

[Federal Register: October 18, 2007 (Volume 72, Number 201)]
[Notices]               
[Page 59123-59125]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc07-84]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56650; File No. SR-Amex-2007-35]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1 Thereto, Relating to the Criteria for Securities That Underlie 
Options Traded on the Exchange

October 12, 2007.

I. Introduction

    On April 5, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend certain rules to permit the initial and 
continued listing and trading on the Exchange of options on Index 
Multiple Exchange Traded Fund Shares (``Multiple Fund Shares'') and 
Index Inverse Exchange Traded Fund Shares (``Inverse Fund Shares'') 
(collectively, the ``Fund Shares''). On August 20, 2007, the Exchange 
filed Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change, as modified by Amendment No. 1, was published for comment in 
the Federal Register on September 6, 2007.\4\ The Commission received 
no comment letters on the proposed rule change. This order approves the 
proposed rule change as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 superseded and replaced the original filing 
in its entirety.
    \4\ See Securities Exchange Act Release No. 56336 (August 29, 
2007), 72 FR 51281.
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II. Description of the Proposal

    The purpose of the proposed rule change is to revise Amex Rules 915 
and 916 to enable the listing and trading on the Exchange of options on 
Multiple Fund Shares \5\ and Inverse Fund Shares.\6\ Multiple and Index 
Fund Shares differ from traditional exchange-traded fund (``ETFs'') 
shares in that they do not merely correspond to the performance of a 
given index, but rather attempt to match a multiple or inverse of such 
underlying index performance. Current Multiple Fund Shares trading on 
the Exchange include the ProShares Ultra Funds and Index Inverse Fund 
Shares trading on the Exchange include the Short Funds and UltraShort 
Funds.\7\
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    \5\ Multiple Fund Shares seek to provide investment results, 
before fees and expenses, that correspond to a specified multiple of 
the percentage performance on a given day of a particular foreign or 
domestic stock index.
    \6\ Inverse Fund Shares seek to provide investment results, 
before fees and expenses, that correspond to the inverse (opposite) 
of the percentage performance on a given day of a particular foreign 
or domestic stock index by a specified multiple.
    \7\ See Securities Exchange Act Release Nos. 52553 (October 3, 
2005), 70 FR 59100 (October 11, 2005) (SR-Amex-2004-62) (approving 
the listing and trading of the Ultra Funds and Short Funds) and 
54040 (June 23, 2006), 71 FR 37629 (June 30, 2006) (SR-Amex-2006-41) 
(approving the listing and trading of the UltraShort Funds). The 
Ultra Funds are expected to gain, on a percentage basis, 
approximately twice (200%) as much as the underlying benchmark index 
and should lose approximately twice (200%) as much as the underlying 
benchmark index when such prices decline. The Short Funds are 
expected to achieve investment results, before fees and expenses, 
that correspond to the inverse or opposite of the daily performance 
(-100%) of an underlying benchmark index. Lastly, the UltraShort 
Funds are expected to achieve investment results, before fees and 
expenses that correspond to twice the inverse or opposite of the 
daily performance (-200%) of the underlying benchmark index.
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    In order to achieve investment results that provide either a 
positive multiple or inverse of the benchmark index, Multiple Fund 
Shares or Inverse Fund Shares may hold a combination of financial 
instruments, including, among other things, stock index futures 
contracts; options on futures; options on securities and indices; 
equity caps, collars and floors; swap agreements; forward contracts; 
repurchase agreements; and reverse repurchase agreements (the 
``Financial Instruments''). The underlying portfolios of Multiple Fund 
Shares generally will hold at least 85% of their assets in the 
component securities of the underlying relevant benchmark index. The 
remainder of any assets are devoted to Financial Instruments that are 
intended to create the additional needed exposure to such Underlying 
Index necessary to pursue its investment objective. Normally, 100% of 
the value of the underlying portfolios of Inverse Fund Shares will be 
devoted to Financial Instruments and money market instruments, 
including U.S. government securities and repurchase agreements (the 
``Money Market Instruments'').
    Currently, Commentary .06 to Amex Rule 915 provides securities 
deemed appropriate for options trading shall include shares or other 
securities (``Exchange-Traded Fund Shares'') that are principally 
traded on a national securities exchange or through the facilities of a 
national securities association and defined as an ``NMS stock'' under 
Rule 600 of Regulation NMS, and that (i) represent an interest in a 
registered investment company organized as an open-end management 
investment company, a unit investment trust or a similar entity which 
holds securities constituting or otherwise based on or representing an 
investment in an index or portfolio of securities; (ii) represent 
interest in a trust or other similar entity that holds a specified non-
U.S. currency and/or currencies deposited with the trust or similar 
entity when aggregated in some specified minimum number may be 
surrendered to the trust by the beneficial owner to receive the 
specified non-U.S. currency and/or currencies and pays the beneficial 
owner interest and other distributions on the deposited non-U.S. 
currency and/or currencies, if any, declared and paid by the trust; or 
(iii) represent commodity pool interests principally engaged, directly 
or indirectly, in holding and/or managing portfolios or baskets of 
securities, commodity futures contracts, options on commodity futures 
contracts, swaps, forward contracts and/or options on physical 
commodities and/or non-U.S. currency (``Commodity Pool ETFs'').

[[Page 59124]]

    The Exchange proposes to amend Commentary .06 to Amex Rule 915 to 
expand the type of options to include the listing and trading of 
options based on Multiple Fund Shares and Inverse Fund Shares \8\ that 
may hold or invest in any combination of securities, Financial 
Instruments and/or Money Market Instruments. Multiple Fund Shares and 
Inverse Fund Shares will continue to otherwise satisfy the listing 
standards in Commentary .06 to Amex Rule 915. In addition, the Exchange 
proposes to remove the reference to a ``national securities 
association'' in Commentary .06 to Amex Rule 915.
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    \8\ See Amex Rule 1000A-AEMI(b)(2).
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    As set forth in proposed amended Commentary .06 to Amex Rule 915, 
Multiple Fund Shares and Inverse Fund Shares must be traded on a 
national securities exchange and must be an ``NMS stock'' as defined 
under Rule 600 of Regulation NMS. In addition, Multiple Fund Shares and 
Inverse Fund Shares must meet either: (i) The criteria and guidelines 
under Commentary .01 to Amex Rule 915; or (ii) be available for 
creation or redemption each business day in cash or in kind from the 
investment company at a price related to net asset value. In addition, 
the investment company shall provide that shares may be created even 
though some or all of the securities and/or cash (in lieu of the 
Financial Instruments) needed to be deposited have not been received by 
the investment company, provided the authorized creation participant 
has undertaken to deliver the shares and/or cash as soon as possible 
and such undertaking has been secured by the delivery and maintenance 
of collateral consisting of cash or cash equivalents satisfactory to 
the fund which underlies the option as described in the prospectus.
    The current continuing or maintenance listing standards for options 
on Exchange Traded Fund Shares will continue to apply.
    The Exchange proposes to amend Commentary .07 to Amex Rule 916 to 
indicate that the index or portfolio may consist of securities, 
Financial Instruments and/or Money Market Instruments. The Exchange 
also seeks to delete references to ``national market securities,'' 
``national securities association'', and ``national market 
association'' set forth in Commentary .07 to Amex Rule 916.
    Under the applicable continued listing criteria in Commentary .07 
to Amex Rule 916, options on Fund Shares may be subject to the 
suspension of opening transactions as follows: (1) Following the 
initial twelve-month period beginning upon the commencement of trading 
of the Fund Shares, there are fewer than 50 record and/or beneficial 
holders of the Fund Shares for 30 or more consecutive trading days; (2) 
the value of the index, non-U.S. currency, portfolio of commodities 
including commodity futures contracts, options on commodity futures 
contracts, swaps, forward contracts and/or options on physical 
commodities, or portfolio of securities and/or Financial Instruments on 
which the Fund Shares are based is no longer calculated or available; 
or (3) such other event occurs or condition exists that in the opinion 
of the Exchange makes further dealing on the Exchange inadvisable. 
Additionally, the Fund Shares shall not be deemed to meet the 
requirements for continued approval, and the Exchange shall not open 
for trading any additional series of option contracts of the class 
covering such Multiple Fund Shares or Inverse Fund Shares, if the 
Shares are halted from trading on their primary market or if the Shares 
are delisted in accordance with the terms of Amex Rule 916 or the value 
of the index or portfolio on which the Shares are based is no longer 
calculated or available.
    The Exchange represents that the expansion of the types of 
investments that may be held by Multiple Fund Shares or Inverse Fund 
Shares under Commentary .06 to Amex Rule 915 will not have any effect 
on the rules pertaining to position and exercise limits \9\ or 
margin.\10\
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    \9\ See Amex Rules 904 and 905.
    \10\ See Amex Rule 462.
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    In addition, the Exchange also seeks to add ``reverse repurchase 
agreements'' within the rule text of Amex Rule 1000A-AEMI(b)(2)(ii) in 
order to correct the definition of Financial Instruments.
    The Exchange has represented that its existing surveillance 
procedures applicable to trading in options are adequate to properly 
monitor the trading in Multiple Fund Shares options and Inverse Fund 
Shares options.

III. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\11\ and in particular, the requirements of section 6(b) of 
the Act.\12\ Specifically, the Commission finds that the proposed rule 
change is consistent with section 6(b)(5) of the Act,\13\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 12 15 U.S.C. 78f(b).
    \13\ 13 15 U.S.C. 78f(b)(5).
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Surveillance

    The Commission notes that the Exchange has represented that its 
existing surveillance procedures applicable to trading options are 
adequate to properly monitor trading in Multiple Fund Shares options 
and Inverse Fund Shares options. In addition, the Exchange represented 
that the expansion of the types of investments that may be held by 
Multiple Fund Shares or Inverse Fund Shares under Commentary .06 to 
Amex Rule 915 will not have any effect on the rules pertaining to 
position and exercise limits \14\ or margin.\15\
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    \14\ See Amex Rules 904 and 905.
    \15\ See Amex Rule 462.
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Listing and Trading Options on Fund Shares

    The Commission notes that, pursuant to the proposed rule change, 
the Exchange represented that the current continuing or maintenance 
listing standards for options on Exchange Traded Fund Shares will 
continue to apply. These provisions include requirements regarding 
initial and continued listing standards, suspension of opening 
transactions, and trading halts. Proposed amended Commentary .06 to 
Amex Rule 915, would require that Multiple Fund Shares and Inverse Fund 
Shares be traded on a national securities exchange and must be an ``NMS 
stock'' as defined under Rule 600 of Regulation NMS.\16\
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    \16\ 17 CFR 242.600(b)(47).
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    The Commission believes that this proposal is necessary to enable 
the Exchange to list and trade options on the shares of the Ultra Fund, 
Short Fund and UltraShort Fund of the ProShares Trust. The Commission 
believes that the ability to trade options on the Multiple and Inverse 
Fund Shares will provide investors with additional risk management 
tools. The Commission further believes that the proposed amendment to 
the Exchange's listing criteria for options on Exchange Traded Fund 
Shares will ensure that the Exchange will be able to list options on

[[Page 59125]]

the Funds of the ProShares Trust as well as other Multiple Fund Shares 
or Inverse Fund Shares that may be introduced in the future, thereby 
affording investors greater investment choices.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-Amex-2007-35), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-20533 Filed 10-17-07; 8:45 am]

BILLING CODE 8011-01-P
