolio must have a 

minimum original principal amount 

outstanding of $100 million or more; 23

• No component Fixed Income 

Security (excluding a Treasury Security) 

represents more than 30% of the weight 

of the index, and the five highest 

weighted component fixed income 

securities in the index do not in the 

aggregate account for more than 65% of 

the weight of the index; 24

• An underlying index or portfolio 

(excluding one consisting entirely of 

exempted securities) must include a 

minimum of 13 non-affiliated issuers; 25

and 

• Component securities that in 

aggregate account for at least 90% of the 

weight of the index or portfolio must be 

either: 26

• From issuers that are required to 

file reports pursuant to Sections 13 and 

15(d) of the Act; 27

• From issuers that have a worldwide 

market value of its outstanding common 

equity held by non-affiliates of $700 

million or more; 

• From issuers that have outstanding 

securities that are notes, bonds, 

debentures, or evidences of 

indebtedness having a total remaining 

principal amount of at least $1 billion; 

• Exempted securities, as defined in 

Section 3(a)(12) of the Act; 28 or 

• From issuers that are governments 

of foreign countries or political 

subdivisions of foreign countries. 

The proposed generic listing 

requirements for ETFs based on Fixed 

Income Indexes would not require that 

component securities in an underlying 

index have an investment-grade 

rating.29 In addition, the proposed 

requirements would not require a 

minimum trading volume, due to the 

lower trading volume that generally 

occurs in the fixed income markets as 

compared to the equity markets.30 Also, 

consistent with the existing Amex Rule 

1000A–AEMI(b)(2)(iii), an IFS based on 

a Fixed Income Index or Combination 

Index that seeks to provide investment 

results that either exceed the 

performance of such underlying index 

or correspond to the inverse (opposite) 

of the performance of such index by a 

specified multiple may not be listed and 

traded pursuant to the proposed generic 

listing standards. 

D. Listing and Trading of ETFs Based on 

Combination Indexes 

To list an ETF pursuant to the 

proposed generic listing standards for 

Combination Indexes, an index 

underlying the ETF must satisfy all the 

conditions contained in proposed 

Commentary .05 to Amex Rule 1000–

AEMI (for PDRs) or proposed 

Commentary .04 to Amex Rule 1000A–

AEMI (for IFSs). As with ETFs based 

solely on Fixed Income Indexes, the 

generic listing standards are intended to 

ensure that securities with substantial 

market distribution and liquidity 

account for a substantial portion of the 

weight of both the equity and fixed 

income portions of a Combination 

Index. 

The proposed rules provide that the 

Exchange may list and trade ETFs based 

on a combination of indexes or a series 

of component securities representing 

the U.S. or domestic equity market, the 

international equity market, and the 

fixed income market, pursuant to Rule 

19b–4(e) under the Act, provided that: 

(i) Such portfolio or combination of 

indexes has been described in an 

exchange rule approved by the 

Commission for the trading of options, 

PDRs, IFSs, Index-Linked Exchangeable 

Notes, or Index-Linked Securities, and 

all of the standards set forth in the 

approval order are satisfied by the 

exchange employing generic listing 

standards; or (ii) the equity portion and 

fixed income portion of the component 

securities separately meet the criteria set 

forth in Commentary .03 (equities) and 

proposed Commentary .04 (fixed 

income) for PDRs and Commentary .02 

(equities) and proposed Commentary .03 

(fixed income) for IFSs.31

E. Index Maintenance and Information 

The Exchange proposes to adopt 

Commentaries .04(b) and .05(a) to Amex 

Rule 1000–AEMI and Commentaries 

.03(b) and .04(a) to Amex Rule 1000A–

AEMI to establish requirements 

regarding the maintenance and 

dissemination of index information in 

connection with ETFs based on Fixed 

Income Indexes and Combination 

Indexes. 

Commentaries .04(b)(ii) and .05(a)(ii) 

to Amex Rule 1000–AEMI and 

Commentaries .03(b)(ii) and .04(a)(ii) to 

Amex Rule 1000A–AEMI would require 

that the underlying value of a Fixed 

Income Index be widely disseminated 

by one or more major market data 

vendors at least once a day during the 

time when the corresponding ETF 

trades on the Exchange. The rules also 

require that the underlying value of a 

Combination Index be widely 

disseminated by one or more major 

market data vendors at least once every 

15 seconds during the time when the 

corresponding ETF trades on the 

Exchange, provided that, with respect to 

the fixed income components of the 

Combination Index, their impact on the 

index is required to be updated only 

once each day. In its proposal, the 

Exchange stated that these provisions 

reflect the nature of the fixed income 

markets as well as the frequency of 

intra-day trading information with 

respect to Fixed Income Securities. If 


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32See Amex Rules 1002(a)(ii) and 1002A(a)(ii) 

(requiring that, before approving an ETF for listing, 

the Exchange will obtain a representation from the 

ETF issuer that the NAV per share will be 

calculated daily and made available to all market 

participants at the same time). 

33See Amex Rules 1000–AEMI and 1001 through 

1006 and Amex Rules 1000A–AEMI and 1001A 

through 1005A. 

34 If an ETF is traded on the Exchange pursuant 

to unlisted trading privileges, the Exchange would 

halt trading if the primary listing market halts 

trading in such ETF because the Intraday Indicative 

Value and/or the index value is not being 

disseminated. See Amex Rules 1002(b)(ii) and 

1002A(b)(ii). 

35See Amendment No. 2. 

36See proposed Commentary .06(f) to Amex Rule 

1000–AEMI and Commentary .05(f) to Amex Rule 

1000A–AEMI. 

37 In approving this proposal, the Commission has 

considered its impact on efficiency, competition, 

and capital formation. See 15 U.S.C. 78c(f). 38 15 U.S.C. 78f(b)(5). 39 15 U.S.C. 78s(b)(1). 40 17 CFR 240.19b–4. 

the index value does not change during 

some or all of the period when trading 

is occurring on the Exchange, the last 

official calculated index value must 

remain available throughout Exchange 

trading hours. 

Moreover, if a Fixed Income Index or 

Combination Index underlying an ETF 

is maintained by broker-dealer or fund 

advisor, the broker-dealer or fund 

advisor shall erect a ‘‘firewall’’ around 

the personnel who have access to 

information concerning changes and 

adjustments to the index. In addition, 

any advisory committee, supervisory 

board, or similar entity that advises a 

Reporting Authority or that makes 

decisions on index composition, 

methodology, and related matters, must 

implement and maintain, or be subject 

to, procedures designed to prevent the 

use and dissemination of material nonpublic information regarding the index. 

F. Application of General Rules 

Proposed Commentary .06 to Amex 

Rule 1000–AEMI and Commentary .05 

to Amex Rule 1000A–AEMI set forth 

requirements governing any ETF based 

on a Fixed Income Index or 

Combination Index. These include 

initial shares outstanding, minimum 

price variation, listing fees, surveillance 

procedures, the application of PDR or 

IFS rules (as applicable), and the 

dissemination of the Intraday Indicative 

Value, which is an estimate of the value 

of a share of each ETF, updated at least 

every 15 seconds. 

G. ETF Listing Criteria, Trading Rules, 

and Procedures 

Under the Exchange’s proposal, an 

ETF based on a Fixed Income Index or 

Combination Index would be subject to 

the listing criteria set out in Amex Rules 

1002 and 1002A. Accordingly, an ETF’s 

NAV must be calculated at least once 

each day and disseminated to all market 

participants at the same time.32 Also, 

where the value of the underlying index 

or portfolio of securities on which the 

ETF is based is no longer calculated or 

available, or if the ETF chooses to 

substitute a new index or portfolio for 

the existing index or portfolio, the 

Exchange would commence delisting 

proceedings if the new index or 

portfolio does not meet the 

requirements of and listing standards set 

forth in Amex Rules 1000–AEMI and 

Rules 1001 et seq. or Amex Rules 

1000A–AEMI and 1001A et seq., as 

applicable. If an ETF chose to substitute 

an index that did not meet any of 

Amex’s generic listing standards, 

approval by the Commission of a 

separate filing pursuant to Section 

19(b)(2) of the Act to list and trade that 

ETF would be required. 

An ETF based on a Fixed Income 

Index or Combination Index would be 

traded, in all respects, under the 

Exchange’s existing trading rules and 

procedures that apply to ETFs generally, 

including with respect to delisting and 

trading halts.33 In particular, Amex 

Rules 1002(b)(ii) and 1002A(b)(ii) 

provide that, if the Intraday Indicative 

Value or the index value applicable to 

that series of ETFs is not being 

disseminated as required, the Exchange 

may halt trading during the day in 

which the interruption to the 

dissemination of the Intraday Indicative 

Value or the index value occurs. If the 

interruption to the dissemination of the 

Intraday Indicative Value or the index 

value persists past the trading day in 

which it occurred, the Exchange would 

halt trading no later than the beginning 

of the trading day following the 

interruption.34

As noted above, if a broker-dealer is 

responsible for maintaining (or has a 

role in maintaining) the underlying 

index, such broker-dealer would be 

required to erect and maintain a 

‘‘firewall,’’ in a form satisfactory to the 

Exchange, to prevent the flow of nonpublic information regarding the 

underlying index from the personnel 

involved in the development and 

maintenance of such index to others 

such as sales and trading personnel. 

H. Surveillance 

The Exchange represents that an ETF 

based on a Fixed Income Index or 

Combination Index would be covered 

under the Exchange’s surveillance 

program for ETFs.35 The Exchange will 

implement written surveillance 

procedures for an ETF based on a Fixed 

Income Index or a Combination Index.36

The Exchange represents that its 

surveillance procedures are adequate to 

properly monitor the trading of ETFs 

listed pursuant to the proposed new 

listing standards. In addition, the 

Exchange also has a general policy 

prohibiting the distribution of material, 

non-public information by its 

employees. 

III. Discussion and Commission 

Findings 

After careful review, the Commission 

finds that the proposed rule change, as 

amended, is consistent with the Act and 

the rules and regulations thereunder 

applicable to a national securities 

exchange.37 In particular, the 

Commission believes that the proposal 

is consistent with Section 6(b)(5) of the 

Act 38 in that it is designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, to foster cooperation 

and coordination with persons engaged 

in facilitating transactions in securities, 

to remove impediments to and perfect 

the mechanism of a free and open 

market and a national market system, 

and, in general, to protect investors and 

the public interest. 

Currently, the Exchange must file a 

proposed rule change with the 

Commission pursuant to Section 

19(b)(1) of the Act 39 and Rule 19b–4 

thereunder 40 to list or trade any ETF 

based on Fixed Income Securities. The 

Exchange also must file a proposed rule 

change to list or trade an ETF based on 

a Fixed Income or Combination Index 

described in an exchange rule 

previously approved by the Commission 

as an underlying benchmark for a 

derivative security. Rule 19b–4(e), 

however, provides that the listing and 

trading of a new derivative securities 

product by an SRO will not be deemed 

a proposed rule change pursuant to Rule 

19b–4(c)(1) if the Commission has 

approved, pursuant to Section 19(b) of 

the Act, the SRO’s trading rules, 

procedures, and listing standards for the 

product class that would include the 

new derivative securities product, and 

the SRO has a surveillance program for 

the product class. The Exchange’s 

proposed rules for the listing and 

trading of ETFs pursuant to Rule 19b–

4(e) based on (1) certain indexes with 

components that include Fixed Income 

Securities or (2) indexes or portfolios 

described in exchange rules previously 

approved by the Commission as 

underlying benchmarks for derivative 

securities fulfill these requirements. Use 

of Rule 19b–4(e) by Amex to list and 

trade such ETFs should promote 


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Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices 12237 

41The Commission notes that failure of a 

particular ETF to satisfy the Exchange’s generic 

listing standards does not preclude the Exchange 

from submitting a separate proposal to list and trade 

such ETF. 

42See notes 12–14 supra. The Commission notes 

that such listing standards permit an exchange to 

list new derivative securities pursuant to Rule 19b–

4(e) under the Act based on portfolios or indexes 

that underlie securities described in other 

previously approved rules, subject to the condition 

that all of the standards set forth in the approval 

order are satisfied by the exchange employing 

generic listing standards. 

43See notes 15–16 supra. 44 15 U.S.C. 78k–1(a)(1)(C)(iii). 

45 If an ETF is traded on the Exchange pursuant 

to unlisted trading privileges, the Exchange would 

halt trading if the primary listing market halts 

trading in such ETF because the Intraday Indicative 

Value and/or the index value is not being 

disseminated. See Amex Rules 1002(b)(ii) and 

1002A(b)(ii). 

46See proposed Commentary .06(f) to Amex Rule 

1000–AEMI and Commentary .05(f) to Amex Rule 

1000A–AEMI. 

competition, reduce burdens on issuers 

and other market participants, and make 

such ETFs available to investors more 

quickly.41

The Commission has previously 

approved generic listing standards for 

ETFs based on indexes that consist of 

stocks listed on U.S. and non-U.S. 

exchanges, as well as for other indexbased derivatives.42 The Commission 

has also approved for listing and trading 

ETFs based on certain fixed income 

indexes and structured notes linked to 

a basket or index of Fixed Income 

Securities.43 The Commission believes 

that adopting additional generic listing 

standards for ETFs based on Fixed 

Income and Combination Indexes 

should fulfill the intended objective of 

that rule by allowing those ETFs that 

satisfy the proposed generic listing 

standards to commence trading without 

a rule filing. Taken together, the 

Commission finds that the Amex 

proposal meets the requirements of Rule 

19b–4(e). All products listed under the 

proposed generic listing standards will 

be subject to existing Amex rules that 

governing the trading of ETFs. 

Proposed Commentary .04 to Amex 

Rule 1000–AEMI (for PDRs) and 

proposed Commentary .03 to Amex Rule 

1000A–AEMI (for IFSs) establish the 

standards for the composition of a Fixed 

Income Index or Combination Index 

underlying an ETF. These requirements 

are designed, among other things, to 

require that components of an index or 

portfolio underlying the ETF are 

adequately capitalized and sufficiently 

liquid, and that no one security 

dominates the index. The Commission 

believes that these standards are 

reasonably designed to ensure that a 

substantial portion of any underlying 

index or portfolio consists of securities 

about which information is publicly 

available, and that when applied in 

conjunction with the other applicable 

listing requirements, will permit the 

listing and trading only of ETFs that are 

sufficiently broad-based in scope to 

minimize potential manipulation. The 

Commission further believes that the 

proposed listing standards are 

reasonably designed to preclude Amex 

from listing and trading ETFs that might 

be used as a surrogate for trading in 

unregistered securities. 

The proposed generic listing 

standards also will permit Amex to list 

and trade an ETF if the Commission 

previously has approved an exchange 

rule that contemplates listing and 

trading a derivative security based on 

the same underlying index. Amex 

would be able to rely on that earlier 

approval order, provided that Amex 

complies with the commitments 

undertaken by the other SRO set forth 

in the prior order, including any 

surveillance-sharing arrangements. 

The Commission believes that Amex’s 

proposal is consistent with Section 

11A(a)(1)(C)(iii) of the Act,44 which sets 

forth Congress’ finding that it is in the 

public interest and appropriate for the 

protection of investors and the 

maintenance of fair and orderly markets 

to assure the availability to brokers, 

dealers, and investors of information 

with respect to quotations for and 

transactions in securities. Under the 

Exchange’s proposed listing standards, 

the underlying value of a Fixed Income 

Index is required to be widely 

disseminated by one or more major 

market data vendors at least once a day 

during the time when the corresponding 

ETF trades on the Exchange. Likewise, 

the underlying value of a Combination 

Index is required to be widely 

disseminated by one or more major 

market data vendors at least once every 

15 seconds during the time when the 

corresponding ETF trades on the 

Exchange, provided that, with respect to 

the fixed income components of the 

Combination Index, the impact on the 

index is required to be updated only 

once each day. 

Furthermore, the Commission 

believes that the proposed rules are 

reasonably designed to promote fair 

disclosure of information that may be 

necessary to price an ETF appropriately. 

If a Fixed Income Index or Combination 

Index underlying such an ETF is 

maintained by a broker-dealer or fund 

advisor, that entity must erect a firewall 

around the personnel who have access 

to information concerning changes and 

adjustments to the index. Any advisory 

committee, supervisory board, or similar 

entity that advises a Reporting 

Authority or that makes decisions on 

index composition, methodology, or 

related matters must implement and 

maintain, or be subject to, procedures 

designed to prevent the use and 

dissemination of material non-public 

information regarding the index. The 

Commission also notes that existing 

Amex Rules 1002(a)(ii) and 1002A(a)(ii), 

which would apply to an ETF listed and 

traded pursuant to this proposal, require 

that, before approving an ETF for listing, 

the Exchange will obtain a 

representation from the ETF issuer that 

the NAV per share will be calculated 

daily and made available to all market 

participants at the same time. 

The Commission also believes that the 

Exchange’s trading halt rules are 

reasonably designed to prevent trading 

in an ETF when transparency cannot be 

assured. Amex Rules 1002(b)(ii) and 

1002A(b)(ii) provide that, if the Intraday 

Indicative Value or the index value 

applicable to an ETF is not 

disseminated as required, the Exchange 

may halt trading during the day in 

which the interruption occurs. If the 

interruption continues, the Exchange 

will halt trading no later than the 

beginning of the next trading day.45

Also, the Exchange will commence 

delisting proceedings in the event that 

the value of the underlying index is no 

longer calculated and widely 

disseminated on at least a 15-second 

basis (for Combination Indexes) or at 

least once a day (for Fixed Income 

Indexes). 

The Exchange will implement written 

surveillance procedures for ETFs based 

on a Fixed Income Indexes or 

Combination Indexes.46 In approving 

this proposal, the Commission has 

relied on the Exchange’s representation 

that its surveillance procedures are 

adequate to properly monitor the 

trading of ETFs listed pursuant to this 

proposal. This approval order is 

conditioned on the continuing accuracy 

of that representation. 

Acceleration 

The Commission finds good cause to 

approve the proposal, as amended, prior 

to the thirtieth day after the amended 

proposal was published for comment in 

the Federal Register. The Commission 

believes that accelerating approval of 

the proposed rule change will expedite 

the listing and trading of additional 

ETFs based on Fixed Income and 

Combination Indexes by the Exchange, 

subject to consistent and reasonable 

standards. The Commission also notes 

that no comments were received during 

the abbreviated comment period, and 


rmajette on PROD1PC67 with NOTICES
12238 Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices 

47 15 U.S.C. 78s(b)(2). 

48 15 U.S.C. 78s(b)(2). 

49 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 54643 

(October 23, 2006), 71 FR 63367 (‘‘Notice’’). 

4 In Amendment No. 2, the Exchange represented 

that CBOE Futures Exchange, LLC (‘‘CFE’’) does not 

currently list and trade RVX futures. The Exchange 

further represented that it will not list for trading 

RVX options until RVX futures have begun trading 

on CFE. 

5The Exchange represented in its filing that the 

RVX is calculated in the same manner as other 

volatility indexes (e.g., the CBOE Volatility Index 

(‘‘VIX’’)), upon which options have been based and 

previously approved by the Commission. A more 

detailed explanation of the method used to 

calculate VIX may be found on CBOE’s Web site at 

the following internet address: http:// 

www.cboe.com/micro/vix/vixwhite.pdf. 

that Amendments No. 2 and 3 do not 

make any substantial changes to the 

proposal. Thus, the Commission finds 

good cause, consistent with Section 

19(b)(2) of the Act,47 to grant accelerated 

approval of the proposed rule change, as 

amended. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments regarding Amendments No. 2 

and 3, including whether Amendments 

No. 2 and 3 are 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–Amex–2006–118 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

Station Place, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–Amex–2006–118. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of 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 

Number SR–Amex–2006–118 and 

should be submitted on or before April 

5, 2007. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,48 that the 

proposed rule change (SR–Amex–2006–

118), as amended, be, and hereby is, 

approved on an accelerated basis. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.49

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–4747 Filed 3–14–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55425; File No. SR–CBOE–

2006–73] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing of 

Amendment No. 2 and Order Granting 

Accelerated Approval of Proposed 

Rule Change as amended, to Amend 

Certain of its Rules to Provide for the 

Listing and Trading of Options on the 

CBOE Russell 2000 Volatility Indexsm

(‘‘RVXsm’’) 

March 8, 2007. 

I. Introduction 

On August 31, 2006, the Chicago 

Board Options Exchange, Incorporated 

(‘‘CBOE’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) a proposed rule 

change, pursuant to Section 19(b)(1) of 

the Securities Exchange Act of 1934 

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

amend certain of its rules to provide for 

the listing and trading of options on the 

CBOE Russell 2000 Volatility Indexsm

(‘‘RVXsm’’). On October 20, 2006, CBOE 

filed Amendment No. 1 to the proposed 

rule change. The proposed rule change, 

as modified by Amendment No. 1, was 

published for comment in the Federal 

Register on October 30, 2006.3 The 

Commission received no comments on 

the proposal. On February 26, 2007, 

CBOE filed Amendment No. 2 to the 

proposed rule change.4 This order 

provides notice of Amendment No. 2 to 

the proposed rule change and approves 

the proposed rule change as amended. 

II. Description of the Proposal 

The Exchange seeks to list and trade 

cash-settled, European-style options on 

the RVX. The index is calculated using 

real-time Russell 2000 Index (‘‘RUT’’) 

option bid/ask quotes. RVX uses nearby 

and second nearby RUT options with at 

least 8 days left to expiration and then 

weights them to yield a constant, 30-day 

measure of the expected volatility of the 

RUT. 

For each contract month, CBOE will 

determine the at-the-money strike price. 

It will then select the at-the-money and 

out-of-the money series with non-zero 

bid prices and determine the midpoint 

of the bid-ask quote for each of these 

series. The midpoint quote of each 

series is then weighted so that the 

further away that series is from the atthe-money strike, the less weight that is 

accorded to the quote. Then, to compute 

the index level, CBOE will calculate a 

volatility measure for the nearby options 

and then for the second nearby options. 

This is done using the weighted midpoint of the prevailing bid-ask quotes 

for all included option series with the 

same expiration date. These volatility 

measures are then interpolated to arrive 

at a single, constant 30-day measure of 

volatility.5

CBOE will compute the index on a 

real-time basis throughout each trading 

day, from 8:30 a.m. until 3:15 p.m. CST. 

Volatility index levels will be calculated 

by CBOE and disseminated at 15-second 

intervals to market information vendors 

via the Options Price Reporting 

Authority (‘‘OPRA’’). 

Because of the generally limited range 

in which RVX has fluctuated, the 

Exchange proposes to list series at $1.00 

or greater strike price intervals for each 

expiration on up to 5 RVX option series 

above and 5 RVX option series below 

the current index level. Additional 

series at $1.00 or greater strike price 

intervals could be listed for each 

expiration as the current index level of 

RVX moves from the exercise price of 

the RVX options series that already have 

been opened for trading on the 

Exchange in order to maintain at least 

5 RVX option series above and 5 RVX 

option series below the current index 

level. 


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