Self-Regulatory Organizations; American Stock Exchange LLC; Order Granting Approval of 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, 37131-37135 [E6-10244]

Download as PDF Federal Register / Vol. 71, No. 125 / Thursday, June 29, 2006 / Notices occurring in the market for the company’s stock. The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above-listed company. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the abovelisted company is suspended for the period from 9:30 a.m. EDT, on June 26, 2006 through 11:59 p.m. EDT, on July 10, 2006. By the Commission. Nancy M. Morris, Secretary. [FR Doc. 06–5791 Filed 6–26–06; 11:51 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54033; File No. SR–Amex– 2005–105] Self-Regulatory Organizations; American Stock Exchange LLC; Order Granting Approval of 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 June 22, 2006. jlentini on PROD1PC65 with NOTICES I. Introduction On October 20, 2005, 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 proposal 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 futures contracts on the following four commodities: Copper, lead, nickel, and zinc (the ‘‘Metals-China Basket’’ or ‘‘Basket’’). On March 23, 2006, Amex filed Amendment No. 1 to the proposed rule change. On April 12, 2006, Amex filed Amendment No. 2 to the proposed rule change. The proposed rule change, as amended, was published for comment in the Federal Register on May 3, 2006.3 The Commission received no comments regarding the proposal. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 53723 (April 25, 2006), 71 FR 26146 (‘‘Notice’’). 2 17 VerDate Aug<31>2005 17:03 Jun 28, 2006 Jkt 208001 This order approves the proposed rule change, as amended. II. Description of the Proposal 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.4 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’’).5 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’’).6 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 4 See Securities Exchange Act Release No. 27753 (March 1, 1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR–Amex–89–29). 5 Wachovia Corporation (‘‘Wachovia’’) and FTSE/ Xinhua Index Limited (‘‘FXI’’), a joint venture between FTSE International Limited and Xinhua Financial Network, have entered into a nonexclusive 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. 6 The LME is the primary futures exchange for copper, lead, nickel, and zinc. 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 bulk of trading on the LME is transacted through inter-office dealing that allows the LME to operate as a 24-hour market. Liquidity for the four commodities primarily exists during the two daily trading sessions on the floor of the LME, from 11:40 a.m. to 1:15 p.m. and from 3:10 p.m. to 4:35 p.m., London time, and declines substantially outside of these trading sessions. See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, Raymond Lombardo, Special Counsel, Division of Market Regulation (‘‘Division’’), Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 2006. For a more detailed discussion of the LME, see Notice, note 3, supra. 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 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 37131 and continued listing guidelines under Sections 1001–1003 8 of the Company Guide. The Notes are senior nonconvertible debt securities of Wachovia. The principal amount of each Note will be $1,000.9 The Notes will have a term of at least one (1) but no more than ten (10) years.10 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’’).11 Accordingly, if the performance of the Metals-China Basket is negative or does not appreciate by greater than 7.2341% as of the fifth business day (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. 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 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 See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, Raymond Lombardo, Special Counsel, Division, Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 2006. 10 Id. 11 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%. E:\FR\FM\29JNN1.SGM 29JNN1 37132 Federal Register / Vol. 71, No. 125 / Thursday, June 29, 2006 / Notices over the term of the Notes.12 Performance of the Basket will be determined at the close of the market on 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 13 occurs on such date, the Valuation Date will be the next trading day on which no market disruption event occurs. 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  Adjusted Basket Ending Level − Basket Starting Level  (ii) $1, 000 ×   Basket Starting Level   Metals-China Basket jlentini on PROD1PC65 with NOTICES The Basket is an equally-weighted basket of the daily settlement value of the futures contracts on 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 12 See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, and Florence Harmon, Senior Special Counsel, Division, Commission, on April 24, 2006. Amex confirmed that the Metals-China Basket is not managed. 13 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 on futures contracts or futures contracts relating to the Index on any relevant related exchange. An ‘‘exchange disruption’’ means any event (other than VerDate Aug<31>2005 17:03 Jun 28, 2006 Jkt 208001 offering the Notes. The Metals-China Basket will not be managed and will remain static over the term of the Notes. The Exchange will calculate an indicative basket amount once each trading day, as opposed to at least every 15 seconds during the trading day. The indicative basket value is the Exchange’s estimate of the value of the Notes, less fees. 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’’).14 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 stocks of the 25 largest and most heavily traded Chinese companies.15 The components of the Index are weighted based on the freefloat 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. 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.16 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. 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% 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 note 19, infra. In cases of a ‘‘market disruption event,’’ other than of a temporary nature, the Exchange will file a proposed rule change pursuant to Rule 19b–4 under the Act. Unless approved for continued trading, the Exchange would commence delisting proceedings. See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, Raymond Lombardo, Special Counsel, Division, Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 2006. 14 See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, and Raymond Lombardo, Special Counsel, Division, Commission, on April 13, 2006. 15 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 invested 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. 16 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 https://www.ftse.com. China 25 Index PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 E:\FR\FM\29JNN1.SGM 29JNN1 EN29JN06.072</MATH> The Maturity Payment Amount per Note will never be less than the principal investment amount of $1,000. 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. Federal Register / Vol. 71, No. 125 / Thursday, June 29, 2006 / Notices jlentini on PROD1PC65 with NOTICES 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. Component Selection Criteria. The China 25 Index is rule-based and is monitored by a governing committee.17 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, 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 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. The Exchange states that the 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 17 A rule-based methodology has specific standards and is applied without discretion. Additional information regarding the methodology for the China 25 Index is available at https:// www.ftse.com/xinhua/english/Indices/ International_Investors/Index_Rules.jsp. See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, Raymond Lombardo, Special Counsel, Division, Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 2006. VerDate Aug<31>2005 17:03 Jun 28, 2006 Jkt 208001 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. 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 prevented by market conditions. 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 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. 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. 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, PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 37133 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: https://www.ftse.com. The Index is calculated using Hong Kong Stock Exchange trade prices and Reuter’s real-time 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 https:// 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.18 Commodities: Copper, Lead, Nickel, and Zinc 19 The China Metals Basket is an equally-weighted basket of four commodities (copper, lead, nickel and zinc) and the FTSE/Xinhua China 25 Index. Each component of the Basket will initially represent 20% of the Basket. The initial Basket starting level is 1,000 so that each component of the Basket will represent 200 (20% of the 18 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). 19 See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, and Raymond Lombardo, Special Counsel, Division, Commission, on June 9, 2006. For a more detailed description of copper, lead, nickel, and zinc, see Notice, note 3, supra. E:\FR\FM\29JNN1.SGM 29JNN1 37134 Federal Register / Vol. 71, No. 125 / Thursday, June 29, 2006 / Notices Basket). Because the China Metals Basket will not be managed over the term of the Notes, the component weights of the Basket will change due to market fluctuations. The China-Metals Basket will be calculated and disseminated once each trading day. The Basket will be calculated by the Exchange at the close of the trading day on the basis of the reported closing price for the most active futures contract of the four commodities and the closing level of the FTSE/Xinhua China 25 Index. The value of the Basket will equal the sum of the products of (i) the component weight or multiplier of each Basket component and (ii) the closing level of the Index or the official closing settlement price of the component commodity. The closing prices and daily settlement prices for the futures contracts are publicly available on the Web sites of the LME at https:// www.lme.com. In addition, various data vendors and news publications publish futures prices and data. The Exchange has represented that futures quotes and last sale information for the futures contracts on the commodities underlying the Index are widely disseminated through a variety of market data vendors worldwide, including Bloomberg and Reuters. jlentini on PROD1PC65 with NOTICES 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.20 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.21 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.22 Third, the Exchange will, prior to trading the 20 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, Commission, on April 24, 2006. 21 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. 22 See Amex Rule 462 and Section 107B of the Company Guide. VerDate Aug<31>2005 17:03 Jun 28, 2006 Jkt 208001 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 deliver a prospectus in connection with the initial sales of the Notes. 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.23 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. The listing and trading of the ChinaMetals 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 23 See Telephone Conference between Jeffrey Burns, Associate General Counsel, Amex, and Florence Harmon, Senior Special Counsel, Division, Commission, on April 24, 2006. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 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, nonpublic 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. III. Discussion and Commission’s Findings After careful consideration, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.24 In particular, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of section 6(b)(5) of the Act,25 which requires, among other things, that the Exchange’s rules be designed to promote just and equitable principles of trade, to remove 24 In approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 25 15 U.S.C. 78f(b)(5). E:\FR\FM\29JNN1.SGM 29JNN1 Federal Register / Vol. 71, No. 125 / Thursday, June 29, 2006 / Notices 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. jlentini on PROD1PC65 with NOTICES A. Surveillance Information sharing agreements with primary markets are an important part of a self-regulatory organization’s ability to monitor for trading abuses in derivative products. The Commission believes that the Exchange’s comprehensive surveillance sharing agreements with the LME and the Hong Kong Stock Exchange for the purpose of providing information in connection with trading of the Index components and commodity futures contracts on which the Notes are based create the basis for Amex to monitor for fraudulent and manipulative practices in the trading of the Notes. The Exchange represents that all of the other trading venues on which current Index components are traded are members of the ISG and the Exchange has access to all relevant trading information with respect to those contracts without any further action. Moreover, Amex Rule 1204A requires Exchange specialists to provide the Exchange with information relating to their trading in physical commodities and related futures contracts and options thereon or any other related commodities derivative. The Commission believes that these rules provide Amex with the tools necessary to adequately surveil trading in the Notes. B. Dissemination of Information The Commission believes that sufficient venues exist for obtaining reliable information so that investors in the Notes can monitor the underlying Index relative to the indicative value of their Notes. There is a considerable amount of information about the Index and its components available through public Web sites and professional subscription services, including Reuters and Bloomberg. The Index is calculated in real time by FXI and published every minute during the index period (09:15– 16:00 Local Hong Kong Time) or (17:15– 24:00 U.S. PDT) and is available, by subscription, directly from FTSE and from the following vendors: Reuters, Bloomberg, Telekurs, FTID, and LSE/ Proquote. The closing prices and daily settlement prices for the futures contracts on copper, lead, nickel and zinc are publicly available on the Web sites of the LME at https://www.lme.com. In addition, various data vendors and news publications publish futures VerDate Aug<31>2005 17:03 Jun 28, 2006 Jkt 208001 prices and data. The Exchange has represented that futures quotes and last sale information for the commodities underlying the Index are widely disseminated through a variety of market data vendors worldwide, including Bloomberg and Reuters. The Exchange will calculate and disseminate an indicative basket value once each trading day. The Commission 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 but at maturity is at least 100% of the principal investment amount, and there will be no creation or redemption of shares as there would be with an ETF. The end of day index value, based on last sale prices, is distributed at 16:15 (Local Hong Kong Time) and is available through the Financial Times Asia edition and other major newspapers and on the FTSE Index Services Web site: https://www.ftse.com. In addition, the daily closing index value, historical values, constituents’ weighting, constituents’ market capitalization and daily percentage changes, as well as, all corporate actions and rules relating to the management of the indices, are publicly available from https:// www.ftsexinhua.com. The commodity prices are determined by the cash settlement price of each respective commodity futures contract traded on the LME. Wachovia will determine the value of the Notes at maturity, which will consist of at least 100% of the principal investment amount, plus the Basket Performance Amount. C. Listing and Trading The Commission finds that the Exchange’s proposed rules and procedures for the listing and trading of the proposed Notes are consistent with the Act. The Notes will trade as debt securities subject to Amex rules including, among others, rules governing equity margins, specialist responsibilities, account opening and customer suitability requirements. The Commission believes that the listing and delisting criteria for the Notes should help to maintain a minimum level of liquidity and therefore minimize the potential for manipulation of the Notes. Finally, the Commission notes that the circular that the Exchange will distribute will inform members and member organizations about the terms, characteristics and risks in trading the Notes, including their prospectus delivery obligations. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 37135 IV. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR–Amex–2005– 105), as amended, be, and it hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.26 Nancy M. Morris, Secretary. [FR Doc. E6–10244 Filed 6–28–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54035; File No. SR–BSE– 2006–20] Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 3 Thereto To Create a New Electronic Trading Facility, the Boston Equities Exchange (‘‘BeX’’), To Be Operated by BSX Group, LLC June 22, 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 May 5, 2006, the Boston Stock Exchange, Inc. (‘‘BSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the BSE. BSE filed Amendment No. 1 to the proposed rule change on June 1, 2006.3 BSE filed Amendment No. 3 to the proposed rule change on June 15, 2006.4 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to create a new electronic trading facility, the Boston Equities Exchange (‘‘BeX’’), to be operated by BSX Group, LLC (‘‘BSX’’). This rule filing sets forth the proposed governance structure of BSX and 26 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1 superseded and replaced the original filing in its entirety. Amendment No. 2 was withdrawn by BSE on June 9, 2006. 4 Amendment No. 3 supersedes and replaces the original filing and Amendment No. 1 in their entirety. 1 15 E:\FR\FM\29JNN1.SGM 29JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 125 (Thursday, June 29, 2006)]
[Notices]
[Pages 37131-37135]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-10244]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54033; File No. SR-Amex-2005-105]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval of 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

June 22, 2006.

I. Introduction

    On October 20, 2005, 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 
proposal 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 
futures contracts on the following four commodities: Copper, lead, 
nickel, and zinc (the ``Metals-China Basket'' or ``Basket''). On March 
23, 2006, Amex filed Amendment No. 1 to the proposed rule change. On 
April 12, 2006, Amex filed Amendment No. 2 to the proposed rule change. 
The proposed rule change, as amended, was published for comment in the 
Federal Register on May 3, 2006.\3\ The Commission received no comments 
regarding the proposal. This order approves the proposed rule change, 
as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53723 (April 25, 
2006), 71 FR 26146 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    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.\4\ 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'').\5\ 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'').\6\ 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.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \5\ 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.
    \6\ The LME is the primary futures exchange for copper, lead, 
nickel, and zinc. 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 bulk 
of trading on the LME is transacted through inter-office dealing 
that allows the LME to operate as a 24-hour market. Liquidity for 
the four commodities primarily exists during the two daily trading 
sessions on the floor of the LME, from 11:40 a.m. to 1:15 p.m. and 
from 3:10 p.m. to 4:35 p.m., London time, and declines substantially 
outside of these trading sessions. See Telephone Conference between 
Jeffrey Burns, Associate General Counsel, Amex, Raymond Lombardo, 
Special Counsel, Division of Market Regulation (``Division''), 
Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 
2006. For a more detailed discussion of the LME, see Notice, note 3, 
supra.
---------------------------------------------------------------------------

    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 will be 
$1,000.\9\ The Notes will have a term of at least one (1) but no more 
than ten (10) years.\10\ 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'').\11\ Accordingly, if the performance 
of the Metals-China Basket is negative or does not appreciate by 
greater than 7.2341% as of the fifth business day (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.
---------------------------------------------------------------------------

    \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\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, Raymond Lombardo, Special Counsel, Division, 
Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 
2006.
    \10\ Id.
    \11\ 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%.
---------------------------------------------------------------------------

    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

[[Page 37132]]

over the term of the Notes.\12\ Performance of the Basket will be 
determined at the close of the market on 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 \13\ occurs on 
such date, the Valuation Date will be the next trading day on which no 
market disruption event occurs.
---------------------------------------------------------------------------

    \12\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on April 24, 2006. Amex confirmed that the 
Metals-China Basket is not managed.
    \13\ 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 on futures 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% 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 note 19, 
infra. In cases of a ``market disruption event,'' other than of a 
temporary nature, the Exchange will file a proposed rule change 
pursuant to Rule 19b-4 under the Act. Unless approved for continued 
trading, the Exchange would commence delisting proceedings. See 
Telephone Conference between Jeffrey Burns, Associate General 
Counsel, Amex, Raymond Lombardo, Special Counsel, Division, 
Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 
2006.
---------------------------------------------------------------------------

    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
[GRAPHIC] [TIFF OMITTED] TN29JN06.072

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

Metals-China Basket

    The Basket is an equally-weighted basket of the daily settlement 
value of the futures contracts on 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 Exchange will calculate an 
indicative basket amount once each trading day, as opposed to at least 
every 15 seconds during the trading day. The indicative basket value is 
the Exchange's estimate of the value of the Notes, less fees. 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'').\14\
---------------------------------------------------------------------------

    \14\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Raymond Lombardo, Special Counsel, 
Division, Commission, on April 13, 2006.
---------------------------------------------------------------------------

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 stocks of 
the 25 largest and most heavily traded Chinese companies.\15\ 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.
---------------------------------------------------------------------------

    \15\ 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 invested 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.
---------------------------------------------------------------------------

    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.\16\ 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.

[[Page 37133]]

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

    \16\ 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 https://www.ftse.com.
---------------------------------------------------------------------------

    Component Selection Criteria. The China 25 Index is rule-based and 
is monitored by a governing committee.\17\ 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, 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.
---------------------------------------------------------------------------

    \17\ A rule-based methodology has specific standards and is 
applied without discretion. Additional information regarding the 
methodology for the China 25 Index is available at https://
www.ftse.com/xinhua/english/Indices/International_Investors/Index_
Rules.jsp. See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, Raymond Lombardo, Special Counsel, Division, 
Commission, and Jan Woo, Attorney, Division, Commission, on June 9, 
2006.
---------------------------------------------------------------------------

    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 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. The Exchange 
states that the 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. 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 prevented by market 
conditions. 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 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.
    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.
    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: 
https://www.ftse.com. The Index is calculated using Hong Kong Stock 
Exchange trade prices and Reuter's real-time 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 https://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.\18\
---------------------------------------------------------------------------

    \18\ 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).
---------------------------------------------------------------------------

Commodities: Copper, Lead, Nickel, and Zinc \19\
---------------------------------------------------------------------------

    \19\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Raymond Lombardo, Special Counsel, 
Division, Commission, on June 9, 2006. For a more detailed 
description of copper, lead, nickel, and zinc, see Notice, note 3, 
supra.
---------------------------------------------------------------------------

    The China Metals Basket is an equally-weighted basket of four 
commodities (copper, lead, nickel and zinc) and the FTSE/Xinhua China 
25 Index. Each component of the Basket will initially represent 20% of 
the Basket. The initial Basket starting level is 1,000 so that each 
component of the Basket will represent 200 (20% of the

[[Page 37134]]

Basket). Because the China Metals Basket will not be managed over the 
term of the Notes, the component weights of the Basket will change due 
to market fluctuations.
    The China-Metals Basket will be calculated and disseminated once 
each trading day. The Basket will be calculated by the Exchange at the 
close of the trading day on the basis of the reported closing price for 
the most active futures contract of the four commodities and the 
closing level of the FTSE/Xinhua China 25 Index. The value of the 
Basket will equal the sum of the products of (i) the component weight 
or multiplier of each Basket component and (ii) the closing level of 
the Index or the official closing settlement price of the component 
commodity.
    The closing prices and daily settlement prices for the futures 
contracts are publicly available on the Web sites of the LME at https://
www.lme.com. In addition, various data vendors and news publications 
publish futures prices and data. The Exchange has represented that 
futures quotes and last sale information for the futures contracts on 
the commodities underlying the Index are widely disseminated through a 
variety of market data vendors worldwide, including Bloomberg and 
Reuters.

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.\20\ 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.\21\ 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.\22\ 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 deliver a prospectus in 
connection with the initial sales of the Notes.
---------------------------------------------------------------------------

    \20\ 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, Commission, on April 24, 2006.
    \21\ 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.
    \22\ See Amex Rule 462 and Section 107B of the Company Guide.
---------------------------------------------------------------------------

    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.\23\ 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.
---------------------------------------------------------------------------

    \23\ See Telephone Conference between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on April 24, 2006.
---------------------------------------------------------------------------

    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.

III. Discussion and Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\24\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with the requirements 
of section 6(b)(5) of the Act,\25\ which requires, among other things, 
that the Exchange's rules be designed to promote just and equitable 
principles of trade, to remove

[[Page 37135]]

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

    \24\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Surveillance

    Information sharing agreements with primary markets are an 
important part of a self-regulatory organization's ability to monitor 
for trading abuses in derivative products. The Commission believes that 
the Exchange's comprehensive surveillance sharing agreements with the 
LME and the Hong Kong Stock Exchange for the purpose of providing 
information in connection with trading of the Index components and 
commodity futures contracts on which the Notes are based create the 
basis for Amex to monitor for fraudulent and manipulative practices in 
the trading of the Notes. The Exchange represents that all of the other 
trading venues on which current Index components are traded are members 
of the ISG and the Exchange has access to all relevant trading 
information with respect to those contracts without any further action.
    Moreover, Amex Rule 1204A requires Exchange specialists to provide 
the Exchange with information relating to their trading in physical 
commodities and related futures contracts and options thereon or any 
other related commodities derivative. The Commission believes that 
these rules provide Amex with the tools necessary to adequately surveil 
trading in the Notes.

B. Dissemination of Information

    The Commission believes that sufficient venues exist for obtaining 
reliable information so that investors in the Notes can monitor the 
underlying Index relative to the indicative value of their Notes. There 
is a considerable amount of information about the Index and its 
components available through public Web sites and professional 
subscription services, including Reuters and Bloomberg. The Index is 
calculated in real time by FXI and published every minute during the 
index period (09:15-16:00 Local Hong Kong Time) or (17:15-24:00 U.S. 
PDT) and is available, by subscription, directly from FTSE and from the 
following vendors: Reuters, Bloomberg, Telekurs, FTID, and LSE/
Proquote.
    The closing prices and daily settlement prices for the futures 
contracts on copper, lead, nickel and zinc are publicly available on 
the Web sites of the LME at https://www.lme.com. In addition, various 
data vendors and news publications publish futures prices and data. The 
Exchange has represented that futures quotes and last sale information 
for the commodities underlying the Index are widely disseminated 
through a variety of market data vendors worldwide, including Bloomberg 
and Reuters.
    The Exchange will calculate and disseminate an indicative basket 
value once each trading day. The Commission 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 but at maturity is at least 100% of the principal 
investment amount, and there will be no creation or redemption of 
shares as there would be with an ETF. The end of day index value, based 
on last sale prices, is distributed at 16:15 (Local Hong Kong Time) and 
is available through the Financial Times Asia edition and other major 
newspapers and on the FTSE Index Services Web site: https://
www.ftse.com. In addition, the daily closing index value, historical 
values, constituents' weighting, constituents' market capitalization 
and daily percentage changes, as well as, all corporate actions and 
rules relating to the management of the indices, are publicly available 
from https://www.ftsexinhua.com. The commodity prices are determined by 
the cash settlement price of each respective commodity futures contract 
traded on the LME. Wachovia will determine the value of the Notes at 
maturity, which will consist of at least 100% of the principal 
investment amount, plus the Basket Performance Amount.

C. Listing and Trading

    The Commission finds that the Exchange's proposed rules and 
procedures for the listing and trading of the proposed Notes are 
consistent with the Act. The Notes will trade as debt securities 
subject to Amex rules including, among others, rules governing equity 
margins, specialist responsibilities, account opening and customer 
suitability requirements. The Commission believes that the listing and 
delisting criteria for the Notes should help to maintain a minimum 
level of liquidity and therefore minimize the potential for 
manipulation of the Notes. Finally, the Commission notes that the 
circular that the Exchange will distribute will inform members and 
member organizations about the terms, characteristics and risks in 
trading the Notes, including their prospectus delivery obligations.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-Amex-2005-105), as amended, be, and 
it hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-10244 Filed 6-28-06; 8:45 am]
BILLING CODE 8010-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.