[Federal Register: March 23, 2007 (Volume 72, Number 56)]
[Notices]
[Page 13847-13851]
[DOCID:fr23mr07-137]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55484; File No. SR-NYSEArca-2006-67]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Order Granting Accelerated Approval of a Proposed Rule Change as
Modified by Amendment No. 1 Thereto To Trade Shares of the PowerShares
DB U.S. Dollar Index Funds Pursuant to Unlisted Trading Privileges

March 16, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, as amended, (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that

on September 28, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange''),
through its wholly owned subsidiary NYSE Arca Equities, Inc. (``NYSE
Arca Equities'') 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 March 6, 2006, the Exchange filed Amendment No. 1 to the proposed
rule change. The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons. This order provides notice of the proposed rule change as
modified by Amendment No. 1 and approves the proposed rule change as
amended on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange is proposing to trade shares (``Shares'') of the
PowerShares DB U.S. Dollar Index Bullish Fund and the PowerShares DB
U.S. Dollar Index Bearish Fund (collectively the ``Funds'') pursuant to
unlisted trading privileges (``UTP'') under Commentary .02 to NYSE Arca
Equities Rule 8.200. The text of the proposed rule change is available
at the Exchange, the Commission's Public Reference Room, and http://nysearca.com
.

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
    Pursuant to Commentary .02 to NYSE Arca Equities Rule 8.200, the
Exchange may approve for listing and trading trust issued receipts
(``TIRs'') investing in shares or securities (``Investment Shares'')
that hold investments in any combination of futures contracts, options
on futures contracts, forward contracts, commodities, swaps or high
credit quality short-term fixed income securities or other
securities.\3\ The Commission previously approved a proposal to list
and trade the Shares by the American Stock Exchange LLC (the
``Amex'').\4\
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    \3\ In April 2006, the Commission approved Commentary .02 to
NYSE Area Equities Rule 8.200, which sets forth the rules related to
listing and trading criteria for Investment Shares, and approved
trading pursuant to UTP the shares of the DB Commodity Index
Tracking Fund. See Securities Exchange Act Release No. 53736 (April
27, 2006), 71 FR 26582 (May 5, 2006) (SR-PCX-2006-22).
    \4\ See Securities Exchange Act Release No. 55292 (February 14,
2007), 72 FR 8406 (February 26, 2007) (the ``Amex Order'').
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    The Exchange proposes to trade pursuant to UTP the Shares of the
Funds under Commentary .02 to NYSE Arca Equities Rules 8.200. The
Shares represent beneficial ownership interests in the corresponding
common units of beneficial interests of the DB U.S. Dollar Index Master
Bullish Fund and the DB U.S. Dollar Index Master Bearish Fund,
respectively (collectively, the ``Master Funds'').
    The overall investment objective of each of the Funds and the
Master Funds is to reflect the performance of their respective
benchmark index, less expenses, plus the excess, if any, of the
corresponding Master Fund's interest income from its holdings of U.S.
Treasury and other high credit quality short-term fixed income
securities over its expenses. The Bullish Fund will seek to track the
``Long Index'' by investing in long positions in futures contracts
(``DX Contracts'') on the U.S. Dollar Index[supreg] (USDX[supreg])
while the Bearish Fund will seek to track the ``Short Index'' by
investing in short positions in DX Contracts on the USDX (collectively,
the ``Indexes''). Both the Long Index and Short Index (collectively,
the ``Indexes'') are designed to reflect the return from investing in
the first-to-expire DX Contract. DX Contracts are traded through the
FINEX currency markets of the New York Board of Trade (``NYBOT''). As
discussed more fully in the Amex Notice, the USDX is composed of six
underlying foreign currencies (the ``Index Currencies''), and the value
of the USDX reflects a general indication of the international value of
the U.S. Dollar (``USD'') by averaging the exchange rates between the
USD and the Index Currencies.
    The use of a long position in a DX Contract in the construction of
the Long Index would cause the Long Index level to rise as a result of
any upward price movement in the DX Contract. Conversely, the use of a
short position in a DX Contract in the construction of the Short Index
would cause the Short Index level to rise as a result of any downward
price movement in the DX Contract. As a result, the performance of the
Long Index and Short Index would reflect any rise or fall of the USD
versus the underlying basket of Index Currencies.
    The Shares. Issuances of the Shares will be made only in one or
more blocks of 200,000 Shares (each such block, a ``Basket''). Each of
the Funds will issue and redeem Shares on a continuous basis, by or
through participants that have entered into participant agreements
(each, an ``Authorized Participant'') with the Managing Owner at the
net asset value (``NAV'') per Share next determined after an order to
purchase a Basket is received in proper form. A Basket will be issued
in exchange for a cash amount equal to the NAV per Share times 200,000
Shares (the ``Cash Deposit Amount''). The Bank of New York (the
``Administrator'') will determine the Cash Deposit Amount on each
business day. An Authorized Participant that wishes to purchase a
Basket must transfer the Cash Deposit Amount to the Administrator.
Authorized Participants that wish to redeem a Basket will receive cash
in exchange for each Basket surrendered in an amount equal to the NAV
per Basket.\5\
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    \5\ Pursuant to a telephone conversation between Andrew Stevens,
Assistant General Counsel, NYSE and Ronesha A. Butler, Special
Counsel, Division of Market Regulation (``Division''), Commission,
on March 14, 2007, this paragraph was added to clarify the creation
and redemption process for the Shares.
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    Availability of Information About the Indexes, the Underlying DX
Contracts and the Shares. As set forth in the Amex Order, information
regarding the Shares will be available through the Amex, Deutsche Bank
AG London (the ``Index Sponsor''), and various independent sources. The
Index Sponsor will calculate the values of the Indexes during the
trading day and such values will be disseminated at least every 15
seconds through major market data vendors and the Index Sponsor's Web
site.\6\ The Amex will also disseminate for each of the Funds on a per-
Share basis an updated ``Indicative Fund Value'' (or ``IFV''), which
reflects the cash required for creations and redemptions for each Fund,
adjusted to reflect the price changes of the DX Contracts and the
holdings of U.S.

Treasury securities and other high-credit-quality, short-term fixed
income securities, at least every 15 seconds from 9:30 a.m. to 4:15
p.m. Eastern Time (``ET''). Shortly after 4 p.m. ET each business day,
the Administrator will determine the NAV for each of the Funds, and the
NAV per Share for each of the Funds will be disseminated to all market
participants at the same time.\7\
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    \6\ Amex has represented that the Managing Owner would seek to
arrange to have each Index calculated and disseminated at least
every 15 seconds on a daily basis through a third party if the Index
Sponsor ceases to calculate and disseminate an Index. If, however,
the Managing Owner is unable to arrange the calculation and
dissemination of any Index value, the Amex has represented that it
will undertake to delist the Shares related to such Index. In such
case, the Exchange would halt trading such Shares. See Amex Order,
supra note 4.
    \7\ The Amex has represented that if the NAV per Share for any
Fund is not disseminated to all market participants at the same
time, it would halt trading in the Shares of such Fund. See Amex
Order, supra note 4.
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    According to the Amex Order, on each business day, the
Administrator will make available immediately prior to the opening of
trading on the Amex the most recent Cash Deposit Amount for the
creation of a Basket, and the Amex will disseminate the current value
of the Cash Deposit Amount on a per-Share basis at least every 15
seconds throughout the trading day. The daily settlement prices of the
DX Contracts, specific contract specifications, and delayed futures
contract information on current and past trading sessions, including
futures quotes and last sale information, are publicly available on
NYBOT's Web site and on the Web sites of various market data vendors,
news publications, automated quotation systems, or other financial
information services.
    The Amex also intends to disseminate on a daily basis for each of
the Funds information with respect to the daily trading volume of each
of the Shares, the number of Shares outstanding, the closing prices of
each Fund's Shares, the corresponding NAV, and a hyperlink on its Web
site to the Index Sponsor's Web site.
    The Web site for the Funds is http://www.dbfunds.db.com. The Web

site for the Funds and/or Amex, which is publicly accessible at no
charge, will contain the following information: (1) The current NAV per
Share daily, the prior business day's NAV, and the reported closing
price; (2) the mid-point of the bid-ask price in relation to the NAV as
of the time the NAV is calculated (the ``Bid-Ask Price''); (3) the
calculation of the premium or discount of such price against such NAV;
(4) data in chart form displaying the frequency distribution of
discounts and premiums of the Bid-Ask Price against the NAV, within
appropriate ranges for each of the four previous calendar quarters; (5)
the prospectus; and (6) other applicable quantitative information.
    UTP Trading Criteria. The Exchange represents that it will cease
trading the Shares of a Fund if: (a) the listing market stops trading
the Shares because of a regulatory halt similar to a halt based on NYSE
Arca Equities Rule 7.12 or halt trading because the IFV or the value of
the Index is no longer available at least every 15 seconds \8\; or (b)
the listing market delists the Shares. Additionally, the Exchange may
cease trading the Shares if such other event shall occur or condition
exists which in the opinion of the Exchange makes further dealings on
the Exchange inadvisable. UTP trading in the Shares is also governed by
the trading halts provisions of NYSE Arca Equities Rule 7.34 relating
to temporary interruptions in the calculation or wide dissemination of
the Intraday Indicative Value (which would encompass the IFV) or the
value of the underlying index.
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    \8\ The Exchange clarified and represented that, in addition to
the requirements contained in NYSE Arca Equities Rule 7.12, the
Exchange will halt trading if the IFV or the value of the Index is
not longer available at least every 15 seconds. Telephone
conversation between Andrew Stevens, Assistant General Counsel, NYSE
and Ronesha A. Butler, Special Counsel, Division, Commission, on
March 14, 2007.
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    Trading Rules. The Exchange deems the Shares to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
The Shares will trade on the NYSE Arca Marketplace from 9:30 a.m. until
4:15 p.m. ET. The Exchange has appropriate rules to facilitate
transactions in the Shares during this trading session. The minimum
trading increment for Shares on the Exchange will be $0.01.
    The trading of the Shares will be subject to Commentary .02(e)(1)-
(4) to NYSE Arca Equities Rule 8.200, which sets forth certain
restrictions on ETP Holders acting as registered Market Makers in TIRs
that invest in Investment Shares to facilitate surveillance. See
``Surveillance'' below for more information.
    With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. These may include: (1) The extent to
which trading is not occurring in the DX Contracts, or (2) whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Shares will be subject to trading halts caused by
extraordinary market volatility pursuant to the Exchange's ``circuit
breaker'' rule \9\ or by the halt or suspension of trading of the DX
Contract. See ``UTP Trading Criteria'' above for specific instances
when the Exchange will cease trading the Shares.
    The Shares will not be subject to the short sale rule pursuant to a
letter issued in response to a request for no-action advice under Rule
10a-1 under the Act.\10\
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    \9\ See NYSE Arca Equities Rule 7.12.
    \10\ See Letter to George T. Simon, Esq., Foley & Lardner LLP,
from Racquel L. Russell, Branch Chief, Office of Trading Practices
and Processing, Commission, dated June 21, 2006.
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    Surveillance. The Exchange intends to utilize its existing
surveillance procedures applicable to derivative products to monitor
trading in the Shares. The Exchange represents that these procedures
are adequate to properly monitor Exchange trading of the Shares and to
deter and detect violations of Exchange rules.
    The Exchange's current trading surveillance focuses on detecting
securities trading outside their normal patterns. When such situations
are detected, surveillance analysis follows and investigations are
opened, where appropriate, to review the behavior of all relevant
parties for all relevant trading violations.
    Further, trading in the Shares will be subject to Commentary
.02(e)(1)-(4) to NYSE Arca Equities Rule 8.200, which sets forth
certain restrictions on ETP Holders acting as registered Market Makers
in TIRs that invest in Investment Shares to facilitate surveillance.
Commentary .02(e)(1) to NYSE Arca Equities Rule 8.200 requires that the
ETP Holder acting as a registered Market Maker in the Shares provide
the Exchange with information relating to its trading in the underlying
physical asset or commodity, related futures or options on futures, or
any other related derivatives. Commentary .02(e)(4) to NYSE Arca
Equities Rule 8.200 prohibits the ETP Holder acting as a registered
Market Maker in the Shares from using any material nonpublic
information received from any person associated with an ETP Holder or
employee of such person regarding trading by such person or employee in
the underlying physical asset or commodity, related futures or options
on futures or any other related derivative (including the Shares). In
addition, Commentary .02(e)(1) to NYSE Arca Equities Rule 8.200
prohibits the ETP Holder acting as a registered Market Maker in the
Shares from being affiliated with a market maker in the underlying
physical asset or commodity, related futures or options on futures or
any other related derivative unless adequate information barriers are
in place, as provided in

NYSE Arca Equities Rule 7.26. Commentary .02(e)(2)-(3) to NYSE Arca
Equities Rule 8.200 requires that Market Makers handling the Shares
provide the Exchange with all the necessary information relating to
their trading in the underlying physical assets or commodities, related
futures contracts and options thereon or any other derivative.
    The Exchange may obtain information via the Intermarket
Surveillance Group (``ISG'') from other exchanges who are members or
affiliates of the ISG, including NYBOT.\11\
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    \11\ For a list of the current members and affiliate members of
ISG, see http://www.isgportal.com.

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    Information Bulletin. Prior to the commencement of trading, the
Exchange will inform its ETP Holders in an Information Bulletin of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
The procedures for purchases and redemptions of Shares in Baskets (and
that Shares are not individually redeemable); (2) NYSE Arca Equities
Rule 9.2(a),\12\ which imposes a duty of due diligence on its ETP
Holders to learn the essential facts relating to every customer prior
to trading the Shares; (3) how information regarding the IFV is
disseminated; (4) the requirement that ETP Holders deliver a prospectus
to investors purchasing newly issued Shares prior to or concurrently
with the confirmation of a transaction; and (5) trading information.
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    \12\ The Exchange recently amended NYSE Arca Equities Rule
9.2(a) (``Diligence as to Accounts'') to provide that ETP Holders,
before recommending a transaction, must have reasonable grounds to
believe that the recommendation is suitable for the customer based
on any facts disclosed by the customer as to his other security
holdings and as to his financial situation and needs. Further, the
proposed rule amendment provides, with a limited exception, that
prior to the execution of a transaction recommended to a non-
institutional customer, the ETP Holders shall make reasonable
efforts to obtain information concerning the customer's financial
status, tax status, investment objectives, and any other information
that they believe would be useful to make a recommendation. See
Securities Exchange Act Release No. 54045 (June 26, 2006), 71 FR
37971 (July 3, 2006) (SR-PCX-2005-115).
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    In addition, the Information Bulletin will advise ETP Holders,
prior to the commencement of trading, of the prospectus delivery
requirements applicable to the Funds. The Exchange notes that investors
purchasing Shares directly from a Fund (by delivery of the
corresponding Cash Deposit Amount) will receive a prospectus. ETP
Holders purchasing Shares from a Fund for resale to investors will
deliver a prospectus to such investors. The Information Bulletin will
also discuss any exemptive, no-action and interpretive relief granted
by the Commission from any rules under the Act.
    In addition, the Information Bulletin will reference that the Funds
are subject to various fees and expenses described in the Registration
Statement. The Information Bulletin will also reference that the CFTC
has regulatory jurisdiction over the trading of futures contracts.
    The Information Bulletin will also disclose the trading hours of
the Shares of the Funds and that the NAV for the Shares will be
calculated after 4 p.m. ET each trading day. The Bulletin will disclose
that information about the Shares of each Fund and the corresponding
Indexes will be publicly available on the Funds' Web site.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with Section 6(b) \13\ of the Act, in general, and furthers the
objectives of Section 6(b)(5) \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 facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    In addition, the proposed rule change is consistent with Rule 12f-5
\15\ under the Act because it deems the Shares to be equity securities,
thus rendering the Shares subject to the Exchange's rules governing the
trading of equity securities.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
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    \15\ 17 CFR 240.12f-5.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

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

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange 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<EMAIL_ADDRESS>Please include

File Number SR-NYSEArca-2006-67 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-NYSEArca-2006-67. 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. Copies of such
filing also will be available for inspection and copying at the
principal offices of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEArca-2006-67 and should be submitted on or before
April 13, 2007.

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

    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.\16\ In
particular, the

Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\17\ which requires that an exchange have
rules designed, among other things, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and in general
to protect investors and the public interest.
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    \16\ 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission finds that the proposal is consistent
with Section 12(f) of the Act,\18\ which permits an exchange to trade,
pursuant to UTP, a security that is listed and registered on another
exchange.\19\ The Commission notes that it previously approved the
listing and trading of the Shares on the Amex.\20\ The Commission also
finds that the proposal is consistent with Rule 12f-5 under the
Act,\21\ which provides that an exchange shall not extend UTP to a
security unless the exchange has in effect a rule or rules providing
for transactions in the class or type of security to which the exchange
extends UTP. The Exchange has represented that it meets this
requirement because it deems the Shares to be equity securities, thus
trading in the Shares will be subject to the Exchange's existing rules
governing the trading of equity securities.
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    \18\ 15 U.S.C. 78l(f).
    \19\ Section 12(a) of the Act, 15 U.S.C. 78l(a), generally
prohibits a broker-dealer from trading a security on a national
securities exchange unless the security is registered on that
exchange pursuant to Section 12 of the Act. Section 12(f) of the Act
excludes from this restriction trading in any security to which an
exchange ``extends UTP.'' When an exchange extends UTP to a
security, it allows its members to trade the security as if it were
listed and registered on the exchange even though it is not so
listed and registered.
    \20\ See Amex Order, supra note 4.
    \21\ 17 CFR 240.12f-5.
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    The Commission further believes that the proposal is consistent
with Section 11A(a)(1)(C)(iii) of the Act,\22\ 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.
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    \22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Finally, the Commission notes that, if the Shares should be
delisted by the Amex, the original listing exchange, the Exchange would
no longer have authority to trade the Shares pursuant to this order.
    In support of this proposal, the Exchange has made the following
representations:
    1. The Exchange has appropriate rules to facilitate transactions in
this type of security in this session.
    2. The Exchange's surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange. The Exchange may
obtain information via the ISG from other exchanges who are members or
affiliates of the ISG, including NYBOT. In addition, to facilitate
surveillance, the Exchange represents that trading in the Shares will
be subject to Commentary .02(e)(1)-(4) to NYSE Arca Equities Rule
8.200.
    3. The Exchange will inform its ETP Holders in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares.
    4. The Exchange will require its ETP Holders to deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction and will note this
prospectus delivery requirement in the Information Bulletin.
    5. The Exchange will cease trading the Shares of a Fund if: (a) the
listing market stops trading the Shares because of a regulatory halt
similar to a halt based on NYSE Arca Equities Rule 7.12 or a halt
because the IFV or the value of the applicable Index is no longer
available at least every 15 seconds; or (b) the listing market delists
the Shares.
    6. The Exchange will halt trading as provided in NYSE Arca Equities
Rule 7.34.
    This approval order is conditioned on the Exchange's adherence to
these representations.
    The Commission finds good cause for approving this proposal before
the thirtieth day after the publication of notice thereof in the
Federal Register. As noted previously, the Commission previously found
that the listing and trading of the Shares on the Amex is consistent
with the Act.\23\ The Commission presently is not aware of any
regulatory issue that should cause it to revisit that earlier finding
or preclude the trading of the Shares on the Exchange pursuant to UTP.
Therefore, accelerating approval of this proposal should benefit
investors by creating, without undue delay, additional competition in
the market for the Shares.
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    \23\ See Amex Order, supra note 4.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-NYSEArca-2006-67), as
modified by Amendment No. 1 be, and it hereby is, approved on an
accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-5316 Filed 3-22-07; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register: December 1, 2005 (Volume 70, Number 230)]
[Notices]
[Page 72141-72143]
[DOCID:fr01de05-63]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52817; File No. SR-Phlx-2005-47]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
and Amendment No. 1 Thereto To Reduce the Value of the Nasdaq Composite
Index[supreg] Underlying the Options Traded Under the Symbol QCE

November 22, 2005.
    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 November 9, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Phlx. On November 18,
2005, the Phlx filed Amendment No. 1 to the proposed rule change.\3\
The Phlx filed the proposal pursuant to section 19(b)(3)(A) of the Act
\4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders the proposal
effective upon filing with the Commission.\6\ 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\ In Amendment No. 1, the Exchange asked the Commission to
waive the 30-day operative delay required by Rule 19b-4(f)(6)(iii).
See 17 CFR 240.19b-4(f)(6)(iii). See also discussion infra section
III.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ The Phlx has asked the Commission to waive the 30-day
operative delay required by Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-
4(f)(6)(iii). See supra note 3.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Phlx proposes to decrease by a factor of ten (10) the value of
the index that underlies the options that are approved to trade on the
Exchange under the symbol QCE (``QCE Options'') and thereby decrease
the strike prices for the QCE Options, in order to eliminate investor
confusion between the QCE Options and the QCX Options.\7\ The proposed
decrease would be achieved by multiplying the Adjusted Base Period
Market Value that is applied to the index underlying the QCE Options
(``QCE Index'') by ten. The position and exercise limits applicable to
QCE Options (currently 300,000 contracts on either side of the market
in the near-term months) would remain unchanged.
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    \7\ See infra section II.A.1 for the definition of ``QCX
Options'' and for the general background.
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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 Phlx 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. The Phlx 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
    In December 2003, the Commission approved Phlx's proposed rule
change to trade full-value options on the Nasdaq Composite
Index[supreg] \8\ under the

symbol QCX (``QCX Options'') and reduced-value options on the Nasdaq
Composite Index[supreg] under the symbol QCE.\9\ Both the QCE Options
and QCX Options were based on the full-value Nasdaq Composite
Index[supreg] and had identical strike prices, but the Premium
Quotation Multiplier for QCX was 100 and the Premium Quotation
Multiplier for QCE was 10. The Exchange has heard from a number of
market participants that investors in QCE Options and QCX Options have
become confused and not willing to trade these products because the
identical options strike prices and similar ticker symbols tend to
create the possibility of placing a mistaken order.\10\ As a result of
this investor confusion, trading in the QCE and QCX Options diminished,
and the Exchange delisted both the QCE and QCX Options on or about
March 21, 2005.
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    \8\ The composite index is a cash-settled, capitalization-
weighted, broad-based, A.M. settled index composed of approximately
3,400 stocks listed and traded on The Nasdaq Stock Market, Inc.
(``Nasdaq''). Nasdaq[supreg], Nasdaq Composite[supreg] and Nasdaq
Composite Index[supreg] are registered trademarks of The Nasdaq
Stock Market, Inc. (which with its affiliates are the
``Corporations'') and are licensed for use by the Philadelphia Stock
Exchange. The product(s) described herein have not been passed on by
the Corporations as to their legality or suitability. The product(s)
are not issued, endorsed, sold, or promoted by the Corporations. The
Corporations make no warranties and bear no liability with respect
to the product(s).
    The Corporations do not guarantee the accuracy and/or
uninterrupted calculation of the Nasdaq Composite Index[supreg] or
any data included therein. The Corporations make no warranty,
express or implied, as to results to be obtained by the exchange,
owners of the product(s), or any other person or entity from the use
of the Nasdaq Composite Index[supreg] or any data included therein.
The Corporations make no express or implied warranties, and
expressly disclaim all warranties of merchantiability or fitness for
a particular purpose or use with respect to the Nasdaq Composite
Index[supreg] or any data included therein. Without limiting any of
the foregoing, in no event shall the Corporations have any liability
for any lost profits or special, incidental, punitive, indirect, or
consequential damages, even if notified of the possibility of such
damages.
    \9\ See Securities Exchange Act Release No. 48884 (December 5,
2003), 68 FR 69753 (December 15, 2003).
    \10\ As approved in 2003, a QCE Option contract is one-tenth the
size of a QCX Option contract. Customarily, strike prices for a
full-size options contract and a reduced-size options contract would
also differ by a factor of ten. However, since both QCE and QCX
Options were linked to the same value of the Nasdaq Composite
Index[supreg], the strike prices for QCE and QCX Options were
identical.
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    The purpose of the proposed rule change is to reduce the value of
the QCE Index by a factor of ten and thereby effectively reduce the
strike price of QCE Options in order to eliminate investor confusion
between the QCE Options and the QCX Options. By reducing the value of
the QCE Index by a factor of ten, investors in QCE Options would see a
similar reduction in the strike prices of QCE Options contracts, and
would be less likely to be confused between the QCE and QCX Options
products.
    For example, as of October 27, 2005, the value of the Nasdaq
Composite Index[supreg] was 2063.50, and a near-month at-the-money call
premium for the QCE Option would have been at a minimum its intrinsic
value of $63.50 per contract.\11\ The Exchange proposes to reduce the
value of the QCE Index to one-tenth of the value of the Nasdaq
Composite Index[supreg], or 206.35, which would effectively be a ``ten-
for-one split.'' This would be achieved by multiplying the Adjusted
Base Period Market Value, the divisor used to calculate the QCE Index,
by ten. In order to maintain a proper economic ratio between the two
options (that is, QCX Options are ten times the value of QCE Options),
each QCE Option contract would be assigned a strike price of one-tenth
of the original strike price. In addition, the Premium Quotation
Multiplier, which is currently $100.00 for QCX Options and $10.00 for
QCE Options, will be increased to $100.00 for QCE Options to maintain a
reasonable equivalence in the options premium in relation to the new
strike prices. Thus, for example, a hypothetical option buyer of one
QCE 2000 call prior to the date of effectiveness of this proposed rule
change would have been quoted a premium of $63.50; after applying the
Premium Quotation Multiplier of $10.00, such option buyer would have
paid a premium of $635.00. Similarly, a hypothetical option buyer of
one QCE 200 call subsequent to the date of effectiveness of this
proposed rule change would be quoted a premium of $6.35; after applying
the Premium Quotation Multiplier of $100.00, such option buyer would
pay a premium of $635.00. As a result, the premium paid, after applying
the Premium Quotation Multiplier, would be $635.00 both before and
after the date of effectiveness of this proposed rule change. The
position and exercise limits applicable to QCE Options would remain
unchanged. The options trading symbol would remain QCE.
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    \11\ While QCX and QCE Options are currently delisted and not
trading, Nasdaq has agreed to continue to calculate and disseminate
the value for both the full-value Nasdaq Composite Index[supreg] and
the QCE Index, and has been doing so since July 1, 2005, to enable
the trading of options overlying the indexes. Nasdaq will continue
to disseminate these index values at least once every fifteen
seconds during the normal trading day. The Exchange understands that
in calculating and disseminating these index values, Nasdaq will
synchronize the timing of changes in the indexes so that they occur
simultaneously in both indexes, and the smaller QCE Index will at
all times be one-tenth the value the larger Nasdaq Composite
Index[supreg], to negate arbitrage opportunities.
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    The Exchange will list the new, lower strike prices for QCE Options
pursuant to Phlx Rule 1101A, Terms of Option Contracts. The Exchange
will announce the effective date of the proposed rule change by way of
an Exchange memorandum to the membership, also serving as notice of the
strike price changes.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with the requirements of section 6(b) of the Act,\12\ in general, and
furthers the objectives of section 6(b)(5) of the Act,\13\ in
particular, because it is designed to promote just and equitable
principles of trade, as well as to protect investors and the public
interest, by establishing a lower index value for the QCE Index which
should, in turn, eliminate customer confusion and facilitate trading in
QCE Options. The Exchange believes that reducing the value of the QCE
Index should not raise manipulation concerns or cause adverse market
impact because the Exchange will continue to employ its surveillance
procedures and has proposed an orderly procedure to achieve the index
value adjustment, which includes providing adequate prior notice to
market participants.\14\
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ The Exchange further believes that reducing the value of
the QCE Index should not impact investors because at the present
time there is no open interest or trading in QCE Options overlying
such index.
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The Phlx has neither solicited nor received written comments on the
proposed rule change.

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

    The foregoing proposed rule change has been filed by the Exchange
as a ``non-controversial'' rule change pursuant to section
19(b)(3)(A)(i) of the Act \15\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\16\ Consequently, 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, and the Exchange provided the Commission with written
notice of its intent to file the proposed rule change at least five
days prior to the filing date, it has become effective pursuant to
section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(i).
    \16\ 17 CFR 240.19b-4(f)(6).
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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-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 Phlx has asked the Commission to waive the 30-day operative
delay to allow the Exchange to promptly decrease the value of the QCE
Index that underlies the QCE Options so that trading in the QCE and QCX
Options may re-commence. The Commission has determined to waive the 30-
day operative delay period.\17\ The Commission believes that waiving
the 30-day operative delay period is consistent with the protection of
investors and the public interest because it will allow the Exchange to
re-list the QCE and QCX Options products in a more timely manner with a
reduced risk of investors confusing the two products and placing
mistaken orders.
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    \17\ 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. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the 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.\18\
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    \18\ The effective date of the original proposed rule change is
November 9, 2005, and the effective date of Amendment No. 1 is
November 18, 2005. For purposes of calculating the 60-day period
within which the Commission may summarily abrogate the proposed rule
change under section 19(b)(3)(C) of the Act, the Commission
considers such period to commence on November 18, 2005, the date on
which the Exchange filed Amendment No. 1. See 15 U.S.C.
78s(b)(3)(C).
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IV. Solicitation of Comments

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

Electronic Comments

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

File No. SR-Phlx-2005-47 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File No. SR-Phlx-2005-47. 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. Copies of such
filing will also be available for inspection and copying at the
principal office of the Phlx. 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 No. SR-Phlx-2005-47 and should be submitted on or before December
22, 2005.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6730 Filed 11-30-05; 8:45 am]

BILLING CODE 8010-01-P