[Federal Register Volume 69, Number 199 (Friday, October 15, 2004)]
[Notices]
[Pages 61280-61289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2657]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50505; File No. SR-NYSE-2004-55]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc. To List and Trade the iShares[reg] FTSE/Xinhua 
China 25 Index Fund

October 8, 2004.
    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 27, 2004 the New York Stock Exchange, Inc. 
(``NYSE'' 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. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE proposes to list and trade the iShares[reg] FTSE/Xinhua 
China 25 Index Fund (``Fund''), an exchange traded fund, which is a 
type of Investment Company Unit (``ICU'').

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 NYSE included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III, below, and is set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange has adopted listing standards applicable to ICUs which 
are consistent with the listing criteria currently used by the American 
Stock Exchange LLC and other national securities exchanges, and trading 
standards pursuant to which the Exchange may either list and trade 
ICUs, or trade such ICUs on the Exchange on an unlisted trading 
privileges (``UTP'') basis. \3\
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    \3\ In 1996, the Commission approved Section 703.16 of the NYSE 
Listed Company Manual (``Manual''), which sets forth the rules 
related to the listing of ICUs. See Securities Exchange Act Release 
No. 36923 (March 5, 1996), 61 FR 10410 (March 13, 1996). In 2000, 
the Commission also approved the Exchange's generic listing 
standards for listing and trading, or the trading pursuant to UTP, 
of ICUs under Section 703.16 of the Manual and NYSE Rule 1100. See 
Securities Exchange Act Release No. 43679 (December 5, 2000), 65 FR 
77949 (December 13, 2000).
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    The Exchange now proposes to list and trade under Section 703.16 of 
the NYSE Listed Company Manual and NYSE Rule 1100 shares of the Fund, 
\4\ a series of the iShares Trust (``Trust''). \5\ Because the Fund 
invests in foreign securities not listed on a national securities 
exchange or the Nasdaq Stock Market, the Fund does not meet the 
``generic'' listing requirements of Section 703.16 of the Manual, which 
permits the listing and trading of ICUs pursuant to Rule 19b-4(e) under 
the Exchange Act. \6\ Therefore, to list the Fund (or trade pursuant to 
unlisted trading privileges), the Exchange must file, and obtain 
Commission approval of, a proposed rule change pursuant to Rule 19b-4 
under the Exchange Act.
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    \4\ iShares is a registered trademark of Barclays Global 
Investors, N.A.
    \5\ The Trust is registered under the Investment Company Act of 
1940, as amended (``Investment Company Act''). On January 22, 2003, 
the Trust filed with the Commission a Registration Statement for the 
fund on Form N-1A under the Securities Act of 1933, as amended, and 
under the Investment Company Act relating to the Fund (File Nos. 
333-92935 and 811-09729) (as amended, the ``Registration 
Statement''). On January 27, 2004, the Trust filed a Form N-1A to 
update certain Fund information.
    On October 5, 2004, the Commission approved the Second Amended 
and Restated Application for an Amended Order under Sections 6(c) 
and 17(b) of the Investment Company Act. See Investment Company Act 
Release No. 26626 (October 5, 2004) (``Amended Order''); Investment 
Company Act Release No. 26597 (September 14, 2004), 69 FR 56105 
(September 17, 2004) (File No. 812-12936). The Amended Order permits 
the Trust to offer three new International ETFs, including the Fund, 
and permits the Fund, along with certain other International ETFs, 
to invest in certain depository receipts, as described below.
    \6\ 17 CFR 240.19b-4(e).
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    As set forth in detail herein, the Fund will hold certain 
securities and other instruments selected to correspond generally to 
the performance of the FTSE/Xinhua China 25 Index (``Underlying 
Index''). The Fund intends to qualify as a ``regulated investment 
company'' (``RIC'') under the Internal Revenue Code (the ``Code''). 
Barclays Global Fund Advisors (``Advisor'' or ``BGFA'') is the 
investment advisor to the Fund. The Advisor is registered under the 
Investment Advisers Act of 1940. The Advisor is the wholly owned 
subsidiary of Barclays Global Investors, N.A. (``BGI''), a national 
banking association. BGI is an 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 of iShares (see ``Issuance of 
Creation Unit Aggregations'' below). The Distributor is not affiliated 
with the Exchange or the Advisor. The Trust has appointed Investors 
Bank & Trust Co. (``IBT'' or ``Administrator'') to act as 
administrator, custodian, fund accountant, transfer agent, and dividend 
disbursing agent for the Fund. The Exchange expects that performance of 
the Administrator's duties and obligations will be conducted within the 
provisions of the Investment Company Act and the rules thereunder. 
There is no affiliation between the Administrator and the Trust, the 
Advisor or the Distributor.
    FTSE/Xinhua Index Ltd. (``FXI''),\7\ the sponsor and compiler of 
the FTSE/Xinhua China 25 Index, is not affiliated with the Trust, the 
Administrator, the Distributor, or with the Advisor or its 
affiliates.\8\ The Fund is not sponsored,

[[Page 61281]]

offered or sold by FXI. FXI is not affiliated with a broker or dealer.
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    \7\ FXI is a Hong Kong incorporated, joint venture company 
between FTSE, the global index company, and Xinhua Financial 
Network.
    \8\ Although FXI is not an affiliated person, or an affiliated 
person of an affiliated person of the Advisor, an employee of 
Barclays Global Investors, North Asia Limited (``BGIL''), an 
affiliate of the Advisor, currently serves as one of the 19 members 
of the FTSE/Xinhua Index Committee. The FTSE/Xinhua Index Committee 
provides practitioner input into the construction of the FTSE/Xinhua 
indices and independent oversight to ensure that relevant index 
construction rules are being followed. The Index Committee is 
currently composed of 19 members, four of whom are currently 
affiliated with non-U.S. broker-dealers. The role of the Index 
Committee is to review the appropriateness of existing index rules, 
to provide oversight to ensure that index rules are properly 
followed, and to recommend changes to the rules in response to 
changes in the underlying market that the index seeks to represent. 
Input from persons or experts (i.e., practitioners) who have 
applicable industry knowledge of the underlying market that the 
index seeks to represent helps ensure that the published index rules 
and the implementation of such rules adequately reflect current 
developments in the underlying market. Any such input would be 
provided in accordance with the published index rules and 
methodology and any changes in index components would be implemented 
in accordance with such rules. The index compilation functions of 
FXI and the FTSE/Xinhua Index Committee are, and will remain, 
completely separate and independent of the portfolio management 
functions of BGFA. FXI and the FTSE/Xinhua Index Committee have 
adopted policies that prohibit the dissemination and use of 
confidential and proprietary information about the Index and have 
instituted procedures designed to prevent the improper dissemination 
and use of such information. The BGIL employee on the FTSE/Xinhua 
Index Committee is not and will not be involved in the operations of 
the Advisor or the Fund, and is and will not be involved in any 
capacity with the Fund's Board of Trustees. BGI and BGIL have 
adopted policies that limit the use of confidential and proprietary 
information about portfolio management decisions to those person 
whose duties require and permit them to have access to such 
information and have instituted procedures designed to prevent the 
improper dissemination and use of such information. BGIL and BGFA 
are separate legal entities and do not share employees, office 
space, trading floors or portfolio management systems.
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    While the Advisor would manage the Fund, the Fund's Board of 
Directors would have overall responsibility for the Fund's operations. 
The composition of the Board is, and would be, in compliance with the 
requirements of Section 10 of the Investment Company Act. The Fund is 
subject to and must comply with Section 303A.06 of the Manual, which 
requires that the Fund have an audit committee that complies with Rule 
10A-3 of the Exchange Act.\9\
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    \9\ 17 CFR 240.10A-3.
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(a) Operation of the Fund
    The investment objective of the Fund will be to provide investment 
results that correspond generally to the price and yield performance of 
the Underlying Index. In seeking to achieve its investment objective, 
the Fund will utilize ``passive'' indexing investment strategies. The 
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 of its Underlying Index, 
but it may not hold all of the Component Securities of its Underlying 
Index.
    From time to time, adjustments may be made in the portfolio of the 
Fund in accordance with changes in the composition of the Underlying 
Index or to maintain compliance with requirements applicable to a RIC 
under the Code.\10\ 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.
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    \10\ In order for the Fund to quality for tax treatment as a 
RIC, it must meet several requirements under the Code. Among these 
is a requirement that, at the close of each quarter of the Fund's 
taxable year, (1) at least 50% of the market value of the Fund's 
total assets must be represented by cash items, U.S. government 
securities, securities of other RICs and other securities, with such 
other securities limited for the purpose of this calculation with 
respect to any one issuer to an amount not greater than 5% of the 
value of the Fund's assets and not greater than 10% of the 
outstanding voting securities of such issuer; and (2) not more than 
25% of the value of its total assets may be invested in securities 
of any one issuer, or two or more issuers that are controlled by the 
Fund (within the meaning of Section 851(b)(4)(B) of the Code) and 
that are engaged in the same or similar trades or business (other 
than U.S. government securities of other RICs).
    ``Other securities'' of an issuer are considered qualifying 
assets only if they meet the following conditions:
    The entire amount of the securities of the issuer owned by the 
company is not greater in value than 5% of the value of the total 
assets of the company; and the entire amount of the securities of 
such issuer owned by the company does not represent more than 10% of 
the outstanding voting securities of such issuer.
    Under the second diversification requirement, the ``25% 
diversification limitation,'' a company may not invest more that 25% 
of the value of its assets in any one issuer or two issuers or more 
that the taxpayer controls.
    Compliance with the above referenced RIC asset diversification 
requirements are monitored by the Adviser and any necessary 
adjustments to portfolio issuer weights will be made on a quarterly 
basis or as necessary to ensure compliance with RIC requirements. 
When an iShares Fund's Underlying Index itself is not RIC compliant, 
the Adviser generally employs a representative sampling indexing 
strategy (as described in the prospectus) in order to achieve the 
Fund's investment objective. Each iShare Fund's prospectus also 
gives such Fund additional flexibility to comply with the 
requirements of the Code and other regulatory requirements and to 
manage future corporate actions and index changes in smaller markets 
by investing a percentage of fund assets in securities that are not 
included in the Fund's Underlying Index or in American Depository 
Receipts and Global Depository Receipts representing such 
securities.
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    The performance of the Fund and the Underlying Index will vary 
somewhat due to transaction costs, market impact, corporate actions 
(such as mergers and spin-offs) and timing variances. It is expected 
that, over time, the correlation between the Fund's performance and 
that of the Underlying Index, before fees and expenses, will be 95% or 
better. A figure of 100% would indicate perfect correlation. Any 
correlation of less than 100% is called ``tracking error.'' Thus, as 
with existing iShares funds, BGFA represents that the expected tracking 
error of the Fund relative to the performance of its Underlying Index 
will be no more than 5%. The Fund's investment objectives, policies and 
investment strategies will be fully disclosed in its prospectus 
(``Prospectus'') and statement of additional information (``SAI'').
    The Fund will not concentrate its investments (i.e., hold 25% or 
more of its assets) in a particular industry or group of industries, 
except that the Fund will concentrate its investments to approximately 
the same extent that the Underlying Index is so concentrated. For 
purposes of this limitation, securities of the U.S. Government 
(including its agencies and instrumentalities), repurchase agreements 
collateralized by U.S. Government securities, and securities of state 
or municipal governments and their political subdivisions are not 
considered to be issued by members of any industry.
    The Fund will at all times invest at least 80% of its assets in 
component securities of its Underlying Index (``Component Securities'') 
and in depository receipts representing such Component Securities \11\ 
and at least half of the remaining 20% of its assets in Component 
Securities or Depository Receipts or in stocks included in the Chinese 
market, but not included in the Underlying Index. To the extent the 
Fund invests in ADRs, they will be listed on a national securities 
exchange or Nasdaq. Other depository receipts, namely GDRs, will be 
listed on a foreign exchange. The Fund will not invest in any unlisted 
depository receipts or any listed depository receipts that the Advisor 
deems to be illiquid or for which pricing information is not readily 
available.\12\ The Fund may also invest up to 10% of its assets in 
certain futures, options and swap contracts and cash and cash 
equivalents, including money market funds advised by the Advisor \13\ 
and other exchange traded funds (including other iShares funds).\14\ 
For example, the Fund may invest in securities not included in the 
Underlying Index in order to reflect prospective changes in the 
Underlying Index (such as future corporate actions

[[Page 61282]]

and index reconstitutions, additions and deletions).
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    \11\ For the purposes of this order, ``Depository Receipts'' are 
American Depository Receipts (``ADRs'') and Global Depository 
Receipts (``GDRs'') (collectively, ``Depository Receipts'').
    \12\ In addition, the Exchange represents that all Depository 
Receipts must be sponsored (with the exception of certain pre-1984 
ADRs that are listed but unsponsored because they were 
grandfathered).
    \13\ See In the Matter of Master Investment Portfolio, et al., 
Investment Company Act Release No. 25158 (September 18, 2001).
    \14\ The Fund, as well as any existing iShares Fund, is 
permitted to invest in shares of another iShares Fund to the extent 
that such investment is consistent with the Fund's investment 
objective, registration statement, and any applicable investment 
restrictions.
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    The Fund intends to hold all of the securities in the Index that 
are listed on the Hong Kong Stock Exchange. The Fund does not intend to 
hold any B-shares which are listed in Chinese markets and included in 
the Underlying Index.\15\ The Fund also does not currently intend to 
invest in the Depository Receipts but reserves the flexibility to do 
so.\16\
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    \15\ See infra note 20.
    \16\ Telephone conversation between Mike Cavalier, Associate 
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and 
Florence Harmon, Senior Special Counsel, Division, Commission, on 
October 7, 2004.
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    The Exchange believes that these requirements and policies prevent 
the Fund from being excessively weighted in any single security or 
small group of securities and significantly reduce concerns that 
trading in the Fund could become a surrogate for trading in 
unregistered securities.
(b) Description of the Fund and the Underlying Index (FTSE/Xinhua China 
25 Index)
    FXI is a Hong Kong incorporated, joint venture company between 
FTSE, the global index company, and Xinhua Financial Network (``XFN''). 
The company was created to facilitate the development of real-time 
indices for the Chinese market that can be used as performance 
benchmarks and as a basis for derivative trading and index tracking 
funds. FTSE is an independent company whose sole business is the 
creation and management of indices and associated data services. FTSE 
originated as a joint venture between the Financial Times and the 
London Stock Exchange. FTSE calculates over 60,000 indices daily, 
including more than 600 real-time indices. XFN is an independent 
financial information provider that focuses on China's markets. XFN is 
based in Hong Kong and Beijing.
Index Description
    The Underlying Index is designed to represent the performance of 
the largest companies in the mainland China equity market that are 
available to international investors. The Underlying Index includes 25 
of the largest and most heavily traded Chinese companies.\17\ 
Securities in the Underlying Index are weighted based on the free-float 
adjusted total market value of their shares, so that securities with 
higher total market values generally have a higher representation in 
the Underlying Index. Index constituents are screened for liquidity and 
weightings are capped to avoid over-concentration in any one stock. The 
inception date of the Underlying Index was March 2001.
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    \17\ The Exchange provided additional information regarding the 
Index and a complete list of its components as of August 31, 2004 in 
Exhibit A to its Form 19b-4 submission.
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    As of December 31, 2003, the Underlying Index's top three holdings 
were BOC Hong Kong (Holdings), PetroChina and China Mobile and the 
Underlying Index's top three industries were oil and gas, 
telecommunications services and banks.
    As of August 31, 2004, the Underlying Index's components had a 
total market capitalization of approximately $154 billion and a float-
adjusted market capitalization of approximately $41 billion.\18\ The 
average total market capitalization was approximately $6.2 billion and 
the average float-adjusted market capitalization was approximately $1.6 
billion. The ten largest constituents represented approximately 60.8% 
of the index weight. The 5 highest weighted stocks, which represented 
40.2% of the index weight, had an average daily trading volume in 
excess of 47.5 million shares during the past 2 months. All of the 
component stocks traded at least 250,000 shares in each of the previous 
6 months.
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    \18\ Float-adjusted market capitalization includes shares 
available in the market for public investment, and reflects free 
float adjustments to the Index in accordance with FTSE's free float 
rules. Additional information regarding FTSE's free float adjustment 
methodology is available on www.ftse.com.
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Index Methodology
    Component Selection Criteria. The FTSE/Xinhua China 25 Index is 
rule-based and is monitored by a governing committee. The FTSE/Xinhua 
China 25 Index Committee (``Index Committee'') is responsible for 
conducting the quarterly review of constituents of the Underlying Index 
and for making changes in accordance with applicable procedures. The 
Index Committee is currently composed of 19 members, four of whom are 
currently affiliated with non-U.S. broker-dealers, including an 
employee of BGIL. Any such input would be provided in accordance with 
the published index rules and methodology and any changes in index 
components would be implemented in accordance with such rules.\19\
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    \19\ Telephone conversation between Mike Cavalier, Associate 
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and 
Florence Harmon, Senior Special Counsel, Division, Commission, on 
October 7, 2004.
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    FTSE has represented that the FTSE, FXI, and the Index Committee 
have adopted policies that prohibit the dissemination and use of 
confidential and proprietary information about the Underlying Index and 
have instituted procedures designed to prevent the improper 
dissemination of the use of such information. BGI and BGIL have made 
similar representations with respect to the Index Committee member who 
is a BGIL employee.
    Eligibility. Each security included in the Underlying Index will be 
a current constituent of the FTSE All-World Index. All classes of 
equity securities in issue are eligible for inclusion in the Underlying 
Index subject to conforming with free-float and liquidity restrictions. 
H shares, Red Chip shares and B shares are eligible for inclusion in 
the Underlying Index.\20\ As of September 24, 2004, only one 
constituent was B shares (approximately 1% of the Underlying Index). 
FXI expects to eventually eliminate B shares from the Underlying Index.
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    \20\ ``H'' Shares--H shares are incorporated in China and listed 
and traded on the Hong Kong exchange. They are quoted and traded in 
Hong Kong and U.S. dollars. Like other securities trading on the 
Hong Kong Stock Exchange, there are no restrictions on who can trade 
H shares.
    ``Red Chip'' Shares--Red Chip shares are incorporated in Hong 
Kong and trade on the Hong Kong stock exchange. They are quoted in 
Hong Kong dollars. Red Chip companies may be substantially owned 
directly or indirectly by the Chinese Government and have the 
majority of their business interested in mainland China.
    H shares and Red Chip shares trade on the Hong Kong Stock 
Exchange, typically on a T+2 basis, through a central book-entry 
system that effectively guarantees settlement of exchange trades by 
broker-dealers.
    ``B'' Shares--B shares are incorporated in China and trade on 
either the Shanghai or Shenzhen stock exchanges. They are quoted in 
U.S. dollars on the Shanghai stock exchange and Hong Kong dollars on 
the Shenzhen stock exchange. They can be traded by non-residents of 
the Peoples' Republic of China and also residents of the People's 
Republic of China with appropriate foreign currency dealing 
accounts. There is not a true ``delivery versus payment'' settlement 
for B foreign depositaries or local banks.
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    Float-Adjusted Market Capitalization. When calculating a company's 
index weights, individual constituents' shares held by governments, 
corporations, strategic partners, or other control groups are excluded 
from the company's shares outstanding. Shares owned by other companies 
are also excluded regardless of whether such companies are index 
constituents. Where a foreign investment limit exists at the sector or 
company level, the constituent's weight will reflect either the foreign 
investment limit or the percentage float, whichever is the more 
restrictive.\21\
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    \21\ The Exchange understands that there are no foreign 
ownership limits with the current constituents to the FTSE/Xinhua 
China 25 Index and that, as such, the percentage float will be used.
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    Stocks are screened to ensure there is sufficient liquidity to be 
traded. Factors in determining liquidity include the

[[Page 61283]]

availability of current and reliable price information and the level of 
trading volume relative to shares outstanding. Value traded and float 
turnover are also analyzed on a monthly basis to ensure ample 
liquidity. Fundamental analysis is not part of the selection criteria 
for inclusion or exclusion of stocks from the Underlying Index. The 
financial and operating condition of a company are not analyzed.
    Index Maintenance and Issue Changes. The Index Committee is 
responsible for undertaking the review of the Underlying Index and for 
approving changes of constituents in accordance with the index rules 
and procedures. The FTSE Global Classification Committee is responsible 
for the industry classification of constituents of the Underlying Index 
within the FTSE Global Classification System. The FTSE Global 
Classification Committee may approve changes to the FTSE Global 
Classification System and Management Rules. FXI appoints the Chairman 
and Deputy Chairman of the Index Committee. The Chairman chairs 
meetings of the Committee and represents the Committee in outside 
meetings. Adjustments to reflect a major change in the amount or 
structure of a constituent company's issued capital will be made before 
the start of the index calculation on the day on which the change takes 
effect. Adjustments to reflect less significant changes will be 
implemented before the start of the index calculation on the day 
following the announcement of the change. All adjustments are made 
before the start of the index calculations on the day concerned, unless 
market conditions prevent this.
    A company will be inserted into the Underlying Index at the 
periodic review if it rises to 15th position or above when the eligible 
companies are ranked by full market value before the application of any 
investibility weightings. A company in the Underlying Index will be 
deleted at the periodic review if it falls to 36th position or below 
when the eligible companies are ranked by full market value before the 
application of any investibility weightings. Any deletion to the 
Underlying Index will simultaneously entail an addition to the 
Underlying Index to maintain 25 index constituents at all times.
    Revisions to the Float Adjustments. The Underlying Index is 
reviewed quarterly for changes in free float. These reviews will 
coincide with the quarterly reviews undertaken of the Underlying Index 
as a whole. Implementation of any changes will be after the close of 
the index calculation on the third Friday in January, April, July and 
October.
    Quarterly Index Rebalancing. The quarterly review of the Underlying 
Index constituents takes place in January, April, July and October. Any 
changes will be implemented on the next trading day following the third 
Friday of the same month of the review meeting. Details of the outcome 
of the review and the dates on which any changes are to be implemented 
will be published as soon as possible after the Index Committee meeting 
has concluded its review.
    Index Availability. The Underlying Index is calculated in real time 
and published every minute during the index period (09:15-16:00 Local 
Hong Kong Time) or (17:15-24:00 U.S. PDT). It is available, by 
subscription, published every minute, directly from FTSE and from the 
following vendors: Reuters, Bloomberg, Telekurs, FTID and LSE/Proquote. 
The end of day index value, based on last sale prices,\22\ is 
distributed at 16:15 (Local Hong Kong Time). This end of day index 
value also will be made available to the Financial Times Asia edition 
and other major newspapers and will be available at the FTSE Index 
Services Web site: http://www.ftse.com. The Underlying Index is 
calculated using Hong Kong Stock Exchange trade prices and Reuter's 
real-time spot currency rates, as described below. A total return index 
value that takes into account reinvested dividends is published daily 
at the end of day. The Underlying Index is not calculated on days that 
are holidays in Hong Kong.
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    \22\ Telephone conversation between Mike Cavalier, Associate 
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and 
Florence Harmon, Senior Special Counsel, Division, Commission, on 
October 7, 2004.
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    The daily closing index value, historical values, constituents' 
weighting, constituents' market capitalization and daily percentage 
changes are publicly available from http://www.ftsexinhua.com. All 
corporate actions and rules relating to the management of the indices 
are also available from the Web site.
    Exchange Rates and Pricing. FXI calculates the value of the 
Underlying Index using Reuters real-time foreign exchange spot rates 
and local stock exchange real-time, last sale security prices. The 
Underlying Index is calculated in Hong Kong Dollars, using Hong Kong 
Stock Exchange trade prices. Non-Hong Kong Dollar denominated 
constituent prices are converted to Hong Kong Dollars in order to 
calculate the value of the Underlying Index.\23\ Thus, the Reuter's 
foreign exchange rates and Hong Kong Stock Exchange prices received at 
the closing time of the Underlying Index will be used to calculate the 
final Underlying Index value each day.
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    \23\ As stated, the Index provider has announced its intention 
to remove the B Share component trading on either the Shanghai or 
Shenzhen stock exchanges in the near future.
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(c) Issuance of Creation Unit Aggregations
    The Exchange notes that, according to the Application, the issuance 
and redemption of Creation Unit Aggregations will operate in a manner 
identical to that of the funds that are the subject of the Prior 
Order.\24\
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    \24\ See supra note 5.
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    (i) In General. The Fund will issues shares (the ``iShares'') on a 
continuous offering basis in groups of 50,000 or more. These ``groups'' 
of shares are called ``Creation Unit Aggregations.'' The Fund will 
issue and redeem iShares only in Creation Unit Aggregations.\25\ The 
anticipated price at which the iShares will initially trade is 
approximately $50.
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    \25\ Each Creation Unit Aggregation will consist of 50,000 or 
more iShares and the estimated initial value per Creation Unit 
Aggregation will be approximately $2,500,000.
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    The NAV per share of the Fund is determined as of 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 the Fund only on 
business days at the next determined NAV of the Fund. Creation Unit 
Aggregations generally will be issued by the Fund in exchange for the 
in-kind deposit of equity securities designated by the Advisor to 
correspond generally to the price and yield performance of the Fund's 
Underlying Index (``Deposit Securities'') and a specified cash payment. 
Creation Unit Aggregations generally will be redeemed by the Fund in 
exchange for portfolio securities of the Fund (``Fund Securities'') and 
a specified cash payment. 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.
    All orders to purchase iShares in Creation Unit Aggregations must 
be placed through an Authorized Participant. An Authorized Participant 
must be either a ``Participating Party'', i.e., a broker-dealer or 
other participant in the clearing process through the National 
Securities Clearing Corporation (``NSCC'') Continuous Net Settlement 
System (``Clearing Process''), a clearing agency that is registered 
with the SEC, or a Depository Trust Company (``DTC'') participant, and 
in each case, must enter into a Participant Agreement. The Fund is 
currently imposing transaction fees in

[[Page 61284]]

connection with creation and redemption transactions.\26\
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    \26\ Telephone conversation between Mike Cavalier, Associate 
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and 
Florence Harmon, Senior Special Counsel, Division, Commission, on 
October 7, 2004.
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    (ii) In-Kind Deposit of Portfolio Securities. Payment for Creation 
Unit Aggregations 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 (``Balancing Amount'') specified by the Advisor in the 
manner described below. The Balancing Amount is an amount equal to the 
difference 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.\27\ The deposit of the 
requisite Deposit Securities and the Balancing Amount are collectively 
referred to herein as a ``Fund Deposit.'' The Advisor will make 
available to the market through 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 Fund Deposit (based on 
information at the end of the previous business day) for the Fund. The 
Fund Deposit will be applicable to the 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 Fund Deposit composition is made available.
---------------------------------------------------------------------------

    \27\ Where the NAV (per Creation Unit Aggregation) of the Fund 
exceeds the Deposit Amount, the purchaser pays the corresponding 
balancing Amount to the Fund. Where, by contrast, the Deposit Amount 
exceeds the NAV (per Creation Unit Aggregation) of the Fund, the 
Balancing Amount is paid by the Fund to the purchaser.
---------------------------------------------------------------------------

    The identity and number of shares of the Deposit Securities 
required for the Fund Deposit for the Fund will change from time to 
time. The composition of the Deposit Securities may change in response 
to adjustments to the weighting or composition of the constituent 
securities in the Underlying Index. In addition, the Trust reserves the 
right 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 that may not be available in sufficient 
quantity for delivery or that may not otherwise be eligible for 
transfer. The Trust also reserves the right to permit or require a 
``cash in lieu'' amount where the delivery of the Deposit Security by 
the Authorized Participant would be restricted under the securities 
laws or where the delivery of the Deposit Security to the Authorized 
Participant would result in the disposition of the Deposit Security by 
the Authorized Participant becoming restricted under the securities 
laws, or in certain other situations. The adjustments described above 
will reflect changes known to the Advisor on the date of announcement 
to be in effect by the time of delivery of the Fund Deposit, in the 
composition of the Underlying Index or resulting from certain corporate 
actions.
(d) Availability of Information Regarding iShares and the Underlying 
Index
    On each business day the list of names and amount of each security 
constituting the current Deposit Securities of the Fund Deposit and the 
Balancing Amount effective as of the previous business day, per 
outstanding share of the Fund, 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 in U.S. dollars, on a per iShare basis (the 
``Intra-day Optimized Portfolio Value'' or ``IOPV'') will be calculated 
by an independent third party (the ``Value Calculator''), such as 
Bloomberg L.P., every 15 seconds during the Exchange's regular trading 
hours and disseminated every 15 seconds on the Consolidated Tape.
    The IOPV reflects the current value of the Deposit Securities and 
the Balancing Amount. The IOPV also reflects changes in currency 
exchange rates between the U.S. dollar and the applicable home foreign 
currency.
    Since the Fund will utilize a representative sampling strategy, the 
IOPV may not reflect the value of all securities included in the 
Underlying Index. In addition, the IOPV does not necessarily reflect 
the precise composition of the current portfolio of securities held by 
the Fund at a particular point in time. Therefore, the Exchange states 
that the IOPV on a per Fund share basis disseminated during the 
Exchange's trading hours should not be viewed as a real time update of 
the NAV of the Fund, which is calculated only once a day. While the 
IOPV disseminated by the Exchange at 9:30 a.m. New York Time is 
expected to be generally very close to the most recently calculated 
Fund NAV on a per-Fund-share basis, it is possible that the value of 
the portfolio of securities held by the Fund may diverge from the 
Deposit Securities values during any trading day. In such case, the 
IOPV will not precisely reflect the value of the Fund portfolio.
    However, during the trading day, the IOPV can be expected to 
closely approximate the value per Fund share of the portfolio of 
securities for the Fund except under unusual circumstances (e.g., in 
the case of extensive rebalancing of multiple Component Securities at 
the same time by the Advisor).
    The Exchange believes that dissemination of the IOPV based on the 
Deposit Securities provides additional information regarding the Fund 
that is not otherwise available to the public and is useful to 
professionals and investors in connection with Fund shares trading on 
the Exchange or the creation or redemption of Fund shares. Since the 
trading hours of the Hong Kong Stock Exchange do not overlap with 
regular trading hours in the U.S., it is expected that the Value 
Calculator, when calculating IOPV, will utilize closing prices (in 
applicable foreign currency prices) in the principal foreign market for 
the securities in the Fund portfolio (i.e., the Hong Kong Stock 
Exchange), and convert the prices to U.S. dollars.
    In addition, FTSE will disseminate a value for the Underlying Index 
once each trading day, based on closing prices in the Hong Kong Stock 
Exchange. The NAV for the Fund will be calculated and disseminated 
daily. The Fund NAV will be calculated by IBT. IBT will disseminate the 
information to BGI, SEI and others, including the NYSE. The Fund NAV 
will be published in a number of places, including iShares.com and on 
the Consolidated Tape.
    The Underlying Index currently uses the Reuters foreign exchange 
rate at the close of the index (4 p.m. Hong Kong Time) to compute final 
index values. The Fund intends to use Reuters/WM foreign exchange rates 
at 4 p.m. London Time. There will also be disseminated a variety of 
data with respect to the Fund on a daily basis by means of CTA and CQ 
High Speed Lines, which will be made available prior to the opening of 
trading on the Exchange. 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. In addition, the Web site for the Trust, www.ishares.com, 
which will be

[[Page 61285]]

publicly accessible at no charge, will contain the following 
information, on a per iShare basis, for the Fund: (a) The prior 
business day's NAV and the mid-point of the bid-ask price at the time 
of calculation of such NAV (``Bid/Ask Price''),\28\ 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.
---------------------------------------------------------------------------

    \28\ The Bid-Ask Price of the Fund is determined using the 
highest bid and lowest offer on the Exchange as of the time of 
calculation of the Fund's NAV.
---------------------------------------------------------------------------

    The closing prices of the Fund's Deposit Securities are readily 
available from, as applicable, the relevant exchanges, automated 
quotation systems, published or other public sources in the relevant 
country, or on-line information services such as Bloomberg or Reuters. 
The exchange rate information required to convert such information into 
U.S. dollars is also readily available in newspapers and other 
publications and from a variety of on-line services.
(e) Redemption of iShares
    Creation Unit Aggregations of the Fund will be redeemable at the 
NAV next determined after receipt of a request for redemption. Creation 
Unit Aggregations of the Fund generally will be redeemed in-kind, 
together with a balancing cash payment (although, as described below, 
Creation Unit Aggregations may sometimes be redeemed for cash). The 
value of the Fund's redemption payments on a Creation Unit Aggregation 
basis will equal the NAV per the appropriate number of Fund shares. 
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 by or through an Authorized Participant.
    Creation Unit Aggregations of the 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 (``Creation List'') and which a redeemer will 
receive from the Fund (``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 Fund 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 if the Fund 
Securities received upon redemption are not identical to the Deposit 
Securities applicable for creations on the same day.\29\ 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.
---------------------------------------------------------------------------

    \29\ See discussion under Section II.A.1(c)(ii) ``In-Kind 
Deposit of Portfolio Securities,'' above.
---------------------------------------------------------------------------

(f) Dividends and Distributions
    Dividends from net investment income will be declared and paid to 
beneficial owners of record at least annually by the Fund. 
Distributions of realized securities gains, if any, generally will be 
declared and paid once a year, but the Fund may make distributions on a 
more frequent basis to comply with the distribution requirements of the 
Code and consistent with the Investment Company Act.
    Dividends and other distributions on iShares of the 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 amounts received 
from the Fund.
    The Trust currently does not intend to make the DTC book-entry 
Dividend Reinvestment Service (``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.\30\
---------------------------------------------------------------------------

    \30\ 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.
---------------------------------------------------------------------------

    Beneficial owners of iShares will receive all of the statements, 
notices, and reports required under the Investment Company Act and 
other applicable laws. They will receive, for example, annual and semi-
annual reports, written statements accompanying dividend payments, 
proxy statements, annual notifications detailing the tax status of 
distributions, IRS Form 1099-DIVs, etc. Because the Trust's records 
reflect ownership of iShares by DTC only, the Trust will make available 
applicable statements, notices, and reports to the DTC Participants 
who, in turn, will be responsible for distributing them to the 
beneficial owners.
(g) Other Issues
    (1) Criteria for Initial and Continued Listing. iShares are subject 
to the criteria for initial and continued listing of ICUs in Section 
703.16 of the Manual. A minimum of two Creation Units (100,000 iShares) 
will be required to be outstanding at the start of trading. his 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 ICUs.
    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 Underlying Index.
    (2) Original and Annual Listing Fees. The original listing fee 
applicable to the Fund for listing on the Exchange is $5,000, and the 
annual continuing listing fee will be $2,000.
    (3) Stop and Stop Limit Orders. Commentary .30 to Exchange Rule 13 
provides that stop and stop limit orders in an ICU shall be elected by 
a quotation, but specifies that if the electing bid or an offer is more 
than 0.10 points away from the last sale and is for the specialist's 
dealer account, prior Floor Official approval is required for the 
election to be effective. This rule applies to ICUs generally.
    (4) Rule 460.10. Rule 460.10 generally precludes certain business 
relationships

[[Page 61286]]

between an issuer and the member or member organization or any other 
member, allied member, or approved person or officer or employee of the 
member organization, such as participating in a proxy contest or 
becoming a director of the company, if the member specializes in the 
issuer's securities. Exceptions in the Rule permit specialists in Fund 
shares to enter into Creation Unit transactions through the Distributor 
to facilitate the maintenance of a fair and orderly market. A 
specialist Creation Unit transaction may only be effected on the same 
terms and conditions as any other investor, and only at the NAV of the 
Fund shares. A specialist may acquire a position in excess of 10% of 
the outstanding issue of the Fund shares, the redemption of which would 
not result in a position, directly or indirectly, in any equity 
security in which the specialist is registered exceeding the 10% 
threshold. However, a specialist registered in the Fund shares may 
purchase and redeem Fund shares from the investment company, as 
appropriate to facilitate the maintenance of a fair and orderly market 
in the subject security.
    (5) Prospectus Delivery. The Commission has granted the Trust an 
exemption from certain prospectus delivery requirements under Section 
24(d) of the Investment Company Act.\31\ Any product description used 
in reliance on the Section 24(d) exemptive order will comply with all 
representations made therein and all conditions thereto. 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 the Fund.
---------------------------------------------------------------------------

    \31\ See In the Matter of iShares, Inc., et al., Investment 
Company Act Release No. 25623 (June 25, 2002).
---------------------------------------------------------------------------

    (6) Information Circular. The Exchange will distribute an 
information circular to its members in connection with the trading of 
the Fund. The circular will discuss the special characteristics and 
risks of trading this type of security. Specifically, the circular, 
among other things, will discuss what the Fund is, how Fund shares are 
created and redeemed, the requirement that members and member firms 
deliver a prospectus or product description to investors purchasing 
shares of the Fund prior to or concurrently with the confirmation of a 
transaction, applicable Exchange rules, dissemination information, 
trading information and the applicability of suitability rules, 
including NYSE Rule 405 (Diligence as to Accounts). The circular will 
also discuss exemptive, no-action and interpretive relief granted by 
the Commission from certain rules under the Exchange Act.
    (7) Trading Halts. In order to halt the trading of the Fund, the 
Exchange may consider, among other things, factors such as the extent 
to which trading is not occurring in Component Securities and whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. In addition, 
trading in Fund shares is subject to trading halts caused by 
extraordinary market volatility pursuant to Exchange Rule 80B.
    (8) Due Diligence. The Exchange represents that the information 
circular to members will note, for example, Exchange responsibilities 
including that before an Exchange member, member organization, or 
employee thereof recommends a transaction in the Fund, a determination 
must be made that the recommendation is in compliance with all 
applicable Exchange and Federal rules and regulations, including due 
diligence obligations under Exchange Rule 405 (Diligence as to 
Accounts).
    (9) Purchases and Redemptions in Creation Unit Size. In the 
Information Circular referenced above, members and member organizations 
will be informed that procedures for purchases and redemptions of 
iShares in Creation Unit Size are described in the Fund Prospectus and 
SAI, and that iShares are not individually redeemable but are 
redeemable only in Creation-Unit-size aggregations or multiples 
thereof.
    (10) Surveillance. Exchange surveillance procedures applicable to 
trading in the proposed iShares are comparable to those applicable to 
other ICUs currently trading on the Exchange. The Exchange represents 
that its surveillance procedures are adequate to properly monitor the 
trading of the Fund. The Exchange's current trading surveillances focus 
on detecting securities trading outside their normal patterns. When 
such situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations. The Exchange 
represents that it is able to obtain information regarding trading in 
both the Fund shares and the Component Securities by its members on any 
relevant market. In addition, the Exchange may obtain trading 
information via the Intermarket Surveillance Group (``ISG'') from other 
exchanges who are members or affiliates of the ISG, including the Hong 
Kong Stock Exchange.
    (11) Hours of Trading/Minimum Price Variation. The Fund will trade 
on the Exchange until 4:15 p.m. (Eastern time) each business day. The 
minimum price variation for quoting will be $.01.
Statutory Basis
    NYSE believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Exchange Act \32\ requiring that an exchange 
have rules that are designed, among other things, to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to, and perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

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

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

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

III. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-55 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NYSE-2004-55. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your

[[Page 61287]]

comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the NYSE. 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-NYSE-2004-55 and should be submitted on or before 
November 5, 2004.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder, applicable to a national securities exchange.\33\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Exchange Act \34\ and will 
promote just and equitable principles of trade, and facilitate 
transactions in securities, and, in general, protect investors and the 
public interest.\35\
---------------------------------------------------------------------------

    \33\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \34\ 15 U.S.C. 78f(b)(5)
    \35\ Pursuant to Section 6(b)(5) of the Exchange 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 
function, 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.
---------------------------------------------------------------------------

    The Commission believes that the NYSE's proposal should advance the 
public interest by providing investors with increased flexibility in 
satisfying their investment needs and by allowing them to purchase and 
sell Fund shares at negotiated prices throughout the business day that 
generally track the price and yield performance of the targeted 
Underlying Index.\36\
---------------------------------------------------------------------------

    \36\ The Commission notes that, as is the case with similar 
previously approved exchange traded funds, investors in the Fund can 
redeem shares in Creation-Unit-size aggregations only. See, e.g., 
Exchange Act Release No. 43679 (December 5, 2000), 65 FR 77949 
(December 13, 2000) (File No. SR-NYSE-00-46); Exchange Act Release 
No. 50189 (August 12, 2004); 69 FR 51723 (August 20, 2004) (File No. 
SR-Amex-2004-05)
---------------------------------------------------------------------------

    Furthermore, the Commission believes that the proposed rule change 
raises no issues that have not been previously considered by the 
Commission. The Fund is similar in structure and operation to exchange-
traded index funds that the Commission has previously approved for 
listing and trading on national securities exchanges under Section 
19(b)(2) of the Exchange Act.\37\ The stocks included in the Underlying 
Index are among the stocks with the highest liquidity and market 
capitalization in the Chinese markets. Further, with respect to each of 
the following key issues, the Commission believes that the Fund 
satisfies established standards.
---------------------------------------------------------------------------

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

A. Fund Characteristics

    Similar to other previously-approved, exchange-listed index fund 
shares, the Commission believes that the proposed Fund will provide 
investors with an alternative to trading a range of securities on an 
individual basis and will give investors the ability to trade a product 
representing an interest in a portfolio of securities designed to 
reflect substantially the Underlying Index. The estimated cost of 
individual shares in the Fund, approximately $50, should make them 
attractive to individual retail investors who wish to hold a security 
representing the performance of a portfolio of stocks. In addition, 
investors will be able to trade shares in the Fund continuously 
throughout the business day in secondary market transactions at 
negotiated prices.\38\ Accordingly, the proposed Fund will allow 
investors to: (1) Respond quickly to market changes through intra-day 
trading opportunities; (2) engage in hedging strategies similar to 
those used by institutional investors; and (3) reduce transaction costs 
for trading a portfolio of securities.
---------------------------------------------------------------------------

    \38\ Because of the potential arbitrage opportunities, the 
Commission believes that Fund shares will not trade at a material 
discount or premium in relation to their NAV.
---------------------------------------------------------------------------

    The Commission believes that the proposed Fund is reasonably 
designed to provide investors with an investment vehicle that 
substantially reflects in value the performance of the Underlying 
Index.\39\
---------------------------------------------------------------------------

    \39\ The FTSE/Xinhua China 25 Index is a free float-adjusted 
market capitalization weighted index that is designed to represent 
the performance of the largest companies in the mainland China 
equity market that are available to international investors. As of 
August 31, 2004, its constituents had a total market capitalization 
of approximately $154 billion and a float-adjusted market 
capitalization of approximately $41 billion.
---------------------------------------------------------------------------

    Moreover, the Commission finds that, although the value of the 
Fund's shares will be derived from and based on the value of the 
securities and cash held in the Fund, the Fund is not leveraged. 
Accordingly, the level of risk involved in the purchase or sale of Fund 
shares is similar to the risk involved in the purchase or sale of 
traditional common stock, with the exception that the pricing mechanism 
for shares in the Fund is based on a portfolio of securities. The 
Commission notes that the Fund will at all times invest at least 80% of 
its assets in Component Securities of its Underlying Index and in 
Depository Receipts representing such securities and at least half of 
the remaining 20% of its assets in such securities or in stocks 
included in the Chinese market, but not included in the Underlying 
Index.\40\ As noted above, the Fund will use a representative portfolio 
sampling strategy to attempt to track its Underlying Index. Although a 
representative sampling strategy entails some risk of tracking error, 
the Advisor will seek to minimize tracking error. It is expected that 
the Fund will have a tracking error relative to the performance of its 
Underlying Index of no more than 5%.
---------------------------------------------------------------------------

    \40\ The Exchange states that, to the extent the Fund invests in 
Depository Receipts, any ADRs will be listed on a national 
securities exchange or Nasdaq. Other Depository Receipts, e.g., 
GDRs, will be listed on a foreign exchange. The Fund will not invest 
in any unlisted depositary receipts or any listed depositary 
receipts that the Advisor deems to be illiquid or for which pricing 
information is not readily available. The Fund does not currently 
intend to invest in ADRs and GDRs but has retained the flexibility 
to do so. Rather, the Fund currently intends to hold all of the 
securities in the Index that are listed on the Hong Kong Stock 
Exchange.
---------------------------------------------------------------------------

    The Advisers to the Fund may attempt to reduce tracking error by 
using a variety of investment instruments, including futures contracts, 
repurchase agreements, options, swaps and currency exchange contracts; 
however, these instruments will not constitute more than 10% of the 
Funds' assets.\41\ The Exchange represents, however, that the Fund will 
not use these instruments to leverage, or borrow against, its 
securities holdings or for speculative purposes. Also, the Exchange 
represents that the Fund will

[[Page 61288]]

not concentrate its investments in any particular industry or group of 
industries, except to the extent that the Underlying Index concentrates 
in the stocks of a particular industry or industries. As described 
above, the Underlying Index is designed to represent the performance of 
the largest companies in the mainland China equity market that are 
available to international investors and includes 25 of the largest and 
most heavily traded Chinese companies.\42\ FXI may adjust the 
Underlying Index based on annual full country indeed reviews, quarterly 
index reviews, and ongoing event-related changes.\43\ Changes to the 
Underlying Index are made public via print and electronic media, and, 
in particular, through press releases on the FTSE Web site.
---------------------------------------------------------------------------

    \41\ See discussion under Section II.A.1(a) ``Operation of 
Fund,'' above.
    \42\ The Commission notes that securities in the Underlying 
Index are weighted based on the free-float adjusted total market 
value of their shares, so that securities with higher total market 
values generally have a higher representation in the Underlying 
Index. Index constituents are screened for liquidity and weightings 
are capped to avoid over-concentration in any one stock.
    \43\ The Commission notes that although one employee of an 
affiliate of the Advisor serves on the FTSE/Xinhua Index Committee 
and provides input to help ensure that the published index rules and 
the implementation of such rules adequately reflect current 
developments in the underlying market, such employee is and will not 
be involved in the operations of the Advisor or the Fund or be 
involved in any capacity with the Fund's Board of Trustees. 
Moreover, the index compilation functions of FXI and the FTSE/Xinhua 
Index Committee are, and will remain, completely separate and 
independent of the portfolio management functions of BGFA. FXI and 
the FTSE/Xinhua Index Committee have adopted policies that prohibit 
the dissemination and use of confidential and proprietary 
information about the Index and have instituted procedures designed 
to prevent the improper dissemination and use of such information. 
BGI and BGIL have adopted policies that limit the use of 
confidential and proprietary information about portfolio management 
decisions to those persons whose duties require and permit them to 
have access to such information and have instituted procedures 
designed to prevent the improper dissemination and use of such 
information.
---------------------------------------------------------------------------

    The Commission believes that the market capitalization and 
liquidity of the Component Securities is such that an adequate level of 
liquidity exists so that the Fund shares should not be susceptible to 
manipulation.\44\ Also, the Commission does not believe that the Fund 
will be so highly concentrated such that it becomes a surrogate for 
trading unregistered foreign securities on the Exchange.
---------------------------------------------------------------------------

    \44\ The Exchange states that as of August 31, 2004, the ten 
largest constituents represented approximately 60.8% of the index 
weight. The 5 highest weighted stocks, which represented 40.2% of 
the index weight, had an average daily trading volume in excess of 
47.5 million shares during the past 2 months. All of the component 
stocks traded at least 250,00 shares in each of the previous 6 
months.
---------------------------------------------------------------------------

    While the Commission believes that these requirements should help 
to reduce concerns that the Fund could become a surrogate for trading 
in a single or a few unregistered stocks, if the Fund's characteristics 
changed materially from the characteristics described herein, the Fund 
would not be in compliance with the listing and trading standards 
approved herein, and the Commission would expect the NYSE to file a 
proposed rule change pursuant to Rule 19b-4 of the Exchange Act.

 B. Disclosure

    The Exchange represents that it will circulate an information 
circular detailing applicable prospectus and product description 
delivery requirements. The circular also will address NYSE members' 
responsibility to deliver a prospectus or product description to all 
investors and highlight the characteristics of the Funds. The circular 
will also remind members of their suitability obligations, including 
NYSE Rule 405 (Diligence as to Accounts).\45\ For example, the 
information circular will also inform members and member organizations 
that Fund shares are not individually redeemable, but are redeemable 
only in Creation-Unit-size aggregations or multiples thereof as set 
forth in the Fund Prospectus and SAI.\46\
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    \45\ NYSE Rule 405 generally requires that members use due 
diligence to learn the essential facts relative to every customer, 
order or account accepted.
    \46\ See discussion under Section II.A.1(a) ``Operation of 
Fund,'' above. The Exchange has represented that the information 
circular will also discuss exemptive, no-action, and interpretive 
relief ranted by the Commission from certain rules under the 
Exchange Act.
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C. Dissemination of Fund Information

    With respect to pricing, each day, the NAV for the Fund will be 
calculated and disseminated by IBT, to various sources, including the 
NYSE, and made available on iShares.com and the Consolidated Tape.\47\
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    \47\ The index currently uses the Reuters foreign exchange rate 
at the close of the index (4 p.m. Hong Kong Time) to compute final 
index values. The Fund intends to use Reuters/WM foreign exchange 
rates at 4 p.m. London Time.
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    During each day the NYSE is open for business, the Exchange states 
that the IOPV of the Underlying Index will be disseminated at regular 
intervals (every 15 seconds) on the Consolidated Tape. The IOPV will be 
updated throughout the NYSE trading day to reflect fluctuations in 
exchange rates between the U.S. dollar and the Hong Kong dollar. The 
underlying Index value based on the sale reporting in the foreign 
market of the Index constituents will be disseminated every 60 seconds 
throughout the foreign market trading day, including, by subscription, 
directly from FTSE and from the following vendors: Reuters, Bloomberg, 
Telekurs, FTID and LSE/Proquote. An end of day closing value for the 
Index, based on last sale reporting in the foreign market, will be 
available throughout the NYSE trading day on http://www.ftsexinhua.com, 
along with other Index information such as historical values, 
composition and component weighting. The Commission believes that this 
information will help an investor to determine whether, and to what 
extent, iShares may be selling at a premium or a discount to NAV.
    The Exchange will also be disseminating a variety of data with 
respect to the Fund on a daily basis by means of CTA and CQ High Speed 
Lines, which will be made available prior to the opening of trading on 
the Exchange. 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. In addition, the Web site for the Trust, www.ishares.com, 
which will be publicly accessible at no charge, will contain the 
following information, on a per iShare basis, for the Fund: (a) The 
prior business day's NAV and the mid-point of the bid-ask price \48\ 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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    \48\ The Bid-Ask Price of the Fund is determined using the 
highest bid and lowest offer on the Exchange as of the time of 
calculation of the Fund's NAV.
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    The closing prices of the Fund's Deposit Securities are available 
from, as applicable, the relevant exchanges, automated quotation 
systems, published or other public sources in the relevant country, or 
on-line information services such as Bloomberg or Reuters. The exchange 
rate information required to convert such information into U.S. dollars 
is also readily available in newspapers and other publications and from 
a variety of on-line services. In addition, the Commission notes that 
the iShares Web site is and will be publicly accessible at no charge, 
and will contain the Fund's NAV as of the prior business day, the Bid-
Asked Price, and a

[[Page 61289]]

calculation of the premium or discount of the Bid-Asked Price in 
relation to the closing NAV.\49\
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    \49\ Additional Information available to investors will include 
data for a period covering at least the four previous calendar 
quarters (or the life of a Fund, if shorter) indicating how 
frequently the Fund's shares traded at a premium or discount to NAV 
based on the Bid-Asked Price and closing NAV, and the magnitude of 
such premiums and discounts; the Fund's Prospectus and two most 
recent reports to shareholders; and other quantitative information 
such as daily trading volume.
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    Based on the representations made in the NYSE proposal, the 
Commission believes that pricing and other important information about 
the Fund is adequate and consistent with the Exchange Act.

D. Listing and Trading

    The Commission finds that adequate rules and procedures exist to 
govern the listing and trading of the Fund's shares. Fund shares will 
be deemed equity securities subject to NYSE rules governing the trading 
of equity securities, including, among others, rules governing trading 
halts,\50\ responsibilities of the specialist, account opening and 
customer suitability requirements,\51\ and the election of stop and 
stop limit orders.
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    \50\ In order to halt the trading of the Fund, the Exchange may 
consider, among others, factors including: (1) The extent to which 
trading is not occurring in stocks underlying the index; or (2) 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. In addition, 
trading in Fund shares is subject to trading halts caused by 
extraordinary market volatility pursuant to NYSE Rule 80B.
    \51\ Prior to commencement of trading, the Exchange states that 
it will issue an Information Circular informing members and member 
organizations of the characteristics of the Fund and of applicable 
Exchange rules, as well as the requirements of NYSE Rule 405 
(Diligence as to Accounts).
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    In addition, the Exchange states that iShares are subject to the 
criteria for initial and continued listing of ICUs in Section 703.16 of 
the NYSE Manual. The Commission believes that the listing and delisting 
criteria for Fund shares should help to ensure that a minimum level of 
liquidity will exist in the Fund to allow for the maintenance of fair 
and orderly markets. Accordingly, the Commission believes that the 
rules governing the trading of Fund shares provide adequate safeguards 
to prevent manipulative acts and practices and to protect investors and 
the public interest.
    As noted above, the NYSE expects to require that a minimum of two 
Creation Units (100,000 iShares) will be required to be outstanding at 
the start of trading. The Commission believes that this minimum number 
is sufficient to help to ensure that a minimum level of liquidity will 
exist at the start of trading.\52\
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    \52\ This minimum number of shares required to be outstanding at 
the start of trading is comparable to requirements that have been 
applied to previously listed series of Investment Company Units.
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E. Surveillance

    The Commission finds that NYSE has adequate surveillance procedures 
to monitor the trading of the proposed iShares, including concerns with 
specialists purchasing and redeeming Creation Units. The NYSE 
represents that it will rely on existing surveillance procedures 
governing ICUs currently trading on the Exchange. The Exchange is also 
able to obtain information regarding trading in both the Fund shares 
and the Component Securities by its members on any relevant market; in 
addition, the Exchange may obtain trading information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges who are 
members or affiliates of the ISG, including, by way of example, the 
Hong Kong Stock Exchange.

F. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\53\ for approving the proposed rule change, as 
amended, prior to the thirtieth day after the date of publication of 
notice in the Federal Register. The Commission notes that the proposal 
is consistent with the listing and trading standards in NYSE Rule 
703.16 (Investment Company Units), and the Commission has previously 
approved similar products based on foreign indices.\54\ The Commission 
does not believe that the proposed rule change, as amended, raises 
novel regulatory issues. Consequently, the Commission believes that it 
is appropriate to permit investors to benefit from the flexibility 
afforded by trading these products as soon as possible. Accordingly, 
the Commission finds that there is good cause, consistent with Section 
6(b)(5) of the Exchange Act,\55\ to approve the proposal on an 
accelerated basis.
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    \53\ 15 U.S.C. 78s(b)(2).
    \54\ See supra note 36. See also, e.g., Securities Exchange Act 
Release Nos. 44990 (October 25, 2001), 66 FR 56869 (November 13, 
2001) (File No. SR-Amex-2001-45); 42748 (May 2, 2000), 65 FR 30155 
(May 10, 2000); and 36947 (March 8, 1996), 61 FR 10606 (March 14, 
1996) (File No. SR-Amex-95-43).
    \55\ 15 U.S.C. 78s(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that the proposed rule change (SR-NYSE-2004-55), is 
hereby approved on an accelerated basis.\56\
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    \56\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2657 Filed 10-14-04; 8:45 am]
BILLING CODE 8010-01-P