Document ID: SEC-2008-0160-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: American Stock Exchange LLC
Posted Date: 2008-01-30T05:00Z

[Federal Register: January 30, 2008 (Volume 73, Number 20)]
[Notices]               
[Page 5604-5607]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ja08-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57187; File No. SR-Amex-2007-109]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change as Modified by Amendment No. 
1 Thereto Relating to the Trading of Exchange Traded Notes (ETNs)

January 23, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 5605]]

notice is hereby given that on October 9, 2007, the American Stock 
Exchange LLC (``Amex'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been 
substantially prepared by the Exchange. On January 11, 2008, the Amex 
submitted Amendment No. 1 to the proposed rule change. 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)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Section 107 of the Amex Company 
Guide (``Company Guide'') to permit certain index-linked securities, 
commodity-linked securities, and currency-linked securities to trade 
under the rules applicable to exchange-traded funds (``ETFs''). The 
text of the proposed rule change is available at the Exchange, the 
Commission's Public Reference Room, and http://www.amex.com.

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

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

1. Purpose
    The Exchange proposes to amend Sections 107D, 107E and 107F of the 
Company Guide to permit certain index-linked securities (``Index-Linked 
Securities''), commodity-linked securities (``Commodity-Linked 
Securities''), and currency-linked securities (``Currency-Linked 
Securities'') (collectively, ``Exchange-Traded Notes or ETNs'') that 
offer a weekly redemption feature to be traded subject to the AEMI 
trading rules specific to ETFs.\3\
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    \3\ The Exchange states that with the introduction of iPath 
Exchange-Traded Notes Issued by Barclays Bank PLC linked to the 
performance of the CBOE S&P 500 BuyWrite Index (symbol: BWV) on May 
23, 2007, the Exchange listed its first ETN that is structurally 
similar to an ETF.
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    The Exchange believes that the existence of a weekly redemption 
feature, at the option of the holder, ensures a strong correlation 
between the market price of the ETN and the performance of the 
underlying asset. This feature is similar to the daily redemption 
feature available in ETFs. In addition, the Exchange notes that these 
Exchange Traded Notes are typically continuously offered, on a daily 
basis, so that the issuer would have the ability to issue new 
securities from time to time at market prices. This process is similar 
to the manner in which ETFs are continuously offered via the creation/
redemption process in Creation Unit aggregations (i.e., 50,000 shares).
Background
    The Exchange states that Securities listed pursuant to Section 107 
of the Company Guide (``Section 107 Securities'') are debt securities 
of an issuer that typically provide for a cash payment at maturity, or 
if available, upon earlier redemption (such as a weekly redemption 
feature) at the holder's option, based on the performance of an 
underlying index or asset. Permitted underlying assets for Index-Linked 
Securities include domestic and international equity indexes. 
Commodity-Linked Securities may be based on a commodity index, basket 
of commodities, or single commodity while Currency-Linked Securities 
may similarly be linked to a currency index, basket of currencies, or 
single currency.
    Section 107 Securities typically have a term of at least one (1) 
year but not greater than 30 years. The issuer may or may not provide 
for periodic interest payments to holders. The holder of a Section 107 
Security may or may not be fully exposed to the appreciation and/or 
depreciation of the underlying asset.
    A number of Section 107 Securities based on securities indexes that 
are listed and traded on the Exchange provide for a payment amount in a 
multiple of the positive index return or performance, subject to a 
maximum gain or cap. The Exchange's generic listing standards in 
connection with Section 107 Securities allow for the multiple 
performance on the upside but prohibit payment at maturity based on a 
multiple of the negative performance of an underlying asset. Section 
107 Securities may or may not provide for a minimum guaranteed amount 
to be repaid, i.e., ``principal protection.'' The Exchange believes 
that the flexibility to list a variety of Section 107 Securities offers 
investors the opportunity to more precisely focus their specific 
investment strategies.
    Section 107 Securities do not give the holder a right to receive 
the underlying asset or any other ownership right or interest in the 
underlying portfolio. The current value of the underlying asset is 
required to be widely disseminated at least every 15 seconds during the 
trading day.
    The Exchange submits that Section 107 Securities are ``hybrid'' 
securities whose rates of return are largely the result of the 
performance of an underlying asset. Prior to the listing and trading of 
Section 107 Securities, the Exchange states that it typically 
highlights and discloses the special risks and characteristics of such 
security in an Information Circular.
Current Rules
    Sections 107D,\4\ 107E,\5\ and 107F \6\ of the Company Guide treat 
Index-Linked Securities, Commodity-Linked Securities and Currency-
Linked Securities as equity instruments subject to the Exchange's AEMI 
trading rules for equities. The only exception to this requirement is 
when a Section 107 Security is listed as a bond or debt (i.e., in 
$1,000 denominations). In such a case, the Section 107 Security will be 
subject to Exchange rules applicable to bond or debt securities.\7\
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    \4\ See Securities Exchange Act Release No. 51563 (April 15, 
2005), 70 FR 21257 (April 25, 2005) (SR-Amex-2005-001).
    \5\ See Securities Exchange Act Release No. 55794 (May 22, 
2007), 72 FR 29558 (May 29, 2007) (SR-Amex-2007-45).
    \6\ Id.
    \7\ Id.
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    Because the current Rules deem ETNs and other Section 107 
Securities as ``equity instruments,'' the full range of AEMI trading 
rules specific to equities apply to all Section 107 Securities 
regardless of the particular structure of the Section 107 Security. In 
connection with an ETN that is continuously-offered with a weekly 
redemption option (such as BWV), the Exchange believes that the AEMI 
trading rules applicable to ETFs (rather than equities) should equally 
apply to such ETN.
Proposal
    In order to qualify, the ETN would be required to offer a weekly 
redemption option to holders (``Eligible ETNs'').\8\

[[Page 5606]]

The Exchange believes that the redemption feature coupled with the 
effective continuous offering ensures a strong correlation between the 
price of the underlying asset and the performance of the Eligible ETN. 
This is similar to how ETFs have historically been structured. 
Accordingly, the Exchange submits that the specific AEMI trading rules 
developed for ETFs should also apply to Eligible ETNs.
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    \8\ See e-mail from Jeffrey P. Burns, Vice President & Associate 
General Counsel, Exchange, to Geoffrey Pemble and Michou Nguyen, 
Special Counsels, Division of Trading and Markets, Commission, on 
January 17, 2008.
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    The following rules specifically applicable to ETF trading would 
apply to the trading of Eligible ETNs:
     Rule 108--AEMI(c). The execution of Eligible ETN orders at 
the opening would be effected in the same manner as ETFs so that orders 
in Eligible ETNs would be executed before any broker-dealer bids or 
offers.
     Rule 110--AEMI(p). A Registered Trader in ETFs (including 
Eligible ETNs) would only actively quote ETFs traded on the same or 
contiguous panels for a maximum of three contiguous panels. A 
Registered Trader would also not actively quote more than a maximum of 
15 ETFs (including Eligible ETNs). A Senior Floor Official of the 
Exchange may modify this restriction if a Registered Trader is able to 
appropriately fulfill his obligations to the market due to the level of 
activity in the ETFs and their proximity.
     Rule 128A--AEMI(d)(iv). Any quotation in an ETF entered 
into the AEMI platform by the specialist or Registered Trader while 
Auto-Ex is enabled that would cause the Amex Published Quote (APQ) to 
be locked or crossed would be automatically executed. In the case of a 
non-ETF Amex-listed security or a non-Nasdaq UTP equity security, 
quotations that are entered into the AEMI platform by the specialist 
while Auto-Ex is enabled that would cause the APQ to cross would be 
rejected. Therefore, Eligible ETNs would be automatically executed, 
rather than rejected, when a specialist or Registered Trader quotation 
causes the APQ to be locked/crossed when Auto-Ex is enabled.
     Rule 128A--AEMI(f)(iv). AEMI does not automatically 
execute non-ETF orders when the automatic execution of an order exceeds 
the price change parameters of the ``1%, 2, 1, \1/2\ point'' rule. This 
rule does not apply to ETFs and would accordingly not apply to the 
trading of Eligible ETNs.
     Rule 131--AEMI(o). AEMI rejects ``too marketable'' non-ETF 
stop and stop limit orders. ``Too marketable'' is defined as a buy stop 
order received during the regular trading session with a stop price 
equal to the bid or lower, or a sell stop order received during the 
regular trading session with a stop price equal to the offer or higher. 
ETF stop orders that are ``too marketable'' are executed by AEMI under 
this Rule, and accordingly, Eligible ETN stop orders would similarly be 
executed.
     Rule 131--AEMI(r). AEMI does not accept electronic cross 
orders for non-ETFs and non-Nasdaq UTP securities. As a result, 
electronic cross orders are acceptable only for ETFs. As proposed, 
electronic cross orders for Eligible ETNs would be acceptable in AEMI.
     Rule 154--AEMI(c)(i). The Stop Order Rule requires floor 
official approval prior to the specialist electing a stop order by 
selling to the bid/buying on the offer. Prior floor official approval 
is not required for ETFs and would similarly not apply to Eligible 
ETNs.
     Rule 154--AEMI(c)(ii). Stop and stop limit orders in ETFs 
are elected by a quotation, although such orders in non-ETFs are not. 
Accordingly, stop and stop limit orders in Eligible ETNs would 
similarly be elected by quotation, pursuant to this rule.
     Rule 154--AEMI(e). Maximum price variation requirements 
are set forth in Rule 154--AEMI(e) (also known as the ``1%-2, 1, .5 
Point Rule). This Rule specifically provides that it does not apply to 
the trading of ETFs. Accordingly, Rule 154--AEMI(e) would similarly not 
apply to Eligible ETNs.
     Commentary .03 to Rule 170--AEMI. A specialist quotation, 
made for his own account, should be such that a transaction effected at 
his quoted price or within the quoted spread, whether having the effect 
of reducing or increasing the specialist's position, would bear a 
proper relation, in the case of ETFs or other derivatively-based 
securities, to the value of underlying or related securities. Eligible 
ETNs would similarly be subject to this requirement.
     Commentary .11 to Rule 170--AEMI. Commentary .11 to Rule 
170--AEMI specifically exempts ETFs from the stabilization 
requirements. Accordingly, Eligible ETNs would similarly be exempt.
     Rule 206--AEMI. This Rule prohibits a specialist from 
crossing the market for the purpose of electing odd-lots and requires 
floor official approval in various circumstances for non-ETFs. The 
exemption for ETFs would similarly apply to Eligible ETNs.
    Eligible ETNs would be subject to the same parity allocation as 
currently exists for ETFs and other equity-traded products that are not 
listed stocks, UTP stocks, or closed-end funds. In addition, Rule 110--
AEMI (o), among other things, permits market makers (i.e., ``Registered 
Traders'') to participate in transactions in Section 107 Securities, 
including Eligible ETNs. However, due to the manner in which Eligible 
ETNs are designated in the AEMI platform as ``equities'' consistent 
with Sections 107D, 107E and 107F, AEMI effectively prevents Registered 
Traders from receiving a parity allocation consistent with Rule 126--
AEMI(c). In addition, the proposal would also provide Registered 
Traders with a greater ability to trade Eligible ETNs through the 
parity allocation process and the designation of such Eligible ETNs as 
``ETFs.'' Accordingly, the Exchange believes that the proposal would 
better coordinate the requirements in AEMI by permitting the 
designation of Eligible ETNs as ETFs subject to the AEMI trading rules 
applicable to ETFs.\9\
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    \9\ Id.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\10\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\11\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transaction in 
securities, 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.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(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 will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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 comment 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

[[Page 5607]]

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 
Exchange 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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

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

File Number SR-Amex-2007-109 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 Number SR-Amex-2007-109. 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, 100 F Street, NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-2007-109 and should be 
submitted on or before February 20, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-1612 Filed 1-29-08; 8:45 am]

BILLING CODE 8011-01-P