

[Federal Register: May 16, 2006 (Volume 71, Number 94)]
[Notices]               
[Page 28394-28398]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16my06-131]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53783; File No. SR-ISE-2005-60]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 
and 2 Thereto Relating to the Criteria for Securities that Underlie 
Options Traded on the Exchange

May 10, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 14, 2005, the International Securities Exchange, Inc. 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change, as described in 
Items I, II, and III below, which items have been prepared by the 
Exchange. On May 5, 2006, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ On May 9, 2006, the Exchange filed Amendment 
No. 2 to the proposed rule change.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ Amendment No. 2 replaced the text of proposed ISE Rules 
408(a) and 807(a) in their entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend ISE Rules 408(a), 502(h), 503(h), 
807(a), and 1400 to enable the initial and continued listing and 
trading on the Exchange of Fund Shares that hold specified non-U.S. 
currency options, futures or options on futures on such currency, or 
any other derivatives based on such currency. The text of the proposed 
rule change is provided below (italics indicates additions; [brackets] 
indicate deletions):
* * * * *

Rule 408. Prevention of the Misuse of Material Nonpublic Information

    (a) Every Member, other than a lessor that is neither registered, 
nor required to be registered, as a broker-dealer under section 15 of 
the Exchange Act, shall establish, maintain and enforce written 
policies and procedures reasonably designed, taking into consideration 
the nature of the Member's business, to prevent the misuse of material 
nonpublic information by such Member or persons associated with such 
Member in violation of the Exchange Act and Exchange Rules.
    (1) Misuse of material nonpublic information includes, but is not 
limited to:
    (i) Trading in any securities issued by a corporation or Funds, as 
defined in Rule 502(h), or a trust or similar entities, or in any 
related securities or related options or other derivative securities, 
or in any related non-U.S. currency, non-U.S. currency options, futures 
or options on futures on such currency, or any other derivatives based 
on such currency while in possession of material nonpublic information 
concerning that corporation or those Funds or that trust or similar 
entities;
    (ii) Trading in an underlying security or related options or other 
derivative securities, or in any related non-U.S. currency, non-U.S. 
currency options, futures or options on futures on such currency, or 
any other derivatives based on such currency while in possession of 
material nonpublic information concerning imminent transactions in the

[[Page 28395]]

above; [underlying security or related securities;] and
    (iii) Disclosing to another person any material nonpublic 
information involving a corporation or Funds or a trust or similar 
entities whose shares are publicly traded or an imminent transaction in 
an underlying security or related securities or in the underlying non-
U.S. currency or any related non-U.S. currency options, futures or 
options on futures on such currency, or any other derivatives based on 
such currency for the purpose of facilitating the possible misuse of 
such material nonpublic information.
    (2) No change.
    (b)-(c) No change.
* * * * *

Rule 502. Criteria for Underlying Securities

* * * * *
    (h) Securities deemed appropriate for options trading shall include 
shares or other securities (``Fund Shares'') that (i) represent 
interests in registered investment companies (or series thereof) 
organized as open-end management investment companies, unit investment 
trusts or similar entities that are [principally] traded on a national 
securities exchange or through the facilities of a national securities 
association and are defined as an ``NMS stock'' under Rule 600 of 
Regulation NMS [reported as ``national market'' securities], and that 
hold portfolios of securities comprising or otherwise based on or 
representing investments in broad-based indexes or portfolios of 
securities (or that hold securities in one or more other registered 
investment companies that themselves hold such portfolios of 
securities) or (ii) represent interests in a trust that holds a 
specified non-U.S. currency deposited with the trust when aggregated in 
some specified minimum number may be surrendered to the trust by the 
beneficial owner to receive the specified non-U.S. currency and pays 
the beneficial owner interest and other distributions on the deposited 
non-U.S. currency, if any, declared and paid by the trust (``Funds''); 
provided that all of the following conditions are met:
    (1) Any non-U.S. component securities of [the] an index or 
portfolio of securities on which the Fund Shares are based that are not 
subject to comprehensive surveillance agreements do not in the 
aggregate represent more than 50% of the weight of the index or 
portfolio;
    (2) Component securities of an index or portfolio of securities on 
which the Fund Shares are based for which the primary market is in any 
one country that is not subject to a comprehensive surveillance 
agreement do not represent 20% or more of the weight of the index;
    (3) Component securities of an index or portfolio of securities on 
which the Fund Shares are based for which the primary market is in any 
two countries that are not subject to comprehensive surveillance 
agreements do not represent 33% or more of the weight of the index; 
[and]
    (4) For Funds that hold a specified non-U.S. currency deposited 
with the trust, the Exchange has entered into an appropriate 
comprehensive surveillance sharing agreement with the marketplace or 
marketplaces with last sale reporting that represent(s) the highest 
volume in derivatives (options or futures) on the specified non-U.S. 
currency, which are utilized by the national securities exchange where 
the underlying Funds are listed and traded; and
    [(4)](5) The Fund Shares either (i) meet the criteria and 
guidelines set forth in paragraphs (a) and (b) above; or (ii) the Fund 
Shares are available for creation or redemption each business day from 
or through the issuing trust, investment company or other entity [Fund] 
in cash or in kind at a price related to net asset value, and the 
issuer [Fund] is obligated to issue Fund Shares in a specified 
aggregate number even if some or all of the [securities] investment 
assets required to be deposited have not been received by the issuer 
[Fund], subject to the condition that the person obligated to deposit 
the [securities] investment assets has undertaken to deliver them 
[securities] as soon as possible and such undertaking is secured by the 
delivery and maintenance of collateral consisting of cash or cash 
equivalents satisfactory to the issuer of Fund Shares [Fund], all as 
described in the Fund Shares' [Fund's] prospectus.
    (i) through (j) No change.

Rule 503. Withdrawal of Approval of Underlying Securities

* * * * *
    (h) Fund Shares approved for options trading pursuant to Rule 
502(h) will not be deemed to meet the requirements for continued 
approval, and the Exchange shall not open for trading any additional 
series of option contracts of the class covering such Fund Shares if 
the [issuer is] Fund Shares are delisted from trading as provided in 
subparagraph (b)(5)[(6)] of this Rule or the Fund Shares are halted 
from trading on their primary market. In addition, the Exchange shall 
consider the suspension of opening transactions in any series of 
options of the class covering Fund Shares in any of the following 
circumstances:
    (1) In the case of options covering Fund Shares approved pursuant 
to Rule 502(h)(5)[4](i), in accordance with the terms of subparagraphs 
(b)(1), (2), (3) and (4) of this Rule 503;
    (2) In the case of options covering Fund Shares approved pursuant 
to Rule 502(h)(5)[(4)](ii), following the initial twelve-month period 
beginning upon the commencement of trading in the Fund Shares on a 
national securities exchange or [as NMS securities] through the 
facilities of a national securities association and are defined as an 
``NMS stock'' under Rule 600 of Regulation NMS, there were fewer than 
50 record and/or beneficial holders of such Fund Shares for 30 or more 
consecutive trading days;
    (3)-(4) No change.
    (i) through (j) No change.
* * * * *

Rule 807. Securities Accounts and Orders of Market Makers

    (a) Identification of Accounts. A Primary Market Maker in the Fund 
Shares, as defined in Rule 502(h), is obligated to conduct all trading 
in the Fund Shares in account(s) that have been reported to the 
Exchange. In addition, [I]in a manner prescribed by the Exchange, each 
market maker shall file with the Exchange and keep current a list 
identifying all accounts for stock, options, non-U.S. currency, non-
U.S. currency options, futures or options on futures on such currency, 
or any other derivatives based on such currency and related securities 
trading in which the market maker may, directly or indirectly, engage 
in trading activities or over which it exercises investment direction. 
No market maker shall engage in stock, options, non-U.S. currency, non-
U.S. currency options, futures or options on futures on such currency, 
or any other derivatives based on such currency or related securities 
trading in an account which has not been reported pursuant to this 
Rule.
    (b)-(c) No change.
* * * * *

Rule 1400. Maintenance, Retention and Furnishing of Books, Records and 
Other Information

    (a)-(b) No change.

Supplementary Material to Rule 1400

    .01 In addition to the existing obligations under Exchange rules 
regarding the production of books and records, a Primary Market Maker 
in non-U.S. currency options, futures or options on futures on such 
currency, or any other derivatives based on such

[[Page 28396]]

currency, shall make available to the Exchange such books, records or 
other information pertaining to transactions in the applicable non-
U.S.-currency options, futures or options on futures on such currency, 
or any other derivatives on such currency, as may be requested by the 
Exchange.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend ISE Rules 
408(a), 502(h), 503(h), 807(a), and 1400 to enable the initial and 
continued listing and trading on the Exchange of Fund Shares that hold 
specified non-U.S. currency options, futures or options on futures on 
such currency, or any other derivatives based on such currency. 
Currently, the term ``Fund Shares,'' as defined in ISE Rule 502(h), 
requires that the investment assets held by a trust, investment 
company, or other similar entity consist of portfolios of securities. 
As proposed, amended ISE Rule 502(h) would also permit the investment 
assets to consist of a trust that holds a specified non-U.S. currency 
deposited with the trust.
    In particular, the proposed amendment to ISE Rule 502(h) would 
permit the Exchange to list options on the Euro Currency Trust 
(``Trust''). The Trust issues Euro Shares (``Shares'') that represent 
units of fractional undivided beneficial interest in, and ownership of, 
the Trust. PADCO Advisors II, Inc., d/b/a Rydex Investments, is the 
sponsor of the Trust (``Sponsor'') \5\ and may be deemed the ``issuer'' 
of the Shares pursuant to section 2(a)(4) of the Securities Act of 
1933, as amended.\6\ The Bank of New York is the trustee of the Trust 
(``Trustee''), JPMorgan Chase Bank, N.A., London Branch, is the 
depository for the Trust (``Depository''), and Rydex Distributors, Inc. 
is the distributor for the Trust (``Distributor''). The Trust intends 
to issue additional Shares on a continuous basis through the Trustee. 
The Sponsor, Trustee, Depository, and Distributor are not affiliated 
with the Exchange or one another, with the exception that the Sponsor 
and Distributor are affiliated.
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    \5\ The Sponsor maintains a public Web site on behalf of the 
Trust, http://www.currencyshares.com, which contains information 

about the Trust and the Shares.
    \6\ Rydex Investments is not an ``issuer'' as per ISE rules.
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    As stated in the Trust's Registration Statement,\7\ the investment 
objective of the Trust is for the Shares to reflect the price of the 
euro. The Shares are intended to provide institutional and retail 
investors with a simple, cost-effective means of gaining investment 
benefits similar to those of holding euro.\8\ The Sponsor believes that 
the Trust is the first exchange traded fund (``ETF'') \9\ whose assets 
are limited to a particular foreign currency. The Shares may be 
purchased from the Trust only in one or more blocks of 50,000 Shares, 
as described in the prospectus under ``Creation and Redemption of 
Shares.'' A block of 50,000 shares is called a Basket. The Trust issues 
Shares in Baskets on a continuous basis to certain authorized 
participants (``Authorized Participants'') as described in the 
prospectus under ``Plan of Distribution.'' Each Basket, when created, 
is offered and sold to an Authorized Participant at a price in euro 
equal to the net asset value (``NAV'') for 50,000 Shares on the day 
that the order to create the Basket is accepted by the Trustee.
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    \7\ The Sponsor, on behalf of the Trust, filed the Form S-1 (the 
``Registration Statement'') on June 7, 2005, Amendment No. 1 thereto 
on August 12, 2005, Amendment No. 2 thereto on October 25, 2005, 
Amendment No. 3 thereto on November 28, 2005, and Amendment No. 4 
thereto on December 6, 2005. See Registration No. 333-125581.
    \8\ The Exchange notes that the Commission has permitted the 
listing of prior securities products for which the underlying was a 
commodity or otherwise was not a security trading on a regulated 
market. See, e.g., Exchange Act Release Nos. 50603 (October 28, 
2004), 69 FR 64614 (November 5, 2004) (SR-NYSE-2004-22) (approving 
listing and trading on NYSE of StreetTRACKS[reg] Gold Shares); 36505 
(November 22, 1995), 60 FR 61277 (November 29, 1995) (SR-PHLX-95-42) 
(approving the listing of dollar-denominated delivery of foreign 
currency options on the Japanese Yen; 36165 (August 29, 1995), 60 FR 
46653 (September 7, 1995) (SR-NYSE-94-41) (approving listing 
standards for, among other things, currency and currency index 
warrants); and 19133 (October 14, 1982), 47 FR 46946 (October 21, 
1982) (SR-PHLX-81-4) (approving the listing of standardized options 
on foreign currencies).
    \9\ The Exchanges notes that the Trust is not a registered 
investment company under the Investment Company Act of 1940 (``1940 
Act'') and is not required to register under the 1940 Act.
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    On December 12, 2005, the Shares were sold to the public by 
Authorized Participants at varying prices in dollars by reference to, 
among other things, the market price of euro and the trading price of 
the Shares on the New York Stock Exchange (``NYSE'') at the time of 
each sale. The Shares trade on the NYSE under the symbol ``FXE.'' The 
Shares may also trade in other markets.
    The Exchange believes that permitting options on foreign currency-
based Fund Shares to be traded on the Exchange is consistent with the 
Commission's recent approval order of a rule change filed by the NYSE 
to list and trade shares of the Trust.\10\ This rule change to ISE's 
listing criteria for Fund Shares is intended to provide appropriate 
listing standards for options on shares of these and similar types of 
foreign currency-based Fund Shares that may be listed in the future.
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    \10\ See Securities Exchange Act Release No. 52843 (November 28, 
2005), 70 FR 72486 (December 5, 2005).
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    Fund Shares will continue to need to satisfy the listing standards 
in ISE Rule 502(h). Specifically, the Fund Shares must be traded on a 
national securities exchange or through the facilities of a national 
securities association and must be an ``NMS stock'' as defined under 
Rule 600 of Regulation NMS.\11\ The Fund Shares must also either: (1) 
Meet the criteria and guidelines under ISE Rules 502(a) and 502(b) 
(Criteria for Underlying Securities); or (2) be available for creation 
or redemption each business day from and through the issuer in cash or 
in-kind at a price related to net asset value, and the issuer is 
obligated to issue Fund Shares in a specified aggregate number even if 
some or all of the investments required to be deposited have not been 
received by the issuer, subject to the condition that the person 
obligated to deposit the investments has undertaken to deliver the 
investment assets as soon as possible, and such undertaking is secured 
by the delivery and maintenance of collateral consisting of cash or 
cash equivalents satisfactory to the issuer, as described in the 
issuer's prospectus.
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    \11\ In light of the implementation of certain aspects of 
Regulation NMS, the Exchange hereby seeks to amend ISE Rule 502(h) 
to reflect that Fund Shares must be National Market System stocks as 
defined under Rule 600 of Regulation NMS, instead of ``national 
market'' securities.
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    Under the applicable continued listing criteria in ISE Rule 503(h), 
the Fund Shares may be delisted as follows: (1) Following the initial 
twelve-month period beginning upon the commencement of trading of the 
Fund

[[Page 28397]]

Shares, there are fewer than 50 record and/or beneficial holders of the 
Fund Shares for 30 or more consecutive trading days; (2) the value of 
the euro is no longer calculated or available; \12\ or (3) such other 
event occurs or condition exists that in the opinion of the Exchange 
makes further dealing on the Exchange inadvisable. Additionally, the 
Fund Shares shall not be deemed to meet the requirements for continued 
approval, and the Exchange shall not open for trading any additional 
series of option contracts of the class covering such Fund Shares, if 
the Fund Shares are halted from trading on their primary market.
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    \12\ Euro pricing information based on the euro spot price is 
available to investors on 24-hour basis from various financial 
information service providers. There are a variety of other public 
Web sites providing information on foreign currency and euro, 
including Bloomberg, CBS MarketWatch and Yahoo! Finance. The Trust 
Web site's euro spot price will be provided by The Bullion Desk 
(http://www.thebulliondesk.com). The Bullion Desk is not affiliated 

with the Trust, Trustee, Sponsor, Depository, Distributor or the 
Exchange. In the event that the Trust's Web site should cease to 
provide this euro spot price information, the Fund Shares shall fail 
this maintenance requirement and may be delisted by the Exchange.
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    Finally, the Exchange represents that the expansion of the types of 
investments that may be held by a Fund Share under ISE Rule 502(h) will 
not have any effect on the rules pertaining to position and exercise 
limits \13\ or margin.\14\
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    \13\ See ISE Rules 412 and 414.
    \14\ See ISE Rule 1202.
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    The Exchange is also proposing to amend ISE Rule 408(a) to ensure 
that, in connection with trading in the applicable non-U.S. currency, 
non-U.S. currency options, futures or options on futures on such 
currency, or any other derivatives on such currency, the ISE Primary 
Market Maker does not use any material nonpublic information it might 
have or receive from any person associated with it in the applicable 
non-U.S. currency options, futures or options on futures on such 
currency, or any other derivatives on such currency. Finally, the 
Exchange is proposing to amend ISE Rules 807(a) and 1400 to ensure that 
market makers handling Fund Shares provide the Exchange with all 
necessary information relating to their trading in the applicable non-
U.S. currency, non-U.S. currency options, futures or options on futures 
on such currency, or any other derivatives based on such currency.
    The Exchange represents that it has an adequate surveillance 
program in place for options on the Shares, and intends to apply those 
same program procedures that it applies to options on Fund Shares 
currently traded on the Exchange. 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. 
Specifically, ISE can obtain such information from the Philadelphia 
Stock Exchange (``Phlx'') in connection with euro options trading on 
the Phlx and from the Chicago Mercantile Exchange (``CME'') and the 
London International Financial Futures Exchange (``LIFFE'') in 
connection with euro futures trading on those exchanges.\15\
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    \15\ Phlx is a member of ISG. CME and LIFFE are affiliate 
members of ISG.
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2. Basis
    The Exchange believes that, with the commencement of trading of a 
currency-based ETF on the NYSE, amending its rules to accommodate the 
listing and trading of options on publicly traded shares or other 
securities that hold investment assets consisting of foreign currency 
will benefit investors by providing them with the same valuable risk 
management tool that is currently available with respect to other 
publicly traded ETFs whose investment assets consist of securities. 
Accordingly, the proposed rule change is consistent with section 6(b) 
of the Act, in general and furthers the objectives of section 6(b)(5) 
in particular, in that it would remove impediments to and perfect the 
mechanism for a free and open market in a manner consistent with the 
protection of investors and the public interest.

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

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

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, as amended; or
    (b) Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

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

File No. SR-ISE-2005-60 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2005-60. 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 Commissions Internet Web site (http://www.sec.gov/rules/sro.shtml). 

Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal 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-
2005-60 and should be submitted by June 6, 2006.


[[Page 28398]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-7454 Filed 5-15-06; 8:45 am]

BILLING CODE 8010-01-P
