Document ID: SEC-2006-0578-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2006-05-03T04:00Z

[Federal Register: May 3, 2006 (Volume 71, Number 85)]
[Notices]               
[Page 26146-26152]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my06-115]                         

[[Page 26146]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53723; File No. SR-Amex-2005-105]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change and Amendments No. 1 and 2 
Thereto Relating to the Listing and Trading of Principal Protected 
Notes Linked to the Metals-China Basket

April 25, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 20, 2005, the American Stock Exchange LLC (the ``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Amex. On March 23, 
2006, Amex filed Amendment No. 1 to the proposed rule change.\3\ On 
April 12, 2006, Amex filed Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 to the proposed rule change: (1) Clarifies 
certain specialist restrictions regarding potential conflicts of 
interests in the underlying commodities; and (2) specifies that the 
listing and trading principle protected notes will occur on the debt 
trading floor and be subject to the Exchange's debt trading rules.
    \4\ Amendment No. 2 to the proposed rule change states that the 
applicable composite basket will be calculated and disseminated once 
each trading day.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade principal protected notes, 
the performance of which is linked to a basket comprised of an equal 
weighting of the FTSE/Xinhua China 25 Index (the ``China 25 Index'' or 
``Index'') and the following four commodities: copper, lead, nickel, 
and zinc (the ``Metals-China Basket'' or ``Basket'').
    The text of the proposed rule change is available on the Amex's Web 
site at http://www.amex.com, the Amex' Office of the Secretary, and at 

the Commission's Public Reference Room.

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

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The Amex has prepared summaries, set forth 
in sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    Under section 107A of the Amex Company Guide (``Company Guide''), 
the Exchange may approve for listing and trading securities that cannot 
be readily categorized under the listing criteria for common and 
preferred stocks, bonds, debentures, or warrants.\5\ The Amex proposes 
to list for trading under section 107A of the Company Guide principal 
protected notes linked to the performance of the Metals-China Basket 
(the ``Notes'').\6\
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    \5\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \6\ Wachovia Corporation (``Wachovia'') and FTSE/Xinhua Index 
Limited (``FXI''), a joint venture between FTSE International 
Limited and Xinhua Financial Network, have entered into a non-
exclusive license agreement providing for the use of the Xinhua 
Index by Wachovia and certain affiliates and subsidiaries in 
connection with certain securities including these Notes. FTSE/
Xinhua Index Limited is not responsible and will not participate in 
the issuance and creation of the Notes.
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    Wachovia will issue the Notes under the name ``Asset Return 
Obligation Securities.'' The China 25 Index is determined, calculated 
and maintained solely by FXI while the commodity prices are determined 
by the cash settlement price of each respective commodity futures 
contract traded on the London Metals Exchange (the ``LME''). The Notes 
will provide for participation in the positive performance of the 
Metals-China Basket during their term while reducing the risk exposure 
to investors through principal protection.
    The Notes will conform to the initial listing guidelines under 
section 107A \7\ and continued listing guidelines under sections 1001-
1003 \8\ of the Company Guide. The Notes are senior non-convertible 
debt securities of Wachovia. The principal amount of each Note is 
expected to be $1,000. The Notes are expected to have a term of at 
least one (1) but no more than ten (10) years. At a minimum, the Notes 
will entitle the owner at maturity to receive at least 100% of the 
principal investment amount. At maturity, the holder would receive the 
full principal investment amount of each Note plus the Basket 
Performance Amount. The Basket Performance Amount is the greater of 
zero and the product of $1,000 and the performance of the Basket as 
adjusted by the adjustment factor (the ``Adjustment Factor'').\9\ 
Accordingly, if the performance of the Metals-China Basket is negative 
or does not appreciate by greater than 7.2341% as of the Valuation 
Date, a holder will nevertheless receive the principal investment 
amount of the Note at maturity. The Notes are not callable by the 
Issuer.
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    \7\ The initial listing standards for the Notes require: (1) A 
market value of at least $4 million; and (2) a term of at least one 
year. Because the Notes will be issued in $1,000 denominations, the 
minimum public distribution requirement of one million units and the 
minimum holder requirement of 400 holders do not apply. In addition, 
the listing guidelines provide that the issuer has assets in excess 
of $100 million, stockholder's equity of at least $10 million, and 
pre-tax income of at least $750,000 in the last fiscal year or in 
two of the three prior fiscal years. In the case of an issuer which 
is unable to satisfy the earning criteria stated in section 101 of 
the Company Guide, the Exchange will require the issuer to have the 
following: (1) Assets in excess of $200 million and stockholders' 
equity of at least $10 million; or (2) assets in excess of $100 
million and stockholders' equity of at least $20 million.
    \8\ The Exchange's continued listing guidelines are set forth in 
sections 1001 through 1003 of part 10 to the Exchange's Company 
Guide. Section 1002(b) of the Company Guide states that the Exchange 
will consider removing from listing any security where, in the 
opinion of the Exchange, it appears that the extent of public 
distribution or aggregate market value has become so reduced to make 
further dealings on the Exchange inadvisable. With respect to 
continued listing guidelines for distribution of the Notes, the 
Exchange will rely, in part, on the guidelines for bonds in section 
1003(b)(iv). Section 1003(b)(iv)(A) provides that the Exchange will 
normally consider suspending dealings in, or removing from the list, 
a security if the aggregate market value or the principal amount of 
bonds publicly held is less than $400,000.
    \9\ The Adjustment Factor is initially set at 100% and will be 
reduced by a rate of 2% per annum compounded daily on an actual 365 
day count. On any calendar day, the Adjustment Factor is equal to 
(100%-(2%/365))n. ``n'' is the number of calendar days from but 
excluding July 21, 2005 to and including the calendar day. The 
Adjustment Factor as of the Valuation Date will be 93.2341%.
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    The payment that a holder or investor of a Note will be entitled to 
receive (the ``Maturity Payment Amount'') will depend on the 
performance of the Metals-China Basket during the term of the Note. The 
Metals-China Basket will not be managed and will remain static over the 
term of the Notes.\10\ Performance of the Basket will be determined at 
the close of the market on

[[Page 26147]]

the fifth business day (the ``Valuation Date'') prior to maturity of 
the Notes. The Basket Starting Level will be 1,000 and the Basket 
Ending Level will be the closing level of the underlying basket on the 
Valuation Date, equal to the sum of the products of (i) the component 
multiplier of each basket component and (ii) the closing price or level 
of the respective basket component on the Valuation Date. The Basket 
Ending Level is then adjusted by the Adjustment Factor as of the 
Valuation Date. In the event that the Valuation Date occurs on a non-
trading day or if a market disruption event \11\ occurs on such date, 
the Valuation Date will be the next trading day on which no market 
disruption event occurs.
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    \10\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission, on April 24, 2006. Amex 
confirmed that the Metals-China Basket is not managed.
    \11\ A ``market disruption event'' is defined as the failure of 
the primary market or related markets to open for trading during 
regular trading hours or the occurrence or existence of any of the 
following events: (i) A trading disruption, if material, at any time 
during the one hour period that ends at the close of trading for a 
relevant exchange or related exchange; (ii) an exchange disruption, 
if material, at any time during the one hour period that ends at the 
close of trading for a relevant exchange or related exchange; or 
(iii) an early closure. A ``trading disruption'' generally means any 
suspension of, or limitation, imposed on trading by the relevant 
exchange or related exchange or otherwise, whether by reason of 
movements in price exceeding limits permitted by the relevant 
exchange or related exchange or otherwise: (i) Relating to 
securities that comprise 20% or more of the level of the Index; or 
(ii) in options contracts or futures contracts relating to the Index 
on any relevant related exchange. An ``exchange disruption'' means 
any event (other than a scheduled early closure) that disrupts or 
impairs the ability of market participants in general to: (i) Effect 
transactions in, or obtain market values on, any relevant exchange 
or related exchange in securities that comprise 20 percent or more 
of the level of the Index or; (ii) effect transactions in options 
contracts or futures contracts relating to the Index on any relevant 
related exchange. A ``related exchange'' is an exchange or quotation 
system on which futures or options contracts relating to the Index 
are traded. See footnote 19, infra.
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    At maturity, a holder will receive a maturity payment amount per 
Note equal to $1,000 + Basket Performance Amount. If the Adjusted 
Basket Ending Level is less than or equal to the Basket Starting Level, 
the Basket Performance Amount will be zero and the Maturity Payment 
Amount will be $1,000.
    The Basket Performance Amount per Note is equal to the greater of: 
(i) Zero; and (ii)
[GRAPHIC] [TIFF OMITTED] TN03MY06.018

    The Maturity Payment Amount per Note will never be less than the 
principal investment amount of $1,000.

Metals-China Basket

    The Basket is an equally-weighted basket of four commodities 
(copper, lead, nickel, and zinc) and the China 25 Index. Each component 
of the Basket will initially represent 20% of the Basket. The Basket is 
not a recognized market index and was created solely for purpose of 
offering the Notes. The Metals-China Basket will not be managed and 
will remain static over the term of the Notes. The basket value will be 
calculated and disseminated once each trading day. The Exchange 
believes that this daily dissemination of an indicative basket amount 
is appropriate because the Notes are a bond traded on Amex's debt 
floor, the value of which is linked to the basket, and there will be no 
creation or redemption of shares as there would be with an exchange-
traded fund (``ETF'').\12\
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    \12\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Raymond Lombardo, Special Counsel, 
Division of Market Regulation, Commission, on April 13, 2006.
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China 25 Index

    The China 25 Index is designed to represent the performance of the 
largest companies in the mainland China equity market that are 
available to international investors. The Index consists of the 25 
largest and most heavily traded Chinese companies.\13\ The components 
of the Index 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 Index. Components 
are screened for liquidity and weightings are capped to avoid over-
concentration in any one stock. The China 25 Index commenced 
publication in March 2001. As of September 30, 2005, the top three 
holdings were China Mobile, PetroChina and BOC Hong Kong, with the top 
three industries being telecommunications, oil and gas, and banks.
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    \13\ All classes of equity securities in issue are eligible for 
inclusion in the Index, subject to conforming with free-float and 
liquidity restrictions. H shares and Red Chip shares are eligible 
for inclusion in the Index. H shares are 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 are 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 interested 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 the 
Exchange states effectively guarantees settlement of exchange trades 
by broker-dealers.
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    As of September 30, 2005, the China 25 Index's components had a 
total market capitalization of approximately $414 billion and a float-
adjusted market capitalization of approximately $55 billion.\14\ The 
average total market capitalization was approximately $16.5 billion and 
the average float-adjusted market capitalization was approximately $22 
billion. The ten largest constituents represented approximately 62% of 
the index weight. The 5 highest weighted stocks, which represented 
41.7% of the index weight, had an average daily trading volume in 
excess of $79 million globally during the past six (6) months.
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    \14\ Float-adjusted market capitalization includes shares 
available in the market for public investment and reflects free 
float adjustments to the 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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    Component Selection Criteria. The China 25 Index is rule-based and 
is monitored by a governing committee. The China 25 Index Committee 
(the ``Index Committee'') is responsible for conducting quarterly 
reviews of components and for making changes in accordance with 
applicable procedures. The Index Committee is currently composed of 19 
members, four of whom are currently affiliated with non-U.S. broker-
dealers. FTSE has represented that the FTSE, FXI, and the Index 
Committee have adopted policies that prohibit the dissemination and use 
of confidential and proprietary information about the Index and have 
instituted procedures designed to prevent the improper dissemination or 
the use of such information.
    Float-Adjusted Market Capitalization. When calculating a 
component's index weight, 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

[[Page 26148]]

companies are index components. Where a foreign investment limit exists 
at the sector or company level, the component's weight will reflect 
either the foreign investment limit or the percentage float, whichever 
is more restrictive. Component 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 Index. 
The financial and operating conditions of a company are not analyzed.
    Index Maintenance. The Index Committee is responsible for 
undertaking the review of the China 25 Index and for approving changes 
of components in accordance with the index rules and procedures. The 
FTSE Global Classification Committee is responsible for the industry 
classification of constituents of the 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 (before the quarterly review) will be made before the start of 
the index calculation on the day on which the change takes effect. 
Adjustments to reflect less significant changes (before the quarterly 
review) will be implemented before the start of the index calculation 
on the day following the announcement of the change. All adjustments 
are made before the start of the index calculations on the day 
concerned, unless market conditions prevent this. A company will be 
inserted into the Index at the quarterly 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 Index will be deleted at the quarterly 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 Index will simultaneously entail an 
addition to the Index to maintain 25 index constituents at all times.
    The China 25 Index is reviewed quarterly for changes in free float. 
These reviews will coincide with the quarterly reviews undertaken of 
the Index as a whole. Implementation of any changes will be after the 
close of the index calculation on the third Friday in January, April, 
July, and October.
    The quarterly review of the Index constituents takes place in 
January, April, July, and October. Any 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 its review.
    Index Dissemination. The Index is calculated in real time and 
published every minute during the index period (09:15-16:00 Local Hong 
Kong Time) or (17:15-24:00 U.S. PDT). It is available, by subscription, 
published every minute, directly from FTSE and from the following 
vendors: Reuters, Bloomberg, Telekurs, FTID, and LSE/Proquote. The end 
of day index value, based on last sale prices, is distributed at 16:15 
(Local Hong Kong Time). This end of day index value is also 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 Index is calculated using Hong Kong Stock 

Exchange trade prices and Reuter's realtime spot currency rates, as 
described below. A total return index value that takes into account 
reinvested dividends is published daily at the end of day. The Index is 
not calculated on days that are holidays in Hong Kong. The daily 
closing 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 indices are also 
available from the Web site.
    Exchange Rates and Pricing. FXI calculates the value of the Index 
using Reuters real-time foreign exchange spot rates and local stock 
exchange real-time, last sale security prices. The underlying Index is 
calculated in Hong Kong Dollars, using Hong Kong Stock Exchange trade 
prices. Non-Hong Kong Dollar denominated constituent prices are 
converted to Hong Kong Dollars in order to calculate the value of the 
underlying Index. Thus, the Reuter's foreign exchange rates and Hong 
Kong Stock Exchange prices received at the closing time of the 
underlying Index will be used to calculate the final underlying Index 
value each day.
    The Commission has previously approved the listing of securities 
linked to the performance of the China 25 Index.\15\
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    \15\ See, e.g., Securities Exchange Act Release Nos. 50505 
(October 8, 2004), 69 FR 61280 (October 15, 2004) (approving the 
listing and trading of the iShares FTSE/Xinhua China 25 Index Fund) 
and 50800 (December 6, 2004), 69 FR 72228 (December 13, 2004) 
(approving the trading of the iShares FTSE/Xinhua China 25 Index 
Fund).
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Commodities: Copper, Lead, Nickel, and Zinc

    Commodity prices are volatile and, although ultimately determined 
by the interaction of supply and demand, are subject to many other 
influences, including the psychology of the marketplace and speculative 
assessments of future world and economic events. Political climate, 
interest rates, treaties, balance of payments, exchange controls and 
other governmental interventions, as well as numerous other variables 
affect the commodity markets, and even with complete information it is 
impossible for any trader to reliably predict commodity prices.
    Copper. The Exchange states that copper was the first mineral that 
man extracted from the earth and along with tin gave rise to the Bronze 
Age. As the ages and technology progressed, the uses for copper 
increased. With the increased demand, exploration for the metal was 
extended throughout the world, laying down the foundations for the 
industry as we know it today. Copper is an excellent conductor of 
electricity, as such one of its main industrial usage is for the 
production of cable, wire and electrical products for both the 
electrical and building industries. The construction industry also 
accounts for copper's second largest usage in such areas as pipes for 
plumbing, heating, and ventilating as well as building wire and sheet 
metal facings.
    The price of copper is volatile with fluctuations expected to 
affect the value of the Notes. The closing price of copper is 
determined by reference to the official U.S. dollar cash settlement 
price per ton of the copper futures contract traded on the LME. The 
price of copper is primarily affected by the global demand for and 
supply of copper.
    Demand for copper is significantly influenced by the level of 
global industrial economic activity. Industrial sectors which are 
particularly important

[[Page 26149]]

include the electrical and construction sectors. In recent years demand 
has been supported by strong consumption from newly industrializing 
countries, which continue to be in a copper-intensive period of 
economic growth as they develop their infrastructure (such as China). 
An additional, but highly volatile, component of demand is adjustments 
to inventory in response to changes in economic activity and/or pricing 
levels. Apart from the United States, Canada, and Australia, the 
majority of copper concentrate supply (the raw material) comes from 
outside the Organization for Economic Cooperation and Development 
countries. Chile is the largest producer of copper concentrate. In 
previous years, copper supply has been affected by strikes, financial 
problems, and terrorist activity. Output has fallen particularly 
sharply in the ``African Copperbelt'' and in Bougainville, Papua New 
Guinea.
    The price of copper during the period January 2001 through 
September 2005, ranged from a high of $3,978 per ton in September 2005 
to a low of $1,319 per ton in November 2001. As of September 30, 2005, 
the spot price as provided by that day's spot copper futures contract 
was $3,949 per ton.
    Lead. Being very soft and pliable and highly resistant to 
corrosion, lead was ideal for use in plumbing as well as for the 
manufacture of pewter. In the early 20th century, the Exchange states 
that the automotive industry took off and new areas of consumption--
batteries and petrol--created an enormous market. Storage batteries 
remain the main outlet but lead-free fuels have caused a decline in 
usage. Ironically, environmental issues have brought about new uses for 
the metal, particularly in the housing of power generation units to 
protect against electrical charges or dangerous radiation.
    Changes in the price of lead are expected to affect the value of 
the Notes. The closing price of lead is determined by reference to the 
official U.S. dollar cash settlement price per ton of the lead futures 
contract traded on the LME. The price of lead is primarily affected by 
the global demand for and supply of lead. Demand for lead is 
significantly influenced by the level of global industrial economic 
activity. The storage battery market is extremely important given that 
the use of lead in the manufacture of batteries accounts for 
approximately two-thirds of worldwide lead demand. Lead is also used to 
house power generation units as it protects against electrical charges 
and dangerous radiation. Additional applications of lead include petrol 
additives, pigments, chemicals and crystal glass. The supply of lead is 
widely spread around the world. It is affected by current and previous 
price levels, which influences important decisions regarding new mines 
and smelters. A critical factor influencing supply is the environmental 
regulatory regimes of the countries in which lead is mined and 
processed. It is not possible to predict the aggregate effect of all or 
any combination of these factors.
    The price of lead during the period January 2001 through September 
2005 ranged from a high of $1,056 per ton in December 2004 to a low of 
$425 per ton in October 2002. As of September 30, 2005, the spot price 
as provided by that day's spot lead futures contract was $975 per 
ton.\16\
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    \16\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission, on April 24, 2006.
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    Nickel. In the mid 18th century, the Exchange states that primary 
nickel was first isolated as a separate metal. Prior to this, it was 
found in copper mines and thought to be an unsmeltable copper ore. 
Primary nickel can resist corrosion and maintains its physical and 
mechanical properties even when placed under extreme temperatures. When 
these properties were recognized, the development of primary nickel 
began. It was found that by combining primary nickel with steel, even 
in small quantities, the durability and strength of the steel increased 
significantly, as did its resistance to corrosion. This partnership has 
remained and the production of stainless steel is now the single 
largest consumer of primary nickel today. This highly useful metal is 
also used in the production of many different metal alloys for 
specialized use.
    Changes in the price of nickel are expected to affect the value of 
the Notes. The closing price of nickel is determined by reference to 
the official U.S. dollar cash settlement price per ton of the nickel 
futures contract traded on the LME. The price of nickel is primarily 
affected by the global demand for and supply of nickel. Demand for 
nickel is significantly influenced by the level of global industrial 
economic activity. The stainless steel industrial sector is 
particularly important given that the use of nickel in the manufacture 
of stainless steel accounts for approximately two-thirds of worldwide 
nickel demand. An additional, but highly volatile, component of demand 
is adjustments to inventory in response to changes in economic activity 
and/or pricing levels. Nickel supply is dominated by Russia, the 
world's largest producer by far. Australia and Canada are also large 
producers. The supply of nickel is also affected by current and 
previous price levels, which will influence investment decisions in new 
mines and smelters. It is not possible to predict the aggregate effect 
of all or any combination of these factors.
    The price of nickel during the period January 2001 through 
September 2005 ranged from a high of $17,770 per ton in January 2004 to 
a low of $4,420 per ton in October 2001. As of September 30, 2005, the 
spot price per ton for nickel as provided by that day's spot nickel 
futures contract was $13,600 per ton.\17\
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    \17\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission, on April 24, 2006. Amex 
confirmed that the spot price for nickel was calculated per ton.
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    Zinc. Zinc is commonly mined as a co-product with standard lead, 
and both metals have growing core markets for their consumption. For 
zinc, the main market is galvanizing, which accounts for almost half 
its modern-day demand. Zinc's electropositive nature enables metals to 
be readily galvanized, which gives added protection against corrosion 
to building structures, vehicles, machinery, and household equipment.
    Changes in the price of zinc are expected to affect the value of 
the Notes. The closing price of zinc is determined by reference to the 
official U.S. dollar cash settlement price per ton of the zinc futures 
contract traded on the LME. The price of zinc is primarily affected by 
the global demand for and supply of zinc. Demand for zinc is 
significantly influenced by the level of global industrial economic 
activity. The galvanized steel industrial sector is particularly 
important given that the use of zinc in the manufacture of galvanized 
steel accounts for approximately 50% of world-wide zinc demand. The 
galvanized steel sector is in turn heavily dependent on the automobile 
and construction sectors. A relatively widespread increase in the 
demand for zinc by the galvanized steel sector, particularly in China 
and the United States, has been the primary cause of the recent rise in 
zinc prices. An additional, but highly volatile, component of demand is 
adjustments to inventory in response to changes in economic activity 
and/or pricing levels. The supply of zinc concentrate (the raw 
material) is dominated by China, Australia, North America, and Latin 
America. The supply of zinc is also affected by current and previous 
price levels, which will influence investment

[[Page 26150]]

decisions in new mines and smelters. It is not possible to predict the 
aggregate effect of all or any combination of these factors.
    The price of zinc during the period January 2001 through September 
2005 ranged from a high of $1,439 per ton in September 2005 to a low of 
$725.5 per ton in August 2002. As of September 30, 2005, the spot price 
per ton for zinc as provided by that day's spot zinc futures contract 
was $1,411 per ton.\18\
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    \18\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission, on April 24, 2006. Amex 
confirmed that the spot price for zinc was calculated per ton.
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The LME

    The LME was established in 1877. The Exchange states that the LME 
is the principal metals exchange in the world on which contracts for 
the future delivery of copper, lead, zinc, and nickel are traded. In 
contrast to U.S. futures exchanges, the LME operates as a principals' 
market for the trading of forward contracts and is therefore more 
closely analogous to over-the-counter physical commodity markets than 
futures markets in the U.S. As a result, members of the LME trade with 
each other as principals and not as agents for customers, although such 
members may enter into offsetting ``back-to-back'' contracts with their 
customers. In addition, while futures exchanges permit trading to be 
conducted in contracts for monthly delivery in stated delivery months, 
historically, LME contracts were established for delivery on any day 
(referred to as a ``prompt date'') from one day to three months 
following the date of the contract (i.e., the average amount of time it 
took a ship to sail from certain Commonwealth countries to London). 
Currently, LME contracts may be established for monthly delivery up to 
63, 27, and 15 months forward (depending on the commodity). Further, 
because it is a principals' forward market, there are no price limits 
applicable to LME contracts, and therefore, prices may decline without 
limitation over a period of time. Trading is conducted on the basis of 
warrants that cover physical material held in listed warehouses.
    The LME is not a cash cleared market. Both inter-office and floor 
trading are cleared and guaranteed by a system run by the London 
Clearing House, whose role is to act as a central counterparty to 
trades executed between clearing members. The LME is subject to 
regulation by the Securities and Investment Board (``SIB'') in the 
United Kingdom. The bulk of trading on the LME is transacted through 
inter-office dealing that allows the LME to operate as a 24-hour 
market. Trading on the floor takes place in two sessions daily, from 
11:40 a.m. to 1:15 p.m. and from 3:10 p.m. to 4:35 p.m., London time. 
The two sessions are each broken down into two rings made up of five 
minutes' trading in each contract. After the second ring of the first 
session, the official prices for the day are announced. Contracts may 
be settled by offset or delivery and can be cleared in U.S. dollars, 
pounds sterling, Japanese yen, and euros. Copper has traded on the LME 
since its establishment. The copper contract was upgraded to high grade 
copper in November 1981 and again to today's Grade-A contract which 
began trading in June 1986. Nickel joined the exchange in April 1979. 
The LME share (by weight) of world terminal market trading is over 90% 
of all copper and virtually all lead, nickel, and zinc.

Commodity Market Regulation

    The Exchange states that the LME provides the trading environment 
for the four commodities of copper, lead, nickel, and zinc (as well as 
several others) and is required to ensure that business in its market 
is conducted in an orderly manner for the protection of investors. The 
members of the LME are the institutions involved in trading with each 
other and with their customers. Regulation of the market is largely 
carried out by the LME subject to SIB oversight with the Financial 
Services Authority (the ``FSA'') responsible for regulating the 
financial soundness and conduct of LME members. Market participants are 
generally subject to a range of requirements, including fitness and 
properness, capital adequacy, liquidity, and systems controls. The FSA 
is responsible for regulating investment products, including 
derivatives, and those who deal in investment products.
    Approved as a recognized investment exchange (``RIE'') and 
conforming with U.K. and other international regulatory requirements, 
the LME provides price and volume transparency and audit trails. The 
Exchange states that LME members operate in a strict regulatory 
environment policed by the FSA. To ensure compliance with its 
regulatory obligations, the LME has a compliance department under the 
supervision of its executive director of regulation and compliance. 
This department monitors the market and member positions in order to 
analyze developments and ensure that the LME is meeting its regulatory 
responsibilities.
    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive a portfolio security, dividend payments, or 
any other ownership right or interest in the portfolio or index of 
securities comprising the Metals-China Basket. The Notes are designed 
for investors who desire to participate or gain exposure to the Metals-
China Basket, are willing to hold the investment to maturity, and who 
want to limit risk exposure by receiving principal protection of their 
investment amount.

Trading

    Because the Notes are issued in $1,000 denominations, the Amex's 
existing debt floor trading rules will apply to the trading of the 
Notes.\19\ First, pursuant to Amex Rule 411, the Exchange will impose a 
duty of due diligence on its members and member firms to learn the 
essential facts relating to every customer prior to trading the 
Notes.\20\ Second, even though the trading of the notes will occur on 
the debt trading floor subject to the debt trading rules of the 
Exchange, the Notes will be subject to the equity margin rules of the 
Exchange.\21\ Third, the Exchange will, prior to trading the Notes, 
distribute a circular to the membership providing guidance with regard 
to member firm compliance responsibilities (including suitability 
recommendations) when handling transactions in the Notes and 
highlighting the special risks and characteristics of the Notes. With 
respect to suitability recommendations and risks, the Exchange will 
require members, member organizations and employees thereof 
recommending a transaction in the Notes: (1) To determine that such 
transaction is suitable for the customer, and (2) to have a reasonable 
basis for believing that the customer can evaluate the special 
characteristics of, and is able to bear the financial risks of, such 
transaction. In addition, Wachovia will

[[Page 26151]]

deliver a prospectus in connection with the initial sales of the Notes.
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    \19\ Because the Notes are principal protected, the Exchange has 
not set out specific criteria for trading halts. However, if a 
``market disruption event'' occurs that is of more than a temporary 
nature, the Exchange will cease trading the Notes. In the event a 
``market disruption event'' occurs that is of more than a temporary 
nature, the Exchange would immediately contact the Commission to 
discuss measures that may be appropriate under the circumstances. 
See Telephone Conference between Jeffrey Burns, Associate General 
Counsel, Amex, and Florence Harmon, Senior Special Counsel, Division 
of Market Regulation, Commission, on April 24, 2006.
    \20\ Amex Rule 411 requires that every member, member firm or 
member corporation use due diligence to learn the essential facts, 
relative to every customer and to every order or account accepted.
    \21\ See Amex Rule 462 and section 107B of the Company Guide.
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    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Notes. Specifically, 
the Amex will rely on its existing surveillance procedures governing 
equities, which have been deemed adequate under the Act. In addition, 
the Exchange also has a general policy which prohibits the distribution 
of material, non-public information by its employees.
    Exchange surveillance procedures applicable to trading in the 
proposed Notes will be similar to those applicable to other index-
linked notes listed and traded on the Exchange. The Exchange also has 
in place a comprehensive surveillance agreement with the Hong Kong 
Stock Exchange.\22\ In addition, the Hong Kong Exchanges and Clearing 
Ltd. (``HKEx''), which is the clearing house for both the Hong Kong 
Stock Exchange and the Hong Kong Futures Exchange, is currently an 
affiliate member of the Intermarket Surveillance Group (``ISG''). In 
addition, the Exchange has negotiated an Information Sharing Agreement 
with the LME regarding the sharing of information related to any 
financial instrument based, in whole or in part, upon an interest in or 
performance of copper, lead, nickel, and zinc.
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    \22\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission, on April 24, 2006.
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    The listing and trading of the China-Metals Notes will be subject 
to Amex Rules 1203A and 1204A applicable to Commodity-Based Trust 
Shares. Amex Rule 1203A addresses potential conflicts of interest and 
provides that the prohibitions in the Amex Rule 175(c) apply to a 
specialist in the Notes so that the specialist or affiliated person may 
not act or function as a market maker in the underlying commodities, 
related futures contracts or option on commodity future, or any other 
related commodity derivative. An affiliated person of the specialist, 
consistent with the Amex Rule 193, may be afforded an exemption to act 
in a market making capacity, other than as a specialist in the Notes on 
another market center, in the underlying commodities, related futures 
or options or any other related commodity derivative. More 
specifically, Amex Rule 1203A provides that an approved person of the 
specialist that has established and obtained Exchange approval for 
procedures restricting the flow of material, non-public market 
information between itself and the specialist member organization, and 
any member, officer, or employee associated therewith, may act in a 
market making capacity, other than as a specialist in the Notes, on 
another market center in the underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives.
    Amex Rule 1204A requires that specialists provide the Exchange with 
all the necessary information relating to their trading in physical 
commodities and related futures contracts and options thereon or any 
other related commodities derivative. Amex Rule 1204A states that, in 
connection with trading the physical asset or commodities, futures or 
options on futures, or any other related derivatives, the use of 
material, non-public information received from any person associated 
with a member, member organization, or employee of such person 
regarding trading by such person or employee in the physical asset or 
commodities, futures or options on futures, or any other related 
derivatives is prohibited by the Exchange.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6 of the Act \23\ in general, and furthers the 
objectives of section 6(b)(5) \24\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, 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

    The Exchange did not receive any written comments on the proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form at http://www.sec.gov/rules/sro.shtml.
 or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-Amex-2005-105 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-Amex-2005-105. 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 at 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.

[[Page 26152]]

    All submissions should refer to File No. SR-Amex-2005-105 and 
should be submitted on or before May 24, 2006.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
Nancy M. Morris,
Secretary.
[FR Doc. E6-6642 Filed 5-2-06; 8:45 am]

BILLING CODE 8010-01-P