

[Federal Register: October 18, 2005 (Volume 70, Number 200)]
[Notices]               
[Page 60590-60592]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc05-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52578; File No. SR-ISE-2005-27]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 4 to the Proposed Rule Change Relating to Listing Standards for 
Broad-Based Index Options

October 7, 2005.

I. Introduction

    On May 19, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish listing and 
maintenance standards and position limits for options on broad-based 
indexes. The ISE filed Amendment No. 1 to the proposed rule change on 
July 13, 2005.\3\ The proposed rule change, as amended by Amendment No. 
1, was published for comment in the Federal Register on July 27, 
2005.\4\ The Commission received no comments regarding the proposal, as 
amended. The ISE filed Amendment No. 2 to the proposed rule change on 
September 26, 2005, and withdrew Amendment No. 2 on September 28, 2005. 
The ISE filed Amendment No. 3 to the proposed rule change on September 
28, 2005, and withdrew Amendment No. 3 on October 6, 2005. The ISE 
filed Amendment No. 4 to the proposal on October 6, 2005.\5\ This order 
approves the proposed rule change, as amended. In addition, the 
Commission is publishing notice to solicit comments on, and is 
simultaneously approving, on an accelerated basis, Amendment No. 4 to 
the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 makes technical corrections to the proposal, 
including revisions that clarify the applicability of the market 
capitalization and options eligibility requirements in ISE Rule 
2002(d).
    \4\ See Securities Exchange Act Release No. 52084 (July 20, 
2005), 70 FR 43481.
    \5\ Amendment No. 4 revises the proposal to: (1) Provide that an 
index's component securities must be ``NMS stocks'' rather than 
``reported securities;'' (2) identify the entities or services that 
will disseminate index values; (3) state that the ISE has an 
adequate surveillance program for broad-based index options; and (4) 
clarify that the position limits for broad-based index options apply 
to option contracts on the same side of the market.
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II. Description of the Proposed Rule Change

    The ISE proposes to adopt ISE Rule 2002(d) to establish initial 
listing standards for broad-based index options. The proposal will 
allow the ISE to list, pursuant to Rule 19b-4(e) under the Act,\6\ 
broad-based index options that meet the listing standards in ISE Rule 
2002(d). The listing standards require, among other things, that the 
underlying index be broad-based, as defined in ISE Rule 2001(j); that 
options on the index be a.m.-settled; that the index be capitalization-
weighted, modified capitalization-weighted, price-weighted, or equal 
dollar-weighted; and that the index be comprised of at least 50 
securities, all of which must be ``NMS stocks,'' as defined in Rule 600 
of Regulation NMS.\7\ In addition, ISE Rule 2002(d) requires that the 
index's component securities meet certain minimum market capitalization 
and average daily trading volume requirements; that no single component 
account for more than 10% of the weight of the index and that the five 
highest weighed components represent no more than 33% of the weight of 
the index; that the index value be widely disseminated at least every 
15 seconds; and that the ISE have written surveillance procedures in 
place with respect to the index options.
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    \6\ 17 CFR 240.19b-4(e).
    \7\ See Amendment No. 4, supra note 5. Rule 600 of Regulation 
NMS defines an ``NMS stock'' to mean ``any NMS security other than 
an option.'' An ``NMS security'' is ``any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan, or an effective national market system plan for reporting 
transactions in listed options.'' See 17 CFR 242.600.
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    The ISE also proposes to adopt ISE Rule 2002(e), which establishes 
maintenance standards for broad-based index options listed pursuant to 
ISE Rule 2002(d). In addition, the ISE proposes to amend ISE Rule 
2004(a) to establish a position limit of 25,000 contracts on the same 
side of the market for broad-based index options listed pursuant to ISE 
Rule 2002(d).\8\
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    \8\ See Amendment No. 4, supra note 5.

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[[Page 60591]]

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange. In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\9\ which requires, among other things, that the rules of a 
national securities exchange be designed 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 a national market system and, in general, 
to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b)(5).
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    To list options on a particular broad-based index, the ISE 
currently must file a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder. However, Rule 
19b-4(e) provides that the listing and trading of a new derivative 
securities product by a self-regulatory organization (``SRO'') will not 
be deemed a proposed rule change pursuant to Rule 19b-4(c)(1) if the 
Commission has approved, pursuant to Section 19(b) of the Act, the 
SRO's trading rules, procedures, and listing standards for the product 
class that would include the new derivative securities product, and the 
SRO has a surveillance program for the product class.
    As described more fully above, the ISE proposes to establish 
listing standards for broad-based index options. The Commission's 
approval of the ISE's listing standards for broad-based index options 
will allow options that satisfy the listing standards to begin trading 
pursuant to Rule 19b-4(e), without constituting a proposed rule change 
within the meaning of Section 19(b) of the Act and Rule 19b-4, for 
which notice and comment and Commission approval is necessary.\10\ The 
ISE's ability to rely on Rule 19b-4(e) to list broad-based index 
options that meet the requirements of ISE Rule 2002(d) potentially 
reduces the time frame for bringing these securities to the market, 
thereby promoting competition and making new broad-based index options 
available to investors more quickly.
    The Commission notes that the ISE has represented that it has 
adequate trading rules, procedures, listing standards, and surveillance 
program for broad-based index options. ISE's existing index option 
trading rules and procedures will apply to broad-based index options 
listed pursuant to ISE Rule 2002(d). Other existing ISE rules, 
including provisions addressing sales practices and margin 
requirements, also will apply to these options. In addition, the ISE 
proposes to establish position and exercise limits of 25,000 contracts 
on the same side of the market for broad-based index options listed 
pursuant to ISE Rule 2002(d).\11\ The Commission believes that the 
proposed position and exercise limits should serve to minimize 
potential manipulation concerns.
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    \10\ When relying on Rule 19b-4(e), the SRO must submit Form 
19b-4(e) to the Commission within five business days after the SRO 
begins trading the new derivative securities product. See Securities 
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 
(December 22, 1998) (File No. S7-13-98).
    \11\ See Amendment No. 4, supra note 5. Under ISE Rule 2007, the 
exercise limits for index options are equivalent to the position 
limits prescribed for option contracts with the nearest expiration 
in ISE Rule 2004 or ISE Rule 2005.
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    The ISE represents that it has adequate surveillance procedures for 
broad-based index options and that it intends to apply its existing 
surveillance procedures for index options to monitor trading in broad-
based index options listed pursuant to ISE Rule 2002(d).\12\ In 
addition, because ISE Rule 2002(d) requires that each component of an 
index be an ``NMS stock,'' as defined in Rule 600 of Regulation NMS 
under the Act, each index component must trade on a registered national 
securities exchange or through Nasdaq. Accordingly, the ISE will have 
access to information concerning trading activity in the component 
securities of an underlying index through the Intermarket Surveillance 
Group (``ISG'').\13\ ISE Rule 2002(d) also provides that non-U.S. index 
components that are not subject to a comprehensive surveillance sharing 
agreement between the ISE and the primary market(s) trading the index 
components may comprise no more than 20% of the weight of the 
index.\14\ The Commission believes that these requirements will help to 
ensure that the ISE has the ability to monitor trading in broad-based 
index options listed pursuant to ISE Rule 2002(d) and in the component 
securities of the underlying indexes.
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    \12\ See Amendment No. 4, supra note 5.
    \13\ The ISG was formed on July 14, 1983, to, among other 
things, coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
All of the registered national securities exchanges and the National 
Association of Securities Dealers, Inc., are members of the ISG. In 
addition, futures exchanges and non-U.S. exchanges and associations 
are affiliate members of the ISG.
    \14\ However, such non-U.S. index components, as ``NMS stocks,'' 
would be registered under Section 12 of the Act and listed and 
traded on a national securities exchange or Nasdaq, where there is 
last sale reporting.
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    The Commission believes that the requirements in ISE Rule 2002(d) 
regarding, among other things, the minimum market capitalization, 
trading volume, and relative weightings of an underlying index's 
component stocks are designed to ensure that the markets for the 
index's component stocks are adequately capitalized and sufficiently 
liquid, and that no one stock dominates the index. In addition, ISE 
Rule 2002(d) requires that the underlying index be ``broad-based,'' as 
defined in ISE Rule 2001(j).\15\ The Commission believes that these 
requirements minimize the potential for manipulating the underlying 
index.
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    \15\ ISE Rule 2001(j) defines ``broad-based index'' to mean ``an 
index designed to be representative of a stock market as a whole or 
of a range of companies in unrelated industries.''
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    The Commission believes that the requirement in ISE Rule 2002(d) 
that the current index value be widely disseminated at least once every 
15 seconds by the Options Price Reporting Authority, the Consolidated 
Tape Association, the Nasdaq Index Dissemination Service or by one or 
more major market data vendors during the time an index option trades 
on the ISE should provide transparency with respect to current index 
values and contribute to the transparency of the market for broad-based 
index options.\16\ In addition, the Commission believes, as it has 
noted in other contexts, that the requirement in ISE Rule 2002(d) that 
an index option be settled based on the opening prices of the index's 
component securities, rather than on closing prices, could help to 
reduce the potential impact of expiring index options on the market for 
the index's component securities.\17\
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    \16\ See Amendment No. 4, supra note 5. The Commission notes, 
however, that if the ISE designated a data vendor, on an exclusive 
basis, to disseminate index values on behalf of the ISE, such vendor 
would be an ``exclusive processor'' under Section 3(a)(22)(B) of the 
Act and, absent an exemption, would be required to register as a 
securities information processor under Section 11A(b)(1) of the Act.
    \17\ See, e.g., Securities Exchange Act Release No. 30944 (July 
21, 1992), 57 FR 33376 (July 28, 1992) (order approving a Chicago 
Board Options Exchange, Incorporated proposal to establish opening 
price settlement for S&P 500 Index options).
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Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving Amendment No. 4 to 
the

[[Page 60592]]

proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 4 strengthens and clarifies the proposal by revising the 
proposal to: (1) Provide that an index's component securities must be 
``NMS stocks'' rather than ``reported securities;'' (2) identify the 
entities or services that will disseminate index values; (3) state that 
the ISE has an adequate surveillance program for broad-based index 
options; and (4) clarify that the position limits for broad-based index 
options apply to option contracts on the same side of the market. 
Accordingly, the Commission finds that it is consistent with Sections 
6(b)(5) and 19(b) of the Act to approve Amendment No. 4 on an 
accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

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

File Number SR-ISE-2005-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-ISE-2005-27. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of the ISE. 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-ISE-2005-27 and should be 
submitted on or before November 8, 2005.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-ISE-2005-27), as amended, is 
approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
Jill M. Peterson,
Assistant Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 05-20775 Filed 10-17-05; 8:45 am]

BILLING CODE 8010-01-P
