

[Federal Register: April 14, 2006 (Volume 71, Number 72)]
[Notices]               
[Page 19568-19571]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14ap06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53621; File No. SR-CBOE-2006-32]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change and Amendment No. 1 Thereto To List for Trading 
Options on the iShares MSCI Emerging Markets Index Fund

April 10, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 5, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule

[[Page 19569]]

change as described in Items I and II below, which Items have been 
prepared by the Exchange. On April 6, 2006, the CBOE filed Amendment 
No. 1 to the proposed rule change.\3\ The Commission is publishing this 
notice and order to solicit comments on the proposal from interested 
persons and to approve the proposed rule change, as amended, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange agreed to list Fund Options 
subject to a 60-day pilot program. During this period, the Exchange 
agrees to use its best efforts to obtain a comprehensive 
surveillance agreement with the Bolsa Mexicana de Valores 
(``Bolsa'') and will regularly update the Commission on the status 
of its negotiations with Bolsa.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade options on the iShares MSCI 
Emerging Markets Index Fund (``Fund Options''). The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.com
), at the Office of the Secretary, CBOE and at the 

Commission.

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. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in sections A, B, and C below.

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

1. Purpose
    The Exchange seeks approval to list for trading on the Exchange 
options on the iShares MSCI Emerging Markets Index Fund (``Fund''). The 
Exchange currently has in place initial listing and maintenance 
standards set forth in CBOE Rules 5.3.06 and 5.4.08, respectively 
(``Listing Standards'') that are designed to allow the Exchange to list 
and trade options on funds structured as open-end investment companies, 
such as the Fund.\4\ The request for approval is based on the 
Exchange's determination that the Fund meets substantially all of the 
Listing Standard requirements, and for the requirements that are not 
met, sufficient mechanisms exist that would provide the Exchange with 
adequate surveillance and regulatory information with respect to the 
Fund.
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    \4\ CBOE Rules 5.3.06 and 5.4.08 set forth the initial listing 
and maintenance standards for registered investment companies (or 
series thereof) organized as open-end management investment 
companies, unit investment trust or other similar entities traded on 
a national securities exchange or through the facilities of a 
national securities exchange (``Exchange-Traded Funds''); see 
approval order for SR-CBOE-97-45 (Securities Exchange Act Release 
No. 40166 (July 2, 1998), 63 FR 37430 (July 10, 1998)).
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    As provided in the Fund's prospectus, the Fund is an open-end 
investment company that is designed to hold a portfolio of securities 
that track the MSCI Emerging Markets Index (``Index'').\5\ The Fund 
employs a ``representative sampling'' methodology to track the Index, 
which means that the Fund invests in a representative sample of 
securities in the Index that have a similar investment profile as the 
Index.\6\ Securities selected by the Fund have aggregate investment 
characteristics (based on market capitalization and industry 
weightings), fundamental characteristics (such as return variability, 
earnings valuation and yield), and liquidity measures similar to those 
of the Index. The Fund generally invests at least 90% of its assets in 
the securities of the Index or in American Depositary Receipts 
(``ADRs'') and Global Depositary Receipts (``GDRs'') representing such 
securities. In order to improve portfolio liquidity and give the Fund 
additional flexibility to comply with the requirements of the U.S. 
Internal Revenue Code and other regulatory requirements and to manage 
future corporate actions and index changes in smaller markets, the Fund 
also has the authority to invest the remainder of its assets in 
securities that are not included in the Index or in ADRs and GDRs 
representing such securities. The Fund may invest up to 10% of its 
assets in other MSCI index funds that seek to track the performance of 
equity securities of constituent countries of the Index. The Fund will 
not concentrate its investments (i.e., hold 25% or more of its total 
assets in the stocks of a particular industry or group of industries), 
except that, to the extent practicable, the Fund will concentrate to 
approximately the same extent that the Index concentrates in the stocks 
of such particular industry or group of industries. The Exchange 
believes that these requirements and policies prevent the Fund from 
being excessively weighted in any single security or small group of 
securities and significantly reduce concerns that trading in the Fund 
could become a surrogate for trading in unregistered securities.
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    \5\ As provided on the Web site of Morgan Stanley Capital 
International Inc. (``MSCI'') (http://www.msci.com), which is the 

entity that created and currently maintains the Index, the Index is 
a capitalization-weighted index whose component securities are 
adjusted for available float and must meet objective criteria for 
inclusion in the Index. The Index aims to capture 85% of the 
publicly available total market capitalization in each emerging 
market included in the Index. As of March 28, 2006, the Index was 
comprised of 832 constituents with the top five constituents 
representing the following weights: 4.19%, 2.09%, 2.06%, 1.72%, and 
1.63%. The Index is rebalanced quarterly, calculated in U.S. Dollars 
on a real time basis, and disseminated every 60 seconds during 
market trading hours.
    \6\ The Fund is comprised of 271 securities as of March 28, 
2006. Samsung Electronics Co LTD GDR Registered, a South Korean 
security, has the greatest individual weight at 5.61%. The security 
with the smallest weight is Metropolitan Bank & Trust Co, a Thailand 
security, at 0.01%. The aggregate percentage weighting of the top 5, 
10, and 20 securities in the Fund are 18.22%, 28.18%, and 43.74%, 
respectively.
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    Shares of the Fund (``Fund Shares'') are issued in exchange for an 
``in kind'' deposit of a specified portfolio of securities, together 
with a cash payment, in minimum size aggregation size of 150,000 shares 
(each, a ``Creation Unit''), as set forth in the Fund's prospectus.\7\ 
The Fund issues and sells Fund Shares in Creation Unit sizes through a 
principal underwriter on a continuous basis at the net asset value per 
share next determined after an order to purchase Fund Shares and the 
appropriate securities are received. Following issuance, Fund Shares 
are traded on an exchange like other equity securities, and equity 
trading rules apply. Likewise, redemption of Fund Shares is made in 
Creation Unit size and ``in kind,'' with a portfolio of securities and 
cash exchanged for Fund Shares that have been tendered for redemption.
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    \7\ See approval order for SR-Amex-2001-45 (Securities Exchange 
Act Release No. 44990, note 16) (October 25, 2001), noting that 
local restrictions on transfers of securities to and between certain 
kinds of investors exist in certain foreign markets that preclude 
in-kind creation and redemptions of Exchange-Traded Funds).
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    The Exchange notes that the maintenance listing standards set forth 
in Rule 5.4.08 for options on open-end investment companies do not 
include criteria based on either the number of shares or other units 
outstanding or on their trading volume. As explained in SR-CBOE-97-
03,\8\ the absence of such criteria is justified on the ground that 
since it should always be possible to create additional shares or other 
interests in open-end investment companies at their net asset value by 
making an in-kind deposit of the securities that comprise the 
underlying index or portfolio, there is no limit on the available 
supply of such shares or interests. The Exchange states that this 
process should make it highly unlikely

[[Page 19570]]

that the market for listed, open-end investment company shares could be 
capable of manipulation, since whenever the market price for such 
shares departs from net asset value, arbitrage will occur. Similarly, 
since the Fund meets all of the requirements of the Listing Standards 
except as described below, the Exchange believes that the same analysis 
applies to the Fund.
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    \8\ See Securities Exchange Act Release No. 40166 (July 2, 
1998), 63 FR 37430 (July 10, 1998).
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    The Exchange has reviewed the Fund and determined that it satisfies 
the Listing Standards except for the requirement set forth in CBOE Rule 
5.3.06(A), which requires the Fund to meet the following condition: 
``any non-U.S. component securities of the index or portfolio on which 
the Units are based that are not subject to comprehensive \9\ 
surveillance agreements do not in the aggregate represent more than 50% 
of the weight of the index or portfolio.'' The Exchange currently has 
in place comprehensive surveillance agreements with foreign exchanges 
that cover 49.76% of the securities in the Fund. One of the foreign 
exchanges on which component securities of the Fund are traded and with 
which the Exchange does not have a comprehensive surveillance agreement 
is the Bolsa. The percentage of the weight of the Fund represented by 
these securities is 7.54%.
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    \9\ The Exchange inadvertently omitted reference to the word 
``comprehensive'' in Rule 5.3.06(A). Telephone conference between 
Bill Speth, Director of Research, Exchange, and Florence Harmon, 
Senior Special Counsel, Division of Market Regulation, Commission, 
on April 7, 2006.
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    The Exchange understands that the Commission has been willing to 
allow an exchange to rely on a memorandum of understanding entered into 
between regulators in the event that the exchanges themselves cannot 
enter into a surveillance agreement. The Exchange had previously 
attempted to enter into a surveillance agreement with Bolsa around the 
time when the Exchange sought approval to list for trading options on 
the CBOE Mexico 30 Index in 1995, which was comprised of stocks trading 
on Bolsa.\10\ Since Bolsa was unable to provide a surveillance 
agreement, the Commission allowed the Exchange to rely on the 
memorandum of understanding executed by the Commission and the Comision 
Nacional Bancaria y de Valores (``CNBV''), dated as of October 18, 1990 
(``MOU''). The Commission noted in the Approval Order that in cases 
where it would be impossible to secure an agreement, the Commission 
relied in the past on surveillance sharing agreements between the 
relevant regulators. The Commission further noted in the Approval Order 
that pursuant to the terms of the MOU, it was the Commission's 
understanding that both the Commission and the CNBV could acquire 
information from and provide information to the other similar to that 
which would be required in a surveillance sharing agreement between 
exchanges, and therefore, should CBOE need information on Mexican 
trading in the component securities of the CBOE Mexico 30 Index, the 
Commission could request such information from the CNBV under the 
MOU.\11\
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    \10\ See Securities Exchange Act Release No. 36415 (October 25, 
1995), 60 FR 55620 (November 1, 1995). Telephone conference between 
Bill Speth, Director of Research, Exchange, and Florence Harmon, 
Senior Special Counsel, Division of Market Regulation, Commission, 
on April 7, 2006 (correcting citation).
    \11\ The Exchange also states that the Commission noted if 
securing an information sharing agreement is not possible, an 
exchange should contact the Commission prior to listing a new 
derivative securities product. The Commission also noted that the 
Commission may determine instead that it is appropriate to rely on a 
memorandum of understanding between the Commission and the foreign 
regulator. See Securities Exchange Act Release No. 40761 (December 
8, 1998), 63 FR 70952 (December 22, 1998).
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    The Exchange has recently contacted Bolsa with a request to enter 
into a comprehensive surveillance agreement. Since Bolsa is still 
reviewing the document, the Exchange is uncertain whether the same 
barriers that prevented Bolsa from entering into an information sharing 
agreement approximately ten years ago still exist today. In this 
regard, the Exchange requests permission to rely for a sixty-day pilot 
period on the MOU entered into between the Commission and the CNBV for 
purposes of satisfying its surveillance and regulatory responsibilities 
for the component securities in the Fund that trade on Bolsa until the 
Exchange is able to secure a surveillance agreement with Bolsa. During 
this period, the Exchange has agreed to use its best efforts to obtain 
a comprehensive surveillance agreement with Bolsa, which shall reflect 
the following: (i) Express language addressing market trading activity, 
clearing activity, and customer identity; (ii) Bolsa's reasonable 
ability to obtain access to and produce requested information; and 
(iii) based on the comprehensive surveillance agreement and other 
information provided by Bolsa, the absence of existing rules, laws, or 
practices that would impede the Exchange from obtaining foreign 
information relating to market activity, clearing activity, or customer 
identity, or, in the event such rules, laws, or practices exist, they 
would not materially impede the production of customer or other 
information. The Exchange also represents that it will regularly update 
the Commission on the status of its negotiations with Bolsa.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with the Act 
\12\ and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
section 6(b) of the Act.\13\ Specifically, the Exchange believes the 
proposed rule change is consistent with the section 6(b)(5) \14\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, and to protect investors and the 
public interest.
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    \12\ 15 U.S.C. 78a et seq.
    \13\ 15 U.S.C. 78(f)(b).
    \14\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

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

Electronic Comments

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

File Number SR-CBOE-2006-32 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-CBOE-2006-32. 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

[[Page 19571]]

only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 

Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal 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-
CBOE-2006-32 and should be submitted on or before May 5, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    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.\15\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with section 6(b)(5) of the 
Act,\16\ which requires that an exchange have rules designed, among 
other things, to promote just and equitable principles of trade, 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.
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    \15\ In approving this 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).
    \16\ 15 U.S.C. 78f(b)(5).
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    The listing of the Fund Options does not satisfy CBOE Rule 
5.3.06(A), which requires that: ``any non-U.S. component securities of 
the index or portfolio on which the Units are based that are not 
subject to comprehensive surveillance agreements do not in the 
aggregate represent more than 50% of the weight of the index or 
portfolio.'' Although the Commission has been willing to allow an 
exchange to rely on a memorandum of understanding entered into between 
regulators where the listing SRO finds it impossible to enter into an 
information sharing agreement, it is not clear that that CBOE has 
exhausted all avenues of discussion with foreign markets, including 
Bolsa, in order to obtain such an agreement. Indeed, with regard to 
Bolsa, conditions may have changed in the time period since CBOE last 
raised the issue with Bolsa in 1995 such that Bolsa now would be able 
to enter a comprehensive surveillance agreement with CBOE.
    Consequently, the Commission has determined to approve CBOE's 
listing and trading of Fund Options for a sixty-day pilot period during 
which time CBOE may rely on the MOU with respect to Fund components 
trading on Bolsa. During this period, the Exchange has agreed to use 
its best efforts to obtain a comprehensive surveillance agreement with 
Bolsa, which shall reflect the following: (i) Express language 
addressing market trading activity, clearing activity, and customer 
identity; (ii) Bolsa's reasonable ability to obtain access to and 
produce requested information; and (iii) based on the comprehensive 
surveillance agreement and other information provided by Bolsa, the 
absence of existing rules, laws, or practices that would impede the 
Exchange from obtaining foreign information relating to market 
activity, clearing activity, or customer identity, or, in the event 
such rules, laws, or practices exist, they would not materially impede 
the production of customer or other information. The Exchange also 
represents that it will regularly update the Commission on the status 
of its negotiations with Bolsa. In approving the proposed rule change, 
the Commission notes that CBOE currently has in place surveillance 
agreements with foreign exchanges that cover 49.76% of the securities 
in the Fund and that the Index upon which the Fund is based appears to 
be a broad-based index.
    The Exchange has requested accelerated approval of the proposed 
rule change. The Commission finds good cause, consistent with Section 
19(b)(2) of the Act,\17\ for approving this proposed rule change before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. The Exchange has agreed to use its best efforts to 
obtain a comprehensive surveillance agreement with the Bolsa during a 
sixty-day pilot period in which the Exchange will rely on the MOU.
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    \17\ 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,\18\ that the proposed rule change (SR-CBOE-2006-32), as amended, 
is approved on an accelerated basis for a sixty-day pilot period ending 
on June 9, 2006.
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    \18\ 18 Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 19 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-5548 Filed 4-13-06; 8:45 am]

BILLING CODE 8010-01-P
