

[Federal Register: July 10, 2006 (Volume 71, Number 131)]
[Notices]               
[Page 38918-38920]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10jy06-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54087; File No. SR-ISE-2005-60]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 3 Thereto Relating to the Criteria for Securities That 
Underlie Options Traded on the Exchange

June 30, 2006.

I. Introduction

    On December 14, 2005, the International Securities Exchange, Inc. 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to enable the listing and trading 
on the Exchange of options on shares or other securities (``Fund 
Shares'') that hold specified non-U.S. currency. The ISE filed 
Amendment No. 1 to the proposed rule change on May 5, 2006.\3\ The ISE 
filed Amendment No. 2 to the proposed rule change on May 9, 2006.\4\ 
The proposed rule change, as amended, was published for comment in the 
Federal Register on May 16, 2006.\5\ The Commission received no 
comments on the proposal. On June 28, 2006, the Exchange filed 
Amendment No. 3 to the proposed rule change.\6\ This order approves the 
proposed rule change, as amended, grants accelerated approval to 
Amendment No. 3 to the proposed rule change, and solicits comments from 
interested persons on Amendment No. 3.
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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.
    \5\ See Securities Exchange Act Release No. 53783 (May 10, 
2006), 71 FR 28394 (``Notice'').
    \6\ In Amendment No. 3, which supplemented the proposal as 
noticed, the Exchange amended ISE Rule 503(h)(3) to clarify that the 
Exchange will consider the suspension of opening transactions with 
respect to a Fund Share if, inter alia, the value of the non-U.S. 
currency on which the Fund Shares are based is no longer calculated 
or available.
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend ISE Rules 408(a), 502(h), 807(a), 
and 1400 to enable the initial and continued listing and trading on the 
Exchange of options on Fund Shares that represent interests

[[Page 38919]]

in a trust that hold a specified non-U.S. currency. In addition, the 
Exchange proposes to amend ISE Rule 503(h) to clarify the effect, with 
respect to options trading on the Exchange, of any Fund Shares being 
delisted from trading or halted from trading on their primary market.
    Specifically, the Exchange is proposing to amend ISE Rule 502(h) 
(Criteria for Underlying Securities) to broaden the definition of Fund 
Shares to include shares or other securities that represent interests 
in registered investment companies or unit investment trusts or similar 
entities that hold a specified non-U.S. currency. The Exchange is also 
proposing to make other conforming changes to the text of ISE Rule 
502(h) to reflect the proposed broadened definition of Fund Shares. In 
addition, the Exchange is proposing to require, in ISE Rule 502(h)(4), 
that before listing and trading options on Fund Shares based on a non-
U.S. currency, the Exchange must have entered into an appropriate 
comprehensive surveillance sharing agreement with the applicable 
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. This provision means that the options exchange 
listing options on the Fund Shares must utilize the same comprehensive 
surveillance sharing arrangements utilized by the equity markets that 
list and trade the Fund Shares.
    The Exchange also proposes to amend ISE Rule 408(a) to require a 
member to establish, maintain, and enforce written policies and 
procedures to prevent the misuse of any material nonpublic information 
it might have or receive in a related security, option, or derivative 
security or 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. In addition, the Exchange proposes 
to amend ISE Rules 807(a) and 1400 to require 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.
    Finally, the Exchange proposes to amend ISE Rule 503(h) regarding 
withdrawal of approval of the underlying securities to specify that 
Fund Shares approved for options trading under ISE Rule 502(h) will not 
be deemed to meet the requirements for continued approval, and ISE will 
not open any additional series of options contracts thereof, if the 
Fund Shares are delisted from trading or halted from trading on their 
primary market. In Amendment No. 3, the Exchange is also proposing to 
amend ISE Rule 503(h)(3) to clarify the continued listing criteria 
applicable to Fund Shares that hold specified non-U.S. currency.\7\
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    \7\ See supra note 6.
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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.\8\ 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 an 
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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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    Currently, the Exchange can list options on Fund Shares that 
represent interests in registered investment companies, unit investment 
trusts, or other similar entities that hold portfolios of securities or 
are otherwise based on or represent investments in broad-based indexes 
or portfolios of securities.\10\ The Exchange's proposal would allow it 
to list and trade options on Fund Shares whose investment assets 
consist of a specified non-U.S. currency deposited with a trust. For 
example, the Exchange's proposed rule change will permit the Exchange 
to list options on the Euro Currency Trust (``Trust''), which issues 
shares (``Euro Shares'') that are listed and traded on the New York 
Stock Exchange (``NYSE'') under the symbol ``FXE,'' and may also trade 
in other markets.\11\ Fund Shares would 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, as the Exchange 
has proposed, must be an ``NMS stock'' as defined under Rule 600 of 
Regulation NMS.\12\ 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 Fund Share's 
prospectus. The Commission notes that the Exchange has represented that 
the expansion of the types of investments that may be held by Fund 
Shares 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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    \10\ See ISE Rule 502(h).
    \11\ See Securities Exchange Act Release No. 52843 (November 28, 
2005), 70 FR 72486 (December 5, 2005) (SR-NYSE-2005-65).
    \12\ In light of the implementation of certain aspects of 
Regulation NMS, the Exchange also proposes to amend ISE Rule 502(h) 
to reflect that qualifying Fund Shares must be defined as National 
Market System stocks as defined under Rule 600 of Regulation NMS.
    \13\ See Notice, supra note 5, at text accompanying note 13. See 
also ISE Rules 412 and 414.
    \14\ See Notice, supra note 5, at text accompanying note 14. See 
also ISE Rule 1202.
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    To accommodate the listing and trading of options on Fund Shares 
investing primarily in non-U.S. currency, the Exchange proposes to 
amend ISE Rule 408(a) to require 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 based on 
such currency, an ISE member must establish policies and procedures 
prohibiting the use of any material nonpublic information it might have 
or receive from any person associated with it 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. 
Further, the Exchange proposes to amend ISE Rules 807(a) and 1400 to 
require 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

[[Page 38920]]

currency. The Commission believes that these requirements minimize the 
potential for manipulating the underlying currency held by the Fund 
Shares.
    Finally, under the proposed change to ISE Rule 503(h), Fund Shares 
would not be deemed to meet the requirements for continued approval, 
and the Exchange would not open for trading any additional series of 
option contracts of the class covering such Fund Shares, if the Fund 
Shares are delisted from trading or, pursuant to the proposed rule 
change, are halted from trading on their primary market. The Commission 
believes that the Exchange's proposal to expand ISE Rule 503(h) to 
address the effect of a trading halt in the Fund Shares on their 
primary market is consistent with the protection of investors and the 
public interest.
    The Commission also notes that the Exchange has represented that it 
has an adequate surveillance program in place for options on Fund 
Shares, as defined by the Exchange's proposal, and it intends to apply 
those same program procedures that it applies to options on Fund Shares 
currently traded on the Exchange. In addition, the Exchange is able to 
obtain trading information via the Intermarket Surveillance Group 
(``ISG'') from other exchanges who are members or affiliates of the 
ISG. With respect to the Euro Shares, the Commission notes that the 
Exchange 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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    The Commission finds good cause for approving Amendment No. 3 to 
the proposed rule change prior to the thirtieth day after the date of 
the publication of notice thereof in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\16\ The Commission notes that Amendment 
No. 3 clarifies the operation of the continued listing criteria in ISE 
Rule 503(h)(3) by providing that the Exchange will consider the 
suspension of opening transactions for Fund Shares if the value of the 
non-U.S. currency on which the Fund Shares are based is no longer 
calculated or available.\17\ The Commission notes that the Notice's 
discussion of the Euro Shares addressed this point,\18\ and that 
Amendment No. 3 makes a conforming change to the text of ISE Rule 
503(h)(3) to address the Exchange's proposed broadened definition of 
Fund Shares to include Fund Shares that represent interests in a trust 
that hold a specified non-U.S. currency. The Commission therefore 
believes that it is appropriate to accelerate approval of Amendment No. 
3 so that the proposed rule change, as amended, may be implemented 
without delay.
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    \16\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, the Commission may not approve any proposed rule change, or 
amendment thereto, prior to the thirtieth day after the date of 
publication of the notice thereof, unless the Commission finds good 
cause for so doing.
    \17\ Under the existing continued listing criteria in ISE Rule 
503(h), Fund Shares may be delisted as follows: (1) Following the 
initial twelve-month period beginning upon the commencement of 
trading of the Fund 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 index or portfolio of securities 
is no longer calculated or available; or (3) such other event occurs 
or condition exists that in the opinion of the Exchange makes 
further dealing on the Exchange inadvisable.
    \18\ See Notice, supra note 5, at 28397 (noting that Euro Shares 
may be delisted if the value of the euro is no longer calculated or 
available).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 3 
to the proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

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

File Number 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 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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 on or before July 
31, 2006.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and rules and 
regulations thereunder applicable to the national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-ISE-2005-60), as amended, is 
approved, and Amendment No. 3 is approved on an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
Nancy M. Morris,
Secretary.
[FR Doc. E6-10717 Filed 7-7-06; 8:45 am]

BILLING CODE 8010-01-P
