
[Federal Register: August 31, 2007 (Volume 72, Number 169)]
[Notice]               
[Page 50426-50429]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31au07-152]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56324; File No. SR-ISE-2007-72]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change, as Modified by Amendment No. 1 Thereto, To List and Trade 
Options on the iShares Emerging Markets Index Fund for a Six Month 
Pilot Program

August 27, 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 August 24, 2007, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') 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 
ISE. On August 27, 2007, the Exchange filed Amendment No. 1 to the 
proposed rule change (``Amendment No. 1''). The Exchange has filed the 
proposal 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, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 for a six month pilot period. ISE is not 
proposing any changes to the rules of the Exchange.

[[Page 50427]]

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

    In its filing with the Commission, ISE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. ISE 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 purpose of this rule change is to obtain approval to list for 
trading on the Exchange options on the iShares MSCI Emerging Markets 
Index Fund (``Fund'') for a six month pilot period. The Exchange 
currently has in place initial listing and maintenance standards set 
forth in ISE Rules 502(h) and 503(h), respectively (the ``Listing 
Standards''), that are designed to allow the Exchange to list funds 
structured as open-end investment companies such as the Fund without 
having to file for Commission approval to list for trading options on 
the fund.\5\ The Exchange submits 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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    \5\ ISE Rules 502(h) and 503(h) set forth the initial listing 
and maintenance standards for registered investment companies (or 
series thereof) organized as open-end management investment 
companies, unit investment trusts, or other similar entities that 
are traded on a national securities exchange or through the 
facilities of a national securities exchange.
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    The Fund is an open-end investment company designed to hold a 
portfolio of securities that tracks the MSCI Emerging Markets Index 
(``Index'').\6\ 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.\7\ 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, 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 is not permitted to 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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    \6\ As provided on the Web site of Morgan Stanley Capital 
International Inc. (``MSCI'') (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 August 17, 2007, the Index was 
comprised of 839 constituents with the top five constituents 
representing the following weights: 3.63%, 2.52%, 2.01%, 1.96%, and 
1.40%. The Index is rebalanced quarterly, calculated in U.S. Dollars 
on a real time basis, and disseminated every 60 seconds during 
market trading hours.
    \7\ The Fund is comprised of 284 securities as of July 31, 2007. 
POSCO ADR, a South Korean security, has the greatest individual 
weight at 4.12%. The aggregate percentage weighting of the top 5, 
10, and 20 securities in the Fund are 16.54%, 25.56%, and 40.03%, 
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 aggregation size of 150,000 shares 
(each, a ``Creation Unit''), as set forth in the Fund's prospectus. 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.
    The Exchange notes that the maintenance listing standards set forth 
in ISE Rule 503(h) for open-end investment companies do not include 
criteria based on either the number of shares or other units 
outstanding, or on their trading volume. 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. This, in 
turn, should make it highly unlikely 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.
    The Exchange has reviewed the Fund and determined that it satisfies 
the Listing Standards except for the requirement set forth in ISE Rule 
502(h)(1), which requires the Fund to meet the following condition: 
``Any non-U.S. component stocks in the index or portfolio on which the 
Fund Shares 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.'' The Exchange currently has 
in place surveillance agreements with foreign exchanges that cover 
45.97% 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 surveillance agreement is the Bolsa Mexicana 
de Valores (``Bolsa''). The percentage of the weight of the Fund 
represented by these securities is 6.53%.
    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 further understands 
that the American

[[Page 50428]]

Stock Exchange (``Amex'') has previously attempted to enter into a 
surveillance agreement with Bolsa as part of seeking approval to list 
and trade options on the Mexico Index.\8\ The Chicago Board Options 
Exchange (``CBOE'') has also previously attempted to enter into a 
surveillance agreement with Bolsa at or about the time when the CBOE 
sought approval to list for trading options on the CBOE Mexico 30 Index 
in 1995, which was comprised of stocks trading on Bolsa.\9\ Since, in 
both instances, Bolsa was unable to provide a surveillance agreement, 
the Commission previously allowed both Amex and CBOE to rely on the 
memorandum of understanding executed by the Commission and the CNBV, 
dated as of October 18, 1990 (``MOU''). The Commission noted in the 
respective Approval Orders 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 respective Approval Orders 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 Amex or CBOE need information on Mexican trading in 
the component securities of the Mexico Index or the CBOE Mexico 30 
Index, the Commission could request such information from the CNBV 
under the MOU.\10\
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    \8\ See Securities Exchange Act Release No. 34500 (August 8, 
1994), 59 FR 41534 (August 12, 1994).
    \9\ See Securities Exchange Act Release No. 36415 (October 25, 
1995), 60 FR 55620 (November 1, 1995).
    \10\ The Commission has also previously noted if securing an 
information sharing agreement is not possible, an exchange should 
contact the Commission prior to listing a new derivative securities 
product. In such case, 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 also recently contacted Bolsa with a request to 
enter into a surveillance agreement. Until such time that the Exchange 
is able to secure a surveillance agreement with Bolsa, the Exchange 
proposed to rely 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. The Exchange believes this proposal is reasonable in that the 
Commission has already acknowledged that the MOU permits both the 
Commission and the CNBV to acquire information from and provide 
information to the other, similar to that which would be required in a 
surveillance sharing agreement between exchanges. This proposal would 
otherwise render the Fund compliant with all of the Listing 
Standards.\11\
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    \11\ The Exchange notes that the component securities of the 
Fund change periodically. Therefore, the Exchange may in fact have 
in place surveillance agreements that would otherwise cover the 
percent weighting requirements set forth in the Listing Standards 
for securities not trading on Bolsa. In this event, the Fund would 
satisfy all of the Listing Standards and reliance on an approval 
order for the Fund would be unnecessary.
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    The Exchange proposes to list options on the Fund for a six month 
pilot program until February 27, 2008 and rely on the MOU entered into 
between the Commission and the CNBV for purposes of satisfying its 
surveillance and regulatory responsibilities until the Exchange is able 
to secure a surveillance agreement with Bolsa. During this period, the 
Exchange agrees 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 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.\12\
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    \12\ The Exchange further represents that it is currently 
engaged in discussions to enter into information sharing agreements 
with certain other exchanges, and that upon signing such agreements, 
ISE will no longer need to rely on the Commission's MOU with the 
CNBV. See Amendment No. 1.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \13\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act, \14\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating 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. Further, this proposed rule 
change is similar to proposals previously submitted by Amex and 
CBOE.\15\
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ See Securities Exchange Act Release Nos. 53824 (May 17, 
2006), 71 FR 30003 (May 24, 2006) (Approving SR-AMEX-2006-43); 56321 
(April 10, 2006), 71 FR 19568 (April 14, 2006) (Approving SR-CBOE-
2006-32).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because the foregoing rule change does not: (1) Significantly 
affect the protection of investors or the public interest; (2) impose 
any significant burden on competition; and (3) become operative for 30 
days after the date of this filing, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act\16\ and Rule 19b-4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\18\ 
However, Rule 19b-4(f)(6)(iii) \19\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative

[[Page 50429]]

delay, to permit the Exchange to list options on the Fund immediately. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The proposal is substantially similar to proposals previously submitted 
by Amex and CBOE. Also, the Exchange has agreed to use its best efforts 
to obtain a comprehensive surveillance agreement with Bolsa during a 
six month pilot period in which the Exchange will rely on the MOU for 
purposes of satisfying its surveillance and regulatory responsibilities 
with respect to the Fund components trading on Bolsa. The Exchange 
represents that it will regularly update the Commission on the status 
of its negotiations with Bolsa. The Exchange further represents that it 
is currently engaged in discussions to enter into information sharing 
agreements with certain other exchanges, and that upon signing such 
agreements, ISE will no longer need to rely on the Commission's MOU 
with the CNBV. The Commission notes that ISE currently has in place 
surveillance agreements with foreign exchanges that cover 45.97% of the 
securities in the Fund, and that the Index upon which the Fund is based 
appears to be a broad based-index. For these reasons, the Commission 
designates the proposed rule change to be operative upon filing with 
the Commission for a six month pilot period until February 27, 
2008.\20\
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    \18\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Exchange has requested the Commission to waive 
this five-day pre-filing notice requirement. The Commission hereby 
grants this request.
    \19 \ Id.
    \20\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors or otherwise in 
furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ISE-2007-72 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-2007-72. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
am and 3 pm. Copies of the filing also will be available for inspection 
and copying at the principal office of ISE. 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-2007-72 and should be submitted on 
or before September 21, 2007.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
Nancy M. Morris,
Secretary.
 [FR Doc. E7-17355 Filed 8-30-07; 8:45 am]

BILLING CODE 8010-01-P
