[Federal Register Volume 67, Number 225 (Thursday, November 21, 2002)]
[Notices]
[Pages 70276-70285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29541]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46834; File No. SR-CHX-2002-27]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Chicago Stock Exchange, Incorporated Relating to the 
Listing and Trading of Fixed Income ETFs

November 14, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on September 26, 2002, the Chicago Stock Exchange, 
Incorporated (``CHX'' 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 Exchange. On November 12, 2002, CHX submitted Amendment No. 1 to 
the proposed rule change.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons, and to grant accelerated approval to the proposed 
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter Ellen J. Neely, Senior Vice President and General 
Counsel, CHX, to Nancy J. Sanow, Division of Market Regulation 
(``Division''), Commission, dated November 8, 2002 (``Amendment No. 
1''). In Amendment No. 1, the Exchange added a representation 
relating to its surveillance procedures and explained why its rule 
prohibiting certain relationships between specialists and the issuer 
of a security did not apply to this rule filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend CHX Article XXVIII, Rule 24, to 
permit the listing and trading of fixed income Exchange Traded Funds 
(``ETFs''), which are based on indices of fixed income securities. 
Additionally, the Exchange seeks approval to trade, pursuant to 
unlisted trading privileges, the following series of the iShares Trust: 
iShares 1-3 Year Treasury Index Fund, iShares 7-10 Year Treasury Index 
Fund, iShares 20+ Year Treasury Index Fund, iShares Treasury Index 
Fund, iShares Government/Credit Index Fund, iShares Lehman Corporate 
Bond Fund and iShares Goldman Sachs Corporate Bond Fund. The text of 
the proposed rule change is below; new text is italicized.
* * * * *

Chicago Stock Exchange Rules

Article XXVIII

* * * * *

Investment Company Units

    RULE 24. The Exchange will consider for trading, whether by listing 
or pursuant to unlisted trading privileges, units of trading 
(``Units'') that meet the criteria of this Rule. A Unit is a security 
that represents an interest in a registered investment company 
(``Investment Company'') that could be organized as a unit investment 
trust, an open-end management investment company, or a similar entity.
    (A) Original Unit Listing Standards
    (1) The Investment Company must:
    (a) Hold securities (including fixed income securities) comprising, 
or otherwise based on or representing an interest in, an index or 
portfolio of securities; or
    (b) hold securities in another registered investment company that 
holds securities as described in (a) above.
    An index or portfolio may be revised as necessary or appropriate to 
maintain the quality and character of the index or portfolio.
    (2) The Investment Company must issue Units in a specified 
aggregate

[[Page 70277]]

number in return for a deposit (the ``Deposit'') consisting of either:
    (a) A specified number of shares of securities (or, if applicable, 
a specified portfolio of fixed income securities) that comprise the 
index or portfolio, or are otherwise based on or represent an 
investment in securities comprising such index or portfolio, and/or a 
cash amount; or
    (b) shares of a registered investment company, as described in 
clause (A)(1)(a) above, and/or a cash amount.
    (3) Units must be redeemable, directly or indirectly, from the 
Investment Company for securities (including fixed income securities) 
and/or cash then comprising the Deposit. Units must pay holders 
periodic cash payments corresponding to the regular cash dividends or 
distributions declared with respect to the securities held by the 
Investment Company, less applicable expenses and charges.
* * * * *

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 CHX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received regarding the proposed rule change. 
The text of these statements may be examined at the places specified in 
Item IV below. The CHX 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 amend CHX Article XXVIII, Rule 24 to 
permit the Exchange to list and trade fixed income ETFs, which are 
based on indices of fixed income securities.
    CHX Article XXVIII, Rule 24 provides standards for listing 
Investment Company Units, which are defined as securities representing 
``an interest in a registered investment company that could be 
organized as a unit investment trust, open-end management investment 
company or similar entity.'' In addition to being registered under the 
Investment Company Act of 1940 (the ``1940 Act''), these securities are 
registered under the Exchange Act. The Exchange is proposing to amend 
this definition to permit the listing and trading of index-based fixed 
income investment products that are based on an index of fixed income 
securities. Examples of such products include U.S. government 
securities and corporate and non-corporate (other than U.S. government) 
debt securities. As amended, CHX Article XXVIII, Rule 24 would 
accommodate the listing and trading of Units based on an index of U.S. 
government debt securities (e.g., securities issued or guaranteed by 
the U.S. Treasury, an agency or instrumentality of the U.S. government, 
or by a government-sponsored entity). Other products that could be 
listed or traded under this rule, as amended, could include Units based 
on an index of corporate and/or non-corporate debt securities.\4\ The 
Commission has recently approved the requests of both the American 
Stock Exchange LLC (``Amex'') and the New York Stock Exchange 
(``NYSE'') to list and trade fixed income ETFs.\5\ The Exchange 
believes that its proposed rule changes are substantially similar to 
those of the Amex and NYSE.
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    \4\ Investment Company Units based on a fixed income securities 
index are not eligible for listing or trading under the Exchange's 
generic listing criteria (CHX Article XXVIII, Rule 24, 
Interpretation and Policy .04). The Exchange understands that it 
must make separate rule filings for any additional series of such 
Investment Company Units based on fixed income indices prior to 
listing or trading those products, even if the Exchange is only 
trading the product on a UTP basis.
    \5\ See Securities Exchange Act Release No. 46252 (July 24, 
2002), 67 FR 49715 (July 31, 2002) (SR-Amex-2001-35); and Securities 
Exchange Act Release No. 46299 (August 1, 2002), 67 FR 51907 (August 
9, 2002) (SR-NYSE-2002-26).
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    Accordingly, the Exchange proposes to amend CHX Article XXVIII, 
Rule 24 to specify that Investment Company Units may be: (1) Based on a 
portfolio of fixed income securities; (2) issued in return for a 
deposit of a specified portfolio of fixed income securities and/or 
cash; and (3) redeemed at a holder's request by the investment company, 
which will pay the redeeming holder fixed income securities and/or 
cash.
    Upon approval of the proposed amendments to CHX Article XXVIII, 
Rule 24, the Exchange proposes to trade on a UTP basis the following 
seven series of the iShares Trust, a registered open-end management 
investment company (the ``Trust''): iShares 1-3 Year Treasury Index 
Fund, iShares 7-10 Year Treasury Index Fund, iShares 20+ Year Treasury 
Index Fund, iShares Treasury Index Fund; iShares Government/Credit 
Index Fund, iShares Lehman Corporate Bond Fund, and iShares Goldman 
Sachs Corporate Bond Fund (each, a ``Fund,'' and jointly, the 
``Funds'').
    Each Fund will hold certain fixed income securities selected to 
correspond generally to the price and yield performance of a specified 
U.S. Treasury, Government/Credit, or Corporate Bond Index (each, an 
``Underlying Index'') maintained either by Lehman Brothers, or, for the 
Goldman Sachs Corporate Bond Fund, by Goldman Sachs & Co.
    Barclays Global Fund Advisors (``Advisor'') is the investment 
advisor for each Fund. The Advisor is registered under the Investment 
Advisers Act of 1940. The Advisor is a wholly owned subsidiary of 
Barclays Global Investors, N.A., which is in turn a wholly owned 
indirect subsidiary of Barclays Bank PLC of the United Kingdom. SEI 
Investments Distribution Co. (``Distributor''), a Pennsylvania 
corporation and broker-dealer registered under the Exchange Act, is the 
principal underwriter and distributor of Creation Unit Aggregations (as 
defined below) of iShares. The Distributor is not affiliated with the 
Exchange or the Advisor.

A. Operation of the Funds

    Each Fund is designed to provide investment results that correspond 
generally to the price and yield performance of its Underlying Index. 
In seeking to achieve its respective investment objective, each Fund 
will utilize ``passive'' indexing investment strategies. Each Fund may 
fully replicate its Underlying Index, but currently intends to use a 
``representative sampling'' strategy to track its Underlying Index. A 
Fund utilizing a representative sampling strategy generally will hold a 
basket of the component securities (``Component Securities'') of its 
Underlying Index, but it may not hold all of the Component Securities 
of its Underlying Index (as compared to a Fund that uses a replication 
strategy which invests in substantially all of the Component Securities 
in its Underlying Index in the same approximate proportions as in the 
Underlying Index).\6\
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    \6\ The Commission approved an ``Application'' by the Trust, the 
Advisor and the Distributor (``Applicants'') for an Order under 
Sections 6(c) and 17(b) of the 1940 Act for the purpose of exempting 
the Funds from various provisions of the 1940 Act. See Investment 
Company Act Release No. 25622 (June 24, 2002) (approving File No. 
812-12390). The information provided in this Rule 19b-4 filing 
relating to the Funds is based on information included in the 
Application and order, as well as in the rule change proposals 
submitted by the NYSE and Amex.
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    When using a representative sampling strategy, the Advisor attempts 
to match the risk and return characteristics of a Fund's portfolio to 
the risk and return characteristics of the Underlying Index. As part of 
this process, the Advisor subdivides each Underlying Index into

[[Page 70278]]

smaller, more homogenous pieces. These subdivisions are sometimes 
referred to as ``cells.'' A cell will contain securities with similar 
characteristics. For fixed income indices, the Advisor generally 
divides the index according to the five parameters that determine a 
bond's risk and expected return: duration, sector, credit rating, 
coupon and the presence of embedded options. When completed, all bonds 
in the index will have been assigned a cell. The Advisor then begins to 
construct the portfolio by selecting representative bonds from these 
cells. The representative sample of bonds chosen from each cell is 
designed closely to correlate to the duration, sector, credit rating, 
coupon and embedded option characteristics of each cell. The 
characteristics of each cell when combined are, in turn, designed to 
closely correlate to the duration, sector, credit rating, coupon and 
embedded option characteristics of the Underlying Index as a whole. The 
Advisor may exclude less liquid bonds in order to create a more 
tradable portfolio and improve arbitrage opportunities.\7\
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    \7\ As stated in the Application, the Goldman Sachs Index 
excludes bonds with embedded options. Although the Lehman Indices 
may include bonds with embedded options, the bonds in each Lehman 
Index (and the respective Deposit Securities and Fund Securities, as 
defined herein) should be liquid and easily tradable because each 
Lehman Index consists of U.S. Treasury and agency securities and/or 
liquid corporate and non-corporate bonds. To the extend a particular 
bond is less liquid than another bond with similar characteristics, 
the Advisor's representative sampling techniques should permit the 
Advisor to replace the less liquid bond with a more liquid one. For 
these reasons, the Applicants do not believe the presence of bonds 
with embedded options in an Underlying Index, the Deposit Securities 
or Fund Securities would have any material impact on the creation/
redemption process and the efficiency of the arbitrage mechanism for 
each Fund.
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    According to the Application, the representative sampling 
techniques used by the Advisor to manage fixed income funds do not 
materially differ from the representative sampling techniques it uses 
to manage equity funds. Due to the differences between bonds and 
equities, the Advisor analyzes different information, e.g., coupon 
rates instead of dividend payments.
    According to the Application, the Funds' use of the representative 
sampling strategy is beneficial for a number of reasons. First, the 
Advisor can avoid bonds that are ``expensive names'' (i.e., bonds that 
trade at perceived higher prices or lower yields because they are in 
short supply) but have the same essential risk, value, duration and 
other characteristics as less expensive names. Second, the use of 
representative sampling techniques permits the Advisor to exclude bonds 
that it believes will soon be deleted from the Underlying Index. Third, 
the Advisor can avoid holding bonds it deems less liquid than other 
bonds with similar characteristics. Fourth, the Advisor can develop a 
basket that is easier to construct and cheaper to trade, thereby 
potentially improving arbitrage opportunities.
    From time to time, adjustments may be made in the portfolio of each 
Fund in accordance with changes in the composition of the Underlying 
Index or to maintain compliance with requirements applicable to a 
regulated investment company (``RIC'') under the Internal Revenue Code. 
For example, if at the end of a calendar quarter a Fund would not 
comply with the RIC diversification tests, the Advisor would make 
adjustments to the portfolio to ensure continued RIC status. It should 
be noted, however, that Applicants do not anticipate that the Funds 
would need to make such adjustments, particularly since these Funds 
(other than the iShares Lehman Corporate Bond Fund and the iShares 
Goldman Sachs Corporate Bond Fund) invest a very large percentage of 
their assets in U.S. Treasury securities.
    The Applicants noted in the Application that they expect that each 
Fund will have a tracking error relative to the performance of its 
respective Underlying Index of no more than five percent (5%). Each 
Fund's investment objectives, policies and investment strategies will 
be fully disclosed in its prospectus (``Prospectus'') and statement of 
additional information (``SAI''). At least 90% of each of the iShares 
1-3 Year Treasury Index Fund, iShares 7-10 Year Treasury Index Fund, 
iShares 20+ Year Treasury Index Fund, iShares Treasury Index Fund, and 
iShares Government/Credit Index Fund's assets will be invested in 
Component Securities of its respective Underlying Index. Each of these 
Funds may also invest up to 10% of its assets in bonds not included in 
its Underlying Index, but which the Advisor believes will help the Fund 
track its Underlying Index, as well as in certain futures, options and 
swap contracts, cash and cash equivalents. For example, these Funds may 
invest in securities not included in the relevant Underlying Index in 
order to reflect prospective changes in the relevant Underlying Index 
(such as future corporate actions and index reconstitutions, additions 
and deletions). Each of the iShares Lehman Corporate Bond Fund and the 
iShares Goldman Sachs Corporate Bond Fund may at times invest up to 20% 
of its assets in certain futures, options and swap contracts, cash and 
cash equivalents as well as in bonds not included in its Underlying 
Index, but which the Advisor believes will help the Fund track its 
Underlying Index and which are either (i) included in the broader index 
upon which such Underlying Index is based (i.e., the Lehman Credit 
Index for the Lehman Credit VLI Index or the Goldman Sachs Investment 
Grade Index for the Goldman Sachs InvesTop Index): or (ii) new issues 
entering or about to enter the Underlying Index or the broader index 
upon which such Underlying Index is based.

B. Issuance of Creation Unit Aggregations

    1. In General. Shares of each Fund (the ``iShares'') will be issued 
on a continuous offering basis in groups of 50,000 or more. These 
``groups'' of shares are called ``Creation Unit Aggregations.'' The 
Funds will issue and redeem iShares only in Creation Unit 
Aggregations.\8\ As with other open-end investment companies, iShares 
will be issued at the net asset value (``NAV'') per share next 
determined after an order in proper form is received. The anticipated 
price at which the iShares will initially trade is approximately $100.
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    \8\ Each Creation Unit Aggregation will consist of 50,000 or 
more iShares and the estimated initial value per Creation Unit 
Aggregation will be approximately $5 million.
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    The NAV per share of each Fund is determined as the close of the 
regular trading session on the Exchange on each day that the Exchange 
is open. The Trust sells Creation Unit Aggregations of each Fund only 
on business days at the next determined NAV of each Fund. Creation Unit 
Aggregations will be issued by Each Fund in exchange for the in-kind 
deposit of portfolio securities designated by the Advisor to correspond 
generally to the price and yield performance of the Fund's Underlying 
Index (the ``Deposit Securities''). Purchasers will generally be 
required to deposit a specified cash payment in the manner more fully 
described in the Application. Creation Unit Aggregations will be 
redeemed by each fund in exchange for portfolio securities of the Fund 
(``Fund Securities'') and a specified cash payment in the manner more 
fully described herein. Fund Securities received on redemption may not 
be identical to Deposit Securities deposited in connection with 
creations of Creation Unit Aggregations for the same day. The 
Distributor will act on an agency basis and will be the Trust's 
principal underwriter for the iShares in

[[Page 70279]]

Creation Unit Aggregations of each Fund. All orders to purchase iShares 
in Creation Unit Aggregations must be placed with the Distributor by or 
through an authorized participant (``Authorized Participant''). 
Authorized Participants, which are required to be Depository Trust 
Company (``DTC'') participants, must enter into a participant agreement 
with the Distributor. The Distributor will transmit such orders to the 
applicable Fund and furnish to those placing orders confirmation that 
the orders have been accepted. The Distributor may reject any order 
that is not submitted improper form. The Distributor will be 
responsible for delivering the prospectus to those persons creating 
iShares in Creation Unit Aggregations and for maintaining records of 
both the orders placed with it and the confirmations of acceptance 
furnished by it. In addition, the Distributor will maintain a record of 
the instructions given to the Trust to implement the delivery of 
iShares.
    2. In-Kind Deposit of Portfolio Securities. Payment for Creation 
Unit Aggregations placed through the Distributor will be made by the 
purchasers generally by an in-kind deposit with the Fund of the Deposit 
Securities together with an amount of cash (the ``Balancing Amount'') 
specified by the Advisor in the manner described below. The Balancing 
Amount is an amount equal to the differences between (1) the NAV (per 
Creation Unit Aggregation) of the Fund and (2) the total aggregate 
market value (per Creation Unit Aggregation) of the Deposit Securities 
(such value referred to herein as the ``Deposit Amount''). The 
Balancing Amount serves the function of compensating for differences, 
if any, between the NAV per Creation Unit Aggregation and that of the 
Deposit Amount. The deposit of the requisite Deposit Securities and the 
Balancing Amount are collectively referred to herein as a ``Portfolio 
Deposit.'' The Advisor will make available to the market through the 
National Securities Clearing Corporation (the ``NSCC'') on each 
Business Day, prior to the opening of trading on the Exchange 
(currently 9:30 a.m. Eastern Time), the list of the names and the 
required number of shares of each Deposit Security included in the 
current Portfolio Deposit (based on the information at the end of the 
previous Business Day) for the relevant Fund. The Portfolio Deposit 
will be applicable to a Fund (subject to any adjustments to the 
Balancing Amount, as described below) in order to effect purchases of 
Creation Unit Aggregations of the Fund until such time as the next-
announced Portfolio Deposit composition is made available.
    The identity and number of shares of the Deposit Securities 
required for the Portfolio Deposit for each Fund will change from time 
to time. The composition of the Deposit Securities may change in 
response to adjustments to the weighting of composition of the 
Component Securities in the relevant Underlying Index. These 
adjustments will reflect changes, known to the Advisor to be in effect 
by the time of determination of the Deposit Securities, in the 
composition of the Underlying Index being tracked by the relevant Fund, 
or resulting from rebalance or additions or deletions to the relevant 
Underlying Index. In addition, the Trust reserves the right with 
respect to each Fund to permit or require the substitution of an amount 
of cash (i.e., a ``cash in lieu'' amount) to be added to the Balancing 
Amount to replace any Deposit Security: (1) that may be unavailable or 
not available in sufficient quantity for delivery to the Trust upon the 
purchase of iShares in Creation Unit Aggregations, or (2) that may not 
be eligible for trading by an Authorized Participant or the investor on 
whose behalf the Authorized Participant is acting.

C. Availability of Information Regarding iShares and Underlying Indices

    1. In General. On each Business Day, the list of names and amount 
of each treasury security, government security or corporate bond 
constituting the current Deposit Securities of the Portfolio Deposit 
and the Balancing Amount effective as of the previous Business Day will 
be made available. An amount per iShare representing the sum of the 
estimated Balancing Amount effective through and including the previous 
Business Day, plus the current value of the Deposit Securities, on a 
per iShare basis (the ``Intra-day Optimized Portfolio Value'' or 
``IOPV'') will be calculated by Bloomberg L.P. (``Bloomberg'') every 15 
seconds during the Exchange's regular trading hours and disseminated 
every 15 seconds on the Consolidated Tape. Bloomberg will use Bloomberg 
Generic Prices (``BGN Prices'') to reflect changing bond prices and 
update the IOPV throughout the day. BGN Prices are current prices on 
individual bonds as determined by Bloomberg using an automated pricing 
program that analyzes multiple bond prices contributed to Bloomberg by 
third-party price contributors (such as broker-dealers). BGN Prices are 
updated throughout the day based on an ongoing analysis of the bid/ask 
prices submitted by the third-party price contributors. When Bloomberg 
receives bid/ask prices from a price contributor, the prices are 
filtered and screened according to pre-determined criteria and set 
parameters in order to maximize the accuracy of the pricing data. The 
net result of this process is an individual bond ``price'' based on an 
analysis of multiple pricing sources. BGN Prices are available on 
Bloomberg systems and Applicants expect that the pricing of the Deposit 
Securities will be transparent to anyone with access to Bloomberg 
systems.
    The Lehman Indices and the Goldman Sachs Index will not be 
calculated or disseminated intra-day. The value and return of each 
Lehman Index is updated on a daily basis by Lehman Brothers. The value 
and return of the Goldman Sachs Index is updated on a daily basis by 
Goldman Sachs.
    Each Fund will make available through NSCC on a daily basis the 
names and required number of shares of each of the Deposit Securities 
in a Creation Unit Aggregation, as well as information regarding the 
Balancing Amount. The NAV for each Fund will be calculated and 
disseminated daily. There will also be disseminated a variety of data 
with respect to each Fund on a daily basis by means of CTA and CQ High 
speed Lines; information with respect to recent NAV, shares 
outstanding, estimated cash amount and total cash amount per Creation 
Unit Aggregation will be made available prior to the opening of the 
Exchange. The closing prices of the Funds' Deposit Securities are 
readily available from published or other public sources, or on-line 
information services provided by Merrill Lynch, IDC, Bridge, Bloomberg, 
Lehman Brothers and other pricing services commonly used by bond mutual 
funds. In addition, the website for the Trust, which will be publicly 
accessible at no charge, will contain the following information, on a 
per iShare basis, for each Fund: (a) The prior Business Day's NAV and 
the mid-point of the bid-ask price \9\ at the time of calculation of 
such NAV (``Bid/Ask Price''), and a calculation of the premium or 
discount of such price against such NAV; and (b) data in chart format 
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.
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    \9\ The Bid-Ask Price of a Fund is determined using the highest 
bid and lowest offer on the Exchange as of the time of calculation 
of each Fund's NAV.
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    2. Information Regarding the Underlying Debt Securities. The

[[Page 70280]]

secondary market for Treasury securities is a highly organized over-
the-counter market. Many dealers, and particularly the primary dealers, 
make markets in Treasury securities. Trading activity takes place 
between primary dealers, non-primary dealers, and customers of these 
dealers, including financial institutions, non-financial institutions 
and individuals. Increasingly, trading in Treasury securities occurs 
through automated trading systems.\10\
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    \10\ See ``eCommerce in the Fixed-Income Markets: The 2001 
Review of Electronic Transaction Systems,'' December 2001. This 
survey of electronic trading systems in the bond market was prepared 
by the staff of The Bond Market Association and is available through 
the Association's Web site: http://www.bondmarkets.com.
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    The primary dealers are among the most active participants in the 
secondary market for Treasury securities. The primary dealers and other 
large market participants frequently trade with each other, and most of 
these transactions occur through an interdealer broker.\11\ The 
interdealer brokers provide primary dealers and other large 
participants in the Treasury market with electronic screens that 
display the bid and offer prices among dealers and allow trades to be 
consummated.
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    \11\ E.g., BrokerTec Global, Cantor Fitzgerald, Garban-
Intercapital, and Liberty Brokerage.
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    Quote and trade information regarding Treasury securities is widely 
available to market participants from a variety of sources. The 
electronic trade and quote systems of the dealers and interdealer 
brokers are one such source. Groups of dealers and interdealer brokers 
also furnish trade and quote information to vendors such as Bloomberg, 
Reuters, Bridge, Moneyline Telerate, and CQG. GovPX,\12\ for example, 
is a consortium of leading government securities dealers and 
subscribers that provides market data from leading government 
securities dealers and interdealer brokers to market data vendors and 
subscribers. TradeWeb, another example, is a consortium of 18 primary 
dealers that, in addition to providing a trading platform, also 
provides market data direct to subscribers or to other market data 
vendors.\13\
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    \12\ See http://www.govpx.com.
    \13\ See http://www.tradeweb.com.
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    Real-time price quotes for corporate and non-corporate debt 
securities are available to institutional investors via proprietary 
systems such as Bloomberg, Reuters and Dow Jones Telerate. Additional 
analytical data and pricing information may also be obtained through 
vendors such as Bridge Information Systems, Muller Data, Capital 
Management Sciences, Interactive Data Corporation and Barra.
    Retail investors do have access to free intra-day bellwether 
quotes.\14\ The Bond Market Association provides links to price and 
other bond information sources on its investor Web site at http://www.investinginbonds.com. In addition, transaction prices and volume 
data for the most actively-traded bonds on the exchanges are published 
daily in newspapers and on a variety of financial websites.
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    \14\ Corporate prices are available at 20 minute intervals from 
Capital Management Services at http://www.bondvu.com/quotmenu.htm.
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    Closing corporate and non-corporate bond prices are also available 
through subscription services (e.g., IDC, Bridge) that provide 
aggregate pricing information based on prices from several dealers, as 
well as subscription services from broker-dealers with a large bond 
trading operation, such as Lehman Brothers and Goldman, Sachs & Co.

D. Redemption of iShares

    Creation Unit Aggregations of each Fund will be redeemable at the 
NAV next determined after receipt of a request for redemption. Creation 
Unit Aggregations of each fund will be redeemed principally in-kind, 
together with a balancing cash payment (although, as described below, 
Creation Unit Aggregations may sometimes be redeemed for cash). The 
value of each Fund's redemption payments on a Creation Unit Aggregation 
basis will equal the NAV per the appropriate number of iShares of such 
Fund. Owners of iShares may sell their iShares in the secondary market, 
but must accumulate enough iShares to constitute a Creation Unit 
Aggregation in order to redeem through the Fund. Redemption orders must 
be placed or through an Authorized Participant.
    Creation Unit Aggregations of any Fund generally will be redeemable 
on any Business Day in exchange for Fund Securities and the Cash 
Redemption Payment (defined below) in effect on the date a request for 
redemption is made. The Advisor will publish daily through NSCC the 
list of securities which a creator of Creation Unit Aggregations must 
deliver to the Fund (the ``Creation List'') and which a redeemer will 
receive from the Fund (the ``Redemption List''). The Creation List is 
identical to the list of the names and the required numbers of shares 
of each Deposit Security included in the current Portfolio Deposit.
    In addition, just as the Balancing Amount is delivered by the 
purchaser of Creation Unit Aggregations to the Fund, the Trust will 
also deliver to the redeeming Beneficial Owner in cash the ``Cash 
Redemption Payment.'' The Cash Redemption Payment on any given Business 
Day will be an amount calculated in the same manner as that for the 
Balancing Amount, although the actual amounts may differ in the Fund 
Securities received upon redemption are not identical to the Deposit 
Securities applicable for creations on the same day. To the extent that 
the Fund Securities have a value greater than the NAV of iShares being 
redeemed, a cash payment equal to the differential is required to be 
paid by the redeeming Beneficial Owner to the Fund. The Trust may also 
make redemptions in cash in lieu of transferring one or more Fund 
Securities to a redeemer if the Trust determines, in its discretion, 
that such method is warranted due to unusual circumstances. An unusual 
circumstance could arise, for example, when a redeeming entity is 
restrained by regulation or policy from transacting in certain Fund 
Securities, such as the presence of such Fund Securities, on a 
redeeming investment banking firm's restricted list.

E. Clearance and Settlement

    The Deposit Securities and Fund Securities of each Fund will settle 
via free delivery through the Federal Reserve System for U.S. 
government securities and the DTC for corporate securities and non-
corporate (other than U.S. government securities). The iShares will 
settle through the DTC. The Custodian will monitor the movement of the 
Deposit Securities and will instruct the movement of the iShares only 
upon validation that the Deposit Securities have settled correctly or 
that required collateral is in place.
    As with the settlement of domestic ETF transactions outside of the 
NSCC Continuous Net Settlement System (the ``CNS System''), (i) iShares 
of the Funds and corporate and non-corporate securities (other than 
U.S. government securities) will clear and settle through DTC, and (ii) 
U.S. government securities and cash will clear and settle through the 
Federal Reserve system. More specifically, creation transactions will 
settle as follows. On settlement date (T + 3), an Authorized 
Participant will transfer Deposit Securities that are corporate and 
non-corporate bonds (other than U.S. government securities) through DTC 
to a DTC account maintained by the Funds' Custodian, and Deposit 
Securities that are U.S. government securities, together with any 
Balancing Amount, to the Custodian through the Federal Reserve system. 
Once the Custodian has verified the

[[Page 70281]]

receipt of all the Deposit Securities (or in the case of failed 
delivery of one or more bonds, collateral in the amount of 105% or more 
of the missing Deposit Securities) and the receipt of any Balancing 
Amount, the Custodian will notify the Distributor and the Advisor. The 
Fund will issue Creation Unit Aggregations of iShares and the Custodian 
will deliver the iShares to the Authorized Participant through DTC. DTC 
will then credit the Authorized Participant's DTC account. The 
clearance and settlement of redemption transactions essentially 
reverses the process described above. After the Trust has received a 
redemption request in proper form and the Authorized Participant 
transfers Creation Unit Aggregations of iShares to the Funds' Custodian 
through DTC, the Trust will cause the Custodian to initiate procedures 
to transfer the requisite Fund Securities and any Cash Redemption 
Payment. On T + 3, assuming the Custodian has verified receipt of the 
Creation Unit Aggregations, the Custodian will transfer Fund Securities 
that are corporate and non-corporate bonds to the Authorized 
Participant through DTC and Fund Securities that are U.S. government 
securities, together with any Cash Redemption Payment, through the 
Federal Reserve system.
    iShares of the Funds will be debited or credited by the Custodian 
directly to the DTC accounts of the Authorized Participants. With 
respect to domestic equity-based ETFs using the CNS System, Creation 
Unit Aggregations of iShares are deposited or charged to the Authorized 
Participants' DTC accounts through the CNS System. Since creation/
redemption transactions for iShares of the Funds will not clear and 
settle through the CNS System, the failed delivery of one or more 
Deposit Securities (on a create) or one or more Fund Securities (on a 
redemption) will not be facilitated by the CNX System. Therefore, 
Authorized Participants will be required to provide collateral to cover 
the failed delivery of Deposit Securities in connection with an ``in-
kind'' creation of iShares. In case of a failed delivery of one or more 
Deposit Securities, the Funds will hold the collateral until the 
delivery of such Deposit Security. The Funds will be protected from 
failure to receive the Deposit Securities because the Custodian will 
not effect the Fund's side of the transaction (the issuance of iShares) 
until the Custodian has received confirmation of receipt of the 
Authorized Participant's incoming Deposit Securities (or collateral for 
failed Deposit Securities) and Balancing Amount. In the case of 
redemption transactions, the Funds will be protected from failure to 
receive Creation Unit Aggregations of iShares because the Custodian 
will not now effect the Fund's side of the transaction (the delivery of 
Fund Securities and the Cash Redemption Payment) until the Transfer 
Agent has received confirmation of receipt of the Authorized 
Participant's incoming Creation Unit Aggregations. In order to simplify 
the transfer agency process and align the settlement of iShares of the 
Funds with the settlement of the Deposit Securities and Fund 
Securities, Applicants plan to settle transactions in U.S. government 
securities, corporate bonds, non-corporate bonds (other than U.S. 
government securities) and iShares on the same T + 3 settlement cycle.
    The issuer does not believe that the clearing and settlement 
process will affect the arbitrage of iShares of the Funds.

F. Dividends and Distributions

    Dividends from net investment income will be declared and paid to 
Beneficial Owners of record at least annually by each Fund. Certain of 
the Funds may pay dividends, if any, on a quarterly or more frequent 
basis. Distributions of realized securities gains, if any, generally 
will be declared and paid once a year, but each Fund may make 
distributions on a more frequent basis to comply with the distribution 
requirements of the Internal Revenue Code and consistent with the 1940 
Act.
    Dividends and other distributions on iShares of each Fund will be 
distributed on a pro rata basis to Beneficial Owners of such iShares. 
Dividend payments will be made through the Depository and the DTC 
Participants to Beneficial Owners then of record with amount received 
from each Fund.
    The Trust will not make the DTC book-entry Dividend Reinvestment 
Service (the ``Service'') available for use by Beneficial Owners for 
reinvestment of their cash proceeds, but certain individual brokers may 
make the Service available to their clients. The SAI will inform 
investors of this fact and direct interested investors to contact such 
investor's broker to ascertain the availability and a description of 
the Service through such broker. The SAI will also caution interested 
Beneficial Owners that they should note that each broker may require 
investors to adhere to specific procedures and timetables in order to 
participate in the Service and such investors should ascertain from 
their broker such necessary details. iShares acquired pursuant to the 
Service will be held by the Beneficial Owners in the same manner, and 
subject to the same terms and conditions, as for original ownership of 
iShares.

G. Other Issues

    1. Criteria for Initial and Continued Listing. iShares are subject 
to the criteria for initial and continued listing of Investment Company 
Units in CHX Article XXVIII, Rule 24. It is anticipated that a minimum 
of two Creation Units (100,000 iShares) will be required to be 
outstanding at the start of trading. This minimum number of iShares 
required to be outstanding at the start of trading will be comparable 
to requirements that have been applied to previously traded series of 
Investment Company Units.
    The Exchange believes that the proposed minimum number of iShares 
outstanding at the start of trading is sufficient to provide market 
liquidity and to further the Trust's objective to seek to provide 
investment results that correspond generally to the price and yield 
performance of the Index.
    2. Original and Annual Listing Fees. If the Funds were to list on 
the Exchange, they would be subject to the listing fees set out in the 
Exchange's Schedule of Membership Dues and Fees.
    3. Prospectus Delivery. The Exchange, in an Information Circular to 
Exchange members and member organizations, will inform members and 
member organizations, prior to commencement of trading, of the 
prospectus or product description delivery requirements applicable to 
iShares.
    4. Trading Halts. Any decision to halt trading of fixed income ETFs 
is subject to CHX Article IX, Rule 10A and CHX Article IX, Rule 10(b). 
In exercising the discretion described in CHX Article IX, Rule 10(b), 
appropriate Exchange officials may consider a variety of factors, 
including the extent to which trading is not occurring in underlying 
security(s); whether trading has been halted or suspended in the 
primary market(s) for any combination of underlying stocks accounting 
for 20% or more of the applicable current portfolio value; and whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.
    5. Suitability. The Information Circular distributed by the 
Exchange to its members will remind members of their obligations 
pursuant to CHX Article VIII, Rule 25 (Business Conduct).
    6. Purchases and Redemptions in Creation Unit Size. In the 
Information Circular referenced above, members and member organizations 
will be informed

[[Page 70282]]

that procedures for purchases and redemptions of iShares in Creation 
Unit Size are described in the Fund prospectus and Statement of 
Additional Information, and that iShares are not individually 
redeemable, but may redeemed only in Creation Unit Size aggregations or 
multiples thereof.\15\
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    \15\ Other exchanges that have sought permission to list and/or 
trade the Funds have noted, in their filings, that their rules that 
prohibit certain types of relationships between an issuer and the 
specialist in the issuer's securities do not prohibit specialists 
from certain transactions in the Funds. See Release No. 46299 
(August 1, 2002), 67 FR 51907 (August 9, 2002) (NYSE's Rule 460.10); 
and Release No. 46252 (July 24, 2002), 67 FR 49715 (July 31, 2002) 
(Amex's Rule 190). The Exchange has a similar rule that prohibits 
certain relationships between its specialists and the issuer of a 
security, but it applies only to issues that are exclusively listed 
on the Exchange; therefore, this rule does not prohibit CHX 
specialists from certain transactions in the Funds. See CHX Article 
XXX, Rule 23.
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    7. Surveillance. Exchange surveillance procedures applicable to 
trading in the proposed iShares are comparable to those applicable to 
other Investment Company Units currently trading on the Exchange. The 
Exchange believes that these surveillance efforts will be adequate to 
properly monitor the trading of the Funds.
    8. Hours of Trading/Minimum Price Variation. The Funds will trade 
on the Exchange until 4:15 p.m. (Eastern time), or, if the Exchange is 
trading the Funds pursuant to unlisted trading privileges, during the 
same hours that they are traded on the primary market. See CHX Article 
IX, Rule 10(b). The minimum price variation for quoting will be $.01.
2. Statutory Basis
    The Exchange believes that the proposed rule is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b).\16\ In 
particular, the proposed rule is consistent with Section 6(b)(5) of the 
Exchange Act \17\ in that it is designed to promote just and equitable 
principles of trade, to remove impediments and to perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or 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. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington 
DC 20549-0609. 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 at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CHX-2002-27 and should be submitted by December 12, 2002.

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

    After careful review, the Commission finds that implementation of 
the proposed rule change, as amended, is consistent with the 
requirements of Section 6 of the Exchange Act \18\ and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ Specifically, the Commission believes that the proposal 
is consistent with Section 6(b)(5) of the Exchange Act.\20\ The 
Commission believes that the Exchange's proposal to list and trade 
fixed income ETFs (including the trading thereof on a UTP basis) \21\ 
will provide investors with a convenient way of participating in the 
U.S. government, corporate and non-corporate (other than U.S. 
government) fixed income markets. The Exchange's proposal should help 
to provide investors with increased flexibility in satisfying their 
investment needs by allowing them to purchase and sell securities at 
negotiated prices throughout the business day that replicate the 
performance of several portfolios of stocks. The Commission believes 
that the availability of the Funds will provide an instrument for 
investors to achieve desired investment results that correspond 
generally to the price and yield performance of the underlying U.S. 
Treasury, Government/Credit, or Corporate Bond Index. The investment 
objective of each Fund will be to provide investment results that 
correspond generally to the price and yield performance of the 
underlying index based on fixed income securities. Accordingly, the 
Commission finds that the Exchange's proposal will facilitate 
transactions in securities, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\22\
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    \18\ 15 U.S.C. 78f.
    \19\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ The Commission notes that, pursuant to Rule 12f-5 under the 
Act, prior to trading a particular class or type of security 
pursuant to UTP, NYSE must have listing standards comparable to 
those of the primary market on which the security is listed. 17 CFR 
240.12f-5. The Commission finds that adequate rules and procedures 
exist to govern the trading of the Fund on NYSE, pursuant to UTP.
    \22\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of exchange trading for new products upon a 
finding that the introduction of the product is in the public 
interest. Such a finding would be difficult with respect to a 
product that served no investment, hedging or other economic 
functions, because any benefits that might be derived by market 
participants would likely be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns.
---------------------------------------------------------------------------

    iShares Trust and iShares, Inc. are each registered in the 1940 Act 
as an open-ended management investment company with multiple series. 
iShares Trust has created (or identified for creation) 66 separate 
series, while iShares, Inc. has created (or identified for creation) 35 
separate series. All of these series operate (or will operate) as ETFs 
pursuant to six prior exemptive orders from the 1940 Act, and each of 
the ETFs seeks to match the return of an equity securities index. 
Additionally, the Commission has granted the Funds appropriate relief 
under various sections of the 1940 Act, including sections 6(c) and 
17(b), so that each Fund may register under the 1940 Act as an open-end 
fund and issue shares that are redeemable in Creation Units, shares of 
Funds may trade in the secondary market at negotiated prices, and 
certain persons affiliated with a Fund by reason of owning 5% or more, 
and in some

[[Page 70283]]

cases more than 25%, of its outstanding securities may do in-kind 
purchases and redemptions of Creation Units.\23\
---------------------------------------------------------------------------

    \23\ Investment Company Act Release No. 25622 (June 25, 2002).
---------------------------------------------------------------------------

    Barclays is registered as an investment adviser under the 1940 Act 
and serves as the investment adviser to the series of iShares Trust and 
iShares, Inc. Distributor acts as the principal underwriter and 
distributor for iShares Trust and iShares, Inc.
    iShares Trust will create seven new series each of which operates 
as an ETF seeking to match the performance of a fixed income securities 
index. The seven indices are the following:

    [sbull] Lehman Brothers 1-3 Year U.S. Treasury Index (containing 
U.S. Treasury securities with remaining maturities of between 1 and 3 
years);
    [sbull] Lehman Brothers 7-10 Year U.S. Treasury Index (containing 
U.S. Treasury securities with remaining maturities of between 7 and 10 
years);
    [sbull] Lehman 20+ Year U.S. Treasury Index (containing U.S. 
Treasury securities with remaining maturities of more than 20 years);
    [sbull] Lehman U.S. Treasury Index (containing U.S. Treasury 
securities with remaining maturities of more than 1 year);
    [sbull] Lehman Government/Credit Index (containing certain 
investment grade government and credit securities with maturities of 
more than 1 year);
    [sbull] Lehman Credit VLI Index (containing the largest issues of 
investment grade credit securities with remaining maturities of more 
than 1 year); and
    [sbull] Goldman Sachs InvesTop Index (containing the 100 most 
liquid and representative bonds in the U.S. investment grade corporate 
market with remaining maturities of at least 3 years).\24\
---------------------------------------------------------------------------

    \24\ As of July 1, 2002, the composition of the Goldman Sachs 
Index, which underlies the iShares Goldman Sachs Corporate Bond 
Fund, was expanded from 30 to 100 investment grade bonds, and the 
index is permitted to include more than one bond per issuer.
---------------------------------------------------------------------------

    The Commission notes that this is the first ETF based on an 
underlying index of fixed income securities (``Fixed Income ETFs''). 
The Funds will operate in substantially the same manner as Equity ETFs. 
Like many other ETFs, each Fund will use a representative sampling 
strategy to track its index. With a sampling strategy, a Fund will seek 
to match the return of its index by holding some, but not all, of the 
fixed income securities contained in its underlying index. In 
constructing the portfolio for a Fund, Barclays will select a sample of 
bonds that will correlate to the duration, sector, credit rating, 
coupon, and embedded option characteristics of the underlying index as 
a whole. Barclays may also exclude less liquid bonds in order to create 
a more tradable portfolio to enhance arbitrage efficiency. As with its 
Equity ETFs, Barclays represents that the Funds will have a tracking 
error relative to the performance of their respective underlying 
indices of no more than 5%.
    Shares of the Funds will be issued and redeemed in Creation Units 
priced at NAV in exchange for Portfolio Deposits and Redemption Baskets 
consisting of Bonds selected and announced by Barclays at the beginning 
of each business day.
    The Commission finds that the Funds will provide benefits to 
investors in allowing investors to trade baskets of bonds in a single 
transaction at a cost comparable to that of trading existing equity 
securities and will allow investors to trade baskets of bonds 
throughout the day and thereby permit them to take advantage of (or 
protect themselves against) intra-day market movements. The Funds may 
make it easier for individual investors to diversify their portfolios 
across a broader range of assets and will provide institutional and 
other large investors with an alternative to futures for various 
hedging and other investment strategies that involve fixed income 
securities. Finally, the Funds will provide investors with a fund 
product that discloses its portfolio on a daily basis rather than semi-
annually.
    While the Funds will be operated in a manner that closely parallels 
the manner in which Equity ETFs are operated, one key potential 
difference may be the efficiency of the arbitrage process. The 
arbitrage mechanism for Equity ETFs generally has caused the market 
price of ETF shares to track closely the NAV of the ETF shares. With 
respect to liquidity of the debt securities likely to be in the ETF 
portfolios, to the extent these debt securities could not be readily 
purchased and sold, the arbitrage process would be less efficient. 
However, the Commission notes that the Funds will invest in some of the 
most liquid debt securities, including U.S. Government securities and 
investment grade corporate and non-corporate bonds.\25\ In addition, 
Barclays will employ a sampling method of portfolio management that 
would allow the Funds to exclude any bonds contained in an underlying 
index that may not have sufficient liquidity for easy trading. As a 
result, the Commission believes that the Funds have addressed the 
liquidity issues that might hamper arbitrage.
---------------------------------------------------------------------------

    \25\ The Lehman Government/Credit Index, Lehman Credit VLI 
Index, and Goldman Sachs InvesTop Index may include investment grade 
corporate and non-corporate bonds issued by non-U.S. issuers 
(sovereign, supra-national, foreign agency, and foreign local 
government). In Barclays' 1940 Act Application, it stated that these 
bonds will be dollar denominated, registered for sale in the U.S., 
and traded on U.S. markets at negotiated and readily available 
prices. Barclays does not believe that these bonds present any 
unique pricing or liquidity issues and does not expect the bonds to 
negatively affect arbitrage efficiency. The Commission notes that if 
any of these major characteristics of these fixed income indices 
(e.g., investment grade, face amount issued, maturity 
classification) were to materially change, the Commission would 
expect NYSE to attend these listing standards accordingly.
---------------------------------------------------------------------------

    In addition, differences in the degree of price transparency in the 
debt and equity markets could lead to larger discounts and premiums for 
the Funds than have been experienced by Equity ETFs. Specifically, 
because the pricing of debt securities can be less transparent than the 
pricing of equity securities, arbitrageurs might account for pricing 
uncertainty by waiting for greater premiums or discounts to develop in 
the market price of the ETF shares before engaging in arbitrage 
transactions.
    The Commission finds that because of the nature of the particular 
debt securities to be included in the portfolios of the Funds (i.e., 
U.S. Government securities and investment grade corporate and non-
corporate bonds), the pricing information should be available. The 
Exchange has indicated that real-time price quotes for corporate and 
non-corporate debt securities are available to institutional investors 
via proprietary systems such as Bloomberg, Reuters and Dow Jones 
Telerate. Additional analytical data and pricing information may also 
be obtained through vendors such as Bridge Information Systems, Muller 
Data, Capital Management Sciences, Interactive Data Corporation and 
Barra.
    The Exchange has also represented that retail investors would have 
access to free intra-day bellwether quotes.\26\ For instance, the Bond 
Market Association provides links to price and other bond information 
sources on its investor Web site at http://www.investinginbonds.com. In 
addition, transaction prices and volume data for the most actively-
traded bonds on the exchanges are published daily in newspapers and on 
a variety of financial websites. Closing corporate and non-corporate 
bond prices are also available through subscription services (e.g., 
IDC, Bridge) that provide aggregate pricing

[[Page 70284]]

information based on prices from several dealers, as well as 
subscription services from broker-dealers with a large bond trading 
operation, such as Lehman Brothers and Goldman Sachs & Co.
---------------------------------------------------------------------------

    \26\ Corporate prices are available at 20 minute intervals from 
Capital Management Services at http://www.bondvu.com/quotmenu.htm.
---------------------------------------------------------------------------

    The Commission also believes that pricing information for the 
Treasury securities should also be available. Quote and trade 
information regarding Treasury securities is widely available to market 
participants from a variety of sources. The electronic trade and quote 
systems of the dealers and interdealer brokers are one such source. 
Groups of dealers and interdealer brokers also furnish trade and quote 
information to vendors such as Bloomberg, Reuters, Bridge, Moneyline 
Telerate, and CQG.
    CHX represents that every 15 seconds a price calculated by 
Bloomberg reflecting the current value of the Portfolio Deposit on a 
per ETF share basis for the Funds will be disseminated. To calculate 
this intra-day value, Bloomberg intends to use Bloomberg Generic 
Prices, which are current prices for individual bonds as determined by 
Bloomberg using an automated pricing program that analyzed multiple 
bond prices contributed by third-part price contributors such as 
broker-dealers.\27\ Accordingly, NYSE believes that the pricing of the 
bonds included in the Portfolio Deposit (and in the Redemption Basket) 
will be transparent to anyone with access to Bloomberg systems. Because 
the arbitrageurs of ETF shares are generally large institutional 
investors, including broker-dealers, the Commission believes that these 
investors likely will have access to Bloomberg systems, as well as 
other bond pricing information sources that should permit efficient 
arbitrage to occur. While the Commission believes that differences in 
the liquidity and pricing transparency of the underlying fixed income 
markets, as compared to the equity markets, may result in the Funds 
trading at slightly higher discounts and premiums, the Commission does 
not believe that this effect is likely to be so substantial as to 
undermine the benefits that Funds will provide to the markets and to 
investors. The Commission expects the Exchange to review the discounts 
or premiums for these products and to respond appropriately if there is 
in fact a significant pricing disparity.
---------------------------------------------------------------------------

    \27\ The Lehman Indices and the Goldman Sachs Index will not be 
calculated or disseminated intra-day. The value and return of each 
Lehman Index is updated on a daily basis by Lehman Brothers. The 
value and return of the Goldman Sachs Index is updated on a daily 
basis by Goldman Sachs.
---------------------------------------------------------------------------

    The Commission has also granted the issuer, Barclays, exemptive 
relief from Section 24(d) of the 1940 Act so that dealers may effect 
secondary market transaction in Barclays ETF shares without delivery a 
prospectus to the purchaser. Instead, under the exemption and under 
CHX's listing standards, sales in the secondary market must be 
accompanied by a ``product description,'' describing the ETF and its 
shares.\28\ The Commission believes a product description, which not 
only highlights the basic characteristics of the product and the manner 
in which the ETF shares trade in the secondary market, but also 
highlights the differences of the Funds from existing equity ETFs and 
notes the unique characteristics and risks of this product, should 
provide market participants with adequate notice of the salient 
features of the product.
---------------------------------------------------------------------------

    \28\ Recently approved Nasdaq listing standards for ETFs clarify 
that NASD members trading equity ETFs through electronic 
communication networks (``ECNs'') would be subject to NASD Rules 
4420(i)(2) and 4420(j)(2) requiring the delivery of product 
descriptions in connection with sales of ETF shares. See Securities 
Exchange Act Release No. 45920 (May 13, 2002), 67 FR 35605 (May 20, 
2002). The Commission expects NASD members to observe the same 
standards for the secondary market trading of Funds.
---------------------------------------------------------------------------

    The Commission also notes that upon the initial listing of any ETF 
under CHX Article XXVIII, Rule 24 the Exchange issues a circular to its 
members explaining the unique characteristics and risks of the 
security; in this instance, Fixed Income ETFs. In particular, the 
circular should include, among other things, a discussion of the risks 
that may be associated with the Funds, in addition to details on the 
composition of the fixed income indices upon which they are based and 
how each Fund would use a representative sampling strategy to track its 
index. The circular also should note Exchange members' responsibilities 
under CHX Article VIII, Rule 25 (``know your customer rule'') regarding 
transactions in such Fixed Income ETFs. CHX Article VIII, Rule 25 
generally requires that members use due diligence to learn the 
essential facts relative to every customer, every order or account 
accepted. The circular also will address members' prospectus delivery 
requirements as well as highlight the characteristics of purchases in 
Funds, including that they only are redeemable in Creation Unit size 
aggregations. Based on these factors, the Commission finds that the 
proposal to trade the Funds is consistent with Section 6(b)(5) of the 
Exchange Act.\29\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b)(f).
---------------------------------------------------------------------------

    The Commission also notes that the Exchange's rules and procedures 
should address the special concerns attendant to the trading of new 
derivative products. In particular, by imposing the Investment Company 
Unit listing standards in CHX Article XXVIII, Rule 24, and addressing 
the suitability, disclosure, and compliance requirements noted above, 
the Commission believes that the Exchange has addressed adequately the 
potential problems that could arise from the derivative nature of the 
Funds.
    In particular, the Commission finds that adequate rules and 
procedures exist to govern the trading of Investment Company Units, 
including Funds. Funds will be deemed equity securities subject to CHX 
rules governing the trading of equity securities. These rules include 
general and floor rules, such as priority, parity, and precedence of 
orders, market volatility related trading halt provisions, members 
dealing for their own accounts, specialists, odd-lot brokers, and 
market makers, and handling of orders and reports; office rules, such 
as conduct of accounts, margin rules, and advertising; and contract 
rules, such as duty to report transactions, comparisons of 
transactions, marking to the market, delivery of securities, dividends 
and interest, closing of contracts, and money and security loans.\30\ 
CHX also will consider halting trading in any series of Investment 
Company Units under certain other circumstances such as the presence of 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market.\31\ The Commission believes 
that the application of these rules should strengthen the integrity of 
the Funds.
---------------------------------------------------------------------------

    \30\ Telephone conversation between Ellen J. Neely, Senior Vice 
President and General Counsel, CHX; and Jennifer Lewis, Division, 
Commission, on November 7, 2002.
    \31\ Id.
---------------------------------------------------------------------------

    The Commission also notes that certain concerns are raised when a 
broker-dealer, such as Lehman or Goldman, is involved in the 
development and maintenance of a stock index upon which an ETF is 
based. Previously, the Commission noted the importance of an exchange 
adopting adequate procedures to prevent the misuse of material, non-
public information regarding changes to component stocks in a fixed 
income securities index.\32\ Goldman and Lehman each have procedures in 
place to prevent the misuse of material, non-public information 
regarding changes to component stocks to the Funds. \33\ The

[[Page 70285]]

Commission believes that these provisions should help to address 
concerns raised by Goldman and Lehman's involvement in the management 
of the indices.
---------------------------------------------------------------------------

    \32\ See supra, note 4.
    \33\ The Commission expects that the procedures implemented by 
Goldman and Lehman will monitor and prevent the misuse of material, 
non-public information as it relates to the development, maintenance 
and calculation of the indices.
---------------------------------------------------------------------------

    The Commission also believes that CHX has appropriate surveillance 
procedures in place to detect and deter potential manipulation for 
similar index-linked products. By applying these procedures to the 
Funds, the Commission believes that the potential for manipulation 
should be minimized, while protecting investors and the public 
interest.
    CHX has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. CHX has 
requested accelerated approval because the 1940 Act Application 
relating to the Funds has been reviewed by the Division of Investment 
Management and notice of the Application has been published in the 
Federal Register.\34\ The Application disclosed the characteristics and 
risks associated with the Funds. No comments were submitted and the 
Commission granted the relief requested in the Application.\35\ The 
Funds will trade on the Exchange in the same manner as Investment 
Company Units previously approved by the Commission. Furthermore, the 
Commission notes that it recently granted accelerated approval to the 
requests of the Amex and NYSE to list and trade fixed income ETFs.\36\ 
Based on the above, the Commission finds good cause to accelerate 
approval of the proposed rule change.
---------------------------------------------------------------------------

    \34\ Investment Company Act Release No. 25594 (May 29, 2002), 67 
FR 38681 (June 5, 2002).
    \35\ Investment Company Act Release No. 25622 (June 25, 2002).
    \36\ See supra, note 5.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\37\ that the proposed rule change (File No. SR-CHX-2002-
27), as amended, is hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.3-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-29541 Filed 11-20-02; 8:45 am]
BILLING CODE 8010-01-P