
[Federal Register: November 24, 2010 (Volume 75, Number 226)]
[Notices]               
[Page 71762-71765]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no10-137]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63333; File No. SR-NASDAQ-2010-148]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Exchange-Traded Notes

November 17, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 15, 2010 The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the NASDAQ. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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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 NASDAQ Stock Market LLC proposes to amend Chapter IV, Section 
3, titled Criteria for Underlying Securities, to: (a) Permit trading 
options on leveraged (multiple or inverse) exchange-traded notes, and 
(b) broaden the definition of ``Futures-Linked Securities.''
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, 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. The 
text of these statements may be examined at

[[Page 71763]]

the places specified in Item IV 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 purpose of the proposed rule change is to amend Chapter IV, 
Section 3(l), titled Index-Linked Securities, to: (a) Permit trading 
options on leveraged (multiple or inverse) exchange-traded notes 
(``ETNs''), and (b) broaden the definition of ``Futures-Linked 
Securities.'' ETNs are also known as ``Index-Linked Securities,'' which 
are designed for investors who desire to participate in a specific 
market segment by providing exposure to one or more identifiable 
underlying securities, commodities, currencies, derivative instruments 
or market indexes of the foregoing. Index- Linked Securities are the 
non-convertible debt of an issuer that have a term of at least one (1) 
year but not greater than thirty (30) years. Despite the fact that 
Index-Linked Securities are linked to an underlying index, each trade 
as a single, exchange-listed security. Accordingly, rules pertaining to 
the listing and trading of standard equity options apply to Index-
Linked Securities.
Leveraged ETN Options
    The Exchange proposes to amend Chapter IV, Section 3(l) to permit 
the listing of options on leveraged (multiple or inverse) ETNs. 
Multiple leveraged ETNs seek to provide investment results that 
correspond to a specified multiple of the percentage performance on a 
given day of a particular Reference Asset. Inverse leveraged ETNs seek 
to provide investment results that correspond to the inverse (opposite) 
of the percentage performance on a given day of a particular Reference 
Asset by a specified multiple. Multiple leveraged ETNs and inverse 
leveraged ETNs differ from traditional ETNs in that they do not merely 
correspond to the performance of a given Reference Asset, but rather 
attempt to match a multiple or inverse of a Reference Asset's 
performance.
    The Barclays Long B Leveraged S&P 500 TR ETN (``BXUB''), the 
Barclays Long C Leveraged S&P 500 TR ETN (``BXUC'') and the UBS AG 2x 
Monthly Leveraged Long Exchange Traded Access Securities (``E-TRACS'') 
linked to the Alerian MLP Infrastructure Index due July 9, 2040 
(``MLPL'') currently trade on the NYSE Arca Stock Exchange and are 
examples of multiple leveraged ETNs. In addition, the Barclays ETN + 
Inverse S&P 500 VIX Short-Term Futures ETN (``XXV'') currently trades 
on the NYSE Arca Stock Exchange and is an example of an inverse 
leveraged ETN. The NYSE Arca Stock Exchange also lists several other 
inverse leveraged ETNs for trading.\3\
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    \3\ These ETNs include: The Barclays Short B Leveraged Inverse 
S&P 500 TR ETN (``BXDB''), the Barclays Short C Leveraged Inverse 
S&P 500 TR ETN (``BXDC'') and the Barclays Short D Leveraged Inverse 
S&P 500 TR ETN (``BXDD'').
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    Currently, Chapter IV, Section 3(l) provides that securities deemed 
appropriate for options trading shall include shares or other 
securities (``Equity Index-Linked Securities,'' ``Commodity-Linked 
Securities,'' ``Currency-Linked Securities,'' ``Fixed Income Index-
Linked Securities,'' ``Futures-Linked Securities,'' and ``Multifactor 
Index-Linked Securities,'' collectively known as ``Index-Linked 
Securities'') that are principally traded on a national securities 
exchange and an ``NMS Stock'' (as defined in Rule 600 of Regulation NMS 
under the Securities Exchange Act of 1934), and represent ownership of 
a security that provides for the payment at maturity, as described 
below:
     Equity Index-Linked Securities are securities that provide 
for the payment at maturity of a cash amount based on the performance 
of an underlying index or indexes of equity securities (``Equity 
Reference Asset'');
     Commodity-Linked Securities are securities that provide 
for the payment at maturity of a cash amount based on the performance 
of one or more physical commodities or commodity futures, options on 
commodities, or other commodity derivatives or Commodity-Based Trust 
Shares or a basket or index of any of the foregoing (``Commodity 
Reference Asset'');
     Currency-Linked Securities are securities that provide for 
the payment at maturity of a cash amount based on the performance of 
one or more currencies, or options on currencies or currency futures or 
other currency derivatives or Currency Trust Shares (as defined in 
Section 3(i)), or a basket or index of any of the foregoing (``Currency 
Reference Asset'');
     Fixed Income Index-Linked Securities are securities that 
provide for the payment at maturity of a cash amount based on the 
performance of one or more notes, bonds, debentures or evidence of 
indebtedness that include, but are not limited to, U.S. Department of 
Treasury securities (``Treasury Securities''), government sponsored 
entity securities (``GSE Securities''), municipal securities, trust 
preferred securities, supranational debt and debt of a foreign country 
or a subdivision thereof or a basket or index of any of the foregoing 
(``Fixed Income Reference Asset'');
     Futures-Linked Securities are securities that provide for 
the payment at maturity of a cash amount based on the performance of an 
index of (a) futures on Treasury Securities, GSE Securities, 
supranational debt and debt of a foreign country or a subdivision 
thereof, or options or other derivatives on any of the foregoing; or 
(b) interest rate futures or options or derivatives on the foregoing in 
this subparagraph (b) (``Futures Reference Asset''); and
     Multifactor Index-Linked Securities are securities that 
provide for the payment at maturity of a cash amount based on the 
performance of any combination of two or more Equity Reference Assets, 
Commodity Reference Assets, Currency Reference Assets, Fixed Income 
Reference Assets, or Futures Reference Assets (``Multifactor Reference 
Asset'').
    For purposes of Chapter IV, Section 3(l), Equity Reference Assets, 
Commodity Reference Assets, Currency Reference Assets, Fixed Income 
Reference Assets, Futures Reference Assets together with Multifactor 
Reference Assets, collectively are referred to as ``Reference Assets.''
    In addition, Index-Linked Securities must meet the criteria and 
guidelines for underlying securities set forth in Chapter IV, Section 
3(b); or (ii) the Index-Linked Securities must be redeemable at the 
option of the holder at least on a weekly basis through the issuer at a 
price related to the applicable underlying Reference Asset. In 
addition, the issuing company is obligated to issue or repurchase the 
securities in aggregation units for cash, or cash equivalents, 
satisfactory to the issuer of Index-Linked Securities which underlie 
the option as described in the Index-Linked Securities prospectus.
    The Exchange proposes to amend Chapter IV, Section 3(l) to expand 
the type of Index-Linked Securities that may underlie options to 
include leveraged (multiple or inverse) ETNs. To affect this change, 
the Exchange proposes to amend Chapter IV, Section 3(l) at subparagraph 
(i) by adding the phrase, ``or the leveraged (multiple or inverse) 
performance'' to each of the subparagraphs ((1) through (6)) in that 
section which set forth the different eligible Reference Assets.
    The Exchange's current continuing listing standards for ETN options 
will continue to apply. Specifically, under

[[Page 71764]]

Chapter IV, Section 4(k), ETN options shall not be deemed to meet the 
Exchange's requirements for continued approval, and the Exchange shall 
not open for trading any additional series or option contracts of the 
class covering such Securities whenever the underlying Securities are 
delisted and trading in the Securities is suspended on a national 
securities exchange, or the Securities are no longer an ``NMS Stock'' 
(as defined in Rule 600 of Regulation NMS under the Securities Exchange 
Act of 1934). In addition, the Exchange shall consider the suspension 
of opening transactions in any series of options of the class covering 
Index-Linked Securities in any of the following circumstances: (1) The 
underlying Index-Linked Security fails to comply with the terms of 
Chapter IV, Section 3(l), (2) in accordance with the terms of Chapter 
IV, Section 4(b), in the case of options covering Index-Linked 
Securities when such options were approved pursuant to Chapter IV, 
Section 3(l), except that, in the case of options covering Index-Linked 
Securities approved pursuant to Chapter IV, Section 3(l)(iii)(2) that 
are redeemable at the option of the holder at least on a weekly basis, 
then option contracts of the class covering such Securities may only 
continue to be open for trading as long as the Securities are listed on 
a national securities exchange and are ``NMS'' stock as defined in Rule 
600 of Regulation NMS; (3) in the case of any Index-Linked Security 
trading pursuant to Chapter IV, Section 3(l), the value of the 
Reference Asset is no longer calculated; or (4) such other event shall 
occur or condition exist that in the opinion of the Exchange makes 
further dealing in such options on the Exchange inadvisable. Expanding 
the eligible types of ETNs for options trading under Chapter IV, 
Section 3(l) will not have any effect on the rules pertaining to 
position and exercise limits \4\ or margin.\5\
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    \4\ See Chapter XIV, Sections 5 and 7, Position Limits, and 
Section 9, Exercise Limits.
    \5\ See Chapter XIII concerning Margin Requirements.
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    This proposal is necessary to enable the Exchange to list and trade 
options on shares of the BXUB, BXUC, XXV, BXDB, BXDC, BXDD and the 
MLPL. The Exchange believes the ability to trade options on leveraged 
(multiple or inverse) ETNs will provide investors with greater risk 
management tools. The proposed amendment to the Exchange's listing 
criteria for options on ETNs is necessary to ensure that the Exchange 
will be able to list options on the above listed leveraged (multiple 
and inverse) ETNs as well as other leveraged (multiple and inverse) 
ETNs that may be introduced in the future.
    The Exchange represents that its existing surveillance procedures 
applicable to trading in options are adequate to properly monitor the 
trading in leveraged (multiple and inverse) ETN options.
    It is expected that The Options Clearing Corporation will seek to 
revise the Options Disclosure Document (``ODD'') to accommodate the 
listing and trading of leveraged (multiple and inverse) ETN options.
    Broaden the Definition of ``Futures-Linked Securities''
    The second change being proposed by this filing is to amend the 
definition of ``Futures-Linked Securities'' set forth in Chapter IV, 
Section 3(l)(i)(5). Currently, the definition of ``Futures-Linked 
Securities'' is limited to securities that provide for the payment at 
maturity of a cash amount based on the performance of an index of (a) 
futures on Treasury Securities, GSE Securities, supranational debt and 
debt of a foreign country or a subdivision thereof, or options or other 
derivatives on any of the foregoing; or (b) interest rate futures or 
options or derivatives on the foregoing in this subparagraph (b).
    Chapter IV, Section 3(l) sets forth generic listing criteria for 
securities that may serve as underlyings for listed options trading. 
The Exchange believes that the current definition of ``Futures-Linked 
Securities'' is unnecessarily restrictive and requires the Exchange to 
submit a filing to amend the definition each time a new ETN is issued 
that tracks the performance of an index of futures/options on futures 
that is not enumerated in the existing rule. To address this issue, the 
Exchange is proposing to revise the definition of ``Futures-Linked 
Securities'' to provide that they are securities that for the payment 
at maturity of a cash amount based on the performance or the leveraged 
(multiple or inverse) performance of an index or indexes of futures 
contracts or options or derivatives on futures contracts (``Futures 
Reference Asset''). The Exchange notes that all ETNs eligible for 
options trading must be principally traded on a national securities 
exchange and must be an ``NMS Stock.'' As a result, the Exchange 
believes that broadening the definition of ``Futures-Linked 
Securities'' by no longer specifically listing the types of futures and 
options on futures contracts that may be tracked by an ETN is 
appropriate.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \7\ 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 facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Exchange believes that the 
proposed rules applicable to trading pursuant to generic listing and 
trading criteria serve to foster investor protection.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(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 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 either solicited or received.

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with 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 fulfilled this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-

[[Page 71765]]

4(f)(6)(iii) permits the Commission to designate a shorter time if such 
action is consistent with the protection of investors and the public 
interest. The Exchange requests that the Commission waive the 30-day 
operative delay so that the Exchange can list and trade options on 
leveraged (multiple or inverse) ETNs and implement the amended 
definition of ``Futures-Linked Securities'' immediately. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest.\10\ The Commission 
notes the proposal is substantively identical to a proposal that was 
recently approved by the Commission, and does not raise any new 
regulatory issues.\11\ For these reasons, the Commission designates the 
proposed rule change as operative upon filing.
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    \10\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \11\ See Securities Exchange Act Release No. 63202 (October 28, 
2010), 75 FR 67794 (November 3, 2010) (SR-CBOE-2010-080).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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-NASDAQ-2010-148 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2010-148. 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 Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
Exchange.\12\ 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-
NASDAQ-2010-148 and should be submitted on or before December 15, 2010.
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    \12\ The text of the proposed rule change is available on the 
Commission's Web site at www.sec.gov.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29561 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P

