Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt Generic Listing Standards for Index-Linked Securities, 41369-41375 [E7-14502]
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Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices
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 CBOE. 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–CBOE–2007–81 and should
be submitted on or before August 17,
2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.15
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–14507 Filed 7–26–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56117; File No. SR–ISE–
2007–47
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Order
Granting Accelerated Approval of
Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, To Adopt
Generic Listing Standards for IndexLinked Securities
jlentini on PROD1PC65 with NOTICES
July 23, 2007.
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 June 26,
2007, the International Securities
Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been substantially prepared by the
Exchange. On July 17, 2007, the
Exchange filed Amendment No. 1 to the
proposed rule change. This order
15 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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provides notice of the proposed rule
change, as amended, and approves the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to (1) Adopt
generic listing standards for equity
index-linked securities (‘‘Equity IndexLinked Securities’’), commodity-linked
securities (‘‘Commodity-Linked
Securities’’), and currency-linked
securities (‘‘Currency-Linked
Securities,’’ and together with Equity
Index-Linked Securities and
Commodity-Linked Securities,
collectively, ‘‘Index-Linked Securities’’)
under new ISE Rule 2130, and (2) make
conforming changes to ISE Rules 2100
and 2101 in regard to the adoption of
the generic listing standards for IndexLinked Securities. The text of the
proposed rule change is available at the
Exchange, the Commission’s Public
Reference Room, and https://
www.ise.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 III below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt new
ISE Rule 2130 (Equity Index-Linked
Securities, Commodity-Linked
Securities and Currency-Linked
Securities), which would provide
generic listing standards to permit the
trading of Index-Linked Securities on
the Exchange pursuant to Rule 19b–4(e)
under the Act.3 The Exchange seeks to
3 Rule 19b–4(e) provides that the listing and
trading of a new derivative securities product by a
self-regulatory organization (‘‘SRO’’) shall not be
deemed a proposed rule change if the Commission
has approved the SRO’s trading rules, procedures,
and listing standards for the product class that
would include the new derivatives securities
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41369
be able to list and/or trade Index-Linked
Securities without individual
Commission approval of each such
product pursuant to section 19(b)(2) of
the Act.4 In addition, the Exchange
proposes to amend ISE Rule 2101(a) to
add Index-Linked Securities to the list
of securities that will only trade on the
Exchange pursuant to unlisted trading
privileges (‘‘UTP’’). Thus, while the
proposal would allow the Exchange to
trade Index-Linked Securities by either
listing or trading pursuant to UTP, the
Exchange would only trade IndexLinked Securities pursuant to UTP. In
order to trade by listing such IndexLinked Securities on the Exchange, the
Exchange would first need to seek
Commission approval and amend its
rules. Finally, the Exchange proposes to
amend ISE Rule 2100(c)(7) to add IndexLinked Securities to the definition of
Equity Securities.
The Exchange represents that any
securities it lists and/or trades pursuant
to proposed ISE Rule 2130 will satisfy
the standards set forth therein. The
Exchange states that within five
business days after commencement of
trading of an Index-Linked Security in
reliance on proposed ISE Rule 2130, the
Exchange will file a Form 19b–4(e) with
the Commission.5
Index-Linked Securities
Index-Linked Securities are designed
for investors who desire to participate in
a specific market segment by providing
exposure to one or more identifiable
underlying securities, commodities,
currencies, derivative instruments, or
market indexes of the foregoing (the
‘‘Underlying Index’’ or ‘‘Underlying
Indexes’’).6 Index-Linked Securities are
the non-convertible debt of an issuer
that have a term of at least one year, but
not greater than thirty years, and are
tied to the performance of the
Underlying Index.7 Index-Linked
Securities may or may not make interest
payments based on dividends or other
cash distributions paid on the
components comprising the Underlying
product, and the SRO has a surveillance program
for the product class. See 17 CFR 240.19b–4(e)(1).
4 15 U.S.C. 78s(b)(2).
5 See 17 CFR 240.19b–4(e)(2)(ii) and 17 CFR
249.820.
6 The Exchange states that the holder of an IndexLinked Security may or may not be fully exposed
to the appreciation and/or depreciation of the
underlying component assets. For example, an
Index-Linked Security may be subject to a ‘‘cap’’ on
the maximum principal amount to be repaid to
holders or a ‘‘floor’’ on the minimum principal
amount to be repaid to holders at maturity.
7 E-mail from Laura Clare, Assistant General
Counsel, ISE, to Edward Cho, Special Counsel,
Division of Market Regulation, Commission, dated
July 18, 2007 (confirming the description of IndexLinked Securities).
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Index or Indexes to the holder during
their term. Despite the fact that IndexLinked Securities are linked to an
Underlying Index, each will trade as a
single, exchange-listed security.
The Exchange represents that the
proposed generic listing standards will
not be applicable to Index-Linked
Securities with respect to which the
payment at maturity is based on a
multiple of negative performance of an
Underlying Index or Indexes. An IndexLinked Security may or may not provide
‘‘principal protection,’’ i.e., a minimum
guaranteed amount to be repaid.8 The
Exchange believes that the flexibility to
list a variety of Index-Linked Securities
will offer investors the opportunity to
more precisely focus their specific
investment strategies.
Index-Linked Securities do not give
the holder any right to receive a
portfolio component, dividend
payments, or any other ownership right
or interest in the portfolio or underlying
components comprising the Underlying
Index. Pursuant to proposed ISE Rule
2130, the current or composite value of
the Underlying Index will be widely
disseminated at least every 15 seconds
during the trading day.
Proposed Listing Criteria for IndexLinked Securities
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The Exchange will apply the
following requirements to all issuers of
Index-Linked Securities:
(A) If the issuer is a company listed
on the New York Stock Exchange, NYSE
Arca, Inc., American Stock Exchange
LLC, or The NASDAQ Stock Market
LLC, the entity must be a company in
good standing (i.e., meets the continued
listing criteria of such exchange). If not
listed, the issuer must meet the
following criteria:
(i) The issuer shall have assets in
excess of $100 million and stockholders’
equity of at least $10 million. In the case
of an issuer which is unable to satisfy
the earnings criteria set forth in (ii)
below, the Exchange generally will
require the issuer to have the following:
(x) assets in excess of $200 million and
stockholders’ equity of at least $10
million; or (y) assets in excess of $100
million and stockholders’ equity of at
least $20 million.
(ii) The issuer’s pre-tax income from
continuing operations shall
substantially exceed $750,000 in its last
fiscal year, or in two of its last three
8 Some Index-Linked Securities may provide for
‘‘contingent’’ protection of the principal amount,
whereby the principal protection may disappear if
the Underlying Index at any point in time during
the life of such security reaches a certain
predetermined level.
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fiscal years (sovereign issuers will be
evaluated on a case-by-case basis).
(B) The issuer will be expected to
have a minimum tangible net worth 9 of
$250,000,000. In the alternative, the
issuer will be expected: (i) To have a
minimum tangible net worth of
$150,000,000; and (ii) not to have issued
Index-Linked Securities, the original
issue price of which, combined with all
the issuer’s other Index-Linked
Securities listed on a national securities
exchange, exceeds 25% of the issuer’s
tangible net worth at the time of
issuance. If the Index-Linked Securities
are fully and unconditionally
guaranteed by an affiliate of the issuer,
the Exchange will rely on such affiliate’s
tangible net worth for purposes of these
requirements and will include in its
calculation all Index-Linked Securities
that are fully and unconditionally
guaranteed by such affiliate.
(C) The issuer must be in compliance
with Rule 10A–3 under the Act.10
The Exchange will apply the
following requirements to each issue of
Index-Linked Securities:
(1) The issue must have (a) A
minimum public distribution of at least
1 million units, except if the IndexLinked Securities are traded in
thousand dollar denominations, and (b)
at least 400 holders, except if the IndexLinked Securities are redeemable at the
option of the holders thereof on at least
a weekly basis 11 or the Index-Linked
Securities are traded in thousand dollar
denominations;
(2) The issue must have a principal
amount/aggregate market value of not
less than $4 million;
(3) The issue must have a term of at
least one year, but not greater than thirty
years;
(4) The issue must be the nonconvertible debt of the issuer; and
(5) The issue must not base its
payment at maturity on a multiple of the
negative performance of an Underlying
Index or Indexes, although the payment
at maturity may or may not provide for
a multiple of the positive performance
of an Underlying Index or Indexes.
Index-Linked Securities must have at
least 400 holders at the time of listing,
except if the Index-Linked Securities are
traded in thousand dollar
denominations or the Index-Linked
9 ‘‘Tangible net worth’’ is defined as total assets,
less intangible assets and total liabilities.
Intangibles include non-material benefits such as
goodwill, patents, copyrights, and trademarks.
10 See 17 CFR 240.10A–3 (setting forth the listing
standards relating to audit committees).
11 E-mail from Laura Clare, Assistant General
Counsel, ISE, to Edward Cho, Special Counsel,
Division of Market Regulation, Commission, dated
July 18, 2007 (clarifying the exceptions to the
holder distribution requirement).
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Securities are redeemable at the option
of the holders thereof on at least a
weekly basis. The Exchange believes
that a weekly redemption right will
ensure a strong correlation between the
market price of the Index-Linked
Securities and the performance of the
Underlying Index, as holders will be
unlikely to sell their Index-Linked
Securities for less than their redemption
value if they have a weekly right to be
redeemed for their full value. In
addition, in the case of Index-Linked
Securities with a weekly redemption
feature, the issuer has the ability to
issue new Index-Linked Securities from
time to time at the indicative value at
the time of such sale. This provides a
ready supply of new Index-Linked
Securities, thereby lessening the
possibility that the market price of such
securities will be affected by a scarcity
of available Index-Linked Securities for
sale. It also assists in maintaining a
strong correlation between the market
price and the indicative value, as
investors will be unlikely to pay more
than the indicative value in the open
market if they can acquire Index-Linked
Securities from the issuer at that price.
The ability to list Index-Linked
Securities with these characteristics
without any specific requirements as to
the number of holders is important to
the successful listing of such securities.
Issuers issuing these types of IndexLinked Securities generally do not
intend to do so by way of an
underwritten offering. Rather, the
distribution arrangement is analogous to
that of an exchange traded fund
issuance, in that the issue is launched
without any significant distribution
event, and the float increases over time
as investors purchase additional
securities from the issuer at the then
indicative value. Investors will
generally seek to purchase the securities
at a point when the Underlying Index is
at a level that they perceive as providing
an attractive growth opportunity. In the
context of such a distribution
arrangement, it is difficult for an issuer
to guarantee its ability to sell to
sufficient investors on the listing date to
meet a specific number-of-holders
requirement. However, the Exchange
believes that this difficulty in ensuring
400 holders on the listing date is not
indicative of a likely long-term lack of
liquidity in Index-Linked Securities or,
for the reasons set forth in the prior
paragraph, of a difficulty in establishing
a pricing equilibrium in the IndexLinked Securities or a successful twosided market.
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Equity Index-Linked Securities Listing
Standards
Equity Index-Linked Securities will
be subject to the criteria in proposed ISE
Rule 2130(c) for initial and continued
listing. For an Underlying Index to be
appropriate for the initial listing of an
Equity Index-Linked Security, such
Underlying Index must be comprised of
at least ten component securities of
different issuers. The Underlying Index
must also either (i) be approved for the
trading of options or other derivative
securities by the Commission under
section 19(b)(2) of the Act 12 and rules
thereunder, and the conditions set forth
in the Commission’s approval order,
including comprehensive surveillance
sharing agreements for non-U.S. stocks,
continue to be satisfied, or (ii) meet the
following requirements:
• Each component security must have
a minimum market value of at least $75
million, except that, for each of the
lowest dollar-weighted component
securities in the Underlying Index that
in the aggregate account for no more
than 10% of the dollar weight of such
Underlying Index, the market value can
be at least $50 million;
• Each component security must have
a trading volume in each of the last six
months of not less than 1,000,000
shares, except that for each of the lowest
dollar-weighted component securities in
the Underlying Index that, in the
aggregate, account for no more than
10% of the dollar weight of such
Underlying Index, the trading volume
shall be at least 500,000 shares in each
of the last six months;
• Underlying Indexes based upon the
equal-dollar or modified equal-dollar
weighting methodology must be
rebalanced at least quarterly;
• In the case of a capitalizationweighted or modified capitalizationweighted Underlying Index, the lesser of
the five highest dollar-weighted
component securities in the Underlying
Index or the highest dollar-weighted
component securities in the Underlying
Index that, in the aggregate, represent at
least 30% of the total number of
component securities in the Underlying
Index, each have an average monthly
trading volume of at least 2,000,000
shares over the previous six months;
• No component security can
represent more than 25% of the dollar
weight of the Underlying Index, and the
five highest dollar-weighted component
securities in the Underlying Index
cannot, in the aggregate, account for
more than 50% of the dollar weight of
the Underlying Index (60% for an
12 15
Underlying Index consisting of fewer
than 25 component securities);
• 90% of the Underlying Index’s
dollar weight and at least 80% of the
total number of component securities
must meet the then current criteria for
standardized options trading on a
national securities exchange; and
• All component securities must
either (A) be securities (other than
foreign country securities and American
Depository Receipts (‘‘ADRs’’)) that are
issued by a reporting company under
the Act that is listed on a national
securities exchange and be an ‘‘NMS
stock,’’ as defined in Rule 600 of
Regulation NMS,13 or (B) be foreign
country securities or ADRs, provided
that foreign country securities or foreign
country securities underlying ADRs
having their primary trading market
outside the United States on foreign
trading markets that are not members of
the Intermarket Surveillance Group
(‘‘ISG’’) or parties to comprehensive
surveillance sharing agreements with
the Exchange cannot, in the aggregate,
represent more than 20% of the dollar
weight of the Underlying Index.
The Exchange would commence
delisting or removal proceedings of an
Equity Index-Linked Security if any of
the standards set forth in the initial
eligibility criteria are not continuously
maintained, except that:
• The criteria that no single
component represent more than 25% of
the dollar weight of the Underlying
Index and the five highest dollarweighted components in the Underlying
Index cannot represent more than 50%
(or 60% for Underlying Indexes with
less than 25 components) of the dollar
weight of the Underlying Index, need
only be satisfied for capitalizationweighted, modified capitalizationweighted, and price-weighted
Underlying Indexes as of the first day of
January and July in each year;
• The total number of components in
the Underlying Index may not increase
or decrease by more than 331⁄3% from
the number of components in the
Underlying Index at the time of its
initial listing, and in no event may be
less than ten components;
• The trading volume of each
component security in the Underlying
Index must be at least 500,000 shares for
each of the last six months, except that
for each of the lowest dollar-weighted
components in the Underlying Index
that, in the aggregate, account for no
more than 10% of the dollar weight of
the Underlying Index, trading volume
must be at least 400,000 shares for each
of the last six months; and
U.S.C. 78s(b)(2).
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13 See
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17 CFR 242.600(b)(47).
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• For a capitalization-weighted or
modified capitalization-weighted
Underlying Index, the lesser of the five
highest dollar-weighted component
securities in the Underlying Index or the
highest dollar-weighted component
securities in the Underlying Index that,
in the aggregate, represent at least 30%
of the total number of stocks in the
Underlying Index must have an average
monthly trading volume of at least
1,000,000 shares over the previous six
months.
In connection with an Equity IndexLinked Security, the Exchange will
commence delisting or removal
proceedings if an Underlying Index or
Indexes fails to satisfy the maintenance
standards or conditions for such
Underlying Index or Indexes, as set
forth by the Commission in its order
under section 19(b)(2) of the Act 14
approving the Underlying Index or
Indexes for the trading of options or
other derivatives. The Exchange will
also commence delisting or removal
proceedings of an Equity Index-Linked
Security under any of the following
circumstances:
• If the aggregate market value or the
principal amount of the Equity IndexLinked Securities publicly held is less
than $400,000;
• If the value of the Underlying Index
or composite value of the Underlying
Indexes is no longer calculated and
widely disseminated on at least a 15second basis during the time the Equity
Index-Linked Securities trade on the
Exchange; or
• If such other event occurs or
condition exists which, in the opinion
of the Exchange, makes further dealings
on the Exchange inadvisable.
Commodity-Linked Securities Listing
Standards
Commodity-Linked Securities will be
subject to the criteria in proposed ISE
Rule 2130(d) for initial and continued
listing. An issue of Commodity-Linked
Securities must meet initial listing
standards set forth in either the first or
second bullet point below:
• One or more physical commodities
or commodity futures, options or other
commodity derivatives, CommodityBased Trust Shares (as defined in ISE
Rule 2125), or a basket or index of any
of the foregoing (the ‘‘Commodity
Reference Asset’’) to which the
Commodity-Linked Security is linked
shall have been reviewed and approved
for the trading of Commodity-Based
Trust Shares, options, or other
derivatives by the Commission under
14 15
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U.S.C. 78s(b)(2).
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Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices
section 19(b)(2) of the Act 15 and rules
thereunder, and the conditions set forth
in the Commission’s approval order,
including with respect to
comprehensive surveillance sharing
agreements, continue to be satisfied; or
• The pricing information for each
component of a Commodity Reference
Asset must be derived from a market
which is an ISG member or affiliate
member or with which the Exchange
has a comprehensive surveillance
sharing agreement. Notwithstanding the
previous sentence, pricing information
for gold and silver may be derived from
the London Bullion Market Association.
In addition, the issue must meet both
of the following initial listing criteria:
• The value of the Commodity
Reference Asset must be calculated and
widely disseminated on at least a 15second basis during the time the
Commodity-Linked Securities trade on
the Exchange; and
• In the case of Commodity-Linked
Securities that are periodically
redeemable, the indicative value of the
subject Commodity-Linked Securities
must be calculated and widely
disseminated by one or more major
market data vendors on at least a 15second basis during the time the
Commodity-Linked Securities trade on
the Exchange.
The Exchange will commence
delisting or removal proceedings if any
of the initial listing criteria described
above is not continuously maintained.
Notwithstanding the foregoing, an issue
of Commodity-Linked Securities will
not be delisted for a failure to have in
place comprehensive surveillance
sharing agreements if the Commodity
Reference Asset has at least ten
components, and the Exchange has
comprehensive surveillance sharing
agreements with respect to at least 90%
of the dollar weight of the Commodity
Reference Asset. The Exchange will also
commence delisting or removal
proceedings:
• If the aggregate market value or the
principal amount of the CommodityLinked Securities publicly held is less
than $400,000;
• The value of the Commodity
Reference Asset is no longer calculated
or available and a new Commodity
Reference Asset is substituted, unless
the new Commodity Reference Asset
meets the requirements of proposed ISE
Rule 2130; or
• If such other event occurs or
condition exists which, in the opinion
of the Exchange, makes further dealings
on the Exchange inadvisable.
Currency-Linked Securities Listing
Standards
Currency-Linked Securities will be
subject to the criteria in proposed ISE
Rule 2130(e) for initial and continued
listing. An issue of Currency-Linked
Securities must meet the initial listing
standards set forth in either bullet point
below:
• One or more currencies, options or
currency futures or other currency
derivatives, Currency Trust Shares (as
defined in ISE Rule 2126), or a basket
or index of any of the foregoing (the
‘‘Currency Reference Asset’’) to which
the Currency-Linked Security is linked
shall have been reviewed and approved
for the trading of Currency Trust Shares,
options, or other derivatives by the
Commission under section 19(b)(2) of
the Act 16 and rules thereunder, and the
conditions set forth in the Commission’s
approval order, including with respect
to comprehensive surveillance sharing
agreements, continue to be satisfied; or
• The pricing information for each
component of a Currency Reference
Asset must be (a) the generally accepted
spot price for the currency exchange
rate in question or (y) derived from a
market which is an ISG member or
affiliate member or with which the
Exchange has in place a comprehensive
surveillance sharing agreement and is
the pricing source for components of a
Currency Reference Asset that has
previously been approved by the
Commission.
In addition, the issue must meet both
of the following initial listing criteria:
• The value of the Currency
Reference Asset must be calculated and
widely disseminated on at least a 15second basis during the time the
Currency-Linked Securities trade on the
Exchange; and
• In the case of Currency-Linked
Securities that are periodically
redeemable, the indicative value of the
subject Currency-Linked Securities must
be calculated and widely disseminated
by one or more major market data
vendors on at least a 15-second basis
during the time the Currency-Linked
Securities trade on the Exchange.
The Exchange will commence
delisting or removal proceedings if any
of the initial listing criteria described
above is not continuously maintained.
Notwithstanding the forgoing, an issue
of Currency-Linked Securities will not
be delisted for a failure to have in place
comprehensive surveillance sharing
agreements if the Currency Reference
Asset has at least ten components, and
the Exchange has comprehensive
15 Id.
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16 Id.
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surveillance sharing agreements with
respect to at least 90% of the dollar
weight of the Currency Reference Asset.
The Exchange will also commence
delisting or removal proceedings under
any of the following circumstances:
• If the aggregate market value or the
principal amount of the CurrencyLinked Securities publicly held is less
than $400,000;
• If the value of the Currency
Reference Asset is no longer calculated
or available and a new Currency
Reference Asset is substituted, unless
the new Currency Reference Asset meets
the requirements of proposed ISE Rule
2130; or
• If such other event occurs or
condition exists which, in the opinion
of the Exchange, makes further dealings
on the Exchange inadvisable.
Exchange Rules Applicable to IndexLinked Securities
Index-Linked Securities traded on the
Exchange will be subject to all Exchange
rules governing the trading of equity
securities. Accordingly, the Exchange
proposes to amend the definition of
‘‘Equity Security’’ to include IndexLinked Securities.17 The Exchange’s
equity margin rules and the Exchange’s
regular trading hours (from 9 a.m. to 4
p.m. Eastern Time) will apply to
transactions in Index-Linked Securities.
Regulatory Information Circular
Upon evaluating the nature and
complexity of each Index-Linked
Security, the Exchange represents that it
will prepare and distribute, if
appropriate, a Regulatory Information
Circular to Electronic Access Members
(‘‘EAMs’’) describing the product.
Accordingly, the particular structure of,
and the corresponding risks transacting
in, an Index-Linked Security will be
highlighted and disclosed. In particular,
the Regulatory Information Circular will
set forth the Exchange’s suitability rule
that requires EAMs recommending a
transaction in Index-Linked Securities
(1) To determine that such transaction is
suitable for the customer (ISE Rule 610),
and (2) to have a reasonable basis for
believing that the customer can evaluate
the special characteristics, and is able to
bear the financial risks, of such
transaction. In addition, the Regulatory
Information Circular will reference the
requirement that EAMs must deliver a
prospectus to investors purchasing
newly issued Index-Linked Securities
prior to or concurrently with the
confirmation of a transaction.
17 See
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ISE Rule 2100(c)(7).
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Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices
Surveillance
The Exchange will closely monitor
activity in Index-Linked Securities to
identify and deter any potential
improper trading activity in such
securities. Additionally, the Exchange
represents that its surveillance
procedures are adequate to properly
monitor the trading of Index-Linked
Securities. Specifically, the Exchange
will rely on its existing surveillance
procedures governing equities, options,
and exchange-traded funds. The
Exchange has developed procedures to
closely monitor activity in Index-Linked
Securities and the Underlying Indexes
and their components to identify and
deter potential improper trading
activity. To the extent applicable, the
Exchange will be able to obtain trading
and beneficial holder information from
the primary trading markets for the
components of the Underlying Indexes
in relation to Index-Linked Securities,
either pursuant to bilateral information
sharing agreements with those markets
or because those markets are full or
affiliate members of ISG.
day in which it occurred, the Exchange
will halt trading no later than the
beginning of the trading day following
the interruption. With respect to IndexLinked Securities admitted to dealings
by the Exchange pursuant to UTP, the
Exchange will halt trading in
accordance with proposed ISE Rule
2101(a), if such Index-Linked Security is
no longer listed or trading on the
primary listing market.
2. Statutory Basis
The proposal is consistent with
section 6(b) of the Act,18 in general, and
section 6(b)(5) of the Act,19 in
particular, in that it is designed 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 transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Firewall Procedures
If the Underlying Index is maintained
by a broker-dealer, the broker-dealer
shall erect a ‘‘firewall’’ around the
personnel responsible for the
maintenance of the Underlying Index or
who have access to information
concerning changes and adjustments to
the Underlying Index, and the
Underlying Index shall be calculated by
a third party who is not a broker-dealer.
Any advisory committee, supervisory
board, or similar entity that advises an
Underlying Index licensor or
administrator or that makes decisions
regarding the Underlying Index or
portfolio composition, methodology,
and related matters must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material, non-public
information regarding the applicable
Underlying Index or portfolio.
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
jlentini on PROD1PC65 with NOTICES
Trading Halts
Electronic Comments
In the case of Commodity- or
Currency-Linked Securities, if the
indicative value or the Commodity
Reference Asset value or Currency
Reference Asset value, as the case may
be, applicable to a series of securities is
not being disseminated as required, or,
in the case of Equity Index-Linked
Securities, if the value of the Underlying
Index is not being disseminated as
required, the Exchange may halt trading
during the day on which such
interruption first occurs. If such
interruption persists past the trading
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to: rulecomments@sec.gov. Please include File
Number SR–ISE–2007–47 on the subject
line.
VerDate Aug<31>2005
16:53 Jul 26, 2007
Jkt 211001
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
PO 00000
18 15
19 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00089
Fmt 4703
Sfmt 4703
41373
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–ISE–2007–47. 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 (https://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 offices 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–ISE–2007–47 and should be
submitted on or before August 17, 2007.
IV. Commission’s Findings and Order
Granting Accelerated Approval of the
Proposed Rule Change
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.20 In particular, the
Commission finds that the proposed
rule change is consistent with the
requirements of section 6(b)(5) of the
Act,21 which requires, among other
things, that the Exchange’s rules be
designed 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 transactions in
20 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).
21 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Generic Listing Standards for IndexLinked Securities
To list and/or trade any issue of
Index-Linked Securities, the Exchange
currently must file a proposed rule
change with the Commission pursuant
to section 19(b)(1) of the Act 22 and Rule
19b–4 thereunder.23 However, Rule
19b–4(e) under the Act 24 provides that
the listing and trading of a new
derivative securities product by an SRO
will not be deemed a proposed rule
change pursuant to Rule 19b–4(c)(1)
under the Act 25 if the Commission has
approved, pursuant to section 19(b) of
the Act, the SRO’s trading rules,
procedures, and listing standards for the
product class that would include the
new derivative securities product, and
the SRO has a surveillance program for
the product class. The Exchange’s
proposed rules for the listing and/or
trading of Index-Linked Securities
pursuant to Rule 19b–4(e) fulfill these
requirements. The Exchange’s ability to
rely on Rule 19b–4(e) to list and/or trade
Index-Linked Securities that meet the
requirements of proposed ISE Rule 2130
should reduce the timeframe for
bringing these securities to the market
and thereby reduce the burdens on
issuers and other market participants,
while also promoting competition and
making such securities available to
investors more quickly.
The Commission has previously
approved generic listing standards that
are substantially similar to ISE’s
proposal.26 The Commission believes
that the proposed generic listing
standards for Index-Linked Securities
should fulfill the intended objective of
Rule 19b–4(e) and allow securities that
satisfy the proposed generic listing
standards to commence trading without
the need for public comment and
Commission approval.27
22 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
24 17 CFR 240.19b–4(e).
25 17 CFR 240.19b–4(c)(1).
26 See Securities Exchange Act Release Nos.
55794 (May 22, 2007), 72 FR 29558 (May 29, 2007)
(SR–Amex–2007–45) (amending the generic listing
standards for Index-Linked Securities and
approving generic listing standards for Commodityand Currency-Linked Securities); and 55687 (May 1,
2007), 72 FR 25824 (May 7, 2007) (SR–NYSE–2007–
27) (approving generic listing standards for Equity
Index-Linked Securities, Commodity-Linked
Securities, and Currency-Linked Securities).
27 The Commission notes that the failure of a
particular product or index to comply with the
proposed generic listing standards under Rule 19b–
4(e), however, would not preclude the Exchange
jlentini on PROD1PC65 with NOTICES
23 17
VerDate Aug<31>2005
16:53 Jul 26, 2007
Jkt 211001
Listing and Trading Index-Linked
Securities
Taken together, the Commission finds
that ISE’s proposal contains adequate
rules and procedures to govern the
listing and trading of Index-Linked
Securities pursuant to Rule 19b–4(e) on
the Exchange. All such securities listed
and/or traded under their respective
generic standards will be subject to the
full panoply of ISE rules and procedures
that currently govern the trading of
equity securities on the Exchange.
As set forth more fully above, ISE has
proposed size, earnings, and minimum
tangible net worth requirements for each
issuer, as well as minimum public
distribution and shareholder, principal
amount/aggregate market value, and
minimum term thresholds for each
issuance of Index-Linked Securities.28
In addition, the Exchange’s proposal
requires that the assets (or their
derivatives) underlying such securities
must either have (1) Been reviewed and
approved for trading by the
Commission, or (2) in the case of Equity
Index-Linked Securities, such
underlying assets or their derivatives
have sufficient market value and trading
volume and not constitute an
unreasonable percentage of the overall
dollar weight of the Underlying Index,
or, in the case of Commodity- and
Currency-Linked Securities, their
pricing information be reliable or
derived from certain required sources.
These requirements are designed to
ensure that the trading markets for the
underlying components are adequately
capitalized and sufficiently liquid. The
Commission believes that these
requirements should minimize the
potential for manipulation.
The Commission also finds that (1) In
the case of Equity Index-Linked
Securities, the requirement that all
component securities must either be
securities issued by a reporting
company under the Act that is listed on
a national securities exchange and be an
NMS stock (as defined in Rule 600 of
from submitting a separate filing pursuant to
Section 19(b)(2), requesting Commission approval
to list and trade a particular equity-, commodity-,
or currency-linked product. The Commission
further notes that securities that satisfy ISE’s
proposed generic listing standards for Index-Linked
Securities would only be traded on the Exchange
pursuant to UTP, pursuant to proposed ISE Rule
2101(a), and that the Exchange would be required
to submit a separate filing pursuant to Section
19(b)(2) requesting Commission approval if the
Exchange seeks to trade such securities by listing
them. See ISE Rule 2101(a).
28 The Commission notes that ISE’s proposed
initial requirements for all issuers and issuances of
Index-Linked Securities are substantially similar to
those adopted by other exchanges. See supra note
26.
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
Regulation NMS) 29 or be foreign
country securities or ADRs, so long as
such foreign country securities or
foreign country securities underlying
the ADRs that are primarily traded on
foreign markets, which are not ISG
members or parties to comprehensive
surveillance sharing agreements, do not
in the aggregate represent more than
20% of the dollar weight of the
Underlying Index, and (2) in the case of
Commodity-Linked and CurrencyLinked Securities with at least ten
components, the requirement that at
least 90% of the dollar weight of the
corresponding Commodity Reference
Asset or Currency Reference Asset, as
the case may be, must have
comprehensive surveillance sharing
agreements with the Exchange, in each
case, should aid the Exchange in
identifying potential trading and other
violations of its rules. The Commission
believes that such a requirement will
contribute to the transparency of the
applicable Underlying Index. The
Commission also notes that, by
requiring pricing information for the
relevant components to be readily
available, the proposed listing standards
of ISE Rule 2130 should help ensure a
fair and orderly market for Index-Linked
Securities listed and/or traded pursuant
to Rule 19b–4(e).
The Exchange has also developed
delisting criteria that will permit it to
suspend trading of Index-Linked
Securities in circumstances that make
further dealings in such products
inadvisable. The Commission believes
that the delisting criteria should help
ensure that a minimum level of liquidity
exists for each such security to allow for
the maintenance of fair and orderly
markets. Also, in the event that the
value of the Underlying Index for IndexLinked Securities (or, for CommodityLinked and Currency-Linked Securities
that are periodically redeemable, the
corresponding indicative value) is no
longer calculated and widely
disseminated on at least a 15-second
basis, the Exchange may halt trading
during the day on which the
interruption first occurs; however, if the
interruption persists past the trading
day on which it occurred, the Exchange
will halt trading no later than the
beginning of the trading day following
the interruption and will commence
delisting proceedings. The Commission
also notes that, because Index-Linked
Securities would only be traded on the
Exchange pursuant to UTP under
proposed ISE Rule 2101(a), the
Exchange would halt the trading of such
securities if such Index-Linked
29 See
E:\FR\FM\27JYN1.SGM
17 CFR 242.600(b)(47).
27JYN1
Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices
41375
Securities are no longer listed or trading
on the original listing market.
information regarding the applicable
Underlying Index or portfolio.
SECURITIES AND EXCHANGE
COMMISSION
Surveillance
Acceleration
The Commission notes that any
Index-Linked Securities approved for
listing and/or trading would be subject
to the Exchange’s existing surveillance
procedures governing equities, options,
and exchange-traded funds, as well as
procedures the Exchange represents it
has developed to closely monitor
activity in such securities and the
Underlying Indexes and/or portfolios.
The Exchange also has represented that
its surveillance procedures are adequate
to properly monitor the trading of
Index-Linked Securities listed pursuant
to the proposed generic listing standards
and that it will be able to obtain
necessary trading and beneficial holder
information from the primary trading
markets for the underlying components,
either pursuant to bilateral information
sharing agreements with those markets
or because those markets are full or
affiliate members of ISG.
[Release No. 34–56108; File No. SR–NASD–
2007–045]
The Commission finds good cause for
approving the proposed rule change, as
modified by Amendment No. 1 thereto,
before the 30th day after the date of
publication of notice of filing thereof in
the Federal Register. The Exchange
requested accelerated approval of the
proposal to facilitate the prompt trading
of Index-Linked Securities pursuant to
UTP based on the specified criteria of
proposed ISE Rules 2100, 2101, and
2130. The Commission notes that the
Exchange’s proposed generic listing
standards for Index-Linked Securities
are substantially based on previously
approved listing standards for such
securities 30 and presently is not aware
of any regulatory issue that should
cause it to revisit that finding or would
preclude the trading of such securities
on the Exchange. Therefore, accelerating
approval of this proposal should benefit
investors by creating, without undue
delay, additional competition in the
market for Index-Linked Securities,
subject to the standards and
representations discussed herein.
Therefore, the Commission finds good
cause, consistent with section 19(b)(2)
of the Act,31 to approve the proposed
rule change on an accelerated basis.
Regulatory Information Circular
The Exchange has represented that it
will distribute, as appropriate, a
Regulatory Information Circular to
EAMs describing the product, the
specific structure of the product, and
the corresponding risks of transacting in
Index-Linked Securities. In addition, the
Regulatory Information Circular will set
forth the Exchange’s suitability
requirements with respect to
recommendations in transactions in
Index-Linked Securities to customers
and the prospectus delivery
requirements.
jlentini on PROD1PC65 with NOTICES
Firewall Procedures
The Exchange has further represented
that if the Underlying Index is
maintained by a broker-dealer, such
broker-dealer will establish a ‘‘firewall’’
around personnel responsible for the
maintenance of such Underlying Index
or who have access to information
concerning changes and adjustments to
the Underlying Index. As an added
measure, a third-party who is not a
broker-dealer will be required to
calculate the value of the Underlying
Index. In addition, the Exchange has
stated that any advisory committee,
supervisory board, or similar entity that
advises an Underlying Index licensor or
administrator or that makes decisions
regarding the Underlying Index or
portfolio composition, methodology,
and related matters must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material, non-public
VerDate Aug<31>2005
16:53 Jul 26, 2007
Jkt 211001
V. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,32 that the
proposed rule change (SR–ISE–2007–
47), as modified by Amendment No. 1
thereto, be, and it hereby is, approved
on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.33
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–14502 Filed 7–26–07; 8:45 am]
July 19, 2007.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on July 2, 2007, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’) 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
substantially prepared by NASD. NASD
has designated the proposed rule change
as constituting a ‘‘non-controversial’’
rule change pursuant to section
19(b)(3)(A) of the Act 3 and Rule 19b–
4(f)(6) thereunder,4 which renders the
proposal effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASD proposes to extend through
July 31, 2008 the portfolio margin pilot
program set forth in Rule 2520(g). The
portfolio margin pilot program permits
members to margin certain products
according to a prescribed portfolio
margin methodology and is set to expire
on July 31, 2007. There is no change to
the rule text with this proposed rule
change. The text of the proposed rule
change is available at NASD, the
Commission’s Public Reference Room,
and https://www.nasd.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,
NASD 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
BILLING CODE 8010–01–P
PO 00000
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Extending the Portfolio
Margin Pilot Program
30 See
1 15
31 15
supra note 26.
U.S.C. 78s(b)(2).
2 17
32 Id.
33 17
CFR 200.30–3(a)(12).
Frm 00091
Fmt 4703
Sfmt 4703
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4.
E:\FR\FM\27JYN1.SGM
27JYN1
]]>Agencies
[Federal Register Volume 72, Number 144 (Friday, July 27, 2007)]
[Notices]
[Pages 41369-41375]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14502]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56117; File No. SR-ISE-2007-47
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Order Granting Accelerated Approval of
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt
Generic Listing Standards for Index-Linked Securities
July 23, 2007.
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 June 26, 2007, the International Securities Exchange, LLC (``ISE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been substantially prepared by the Exchange.
On July 17, 2007, the Exchange filed Amendment No. 1 to the proposed
rule change. This order provides notice of the proposed rule change, as
amended, and approves the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to (1) Adopt generic listing standards for
equity index-linked securities (``Equity Index-Linked Securities''),
commodity-linked securities (``Commodity-Linked Securities''), and
currency-linked securities (``Currency-Linked Securities,'' and
together with Equity Index-Linked Securities and Commodity-Linked
Securities, collectively, ``Index-Linked Securities'') under new ISE
Rule 2130, and (2) make conforming changes to ISE Rules 2100 and 2101
in regard to the adoption of the generic listing standards for Index-
Linked Securities. The text of the proposed rule change is available at
the Exchange, the Commission's Public Reference Room, and https://
www.ise.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 III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt new ISE Rule 2130 (Equity Index-
Linked Securities, Commodity-Linked Securities and Currency-Linked
Securities), which would provide generic listing standards to permit
the trading of Index-Linked Securities on the Exchange pursuant to Rule
19b-4(e) under the Act.\3\ The Exchange seeks to be able to list and/or
trade Index-Linked Securities without individual Commission approval of
each such product pursuant to section 19(b)(2) of the Act.\4\ In
addition, the Exchange proposes to amend ISE Rule 2101(a) to add Index-
Linked Securities to the list of securities that will only trade on the
Exchange pursuant to unlisted trading privileges (``UTP''). Thus, while
the proposal would allow the Exchange to trade Index-Linked Securities
by either listing or trading pursuant to UTP, the Exchange would only
trade Index-Linked Securities pursuant to UTP. In order to trade by
listing such Index-Linked Securities on the Exchange, the Exchange
would first need to seek Commission approval and amend its rules.
Finally, the Exchange proposes to amend ISE Rule 2100(c)(7) to add
Index-Linked Securities to the definition of Equity Securities.
---------------------------------------------------------------------------
\3\ Rule 19b-4(e) provides that the listing and trading of a new
derivative securities product by a self-regulatory organization
(``SRO'') shall not be deemed a proposed rule change if the
Commission has approved the SRO's trading rules, procedures, and
listing standards for the product class that would include the new
derivatives securities product, and the SRO has a surveillance
program for the product class. See 17 CFR 240.19b-4(e)(1).
\4\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
The Exchange represents that any securities it lists and/or trades
pursuant to proposed ISE Rule 2130 will satisfy the standards set forth
therein. The Exchange states that within five business days after
commencement of trading of an Index-Linked Security in reliance on
proposed ISE Rule 2130, the Exchange will file a Form 19b-4(e) with the
Commission.\5\
---------------------------------------------------------------------------
\5\ See 17 CFR 240.19b-4(e)(2)(ii) and 17 CFR 249.820.
---------------------------------------------------------------------------
Index-Linked Securities
Index-Linked Securities are designed for investors who desire to
participate in a specific market segment by providing exposure to one
or more identifiable underlying securities, commodities, currencies,
derivative instruments, or market indexes of the foregoing (the
``Underlying Index'' or ``Underlying Indexes'').\6\ Index-Linked
Securities are the non-convertible debt of an issuer that have a term
of at least one year, but not greater than thirty years, and are tied
to the performance of the Underlying Index.\7\ Index-Linked Securities
may or may not make interest payments based on dividends or other cash
distributions paid on the components comprising the Underlying
[[Page 41370]]
Index or Indexes to the holder during their term. Despite the fact that
Index-Linked Securities are linked to an Underlying Index, each will
trade as a single, exchange-listed security.
---------------------------------------------------------------------------
\6\ The Exchange states that the holder of an Index-Linked
Security may or may not be fully exposed to the appreciation and/or
depreciation of the underlying component assets. For example, an
Index-Linked Security may be subject to a ``cap'' on the maximum
principal amount to be repaid to holders or a ``floor'' on the
minimum principal amount to be repaid to holders at maturity.
\7\ E-mail from Laura Clare, Assistant General Counsel, ISE, to
Edward Cho, Special Counsel, Division of Market Regulation,
Commission, dated July 18, 2007 (confirming the description of
Index-Linked Securities).
---------------------------------------------------------------------------
The Exchange represents that the proposed generic listing standards
will not be applicable to Index-Linked Securities with respect to which
the payment at maturity is based on a multiple of negative performance
of an Underlying Index or Indexes. An Index-Linked Security may or may
not provide ``principal protection,'' i.e., a minimum guaranteed amount
to be repaid.\8\ The Exchange believes that the flexibility to list a
variety of Index-Linked Securities will offer investors the opportunity
to more precisely focus their specific investment strategies.
---------------------------------------------------------------------------
\8\ Some Index-Linked Securities may provide for ``contingent''
protection of the principal amount, whereby the principal protection
may disappear if the Underlying Index at any point in time during
the life of such security reaches a certain predetermined level.
---------------------------------------------------------------------------
Index-Linked Securities do not give the holder any right to receive
a portfolio component, dividend payments, or any other ownership right
or interest in the portfolio or underlying components comprising the
Underlying Index. Pursuant to proposed ISE Rule 2130, the current or
composite value of the Underlying Index will be widely disseminated at
least every 15 seconds during the trading day.
Proposed Listing Criteria for Index-Linked Securities
The Exchange will apply the following requirements to all issuers
of Index-Linked Securities:
(A) If the issuer is a company listed on the New York Stock
Exchange, NYSE Arca, Inc., American Stock Exchange LLC, or The NASDAQ
Stock Market LLC, the entity must be a company in good standing (i.e.,
meets the continued listing criteria of such exchange). If not listed,
the issuer must meet the following criteria:
(i) The issuer shall have assets in excess of $100 million and
stockholders' equity of at least $10 million. In the case of an issuer
which is unable to satisfy the earnings criteria set forth in (ii)
below, the Exchange generally will require the issuer to have the
following: (x) assets in excess of $200 million and stockholders'
equity of at least $10 million; or (y) assets in excess of $100 million
and stockholders' equity of at least $20 million.
(ii) The issuer's pre-tax income from continuing operations shall
substantially exceed $750,000 in its last fiscal year, or in two of its
last three fiscal years (sovereign issuers will be evaluated on a case-
by-case basis).
(B) The issuer will be expected to have a minimum tangible net
worth \9\ of $250,000,000. In the alternative, the issuer will be
expected: (i) To have a minimum tangible net worth of $150,000,000; and
(ii) not to have issued Index-Linked Securities, the original issue
price of which, combined with all the issuer's other Index-Linked
Securities listed on a national securities exchange, exceeds 25% of the
issuer's tangible net worth at the time of issuance. If the Index-
Linked Securities are fully and unconditionally guaranteed by an
affiliate of the issuer, the Exchange will rely on such affiliate's
tangible net worth for purposes of these requirements and will include
in its calculation all Index-Linked Securities that are fully and
unconditionally guaranteed by such affiliate.
---------------------------------------------------------------------------
\9\ ``Tangible net worth'' is defined as total assets, less
intangible assets and total liabilities. Intangibles include non-
material benefits such as goodwill, patents, copyrights, and
trademarks.
---------------------------------------------------------------------------
(C) The issuer must be in compliance with Rule 10A-3 under the
Act.\10\
---------------------------------------------------------------------------
\10\ See 17 CFR 240.10A-3 (setting forth the listing standards
relating to audit committees).
---------------------------------------------------------------------------
The Exchange will apply the following requirements to each issue of
Index-Linked Securities:
(1) The issue must have (a) A minimum public distribution of at
least 1 million units, except if the Index-Linked Securities are traded
in thousand dollar denominations, and (b) at least 400 holders, except
if the Index-Linked Securities are redeemable at the option of the
holders thereof on at least a weekly basis \11\ or the Index-Linked
Securities are traded in thousand dollar denominations;
---------------------------------------------------------------------------
\11\ E-mail from Laura Clare, Assistant General Counsel, ISE, to
Edward Cho, Special Counsel, Division of Market Regulation,
Commission, dated July 18, 2007 (clarifying the exceptions to the
holder distribution requirement).
---------------------------------------------------------------------------
(2) The issue must have a principal amount/aggregate market value
of not less than $4 million;
(3) The issue must have a term of at least one year, but not
greater than thirty years;
(4) The issue must be the non-convertible debt of the issuer; and
(5) The issue must not base its payment at maturity on a multiple
of the negative performance of an Underlying Index or Indexes, although
the payment at maturity may or may not provide for a multiple of the
positive performance of an Underlying Index or Indexes.
Index-Linked Securities must have at least 400 holders at the time
of listing, except if the Index-Linked Securities are traded in
thousand dollar denominations or the Index-Linked Securities are
redeemable at the option of the holders thereof on at least a weekly
basis. The Exchange believes that a weekly redemption right will ensure
a strong correlation between the market price of the Index-Linked
Securities and the performance of the Underlying Index, as holders will
be unlikely to sell their Index-Linked Securities for less than their
redemption value if they have a weekly right to be redeemed for their
full value. In addition, in the case of Index-Linked Securities with a
weekly redemption feature, the issuer has the ability to issue new
Index-Linked Securities from time to time at the indicative value at
the time of such sale. This provides a ready supply of new Index-Linked
Securities, thereby lessening the possibility that the market price of
such securities will be affected by a scarcity of available Index-
Linked Securities for sale. It also assists in maintaining a strong
correlation between the market price and the indicative value, as
investors will be unlikely to pay more than the indicative value in the
open market if they can acquire Index-Linked Securities from the issuer
at that price.
The ability to list Index-Linked Securities with these
characteristics without any specific requirements as to the number of
holders is important to the successful listing of such securities.
Issuers issuing these types of Index-Linked Securities generally do not
intend to do so by way of an underwritten offering. Rather, the
distribution arrangement is analogous to that of an exchange traded
fund issuance, in that the issue is launched without any significant
distribution event, and the float increases over time as investors
purchase additional securities from the issuer at the then indicative
value. Investors will generally seek to purchase the securities at a
point when the Underlying Index is at a level that they perceive as
providing an attractive growth opportunity. In the context of such a
distribution arrangement, it is difficult for an issuer to guarantee
its ability to sell to sufficient investors on the listing date to meet
a specific number-of-holders requirement. However, the Exchange
believes that this difficulty in ensuring 400 holders on the listing
date is not indicative of a likely long-term lack of liquidity in
Index-Linked Securities or, for the reasons set forth in the prior
paragraph, of a difficulty in establishing a pricing equilibrium in the
Index-Linked Securities or a successful two-sided market.
[[Page 41371]]
Equity Index-Linked Securities Listing Standards
Equity Index-Linked Securities will be subject to the criteria in
proposed ISE Rule 2130(c) for initial and continued listing. For an
Underlying Index to be appropriate for the initial listing of an Equity
Index-Linked Security, such Underlying Index must be comprised of at
least ten component securities of different issuers. The Underlying
Index must also either (i) be approved for the trading of options or
other derivative securities by the Commission under section 19(b)(2) of
the Act \12\ and rules thereunder, and the conditions set forth in the
Commission's approval order, including comprehensive surveillance
sharing agreements for non-U.S. stocks, continue to be satisfied, or
(ii) meet the following requirements:
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
Each component security must have a minimum market value
of at least $75 million, except that, for each of the lowest dollar-
weighted component securities in the Underlying Index that in the
aggregate account for no more than 10% of the dollar weight of such
Underlying Index, the market value can be at least $50 million;
Each component security must have a trading volume in each
of the last six months of not less than 1,000,000 shares, except that
for each of the lowest dollar-weighted component securities in the
Underlying Index that, in the aggregate, account for no more than 10%
of the dollar weight of such Underlying Index, the trading volume shall
be at least 500,000 shares in each of the last six months;
Underlying Indexes based upon the equal-dollar or modified
equal-dollar weighting methodology must be rebalanced at least
quarterly;
In the case of a capitalization-weighted or modified
capitalization-weighted Underlying Index, the lesser of the five
highest dollar-weighted component securities in the Underlying Index or
the highest dollar-weighted component securities in the Underlying
Index that, in the aggregate, represent at least 30% of the total
number of component securities in the Underlying Index, each have an
average monthly trading volume of at least 2,000,000 shares over the
previous six months;
No component security can represent more than 25% of the
dollar weight of the Underlying Index, and the five highest dollar-
weighted component securities in the Underlying Index cannot, in the
aggregate, account for more than 50% of the dollar weight of the
Underlying Index (60% for an Underlying Index consisting of fewer than
25 component securities);
90% of the Underlying Index's dollar weight and at least
80% of the total number of component securities must meet the then
current criteria for standardized options trading on a national
securities exchange; and
All component securities must either (A) be securities
(other than foreign country securities and American Depository Receipts
(``ADRs'')) that are issued by a reporting company under the Act that
is listed on a national securities exchange and be an ``NMS stock,'' as
defined in Rule 600 of Regulation NMS,\13\ or (B) be foreign country
securities or ADRs, provided that foreign country securities or foreign
country securities underlying ADRs having their primary trading market
outside the United States on foreign trading markets that are not
members of the Intermarket Surveillance Group (``ISG'') or parties to
comprehensive surveillance sharing agreements with the Exchange cannot,
in the aggregate, represent more than 20% of the dollar weight of the
Underlying Index.
---------------------------------------------------------------------------
\13\ See 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------
The Exchange would commence delisting or removal proceedings of an
Equity Index-Linked Security if any of the standards set forth in the
initial eligibility criteria are not continuously maintained, except
that:
The criteria that no single component represent more than
25% of the dollar weight of the Underlying Index and the five highest
dollar-weighted components in the Underlying Index cannot represent
more than 50% (or 60% for Underlying Indexes with less than 25
components) of the dollar weight of the Underlying Index, need only be
satisfied for capitalization-weighted, modified capitalization-
weighted, and price-weighted Underlying Indexes as of the first day of
January and July in each year;
The total number of components in the Underlying Index may
not increase or decrease by more than 33\1/3\% from the number of
components in the Underlying Index at the time of its initial listing,
and in no event may be less than ten components;
The trading volume of each component security in the
Underlying Index must be at least 500,000 shares for each of the last
six months, except that for each of the lowest dollar-weighted
components in the Underlying Index that, in the aggregate, account for
no more than 10% of the dollar weight of the Underlying Index, trading
volume must be at least 400,000 shares for each of the last six months;
and
For a capitalization-weighted or modified capitalization-
weighted Underlying Index, the lesser of the five highest dollar-
weighted component securities in the Underlying Index or the highest
dollar-weighted component securities in the Underlying Index that, in
the aggregate, represent at least 30% of the total number of stocks in
the Underlying Index must have an average monthly trading volume of at
least 1,000,000 shares over the previous six months.
In connection with an Equity Index-Linked Security, the Exchange
will commence delisting or removal proceedings if an Underlying Index
or Indexes fails to satisfy the maintenance standards or conditions for
such Underlying Index or Indexes, as set forth by the Commission in its
order under section 19(b)(2) of the Act \14\ approving the Underlying
Index or Indexes for the trading of options or other derivatives. The
Exchange will also commence delisting or removal proceedings of an
Equity Index-Linked Security under any of the following circumstances:
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
If the aggregate market value or the principal amount of
the Equity Index-Linked Securities publicly held is less than $400,000;
If the value of the Underlying Index or composite value of
the Underlying Indexes is no longer calculated and widely disseminated
on at least a 15-second basis during the time the Equity Index-Linked
Securities trade on the Exchange; or
If such other event occurs or condition exists which, in
the opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
Commodity-Linked Securities Listing Standards
Commodity-Linked Securities will be subject to the criteria in
proposed ISE Rule 2130(d) for initial and continued listing. An issue
of Commodity-Linked Securities must meet initial listing standards set
forth in either the first or second bullet point below:
One or more physical commodities or commodity futures,
options or other commodity derivatives, Commodity-Based Trust Shares
(as defined in ISE Rule 2125), or a basket or index of any of the
foregoing (the ``Commodity Reference Asset'') to which the Commodity-
Linked Security is linked shall have been reviewed and approved for the
trading of Commodity-Based Trust Shares, options, or other derivatives
by the Commission under
[[Page 41372]]
section 19(b)(2) of the Act \15\ and rules thereunder, and the
conditions set forth in the Commission's approval order, including with
respect to comprehensive surveillance sharing agreements, continue to
be satisfied; or
---------------------------------------------------------------------------
\15\ Id.
---------------------------------------------------------------------------
The pricing information for each component of a Commodity
Reference Asset must be derived from a market which is an ISG member or
affiliate member or with which the Exchange has a comprehensive
surveillance sharing agreement. Notwithstanding the previous sentence,
pricing information for gold and silver may be derived from the London
Bullion Market Association.
In addition, the issue must meet both of the following initial
listing criteria:
The value of the Commodity Reference Asset must be
calculated and widely disseminated on at least a 15-second basis during
the time the Commodity-Linked Securities trade on the Exchange; and
In the case of Commodity-Linked Securities that are
periodically redeemable, the indicative value of the subject Commodity-
Linked Securities must be calculated and widely disseminated by one or
more major market data vendors on at least a 15-second basis during the
time the Commodity-Linked Securities trade on the Exchange.
The Exchange will commence delisting or removal proceedings if any
of the initial listing criteria described above is not continuously
maintained. Notwithstanding the foregoing, an issue of Commodity-Linked
Securities will not be delisted for a failure to have in place
comprehensive surveillance sharing agreements if the Commodity
Reference Asset has at least ten components, and the Exchange has
comprehensive surveillance sharing agreements with respect to at least
90% of the dollar weight of the Commodity Reference Asset. The Exchange
will also commence delisting or removal proceedings:
If the aggregate market value or the principal amount of
the Commodity-Linked Securities publicly held is less than $400,000;
The value of the Commodity Reference Asset is no longer
calculated or available and a new Commodity Reference Asset is
substituted, unless the new Commodity Reference Asset meets the
requirements of proposed ISE Rule 2130; or
If such other event occurs or condition exists which, in
the opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
Currency-Linked Securities Listing Standards
Currency-Linked Securities will be subject to the criteria in
proposed ISE Rule 2130(e) for initial and continued listing. An issue
of Currency-Linked Securities must meet the initial listing standards
set forth in either bullet point below:
One or more currencies, options or currency futures or
other currency derivatives, Currency Trust Shares (as defined in ISE
Rule 2126), or a basket or index of any of the foregoing (the
``Currency Reference Asset'') to which the Currency-Linked Security is
linked shall have been reviewed and approved for the trading of
Currency Trust Shares, options, or other derivatives by the Commission
under section 19(b)(2) of the Act \16\ and rules thereunder, and the
conditions set forth in the Commission's approval order, including with
respect to comprehensive surveillance sharing agreements, continue to
be satisfied; or
---------------------------------------------------------------------------
\16\ Id.
---------------------------------------------------------------------------
The pricing information for each component of a Currency
Reference Asset must be (a) the generally accepted spot price for the
currency exchange rate in question or (y) derived from a market which
is an ISG member or affiliate member or with which the Exchange has in
place a comprehensive surveillance sharing agreement and is the pricing
source for components of a Currency Reference Asset that has previously
been approved by the Commission.
In addition, the issue must meet both of the following initial
listing criteria:
The value of the Currency Reference Asset must be
calculated and widely disseminated on at least a 15-second basis during
the time the Currency-Linked Securities trade on the Exchange; and
In the case of Currency-Linked Securities that are
periodically redeemable, the indicative value of the subject Currency-
Linked Securities must be calculated and widely disseminated by one or
more major market data vendors on at least a 15-second basis during the
time the Currency-Linked Securities trade on the Exchange.
The Exchange will commence delisting or removal proceedings if any
of the initial listing criteria described above is not continuously
maintained. Notwithstanding the forgoing, an issue of Currency-Linked
Securities will not be delisted for a failure to have in place
comprehensive surveillance sharing agreements if the Currency Reference
Asset has at least ten components, and the Exchange has comprehensive
surveillance sharing agreements with respect to at least 90% of the
dollar weight of the Currency Reference Asset. The Exchange will also
commence delisting or removal proceedings under any of the following
circumstances:
If the aggregate market value or the principal amount of
the Currency-Linked Securities publicly held is less than $400,000;
If the value of the Currency Reference Asset is no longer
calculated or available and a new Currency Reference Asset is
substituted, unless the new Currency Reference Asset meets the
requirements of proposed ISE Rule 2130; or
If such other event occurs or condition exists which, in
the opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
Exchange Rules Applicable to Index-Linked Securities
Index-Linked Securities traded on the Exchange will be subject to
all Exchange rules governing the trading of equity securities.
Accordingly, the Exchange proposes to amend the definition of ``Equity
Security'' to include Index-Linked Securities.\17\ The Exchange's
equity margin rules and the Exchange's regular trading hours (from 9
a.m. to 4 p.m. Eastern Time) will apply to transactions in Index-Linked
Securities.
---------------------------------------------------------------------------
\17\ See ISE Rule 2100(c)(7).
---------------------------------------------------------------------------
Regulatory Information Circular
Upon evaluating the nature and complexity of each Index-Linked
Security, the Exchange represents that it will prepare and distribute,
if appropriate, a Regulatory Information Circular to Electronic Access
Members (``EAMs'') describing the product. Accordingly, the particular
structure of, and the corresponding risks transacting in, an Index-
Linked Security will be highlighted and disclosed. In particular, the
Regulatory Information Circular will set forth the Exchange's
suitability rule that requires EAMs recommending a transaction in
Index-Linked Securities (1) To determine that such transaction is
suitable for the customer (ISE Rule 610), and (2) to have a reasonable
basis for believing that the customer can evaluate the special
characteristics, and is able to bear the financial risks, of such
transaction. In addition, the Regulatory Information Circular will
reference the requirement that EAMs must deliver a prospectus to
investors purchasing newly issued Index-Linked Securities prior to or
concurrently with the confirmation of a transaction.
[[Page 41373]]
Surveillance
The Exchange will closely monitor activity in Index-Linked
Securities to identify and deter any potential improper trading
activity in such securities. Additionally, the Exchange represents that
its surveillance procedures are adequate to properly monitor the
trading of Index-Linked Securities. Specifically, the Exchange will
rely on its existing surveillance procedures governing equities,
options, and exchange-traded funds. The Exchange has developed
procedures to closely monitor activity in Index-Linked Securities and
the Underlying Indexes and their components to identify and deter
potential improper trading activity. To the extent applicable, the
Exchange will be able to obtain trading and beneficial holder
information from the primary trading markets for the components of the
Underlying Indexes in relation to Index-Linked Securities, either
pursuant to bilateral information sharing agreements with those markets
or because those markets are full or affiliate members of ISG.
Firewall Procedures
If the Underlying Index is maintained by a broker-dealer, the
broker-dealer shall erect a ``firewall'' around the personnel
responsible for the maintenance of the Underlying Index or who have
access to information concerning changes and adjustments to the
Underlying Index, and the Underlying Index shall be calculated by a
third party who is not a broker-dealer. Any advisory committee,
supervisory board, or similar entity that advises an Underlying Index
licensor or administrator or that makes decisions regarding the
Underlying Index or portfolio composition, methodology, and related
matters must implement and maintain, or be subject to, procedures
designed to prevent the use and dissemination of material, non-public
information regarding the applicable Underlying Index or portfolio.
Trading Halts
In the case of Commodity- or Currency-Linked Securities, if the
indicative value or the Commodity Reference Asset value or Currency
Reference Asset value, as the case may be, applicable to a series of
securities is not being disseminated as required, or, in the case of
Equity Index-Linked Securities, if the value of the Underlying Index is
not being disseminated as required, the Exchange may halt trading
during the day on which such interruption first occurs. If such
interruption persists past the trading day in which it occurred, the
Exchange will halt trading no later than the beginning of the trading
day following the interruption. With respect to Index-Linked Securities
admitted to dealings by the Exchange pursuant to UTP, the Exchange will
halt trading in accordance with proposed ISE Rule 2101(a), if such
Index-Linked Security is no longer listed or trading on the primary
listing market.
2. Statutory Basis
The proposal is consistent with section 6(b) of the Act,\18\ in
general, and section 6(b)(5) of the Act,\19\ in particular, in that it
is designed 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 transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purpose of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to: rule-comments@sec.gov. Please include
File Number SR-ISE-2007-47 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-ISE-2007-47. 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 (https://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 offices 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-ISE-2007-47 and should be
submitted on or before August 17, 2007.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
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.\20\ In particular, the Commission finds that the
proposed rule change is consistent with the requirements of section
6(b)(5) of the Act,\21\ which requires, among other things, that the
Exchange's rules be designed 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 transactions in
[[Page 41374]]
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\20\ 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).
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Generic Listing Standards for Index-Linked Securities
To list and/or trade any issue of Index-Linked Securities, the
Exchange currently must file a proposed rule change with the Commission
pursuant to section 19(b)(1) of the Act \22\ and Rule 19b-4
thereunder.\23\ However, Rule 19b-4(e) under the Act \24\ provides that
the listing and trading of a new derivative securities product by an
SRO will not be deemed a proposed rule change pursuant to Rule 19b-
4(c)(1) under the Act \25\ if the Commission has approved, pursuant to
section 19(b) of the Act, the SRO's trading rules, procedures, and
listing standards for the product class that would include the new
derivative securities product, and the SRO has a surveillance program
for the product class. The Exchange's proposed rules for the listing
and/or trading of Index-Linked Securities pursuant to Rule 19b-4(e)
fulfill these requirements. The Exchange's ability to rely on Rule 19b-
4(e) to list and/or trade Index-Linked Securities that meet the
requirements of proposed ISE Rule 2130 should reduce the timeframe for
bringing these securities to the market and thereby reduce the burdens
on issuers and other market participants, while also promoting
competition and making such securities available to investors more
quickly.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78s(b)(1).
\23\ 17 CFR 240.19b-4.
\24\ 17 CFR 240.19b-4(e).
\25\ 17 CFR 240.19b-4(c)(1).
---------------------------------------------------------------------------
The Commission has previously approved generic listing standards
that are substantially similar to ISE's proposal.\26\ The Commission
believes that the proposed generic listing standards for Index-Linked
Securities should fulfill the intended objective of Rule 19b-4(e) and
allow securities that satisfy the proposed generic listing standards to
commence trading without the need for public comment and Commission
approval.\27\
---------------------------------------------------------------------------
\26\ See Securities Exchange Act Release Nos. 55794 (May 22,
2007), 72 FR 29558 (May 29, 2007) (SR-Amex-2007-45) (amending the
generic listing standards for Index-Linked Securities and approving
generic listing standards for Commodity- and Currency-Linked
Securities); and 55687 (May 1, 2007), 72 FR 25824 (May 7, 2007) (SR-
NYSE-2007-27) (approving generic listing standards for Equity Index-
Linked Securities, Commodity-Linked Securities, and Currency-Linked
Securities).
\27\ The Commission notes that the failure of a particular
product or index to comply with the proposed generic listing
standards under Rule 19b-4(e), however, would not preclude the
Exchange from submitting a separate filing pursuant to Section
19(b)(2), requesting Commission approval to list and trade a
particular equity-, commodity-, or currency-linked product. The
Commission further notes that securities that satisfy ISE's proposed
generic listing standards for Index-Linked Securities would only be
traded on the Exchange pursuant to UTP, pursuant to proposed ISE
Rule 2101(a), and that the Exchange would be required to submit a
separate filing pursuant to Section 19(b)(2) requesting Commission
approval if the Exchange seeks to trade such securities by listing
them. See ISE Rule 2101(a).
---------------------------------------------------------------------------
Listing and Trading Index-Linked Securities
Taken together, the Commission finds that ISE's proposal contains
adequate rules and procedures to govern the listing and trading of
Index-Linked Securities pursuant to Rule 19b-4(e) on the Exchange. All
such securities listed and/or traded under their respective generic
standards will be subject to the full panoply of ISE rules and
procedures that currently govern the trading of equity securities on
the Exchange.
As set forth more fully above, ISE has proposed size, earnings, and
minimum tangible net worth requirements for each issuer, as well as
minimum public distribution and shareholder, principal amount/aggregate
market value, and minimum term thresholds for each issuance of Index-
Linked Securities.\28\ In addition, the Exchange's proposal requires
that the assets (or their derivatives) underlying such securities must
either have (1) Been reviewed and approved for trading by the
Commission, or (2) in the case of Equity Index-Linked Securities, such
underlying assets or their derivatives have sufficient market value and
trading volume and not constitute an unreasonable percentage of the
overall dollar weight of the Underlying Index, or, in the case of
Commodity- and Currency-Linked Securities, their pricing information be
reliable or derived from certain required sources. These requirements
are designed to ensure that the trading markets for the underlying
components are adequately capitalized and sufficiently liquid. The
Commission believes that these requirements should minimize the
potential for manipulation.
---------------------------------------------------------------------------
\28\ The Commission notes that ISE's proposed initial
requirements for all issuers and issuances of Index-Linked
Securities are substantially similar to those adopted by other
exchanges. See supra note 26.
---------------------------------------------------------------------------
The Commission also finds that (1) In the case of Equity Index-
Linked Securities, the requirement that all component securities must
either be securities issued by a reporting company under the Act that
is listed on a national securities exchange and be an NMS stock (as
defined in Rule 600 of Regulation NMS) \29\ or be foreign country
securities or ADRs, so long as such foreign country securities or
foreign country securities underlying the ADRs that are primarily
traded on foreign markets, which are not ISG members or parties to
comprehensive surveillance sharing agreements, do not in the aggregate
represent more than 20% of the dollar weight of the Underlying Index,
and (2) in the case of Commodity-Linked and Currency-Linked Securities
with at least ten components, the requirement that at least 90% of the
dollar weight of the corresponding Commodity Reference Asset or
Currency Reference Asset, as the case may be, must have comprehensive
surveillance sharing agreements with the Exchange, in each case, should
aid the Exchange in identifying potential trading and other violations
of its rules. The Commission believes that such a requirement will
contribute to the transparency of the applicable Underlying Index. The
Commission also notes that, by requiring pricing information for the
relevant components to be readily available, the proposed listing
standards of ISE Rule 2130 should help ensure a fair and orderly market
for Index-Linked Securities listed and/or traded pursuant to Rule 19b-
4(e).
---------------------------------------------------------------------------
\29\ See 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------
The Exchange has also developed delisting criteria that will permit
it to suspend trading of Index-Linked Securities in circumstances that
make further dealings in such products inadvisable. The Commission
believes that the delisting criteria should help ensure that a minimum
level of liquidity exists for each such security to allow for the
maintenance of fair and orderly markets. Also, in the event that the
value of the Underlying Index for Index-Linked Securities (or, for
Commodity-Linked and Currency-Linked Securities that are periodically
redeemable, the corresponding indicative value) is no longer calculated
and widely disseminated on at least a 15-second basis, the Exchange may
halt trading during the day on which the interruption first occurs;
however, if the interruption persists past the trading day on which it
occurred, the Exchange will halt trading no later than the beginning of
the trading day following the interruption and will commence delisting
proceedings. The Commission also notes that, because Index-Linked
Securities would only be traded on the Exchange pursuant to UTP under
proposed ISE Rule 2101(a), the Exchange would halt the trading of such
securities if such Index-Linked
[[Page 41375]]
Securities are no longer listed or trading on the original listing
market.
Surveillance
The Commission notes that any Index-Linked Securities approved for
listing and/or trading would be subject to the Exchange's existing
surveillance procedures governing equities, options, and exchange-
traded funds, as well as procedures the Exchange represents it has
developed to closely monitor activity in such securities and the
Underlying Indexes and/or portfolios. The Exchange also has represented
that its surveillance procedures are adequate to properly monitor the
trading of Index-Linked Securities listed pursuant to the proposed
generic listing standards and that it will be able to obtain necessary
trading and beneficial holder information from the primary trading
markets for the underlying components, either pursuant to bilateral
information sharing agreements with those markets or because those
markets are full or affiliate members of ISG.
Regulatory Information Circular
The Exchange has represented that it will distribute, as
appropriate, a Regulatory Information Circular to EAMs describing the
product, the specific structure of the product, and the corresponding
risks of transacting in Index-Linked Securities. In addition, the
Regulatory Information Circular will set forth the Exchange's
suitability requirements with respect to recommendations in
transactions in Index-Linked Securities to customers and the prospectus
delivery requirements.
Firewall Procedures
The Exchange has further represented that if the Underlying Index
is maintained by a broker-dealer, such broker-dealer will establish a
``firewall'' around personnel responsible for the maintenance of such
Underlying Index or who have access to information concerning changes
and adjustments to the Underlying Index. As an added measure, a third-
party who is not a broker-dealer will be required to calculate the
value of the Underlying Index. In addition, the Exchange has stated
that any advisory committee, supervisory board, or similar entity that
advises an Underlying Index licensor or administrator or that makes
decisions regarding the Underlying Index or portfolio composition,
methodology, and related matters must implement and maintain, or be
subject to, procedures designed to prevent the use and dissemination of
material, non-public information regarding the applicable Underlying
Index or portfolio.
Acceleration
The Commission finds good cause for approving the proposed rule
change, as modified by Amendment No. 1 thereto, before the 30th day
after the date of publication of notice of filing thereof in the
Federal Register. The Exchange requested accelerated approval of the
proposal to facilitate the prompt trading of Index-Linked Securities
pursuant to UTP based on the specified criteria of proposed ISE Rules
2100, 2101, and 2130. The Commission notes that the Exchange's proposed
generic listing standards for Index-Linked Securities are substantially
based on previously approved listing standards for such securities \30\
and presently is not aware of any regulatory issue that should cause it
to revisit that finding or would preclude the trading of such
securities on the Exchange. Therefore, accelerating approval of this
proposal should benefit investors by creating, without undue delay,
additional competition in the market for Index-Linked Securities,
subject to the standards and representations discussed herein.
Therefore, the Commission finds good cause, consistent with section
19(b)(2) of the Act,\31\ to approve the proposed rule change on an
accelerated basis.
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\30\ See supra note 26.
\31\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-ISE-2007-47), as modified by
Amendment No. 1 thereto, be, and it hereby is, approved on an
accelerated basis.
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\32\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-14502 Filed 7-26-07; 8:45 am]
BILLING CODE 8010-01-P
