
[Federal Register: February 28, 2008 (Volume 73, Number 40)]
[Notices]               
[Page 10839-10844]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28fe08-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57365; File No. SR-CBOE-2007-109]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, 
Adopting Generic Listing Standards for Exchange-Traded Funds Based on 
International or Global Indexes or Portfolios, or Indexes or Portfolios 
Described in Exchange Rules Previously Approved by the Commission as 
Underlying Benchmarks for Derivative Securities

February 21, 2008.
    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 September 10, 2007, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 February 19, 2008, CBOE filed Amendment No. 1 to the 
proposed rule change. This order provides notice of the proposal, as 
amended, and approves the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to revise its listing standards, adopted 
pursuant to Rule 19b-4(e) under the Act, in CBOE Rules 31.5(L) and 
31.5(M) to include generic listing standards for Index Portfolio 
Receipts (``IPRs'') and Index Portfolio Shares (``IPSs,'' together with 
IPRs, referred to herein with as ``exchange-traded funds'' or ``ETFs'') 
that are based on international or global indexes or portfolios, or on 
indexes or portfolios described in exchange rules that have been 
previously approved by the Commission for the trading of ETFs or other 
specified index-based securities.
    The text of the proposed rule change is available from the 
Exchange's Web site (http://www.cboe.org/Legal), at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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 list and trade ETFs pursuant to Rule 19b-
4(e) under the Act \3\ if each of the conditions set forth in CBOE 
Rules 31.5(L) or (M) is satisfied. 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, pursuant to paragraph (c)(1) of Rule 19b-4, 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 derivatives securities product, and the SRO has a 
surveillance program for the product class.\4\ This proposed rule 
change is based on SR-Phlx-2007-20, which was approved by the 
Commission on July 11, 2007.\5\
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    \3\ 17 CFR 240.19b-4(e).
    \4\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange 
begins trading the new derivative securities products. See 17 CFR 
240.19b-4(e)(2)(ii).
    \5\ See Securities Exchange Act Release No. 56049 (July 11, 
2007), 72 FR 39121 (July 17, 2007) (SR-Phlx-2007-20).
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a. Background
    CBOE Rules 31.5(L) and (M) provide standards for listing Index 
Portfolio Receipts and Index Portfolio Shares, respectively, on CBOE. 
An Index Portfolio Receipt is a security that represent an interest in 
a unit investment trust that holds securities that comprise a stock 
index on which a series of IPR is based.\6\ An Index Portfolio Share is 
a security that is issued by an open-end management investment company 
and based on a portfolio of stocks or fixed income

[[Page 10840]]

securities designed to provide investment results that correspond 
generally to the price and yield performance of a specified foreign or 
domestic stock index or fixed income securities index.\7\ Pursuant to 
CBOE Rule 1.1.02, IPRs must be issued in a specified aggregate minimum 
number in return for a deposit of specified numbers of shares of stock 
plus a cash amount. Pursuant to CBOE Rule 1.1.03, IPSs must be issued 
in a specified aggregate minimum number in return for a deposit of 
specified numbers of shares of stock and/or a cash amount, or a 
specified portfolio of fixed income securities and/or a cash amount, 
with a value equal to the next determined net asset value (``NAV''). 
When aggregated in the same specified minimum number, the ETFs must be 
redeemable by the issuer for stock and/or cash, with a value equal to 
the next determined NAV. The NAV is calculated once a day after the 
close of the regular trading day.
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    \6\ The complete definition of IPRs is set forth in CBOE Rule 
1.1.02.
    \7\ The complete definition of IPSs is set forth in CBOE Rule 
1.1.03.
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    To meet the investment objective of providing investment returns 
that correspond to the price and the dividend and yield performance of 
the underlying index, an ETF may use a ``replication'' strategy or a 
``representative sampling'' strategy with respect to the ETF 
portfolio.\8\ An ETF using a replication strategy will invest in each 
stock of the underlying index in about the same proportion as that 
stock is represented in the index itself. An ETF using a representative 
sampling strategy will generally invest in a significant number, but 
not all of the component securities of the underlying index, and will 
hold stocks that, in the aggregate, are intended to approximate the 
full index in terms of key characteristics, such as price/earnings 
ratio, earnings growth, and dividend yield.
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    \8\ In either case, an ETF, by its terms, may be considered 
invested in the securities of the underlying index to the extent the 
ETF invests in sponsored American Depositary Receipts (``ADRs''), 
Global Depositary Receipts (``GDRs''), or European Depositary 
Receipts (``EDRs'') that trade on exchanges with last-sale reporting 
representing securities in the underlying index.
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    In addition, an ETF portfolio may be adjusted in accordance with 
changes in the composition of the underlying index or to maintain 
compliance with requirements applicable to a regulated investment 
company under the Internal Revenue Code (``IRC'').
b. Generic Listing Standards For Exchange-Traded Funds
    The Commission has previously approved generic listing standards 
for ETFs based on indexes that consist of stocks listed on U.S. 
exchanges.\9\ In general, the proposed criteria for the underlying 
component securities in the international and global indexes are 
similar to those for the domestic indexes, but with modifications for 
the issues and risks associated with non-U.S. securities.
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    \9\ See, e.g., Securities Exchange Act Release No. 44046 (March 
7, 2001), 66 FR 15152 (March 15, 2001) (SR-CBOE-00-51); Securities 
Exchange Act Release No. 45178 (December 20, 2001), 66 FR 67610 
(December 31, 2001) (SR-Phlx-00-68); Securities Exchange Act Release 
No. 43912 (January 31, 2001), 66 FR 9401 (February 7, 2001) (SR-
Phlx-00-91).
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    In addition, the Commission has previously approved generic listing 
standards of exchanges governing the listing and trading of ETFs based 
on indexes or portfolios composed of Non-U.S. Component Stocks, as well 
as indexes or portfolios based on both non-U.S. Component Stocks and 
U.S. Component Stocks.\10\
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    \10\ See Securities Exchange Act Release No. 55621 (April 12, 
2007), 72 FR 19571 (April 18, 2007) (SR-NYSEArca-2006-86); 
Securities Exchange Act Release No. 55269 (February 9, 2007), 72 FR 
7490 (February 15, 2007) (SR-NASDAQ-2006-50); Securities Exchange 
Act Release No. 55113 (January 17, 2007), 72 FR 3179 (SR-NYSE-2006-
101).
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    The Commission has also approved generic listing standards for 
index-based derivative securities products based on indexes or 
portfolios described in exchange rules that have been previously 
approved by the Commission under Section 19(b)(2) of the Act for the 
trading of other index-based securities on the condition that all of 
the standards set forth in those orders, including surveillance sharing 
agreements, continue to be satisfied.\11\
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    \11\ See, e.g., Securities Exchange Act Release No. 51563 (April 
15, 2005) 70 FR 21257 (April 25, 2005) (SR-Amex-2005-001); 
Securities Exchange Act Release No. 52204 (August 3, 2005), 70 FR 
46559 (August 10, 2005) (SR-PCX-2005-63).
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    The Exchange believes that adopting generic listing standards and 
applying Rule 19b-4(e) should fulfill the intended objective of that 
rule by allowing those ETFs that satisfy the proposed generic listing 
standards to commence trading, without the need for a public comment 
period and Commission approval. The proposed rules have the potential 
to reduce the time frame for bringing ETFs to market, thereby reducing 
the burdens on issuers and other market participants. The failure of a 
particular ETF to comply with the proposed generic listing standards 
under Rule 19b-4(e) would not, however, preclude the Exchange from 
submitting a separate filing pursuant to Section 19(b)(2) requesting 
Commission approval to list and trade a particular ETF.
c. Proposed Requirements for Listing and Trading ETFs Based on 
International and Global Indexes or Portfolios
    ETFs listed pursuant to the proposed generic listing standards or 
that are traded pursuant to UTP would be traded, in all other respects, 
under the Exchange's existing trading rules and procedures that apply 
to ETFs and would be covered under the Exchange's surveillance program 
for ETFs.\12\
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    \12\ See proposed CBOE Rules 31.5(L).01(g) and (M).01(g).
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    To list an ETF pursuant to the proposed generic listing standards 
for an international or global index or portfolio, the index or 
portfolio would have to satisfy all the conditions contained in 
proposed CBOE Rules 31.5(L).01(a)(2) or 31.5(M).01(a)(2). As with the 
existing generic standards for ETFs based on domestic indexes or 
portfolios, these generic listing standards are intended to ensure that 
stocks with substantial market capitalization and trading volume 
account for a substantial portion of the weight of the index or 
portfolio. While the standards in this proposal are based on the 
standards contained in the current generic listing standards for ETFs 
based on domestic indexes or portfolios, they have been adapted as 
appropriate to apply to international and global indexes or portfolios.
    As proposed, CBOE 31.5(L)(e) and 31.5(M)(c) would provide 
definitions of the terms U.S. Component Stock and Non-U.S. Component 
Stock. These new definitions would provide the basis for the standards 
for indexes or portfolios with either domestic or international stocks, 
or a combination of both. A ``Non-U.S. Component Stock'' would mean an 
equity security that is not registered under Section 12(b) or 12(g) of 
the Act,\13\ and that is issued by an entity that (1) is not organized, 
domiciled, or incorporated in the United States; and (2) is an 
operating company (including a real estate investment trust or income 
trust, but excluding an investment trust, unit trust, mutual fund, or 
derivative). This definition is designed to create a category of 
component stocks that are issued by companies that are not based in the 
United States, are not subject to oversight through Commission 
registration, and would include sponsored GDRs and EDRs. A ``U.S. 
Component Stock'' would mean an equity security that is registered 
under Section 12(b) or 12(g) of the Act or an ADR the underlying equity 
security of which is registered under Section 12(b)

[[Page 10841]]

or 12(g) of the Act. An ADR with an underlying equity security that is 
registered pursuant to the Act is considered a U.S. Component Stock 
because the issuer of that security is subject to Commission 
jurisdiction and must comply with Commission rules.
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    \13\ 15 U.S.C. 78l(b) or (g).
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    The Exchange proposes that, to list an IPR or IPS based on an 
international or global index or portfolio pursuant to the generic 
listing standards, such index or portfolio must meet the following 
criteria:
     Component stocks that in the aggregate account for at 
least 90% of the weight of the index or portfolio each must have a 
minimum market value of at least $100 million (proposed CBOE Rules 
31.5(L).01(a)(2)(A) and 31.5(M).01(a)(2)(A));
     Component stocks representing at least 90% of the weight 
of the index or portfolio each must have a minimum worldwide monthly 
trading volume during each of the last six months of at least 250,000 
shares (proposed CBOE Rules 31.5(L).01(a)(2)(B) and 
31.5(M).01(a)(2)(B));
     The most heavily weighted component stock may not exceed 
25% of the weight of the index or portfolio and the five most heavily 
weighted component stocks may not exceed 60% of the weight of the index 
or portfolio (proposed CBOE Rules 31.5(L).01(a)(2)(C) and 
31.5(M).01(a)(2)(C));
     The index or portfolio shall include a minimum of 20 
component stocks (proposed CBOE Rules 31.5(L).01(a)(2)(D) and 
31.5(M).01(a)(2)(D)); and
     Each U.S. Component Stock must be listed on a national 
securities exchange and an NMS stock as defined in Rule 600 of 
Regulation NMS under the Act, and each Non-U.S. Component Stock must be 
listed on an exchange that has last-sale reporting (proposed CBOE Rules 
31.5(L).01(a)(2)(E) and 31.5(M).01(a)(2)(E)).
    The Exchange believes that these proposed standards are reasonable 
for international and global indexes or portfolios, and, when applied 
in conjunction with the other listing requirements, would result in the 
listing and trading of ETFs that are sufficiently broad-based in scope 
and not readily susceptible to manipulation. The Exchange also believes 
that the proposed standards would result in ETFs that are adequately 
diversified in weighting for any single security or small group of 
securities to significantly reduce concerns that trading in an ETF 
based on an international or global index could become a surrogate for 
the trading in of securities not registered in the United States.
    The Exchange further notes that, while these standards are similar 
to those for indexes or portfolios that include only U.S. Component 
Stocks, they differ in certain important respects and are generally 
more restrictive, reflecting greater concerns over portfolio 
diversification with respect to ETFs investing in components that are 
not individually registered with the Commission. First, in the proposed 
standards, component stocks that in the aggregate account for at least 
90% of the weight of the index or portfolio each shall have a minimum 
market value of at least $100 million, compared to a minimum market 
value of at least $75 million for indexes or portfolios with only U.S. 
Component Stocks. (Market value is calculated by multiplying the total 
shares outstanding by the price per share of the component stock.) 
Second, in the proposed standards, the most heavily weighted component 
stock cannot exceed 25% of the weight of the index or portfolio, in 
contrast to a proposed 30% standard for an index or portfolio comprised 
of only U.S. Component Stocks.\14\ Third, in the proposed standards, 
the five most heavily weighted component stocks shall not exceed 60% of 
the weight of the index or portfolio, compared to a 65% standard for 
indexes or portfolios comprised of only U.S. Component Stocks. Fourth, 
the minimum number of stocks in the proposed standards is 20, in 
contrast to a minimum of 13 in the standards for an index or portfolio 
with only U.S. Component Stocks. Finally, the proposed standards 
require that each Non-U.S. Component Stock included in the index or 
portfolio be listed and traded on an exchange that has last-sale 
reporting.
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    \14\ See proposed CBOE Rules 31.5(L).01(a)(1)(C), 
31.5(L).01(a)(2)(C), 31.5(M).01(a)(1)(C), and 31.5(M).01(a)(2)(C).
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    The Exchange also proposes to modify CBOE Rules 31.5(L).01(b)(ii) 
and 31.5(M).01(b)(ii) to require that the index value for an ETF listed 
pursuant to this proposal be widely disseminated by one or more major 
market data vendors at least every 60 seconds during the time when the 
ETF shares trade on the Exchange. If the index value does not change 
during some or all of the period when trading is occurring on the 
Exchange, the last official calculated index value must remain 
available throughout Exchange trading hours. In contrast, the index 
value for an ETF listed pursuant to the existing standards for domestic 
indexes must be disseminated at least every 15 seconds during the 
trading day. This modification reflects limitations, in some instances, 
on the frequency of intra-day trading information with respect to Non-
U.S. Component Stocks and that, in many cases, trading hours for 
overseas markets overlap only in part, or not at all, with Exchange 
trading hours.
    In addition, CBOE Rules 31.5(L).01(c) and 31.5(M).01(c) would be 
modified to define the term ``Intraday Indicative Value'' (``IIV'') as 
the estimate of the value of a share of each ETF that is updated at 
least every 15 seconds during Normal Market Hours.\15\ CBOE also 
proposes to clarify in these rules that the IIV would be updated at 
least every 15 seconds during trading in the ETF on the Exchange to 
reflect changes in the exchange rate between the U.S. dollar and the 
currency in which any component stock is denominated. If the IIV does 
not change during some or all of the period when trading is occurring 
on the CBOE Stock Exchange (``CBSX''), CBOE's equity trading platform, 
then the last official calculated IIV must remain available throughout 
CBSX's trading hours.
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    \15\ Normal Market Hours are defined in proposed CBOE Rule 
52.3(c)(2) as the time period from 8:30 a.m. until 3:15 p.m. Central 
Time (``CT'').
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    CBOE is proposing that it may designate an ETF for trading during 
the trading hours specified in CBOE Rule 51.2(d) \16\ for IPRs and IPSs 
as long as the index value and IIV dissemination requirements of CBOE 
Rules 31.5(L).01(b)(ii), 31.5(L).01(c), 31.5(M).01(b)(ii), and 
31.5(M).01(c) are met.
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    \16\ CBOE Rule 51.2(d) provides that the hours during which IPR 
transactions may be made on CBSX are 8:15 a.m. until 3:15 p.m. CT, 
and that the hours during which IPS transactions may be made on CBSX 
are 8:15 a.m. until 3:00 p.m. or 3:15 p.m. CT for each series of 
IPSs, as specified by CBSX.
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    The Exchange proposes to adopt CBOE Rules 31.5(L).01(g) and 
31.5(M).01(g) to specify that CBOE will implement written surveillance 
procedures for ETFs. The Exchange also proposes to add new CBOE Rules 
31.5(L).01(h) and 31.5(M).01(h) regarding the creation and redemption 
process for ETFs and compliance with federal securities laws for ETFs 
listed pursuant to the new generic listing standards. These new 
subsections would apply to ETFs listed pursuant to CBOE Rules 31.5(L) 
and (M), respectively. They would require that the statutory prospectus 
or the application for exemption from provisions of the Investment 
Company Act of 1940 \17\ for the ETF state that the ETF must comply 
with the federal

[[Page 10842]]

securities laws in accepting securities for deposits and satisfying 
redemptions with redemption securities, including that the securities 
accepted for deposits and the securities used to satisfy redemption 
requests are sold in transactions that would be exempt from 
registration under the Securities Act of 1933.\18\
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    \17\ 15 U.S.C. 80a et seq.
    \18\ 15 U.S.C. 77a et seq.
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    The Commission has approved generic listing standards providing for 
the listing, pursuant to Rule 19b-4(e), of other derivative securities 
products based on indexes or portfolios described in rules previously 
approved by the Commission under Section 19(b)(2) of the Act.\19\ The 
Exchange proposes to include in the generic listing standards for the 
listing of ETFs based on indexes or portfolios that have been approved 
by the Commission in connection with the listing of options, Index 
Portfolio Receipts, Index Portfolio Shares, index-linked securities, or 
Index-Linked Exchangeable Notes. The Exchange believes that the 
application of this standard to ETFs is appropriate because the 
underlying index would have been subject to detailed and specific 
Commission review in the context of the approval of listing of those 
other derivatives.
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    \19\ See supra note 11.
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    This new generic standard would be limited to stock indexes or 
portfolios, and would require that each component stock be either: (1) 
A U.S. Component Stock that is listed on a national securities exchange 
and is an NMS stock as defined in Rule 600 of Regulation NMS; or (2) a 
Non-U.S. Component Stock that is listed and traded on an exchange that 
has last-sale reporting.
    The Exchange is also proposing to include additional continued 
listing standards relating to ETFs. The Exchange would commence 
delisting proceedings if the value of the index or portfolio of 
securities on which the ETF is based is no longer calculated or 
disseminated.
    The Exchange proposes to adopt CBOE Rules 31.5(L)(f) and 31.5(M)(d) 
to formalize in the rules existing best practices for providing equal 
access to material information about the value of ETFs. Prior to 
approving an ETF for listing, the Exchange would obtain a 
representation from the ETF issuer that the NAV per share would be 
calculated daily and made available to all market participants at the 
same time.
    Proposed CBOE Rule 52.3(b) provides that the Exchange would halt 
trading in a Derivative Securities Product \20\ if the circuit breaker 
parameter of CBOE Rule 6.3B has been reached. In exercising its 
discretion to halt or suspend trading in a Derivative Securities 
Product, the Exchange could consider factors such as the extent to 
which trading in the underlying securities is not occurring or whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present, in addition to 
other relevant factors.
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    \20\ Proposed Rule 52.3(c)(5)(i) defines ``Derivative Securities 
Product'' as a series of Equity-Linked Term Notes, Index-Linked 
Exchangeable Notes, Index Portfolio Receipts, Index Portfolio 
Shares, or Trust Issued Receipts that is based on an underlying 
security or index.
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    Proposed CBOE Rule 52.3(c) sets forth the trading halt rules that 
apply to a Derivative Securities Product that is traded on the Exchange 
on a UTP basis. The rule provides that, during the hours for trading of 
Derivative Securities Products on the Exchange, if a temporary 
interruption occurs in the calculation or wide dissemination of the 
Required Value \21\ by a major market data vendor and the listing 
market halts trading in the Derivative Securities Product, the 
Exchange, upon notification by the listing market of such halt due to 
such temporary interruption, also shall immediately halt trading in the 
series of Derivative Securities Product. If the Required Value 
continues not to be calculated or widely available as of the 
commencement of trading on the Exchange on the next business day, the 
Exchange shall not commence trading of the series of Derivative 
Securities Product that day. If an interruption in the calculation or 
wide dissemination of the Required Value continues, the Exchange may 
resume trading in the series of Derivative Securities Product only if 
calculation and wide dissemination of the Required Value resumes or 
trading in such series resumes in the listing market.
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    \21\ Proposed Rule 52.3(c)(5)(ii) defines ``Required Value'' as 
the value of any security or index underlying a Derivative 
Securities Product, as well as the IIV, indicative optimized 
portfolio value, or other comparable estimate of the value of a 
share of a Derivative Securities Product, updated regularly during 
the trading day.
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    The Exchange proposes to amend CBOE Rule 31.5 to stipulate that, as 
provided by the Commission Rule 12f-5,\22\ the Exchange may extend UTP 
to any security, such as an ETF, for which the Exchange has in effect 
rules providing for transactions in such class or type of security.\23\ 
The provision of CBOE Rule 31.5(L) and (M) that governs surveillance 
procedures, the provisions of CBOE Rule 54.1 and 54.2 that relate to 
information circulars and prospectus delivery, and CBOE Rule 51.2(d) 
that governs trading hours for transactions in IPRs and IPSs, would 
apply to securities traded on a UTP basis (as does the applicable 
proposed trading halt provision of CBOE Rule 52.3(b)). The Exchange 
would not, however, apply quantitative listing standards to securities 
traded on a UTP basis.
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    \22\ 17 CFR 240.12f-5.
    \23\ See proposed CBOE Rule 31.5.
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    The Exchange is proposing other minor and clarifying changes to 
CBOE Rules 31.5(L) and (M). Current CBOE Rules 31.5L.01(b)(i) and 
31.5M.01(b)(i) would be deleted, so that an index underlying a series 
of IPRs or IPSs need not be calculated according to the methodologies 
specified in those rules.\24\ CBOE Rules 31.5(L).01(b)(ii) and 
31.5(M).01(b)(ii) would be amended to ensure that an entity that 
advises an index provider or calculator and related entities has in 
place procedures designed to prevent the use and dissemination of 
material non-public information regarding the index underlying the ETF. 
CBOE Rules 31.5(L).01(e) and 31.5(M).01(e) would be adopted to clarify 
that the minimum increment for bids and offers is set in Rule 51.2(d). 
CBOE Rules 31.5(L).01(f) and 31.5(M).01(f) are being adopted to clarify 
that the trading hours for IPRs and IPSs, respectively, are set in CBOE 
Rule 51.2. CBOE Rules 31.5(L).01(a)(1)(C) and 31.5(M).01(a)(1)(C) would 
be amended to change the maximum weighting requirement for the most 
heavily weighted component stock from 25% to 30% of the weight of the 
index or portfolio for IPRs and IPSs.\25\
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    \24\ This is consistent with the rules of other national 
securities exchanges. See, e.g., NYSE Arca Equities Rules 5.2(j)(3) 
and 8.200.
    \25\ This is consistent with the rules of other SROs. See, e.g., 
Securities Exchange Act Release Nos. 44532 (July 10, 2001), 66 FR 
37078 (July 16, 2001) (SR-Amex-2001-25).
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    The Exchange will closely monitor activity in ETFs to identify and 
deter any potential improper trading activity in ETFs. The Exchange 
represents that its surveillance procedures are adequate to properly 
monitor the trading of ETFs that would be listed or traded pursuant to 
UTP. Specifically, CBOE will rely on its existing surveillance 
procedures governing equities, options, and ETFs. Additionally, the 
Exchange states that it will develop procedures to closely monitor 
activity in ETFs and related securities to identify and deter any 
potential improper trading activity. In addition, the Exchange has a 
general policy prohibiting the dissemination of material, non-public 
information by its employees. Finally, the Exchange deems IPRs and IPSs 
to be equity securities. Therefore, IPRs and IPSs are subject to

[[Page 10843]]

the Exchange's trading rules that apply to equity securities.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \26\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \27\ in particular, in that it is designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because the proposal would permit the Exchange 
to more efficiently introduce products for trading on CBSX. In 
addition, the proposal is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change would result in 
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

    The Exchange neither solicited nor received comments on the 
proposal.

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 (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2007-109 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2007-109. 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 20549-1520 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-2007-109 and should be 
submitted on or before March 20, 2008.

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

    After careful review, 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.\28\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act \29\ 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 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.
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    \28\ 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).
    \29\ 15 U.S.C. 78f(b)(5).
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    Currently, the Exchange must file a proposed rule change with the 
Commission pursuant to Section 19(b)(1) of the Act \30\ and Rule 19b-4 
thereunder \31\ to list and trade any ETF based on an index comprised 
of foreign securities. The Exchange also must file a proposed rule 
change to list and trade any ETF based on an index or portfolio 
described in a rule change that has previously been approved by the 
Commission as an underlying benchmark for derivative securities. 
However, Rule 19b-4(e) 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) 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. CBOE's proposed rules, 
which allow the listing and trading of ETFs pursuant to Rule 19b-4(e) 
based on certain indexes or portfolios with components that include 
foreign securities or indexes or portfolios described in exchange rules 
that have been previously approved by the Commission as underlying 
benchmarks for derivative securities, fulfill these requirements. Use 
of Rule 19b-4(e) by the Exchange to list and trade such ETFs should 
promote competition, reduce burdens on issuers and other market 
participants, and make such ETFs available to investors more 
quickly.\32\
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    \30\ 15 U.S.C. 78s(b)(1).
    \31\ 17 CFR 240.19b-4.
    \32\ The Commission notes, however, that the failure of a 
particular ETF to meet these generic listing standards would not 
preclude the Exchange from submitting a separate proposed rule 
change to list and trade the ETF.
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    The Commission previously has approved generic listing standards 
for other exchanges that are substantially similar to those proposed 
here by the Exchange.\33\ This proposal does not appear to raise any 
novel regulatory issues. Therefore, the Commission finds that CBOE's 
proposal is consistent with the Act on the same basis that it approved 
the other exchanges' generic listing standards for ETFs based on 
international or global indexes or portfolios, or on indexes or 
portfolios described in exchange rules that have been previously 
approved by the

[[Page 10844]]

Commission as underlying benchmarks for derivative securities.
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    \33\ See, e.g., Securities Exchange Act Release No. 56049 (July 
11, 2007), 72 FR 39121 (July 17, 2007) (SR-Phlx-2007-20); Securities 
Exchange Act Release No. 55269 (February 9, 2007), 72 FR 19571 
(February 15, 2007) (SR-NASDAQ-2006-50); Securities Exchange Act 
Release No. 55621 (April 12, 2007), 72 FR 19571 (April 18, 2007) 
(SR-NYSEArca-2006-86); Securities Exchange Act Release No. 55113 
(January 17, 2007), 72 FR 3179 (January 24, 2007) (SR-NYSE-2006-
101); Securities Exchange Act Release No. 54739 (November 9, 2006), 
71 FR 66993 (November 17, 2007) (SR-Amex-2006-78).
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    Proposed CBOE Rules 31.5(L).01(a)(2) and 31.5(M).01(a)(2) establish 
standards for the composition of indexes and portfolios underlying 
international ETFs. These requirements are designed, among other 
things, to require that components of an index or portfolio underlying 
an ETF are adequately capitalized and sufficiently liquid, and that no 
one security dominates the index. The Commission believes that, taken 
together, these standards are reasonably designed to ensure that 
securities with substantial market capitalization and trading volume 
account for a substantial portion of any underlying index or portfolio, 
and that when applied in conjunction with the other applicable listing 
requirements will permit the listing and trading of only ETFs that are 
sufficiently broad-based in scope to minimize potential manipulation. 
The Commission further believes that the proposed listing standards are 
reasonably designed to preclude CBOE from listing and trading ETFs that 
might be used as surrogate for trading in unregistered securities. The 
requirement that each component security underlying an ETF be an NMS 
Stock (in the case of a U.S. Component Stock) or listed on an exchange 
and subject to last-sale reporting (in the case of a Non-U.S. Component 
Stock) also should contribute to the transparency of the market for 
these ETFs.
    The proposed generic listing standards also will permit the 
Exchange to list and trade an ETF if the Commission has previously 
approved an SRO rule change that contemplates listing and trading a 
derivative product based on the same underlying index. CBOE would be 
able to rely on that earlier approval order, provided that: (1) The 
securities comprising the underlying index consist of U.S. Component 
Stocks or Non-U.S. Component Stocks; and (2) CBOE complies with the 
commitments undertaken by the other SRO set forth in the prior order, 
including any surveillance-sharing arrangements with a foreign market.
    The Commission believes that CBOE's proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\34\ which sets forth Congress' 
finding that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for and transactions in 
securities. CBOE's proposal requires the value of the index or 
portfolio underlying an ETF based on a global or international index to 
be disseminated at least once every 60 seconds during the time when the 
ETF shares trade on the Exchange.\35\ CBOE has represented that, if an 
underlying index or portfolio value is no longer calculated or 
available, it would commence delisting proceedings for the associated 
ETF. In addition, an IIV, which represents an estimate of the value of 
a share of each ETF, must be updated and disseminated at least once 
every 15 seconds during CBOE Normal Market Hours trading session. The 
IIV must reflect changes in the exchange rate between the U.S. dollar 
and the currency in which any index or portfolio component stock is 
denominated. If the IIV does not change during some or all of the 
period when trading is occurring on CBOE, then the last official 
calculated IIV must remain available throughout CBOE's trading 
hours.\36\
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    \34\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \35\ See proposed CBOE Rule 31.5(L).01(b)(ii) and 
31.5(M).01(b)(ii).
    \36\ See proposed CBOE Rules 31.5(L).01(c) and 31.5(M).01(c).
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    The Commission believes the proposal is reasonably designed to 
preclude trading of ETFs when transparency is impaired. Proposed CBOE 
Rule 52.3(b) provides that, when the Exchange is the listing market, 
CBOE may halt trading during the day in which the interruption occurs 
if the IIV or its equivalent or index value applicable to a Derivative 
Securities Product is not disseminated as required. If the interruption 
continues, CBOE will halt trading no later than the beginning of the 
next trading day. In addition, proposed CBOE Rule 52.3(c) sets forth 
trading halt procedures when the Exchange trades the Derivative 
Securities Product pursuant to UTP. This proposed rule is substantially 
similar to that recently adopted by other exchanges.\37\
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    \37\ See supra note 33; see also Securities Exchange Act Release 
No. 54997 (December 21, 2006), 71 FR 78501 (December 29, 2006) (SR-
NYSEArca-2006-77).
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    The Commission believes that the proposed rules are reasonably 
designed to promote fair disclosure of information that may be 
necessary to price an ETF appropriately. These generic listing 
standards provide that the issuer of an ETF must represent that it will 
calculate the NAV and make it available daily to all market 
participants at the same time.\38\ CBOE proposed to amend current CBOE 
Rules 31.5(L).01(b)(ii) and 31.5(M).01(b)(ii) to make sure that an 
entity that advises an index provider or calculator and related 
entities has in place procedures designed to prevent the use and 
dissemination of material non-public information regarding the index 
underlying the ETF.
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    \38\ See proposed CBOE Rules 31.5(L)(f) and 31.5(M)(d).
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    CBOE has represented that its surveillance procedures are adequate 
to properly monitor the trading of the IPRs and IPSs listed pursuant to 
the proposed new listing standards or traded on a UTP basis. This 
approval is based on that representation.
Acceleration
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of filing thereof in the Federal Register. The Commission 
notes that CBOE's proposal is substantially similar to other proposals 
that have been approved by the Commission.\39\ The Commission does not 
believe that CBOE's proposal raises any novel regulatory issues and, 
therefore, that good cause exists for approving the filing before the 
conclusion of a notice-and-comment period. Accelerated approval of the 
proposal will expedite the listing and trading of additional ETFs by 
CBOE, subject to consistent and reasonable standards. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\40\ to approve the proposed rule change, as amended, on an 
accelerated basis.
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    \39\ See supra note 33.
    \40\ 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,\41\ that the proposed rule change (SR-CBOE-2007-109), as amended, 
be, and it hereby is, approved on an accelerated basis.
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    \41\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-3732 Filed 2-27-08; 8:45 am]

BILLING CODE 8011-01-P
