[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Notices]
[Pages 71762-71765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29561]
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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 [email protected]. 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