

[Federal Register: September 8, 2006 (Volume 71, Number 174)]
[Notices]               
[Page 53142-53148]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se06-83]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54397; File No. SR-BSE-2005-11]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change and Amendments Nos. 1 and 2 Thereto Relating to Rules to 
Allow the Listing and Trading of Options on Indices on the Boston 
Options Exchange

 August 31, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 5, 2005, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. On July 12, 
2006, BSE filed Amendment No. 1 to the proposed rule change.\3\ On 
August 29, 2006, BSE filed Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice and order to 
solicit comments on the proposal from interested persons and to approve 
the proposed rule change, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original rule 
filing in its entirety.
    \4\ In Amendment No. 2, BSE removed its proposal to have generic 
listing standards for narrow-based options and added its proposal to 
list and trade options and long term index options on the full value 
of the Nasdaq 100 index, the one tenth value of the Nasdaq 100 index 
and the Russell 2000 index. Amendment No. 2 replaced and superseded 
the original rule filing in its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    BSE proposes to adopt rules which would allow the Boston Options 
Exchange (``BOX'') to list and trade options on indices, including 
rules pursuant to Rule 19b-4(e) for the listing and trading of broad-
based index options.\5\ BSE also seeks approval herein for BOX to list 
and trade index options and long term index options (``LEAPs'') on the 
full value of the Nasdaq 100 index (``NDX''), the one tenth value of 
the Nasdaq 100 index (``MNX''), and the Russell 2000 Index (``RUT''). 
The text of the proposed rule change, as amended is available on BSE's 
Web site (http://www.bostonstock.com), at BSE's


[[Page 53143]]

principal office, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------

    \5\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

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, as 
amended, 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 III 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    According to BSE, the purpose of the proposed rule change is to 
adopt rules necessary to allow BOX to list and trade options on 
indices. The proposed rules include, among other items, listing and 
maintenance criteria for options on underlying indices, rules on 
dissemination of index values, positions and exercise limits for index 
options, strike price intervals, and exemptions from the limits and 
terms of index options contracts. All of the proposed rules and changes 
to existing BOX Rules are based on the existing rules of the other five 
options exchanges.\6\
---------------------------------------------------------------------------

    \6\ See rules of the American Stock Exchange LLC (``Amex), the 
Chicago Board Options Exchange, Incorporated (``CBOE''), the 
Philadelphia Stock Exchange, Inc. (``Phlx''), NYSE Arca, Inc. 
(``NYSE Arca'') and the International Stock Exchange, Inc. 
(``ISE''). See, e.g., Amex Rules 900C through 905C; CBOE Rules 4.11, 
4.16, 6.2, 6.7, 8.7, 11.1, and 23.1 through 24.20; ISE Rules 413, 
418, 803, 1100, and 2000 through 2012; NYSE Arca Rules 5.10 through 
5.26; and Phlx Rules 1000A through 1104A. The proposed new rules and 
changes to existing BOX Rules are primarily based on the ISE Rules 
previously referenced. Any differences are due to the following: (i) 
Section 11 of Chapter VI of the BOX Rules, unlike ISE Rule 1407, 
currently incorporates the NASD's ``hedging exception'' and 
therefore does not need to be amended to accommodate the listing and 
trading of options on indices; (ii) the different terminology and 
defined terms in the BOX Rules; (iii) different cross-references; 
(iv) the regulatory role of the Boston Options Exchange Regulation 
LLC (BOXR); (v) that BOX does not have ``trading rotations'' as that 
term is used in ISE's Rules; and (vi) other minor differences in 
current rules. BOX does not have ``trading rotations'' as that term 
is used in ISE's Rules because BOX is not a specialist driven 
system. On BOX, there are no designated specialists, primary market 
makers, or lead market makers with authority to control trading in a 
particular options class. Instead, BOX has multiple and competing 
market makers trading in each options class. On a specialist driven 
system, the specialist maintains control over the open and the 
close, whereas on BOX, the electronic trading system maintains 
control over the open and the close.
---------------------------------------------------------------------------

    Because the rules related to trading options on indices are product 
specific in many areas, BSE, on behalf of BOX, will need to file 
additional proposed rule changes with the Commission when BOX 
identifies specific products (with the exception of those products that 
satisfy the ``generic'' broad-based listing standards pursuant to Rule 
19b-4(e)). For purposes of this proposed rule change, certain rules 
indicate that they apply to ``specified'' indices. Proposed Sections 
2(l), 5(a), 7(a), 8(a), 10, and 12 of proposed Chapter XIV of the BOX 
Rules all contain provisions that are dependant upon the BSE 
identifying specific index products in the rule. Accordingly, proposed 
Section 1 of proposed Chapter XIV of the BOX Rules states that where 
the rules in Chapter XIV indicate that particular indices or 
requirements with respect to particular indices will be ``Specified,'' 
the BSE shall file a proposed rule change with the Commission pursuant 
to Section 19 of the Act \7\ and Rule 19b-4 thereunder \8\ to specify 
such indices or requirements.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s.
    \8\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    New Chapter XIV to BOX Rules. The Exchange proposes to add a new 
Chapter XIV to the BOX Rules, as well as conforming changes to certain 
existing BOX rules. The following are the specific rule changes:
    Proposed Section 1 of Chapter XIV: This proposed rule specifies 
that Chapter XIV is applicable only to index options, and that the 
rules in Chapters I through XIII also apply to index options, unless 
they are replaced by the new rules or the context otherwise requires.
    Proposed Section 2 of Chapter XIV: This proposed rule contains the 
necessary definitions for index options trading.
    Proposed Section 3 of Chapter XIV: This proposed rule contains the 
general listing standards for broad-based index options. Under proposed 
Section 3(a) of Chapter XIV the Exchange would be able to list broad-
based index options pursuant to Rule 19b-4(e) under the Act, if each of 
the conditions set forth in proposed Section 3(b) of Chapter XIV are 
satisfied. Pursuant to proposed Section 3(b) of Chapter XIV, the 
proposed rule change would provide ongoing maintenance standards for 
broad-based index options listed pursuant to proposed Section 3(a) of 
Chapter XIV. These options would, in all other respects, be traded 
pursuant to the Exchange's trading rules and procedures applicable to 
index options.
    The Exchange notes that other options exchanges currently have 
rules that contain generic listing standards pursuant to Rule 19b-4(e) 
of the Act \9\ for broad-based index options.\10\ Other exchanges also 
have rules that contain generic listing standards for narrow-based 
indexes and micro-based index options.\11\ The Exchange states that the 
standards contained in these proposed generic listing standards for 
broad-based index options are based on the standards contained in the 
generic listing standards for narrow-based index options and micro-
based index options that were previously approved by the Commission, 
but have been modified to reflect the characteristics of broad-based 
index options. The proposed Section 3 of Chapter XIV is based on the 
broad-based index option rules of the ISE.\12\ At this time, the 
Exchange is only proposing generic listing standards for broad-based 
index options.
---------------------------------------------------------------------------

    \9\ 17 CFR 240.19b-4(e).
    \10\ The ISE, CBOE, Amex, and Phlx have broad-based index 
generic listing standard rules. See Securities Exchange Act Release 
Nos. 52578 (October 7, 2005), 70 FR 60590 (October 18, 2005) (SR-
ISE-2005-27); 52781 (November 16, 2005), 70 FR 70898 (November 23, 
2005) (SR-Amex-2005-069); 53266 (February 9, 2006), 71 FR 8321 
(February 16, 2006)(SR-CBOE-2005-59); 54158 (July 17, 2006), 70 FR 
41853 (July 24, 2006) (SR-Phlx-2006-17).
    \11\ Examples of narrow-based rules are NYSE Arca Rule 5.13 and 
ISE Rule 2002. Examples of micro-based rules are NYSE Arca Rule 5.13 
and CBOE Rules 24.2(d), 24.2(e) and 24.4B.
    \12\ See ISE Rules 2002(d) and 2002(e).
---------------------------------------------------------------------------

    In order to list broad-based index options pursuant to the generic 
Rule 19b-4(e) listing standards, the underlying index must satisfy all 
the conditions contained in proposed Section 3(b). If the underlying 
index does not satisfy all of the conditions, the Exchange would be 
required to file a proposed rule change with the Commission on Form 
19b-4 pursuant to Section 19(b)(2) of the Act and obtain Commission 
approval in order to list options on that index. Following are the 
conditions contained in proposed Section 3(b) of Chapter XIV.
    Under proposed Section 3(b) of Chapter XIV, the index must be 
broad-based as defined in Section 2 of Chapter XIV as an index designed 
to be representative of a stock market as a whole or for a range of 
companies in unrelated industries. The index must be designated as A.M. 
settled and must be either: (i) Capitalization-weighted; (ii) price-
weighted; (iii) equal-dollar weighted; or (iv) modified-capitalization 
weighted. Broad-based indexes must consist of 50 or more component

[[Page 53144]]

securities. The Exchange believes that a 50 component minimum is 
reasonable for broad-based indexes, and, when applied in conjunction 
with the other listing requirements, would result in indexes that are 
sufficiently broad-based in scope and not readily subject to 
manipulation.\13\ Component securities comprising at least 95% of the 
index by weight must have a minimum market capitalization of $75 
million. Component securities comprising at least 65% of the index by 
weight must have a minimum market capitalization of $100 million.
---------------------------------------------------------------------------

    \13\ The Exchange notes that there are currently a number of 
broad-based indexes that consist of fewer than 50 components, such 
as, the Dow Jones Industrial Average Index (30 components) and the 
Amex Major Market Index (20 components), which would require 
specific approval for listing and trading by the Commission. 
Telephone conference between Bill Meehan, General Counsel, BSE, and 
Florence Harmon, Senior Special Counsel, Division of Market 
Regulation, Commission on August 31, 2006 (``August 31 Telephone 
Conference'').
---------------------------------------------------------------------------

    Component securities comprising at least 80% of the index by weight 
must satisfy the requirements of Section 3 of Chapter IV of BOX Rules 
which sets forth the criteria for underlying securities. Accordingly, 
those securities must be ``options eligible,'' meaning they must have, 
for example, at least a $7 million share float, 2000 holders, total 
annual trading volume of 2,400,000 shares, a minimum price of $3 per 
share, and the issuer must be in compliance with its obligations under 
the Act. The Exchange believes that an 80% weighting is reasonable for 
broad-based indexes, and, when applied in conjunction with the other 
listing requirements, will result in indexes that contain components 
that are sufficiently liquid and not readily subject to manipulation. 
The Exchange notes that broad-based indexes may consist of thousands of 
components (for example, the Russell 3000 Index), and the components 
comprising the bottom 10% to 20% of the weight of the index generally 
are the smallest capitalized stocks and tend not to meet the 
requirements of Section 3 of Chapter IV of BOX Rules.\14\
---------------------------------------------------------------------------

    \14\ The Exchange further notes that the generic listing 
standards pursuant to Rule 19b-4(e) for narrow-based index options 
are less liberal, requiring a 90% weighting. August 31 Telephone 
Conference.
---------------------------------------------------------------------------

    Each component security that accounts for at least 1% of the weight 
of the index must have an average daily trading volume (``ADTV'') of at 
least 90,000 shares over the prior six-month period. The Exchange 
believes that 90,000 ADTV is reasonable for broad-based indexes, and, 
when applied in conjunction with the other listing requirements, will 
result in indexes in which the more heavily-weighted components are 
sufficiently liquid and not readily subject to manipulation.
    No single component security may account for more than 10% of the 
weight of an index, and the five highest weighted components securities 
in the index may not, in the aggregate, account for more than 33% of 
the weight for an index. The Exchange notes that the 10% and 33% 
weighting concentration caps are reasonable for broad-based indexes, 
and, when applied in conjunction with the other listing requirements, 
will result in indexes that are not unreasonably dominated by a few 
heavily-weighted components.\15\
---------------------------------------------------------------------------

    \15\ The Exchange notes that the generic listing standards for 
narrow-based index options require 30% and 50% weighting 
concentration caps. August 31 Telephone Conference.
---------------------------------------------------------------------------

    All component securities must be NMS Stocks as defined in Rule 600 
of Regulation NMS. No more than 20% of the securities in the index, by 
weight, may be comprised of foreign securities or American Depositary 
Receipts overlying foreign securities that are not subject to 
comprehensive surveillance sharing agreements. Section 3(b) of Chapter 
XIV also requires the current index value to be widely disseminated at 
least once every fifteen seconds by one or more major market data 
vendors during the time options on the index are traded on the 
Exchange.
    The Exchange must reasonably believe it has adequate system 
capacity to support the trading of options on the index. That belief 
must be based on the performance of a calculation by the Exchange that 
takes into account the Exchange's current Independent System Capacity 
Advisor (``ISCA'') allocation and the number of new peak messages per 
second expected to be generated by options on such index.
    An equal dollar-weighted index must be rebalanced at least once 
every calendar quarter.
    Broker-dealer maintained indexes must be calculated by a third 
party who is not a broker-dealer. Further, the broker-dealer must 
establish procedures including informational barriers, to ensure that 
the broker-dealer will not possess or be able to misuse any 
informational advantages with respect to changes in, and adjustments 
to, an index.
    The Exchange must also have written surveillance procedures in 
place for broad-based index options.\16\
---------------------------------------------------------------------------

    \16\ See infra Index Surveillance Letter, dated August 29, 2006.
---------------------------------------------------------------------------

    Following the listing of a broad-based index option pursuant to 
proposed Section 3(b) the underlying index must continue to satisfy the 
maintenance standards contained in proposed Section 3(c) of Chapter 
XIV, which are based on the criteria set forth in proposed Section 3(b) 
of Chapter XIV. If the underlying index fails to satisfy the 
maintenance standards, the Exchange may not open for trading any 
additional series of options on that class of index options unless the 
continued listing of that class of options has been approved by the 
Commission pursuant to Section 19(b)(2) of the Act.
    Proposed Section 4 of Chapter XIV: This proposed rule requires the 
dissemination of index values as a condition to the trading of options 
on an index.
    Proposed Sections 5 through 8 of Chapter XIV: These proposed rules 
contain the standard position limit and exercise limits for index 
options, as well as exemption standards and the procedures for 
requesting exemptions from those proposed rules. Proposed Section 5 of 
Chapter XIV sets the standard position limit for broad-based index 
options listed pursuant to Rule 19b-4(e) in proposed Section 3 of 
Chapter XIV at 25,000 contracts unless ``specified'' as defined in 
Proposed Section 1 of Chapter XIV. The Exchange has specified limits on 
the three broad-based index options it intends to trade upon Commission 
approval of these proposed rule changes. The Exchange proposes to have 
no position limits for the NDX, a 750,000 contract position for the 
MNX, and to have a 50,000 contact position limit for the RUT. Section 
7(a)(5) of this Chapter XIV specifies that the broad-based hedge 
exemption for the MNX index options is 1,500,000 contracts and for all 
other broad-based index options 75,000 in addition to the standard 
limit.
    Proposed Section 9 of Chapter XIV: This proposed rule provides that 
index options will trade until 4:15 p.m. Eastern Time, the same as on 
other exchanges. The proposed rule also contains procedures for 
openings, as well as trading halts and suspensions.
    Proposed Sections 10 and 11 of Chapter XIV: Proposed Section 10 
outlines the terms of index options contracts, while proposed Section 
11 applies to debit put spreads. Proposed Section 10 incorporates a 
rule change proposed by the ISE that was effective upon filing.\17\ In 
the proposal, ISE clarified that the ``reporting authority'' (or index 
calculator) for any securities index on which options are traded on the 
ISE may determine to use the reported sales prices for one or more

[[Page 53145]]

underlying securities from a market that may not necessarily be the 
primary market for that security in calculating the appropriate index 
value. Proposed Section 10 also states that the NDX, MNX and RUT, and 
LEAPS on those index options will be A.M. settled and European Style 
exercised with strike prices intervals of no less than $2.50 if the 
strike price is less than $200.
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release No. 51176 (February 9, 
2005), 70 FR 7985 (February 16, 2005) (SR-ISE-2005-03).
---------------------------------------------------------------------------

    Proposed Section 12 of Chapter XIV: This proposed rule disclaims 
liability for index reporting authorities.
    Proposed Section 13 of Chapter XIV: This proposed rule contains 
standards for exercising American-style index options.
    Amendments to Current Rules:
    Amendment to Section 8 of Chapter III: This proposed amendment adds 
broad-based index options to the market maker exemption from position 
limits.
    Amendments to Section 12 of Chapter III and Section 1 of Chapter 
VII: In conjunction with proposed Section 13 of Chapter XIV, these 
proposed rules will govern the exercise of American-style, cash settled 
index options.
    Amendment to Section 6 of Chapter IV: This Section currently 
provides that at the commencement of trading on BOX of a particular 
class of options, BOXR usually will open three (3) series of options 
for each expiration month in that class in the case of individual 
equity options, or four (4) series of options for each expiration month 
in that class in the case of index options. The proposal would amend 
this section to replace BOXR with BOX because BOX, as the options 
trading facility, is the entity responsible for opening all series of 
options. In order to conform this Section to the corresponding rule of 
other options exchanges, the proposal would also amend this section to 
eliminate the separate reference to index options. However, the 
Exchange also proposes to clarify this section to reflect actual market 
practice by specifying that at the commencement of trading on BOX of a 
particular class of options, BOX usually will open a ``minimum'' of 
three (3) series of options for each expiration month in that class.
    Amendment to Section 26 of Chapter V: In conjunction with proposed 
Section 12 of Chapter XIV, this proposed rule would limit liability 
regarding the dissemination of index information.
    Amendment to Section 5 of Chapter VI: This proposed amendment 
discusses bid/ask differentials for indices.
    Amendment to Section 4 of Chapter XII: In conjunction with proposed 
Section 7 of Chapter XIV (specifically subsection (a)(14) of Section 7 
of Chapter XIV), this proposed rule would permit BOXR to impose 
additional margin upon an account if it determines that additional 
margin is warranted in light of the risk associated with an under-
hedged options position in certain broad-based indices.
    NDX, MNX and RUT Index Options. The Exchange proposes to amend its 
rules to provide for the listing and trading of NDX and MNX (one tenth 
value of the NDX) \18\ including long term index options based upon the 
full value of the Nasdaq 100 Index (``NDX Leaps'') and one tenth value 
(``MNX Leaps''). These indexes are cash settled, European style options 
based on the full and one tenth value of the Nasdaq 100, a stock index 
calculated and maintained by the Nasdaq Stock Market, Inc. 
(``Nasdaq'').\19\
---------------------------------------------------------------------------

    \18\ MNX and NDX index options are currently listed and trading 
on the Amex, the CBOE, and the ISE. See Securities Exchange Act 
Release Nos. 51884 (June 20, 2005), 70 FR 36973 (June 27, 2005) (SR-
Amex-2005-038); 33166 (November 8, 1993), 58 FR 60710 (November 17, 
1993) (SR-CBOE-93-42); and 51121 (February 1, 2005), 70 FR 6476 
(February 7, 2005) (SR-ISE-2005-01).
    \19\ A description of the Nasdaq 100 Index is available on 
Nasdaq's Web site at http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm
.

---------------------------------------------------------------------------

    The Nasdaq 100 includes 100 of the largest domestic and 
international non-financial securities listed on Nasdaq, based on 
market capitalization. The Nasdaq 100 reflects companies across major 
industry groups including computer hardware and software, 
telecommunications, retail/wholesale trade and biotechnology. The 
Nasdaq 100 is calculated using a modified capitalization-weighted 
methodology. To be eligible for initial inclusion in the Nasdaq 100, a 
security must be listed on Nasdaq's Global or Global Select markets, 
unless it was dually-listed on another exchange prior to January 1, 
2004 and has maintained such listing. The security must have an ADTV of 
at least 200,000 shares, and the issuer must not currently be in 
bankruptcy proceedings. If a component security is of a foreign issuer, 
based on its country of incorporation, it must have listed options or 
be eligible for listed options trading. In addition, the issuer of a 
component security must not have entered into any definitive agreement 
or other arrangement that would result in the security no longer being 
eligible for inclusion in the index within the next six months. In 
addition, the issuer of a component security must not have annual 
financial statements with an audit opinion, where the auditor or the 
issuer indicated that the audit opinion cannot be currently relied 
upon.
    As of July 31, 2006, the following were characteristics of the 
Nasdaq 100:
     Total capitalization of all components of the Index was 
approximately $2.4 trillion;
     Component capitalization: (a) The highest capitalization 
of a component was $158.4 billion; (b) the lowest capitalization of a 
component was $4.5 billion; (c) the mean capitalization was $24.1 
billion; and (d) the median capitalization of the components was $14.5 
billion.
     Component price per share: (a) The highest price per share 
of a component was $386.60; (b) the lowest price per share of a 
component was $2.13; (c) the mean price per share of the components was 
$39.98; and (d) the median price per share of the components was 
$32.31.
     Component weightings: (a) The highest weighting of a 
component was 6.57%; (b) the lowest weighting of a component was .19%; 
(c) the mean weighting of the components was 1.00%; and (d) the median 
weighting of a component was .605%.
    Since the full value NDX options trade at a level that may be 
uncomfortably high for retail investors, the Exchange believes that 
listing index options on a reduced one-tenth value of the full value of 
the NDX, such as the MNX, attracts a greater source of customer 
business and provides an opportunity for investors to hedge or 
speculate on the market risk associated with the component stocks with 
a smaller outlay of capital, thereby creating a more active and liquid 
trading environment.
    The Nasdaq maintains and monitors the Nasdaq 100 and is responsible 
for any adjustments, component deletions and component additions. The 
NDX component securities are evaluated on an annual basis. The NDX and 
MNX are calculated continuously, using the last sale price for each 
component stock in the Index, and are disseminated every 15 seconds 
throughout the trading day.
    The Exchange is also amending its rules to provide for the listing 
of index options on the Russell 2000 Index (``RUT'') \20\ and long-term 
index options on the Russell 2000 Index (``RUT LEAPS'').\21\ The 
Russell 2000 is constructed to provide a comprehensive and unbiased 
small-cap barometer and is completely reconstituted annually to ensure 
larger stocks do not distort the performance and characteristics of the 
true small-cap opportunity set. The

[[Page 53146]]

Russell 2000 includes the smallest of the Russell 3000 stocks 
representing approximately 8% of the investable U.S. equity market. 
Component stocks must be trading at or above $1.00 on May 31st of every 
year to be eligible for inclusion.
---------------------------------------------------------------------------

    \20\ For more detailed description of the Russell 2000 Index, 
see http://russell.com/indexes.

    \21\ Options on the Russell 2000 Index trade on the CBOE and 
ISE. See Securities Exchange Act Release Nos. 51619 (April 27, 
2005), 70 FR 22947 (May 3, 2005) (SR-ISE-2005-09) and 31382 (October 
30, 1992), 57 FR 52802 (November 5, 1992) (SR-CBOE-92-02).
---------------------------------------------------------------------------

    The Russell 2000 is capitalization-weighted and includes only 
common stocks belonging to corporations domiciled in the United States 
that are traded on the NYSE, AMEX or Nasdaq exchanges. Stocks are 
weighted by their available market capitalization, which is calculated 
by multiplying the primary market price by the available shares. As of 
June 30, 2006, the average market capitalization was $1.07 billion, the 
median market capitalization was $604 million, the largest company by 
market capitalization had a $2.335 billion market capitalization, and 
the smallest company had a market capitalization of $83 million.
    The Russell 2000 is monitored and maintained by the Frank Russell 
Company. The Frank Russell Company is responsible for making any 
adjustments, component deletions and component additions. The value of 
the Russell 2000 is calculated by Reuters on behalf of the Frank 
Russell Company and is disseminated every 15 seconds throughout the 
trading day.
    The Exchange believes the NDX, NDX LEAPS, MNX, MNX LEAPS, RUT, and 
RUT LEAPS are not readily subject to manipulation because of the broad-
based characteristics of the underlying indexes, including the 
component security criteria, index weighting methodologies, 
maintenance, evaluation, calculation and dissemination. The trading of 
NDX, NDX LEAPS, MNX, MNX LEAPS, RUT, and RUT LEAPS would be subject to 
the same rules proposed in Chapter XIV that would govern the trading of 
all index options.
    The Exchange represents that it will not list any options on 
indices without first determining that BOX has sufficient capacity to 
accommodate the anticipated order flow. The Exchange will also not 
commence the trading of any options on indices without having the 
appropriate surveillance procedures for such index options trading in 
operation as set forth to the Commission in the Exchange's Index 
Surveillance Letter dated August 29, 2006 submitted confidentially 
under a FOIA request (``Index Surveillance Letter''). Pursuant to the 
Index Surveillance Letter the Exchange will incorporate new index 
option products into the Exchange's surveillance reports and procedures 
prior to trading these products.
2. Statutory Basis
    BSE believes that the proposed rule change, as amended, is 
consistent with the requirements of Section 6(b) of the Act,\22\ in 
general, and Section 6(b)(5) of the Act,\23\ in particular, in that it 
is designed to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transaction in securities, to remove impediments 
to and perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78(f)(b).
    \23\ 15 U.S.C. 78(f)(b)(5).
---------------------------------------------------------------------------

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

    BSE 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 Act.

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

    No written comments were solicited or received with respect to the 
proposed rule change, as amended.

III. 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 Number SR-BSE-2005-11 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-BSE-2005-11. 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 offices 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-BSE-2005-11 and should be submitted on or before 
September 29, 2006.

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

    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.\24\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\25\ 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 
for a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \24\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    To list options on a particular broad-based index, BSE 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 
security 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

[[Page 53147]]

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 BSE proposes to establish 
listing standards for broad-based index options. The Commission's 
approval of the BSE'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.\26\ The 
Exchange's ability to rely on Rule 19b-4(e) to list broad-based index 
options that meet the requirements of proposed Section 3 of Chapter XIV 
of BOX Rules 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.
---------------------------------------------------------------------------

    \26\ 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), 65 FR 70952 
(December 22, 1998) (File No. S7-13-98).
---------------------------------------------------------------------------

    With regard to the NDX, MDX, and RUT index options and LEAPs, the 
Commission finds the current characteristics of these indexes are such 
that the indexes that contain components that are sufficiently liquid 
and not readily subject to manipulation; and thus, the Exchange's 
trading rules and surveillance procedures for these products address 
the current characteristics of these products.
    The Commission notes that the Exchange has represented that it has 
adequate trading rules, procedures, listing standards and a 
surveillance program for broad-based index options, including the NDX, 
MDX, and RUT. BSE's existing index option trading rules and procedures 
will apply to broad-based index options listed pursuant to proposed 
Chapter XIV. Other existing BOX rules, including provisions addressing 
sales practices and margin requirements, also will apply to these 
options. In addition, BSE 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 Section 5 of Chapter XIV.\27\ 
The Commission believes that the proposed position and exercise limits 
should serve to minimize potential manipulation concerns.
---------------------------------------------------------------------------

    \27\ Under Section 10 of Chapter XIV of BOX Rules, the exercise 
limits for index options are equivalent to the position limits 
prescribed for option contracts with the nearest expiration in 
Section 5 or Section 6 of BOX Rules. Also, the position and exercise 
limits for the NDX, MDX, and RUT options and LEAPs are consistent 
with those rules approved by the Commission for other options 
exchanges.
---------------------------------------------------------------------------

    The BSE represents that its surveillance procedures are adequate to 
properly monitor the trading of 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 
Section 3 of Chapter XIV of BOX Rules. In addition, because Section 
3(b)(9) of Chapter XIV 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 BSE will have access to 
information concerned trading activity in the component securities of 
an underlying index through the Intermarket Surveillance Group 
(``ISG'').\28\ Section 3(b)(10) of Chapter XIV of BOX Rules also 
provides that non-U.S. index components that are not subject to a 
comprehensive surveillance sharing agreement between the BSE and the 
primary market(s) trading the index components may comprise no more 
than 20% of the weight of the index.\29\ The Commission believes that 
these requirements will help to ensure that the BSE has the ability to 
monitor trading in broad-based index options listed pursuant to Section 
3 of Chapter XIV of BOX Rules and in the component securities of the 
underlying indexes.
---------------------------------------------------------------------------

    \28\ 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.
    \29\ 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.
---------------------------------------------------------------------------

    The Commission believes that the requirements Section 3 of Chapter 
XIV of BOX Rules 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, Section 3 of Chapter XIV of BOX Rules requires that the 
underlying index be ``broad-based,'' as defined in Section 2 of Chapter 
XIV of BOX Rules.\30\ The Commission believes that these requirements 
minimize the potential for manipulating the underlying index.
---------------------------------------------------------------------------

    \30\ Section 2(j) of Chapter XIV of BOX Rules 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.''
---------------------------------------------------------------------------

    The Commission believes that the requirement in Section 3(b)(11) of 
Chapter XIV of BOX Rules 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 BOX should provide 
transparency with respect to current index values and contribute to the 
transparency of the market for broad-based index options. In addition, 
the Commission believes, as it has noted in other contexts, that the 
requirement in Section 10 of Chapter XIV of BOX Rules 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.\31\
---------------------------------------------------------------------------

    \31\ See, e.g., Securities Exchange Act Release No. 30944 (July 
21, 1992), 57 FR 33376 (July 28, 1992) (order approving CBOE 
proposal to establish open price settlement for S&P 500 Index 
options).
---------------------------------------------------------------------------

    The proposed rule change will permit the Exchange and its members 
to trade options on indices on BOX and should allow BOX to remain 
competitive with the other options exchanges that already list and 
trade options on indices. The proposed rule change should also benefit 
investors by increasing competition among markets that trade options on 
indices.
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of filing in the Federal Register. The Exchange has 
requested accelerated approval of the proposed rule change. The 
proposal implements listing and maintenance standards and position and 
exercise limits for broad-based index options substantially identical 
to those recently approved for the ISE, the Amex and CBOE.\32\ The 
Commission does not

[[Page 53148]]

believe that the Exchange's proposal raises any novel regulatory 
issues. Therefore, the Commission finds good cause, consistent with 
Section 19(b)(2) of the Act,\33\ to approve the proposed rule change, 
as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \32\ See Securities Exchange Act Release Nos. 52578 (October 7, 
2005), 70 FR 60590 (October 18, 2005) (SR-ISE-2005-27); 52781 
(November 16, 2005), 70 FR 70898 (November 23, 2005) (SR-Amex-2005-
069); and 53266 (February 9, 2006), 71 FR 8321 (February 16, 2006) 
(SR-CBOE-2005-59).
    \33\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    BSE also proposes to amend its rules to provide for the listing of 
the NDX and MNX (one tenth value of the NDX), including long term index 
options based upon the full value of the Nasdaq 100 Index (``NDX 
Leaps'') and one-tenth value (``MNX Leaps''). These indexes are cash 
settled, European style options based on the full and one-tenth value 
of the Nasdaq 100, a stock calculated and maintained by the Nasdaq 
stock market. The BSE is also amending its rules to provide for the 
listing of the RUT and RUT LEAPS.
    The Commission notes that it previously approved the listing and 
trading of options on the NDX and MNX on other exchanges.\34\ The 
Commission also notes that it has previously approved the listing and 
trading of the RUT on other exchanges.\35\ The Commission is presently 
not aware of any regulatory issues that should cause it to revisit that 
earlier finding or preclude the trading of such options on the BSE.
---------------------------------------------------------------------------

    \34\ Options on the MNX and NDX are currently listed and trading 
on the Amex, the CBOE and the ISE. See Securities Exchange Act 
Release Nos. 51884 (June 20, 2005), 70 FR 36973 (June 27, 2005) (SR-
Amex-2005-038); 33166 (November 8, 1993), 58 FR 60710 (November 17, 
1993) (SR-CBOE-93-42); and 51121 (February 1, 2005), 70 FR 6476 
(February 7, 2005) (SR-ISE-2005-01).
    \35\ See Securities Exchange Act Release Nos. 51619 (April 27, 
2005), 70 FR 22947 (May 3, 2005) (SR-ISE-2005-09) and 31382 (October 
30, 1992), 57 FR 52802 (November 5, 1992) (SR-CBOE-92-02).
---------------------------------------------------------------------------

    In approving the proposal, the Commission has specifically relied 
on the following representations made by the BSE:
    1. The BSE will notify the Commission's Division of Market 
Regulation immediately if Nasdaq ceases to maintain or calculate the 
Nasdaq 100 Index (or one-tenth Nasdaq 100 value), or if these Nasdaq 
100 Index values are not disseminated every 15 seconds by a widely 
available source during the time the index options trade on BOX. The 
BSE will notify the Commission's Division of Market Regulation 
immediately if the Frank Russell Company ceases to maintain or 
calculate the Russell 2000 Index, or if the Russell 2000 Index value is 
not disseminated every 15 seconds by a widely available source during 
the time the index options trade on BOX. If such Indexes cease to be 
maintained or calculated, or if the Index values are not disseminated 
every 15 seconds by a widely available source, the BSE will not list 
any additional series for trading and will limit all transactions in 
such option to closing transactions for the purpose of maintaining a 
fair and orderly market and protecting investors.
    2. The BSE has an adequate surveillance program in place for index 
options traded on the Nasdaq 100 Index and the Russell 2000 Index.
    3. The additional quote and message traffic that will be generated 
by listing and trading the NDX, MNX, NDX LEAPS, MNX LEAPS, the RUT and 
the RUT LEAPS will not exceed the BSE's current message capacity 
allocated by the Independent System Capacity Advisor.
    The Commission further notes that in approving this proposal, it 
relied on the BSE's discussion of how Nasdaq and the Frank Russell 
Company currently calculates the respective indexes. If the manner in 
which Nasdaq or the Frank Russell Company calculates the indexes were 
to change substantially, the approval might no longer be consistent 
with the Act and might no longer be effective.
    With respect to the NDX, the MNX, and the RUT, the Commission 
believes that the position limits for these index options and the hedge 
exemption for such position limits are reasonable and consistent with 
the Act. The Commission previously has found identical provisions for 
NDX and MNX options to be consistent with the Act.\36\
---------------------------------------------------------------------------

    \36\ See e.g., Securities Exchange Act Release No. 44156 (April 
6, 2001), 66 FR 19261 (April 13, 2001) (SR-CBOE-00-14) (order 
approving a proposed rule change by CBOE to increase position limits 
and exercise limits for Nasdaq 100 Index options, expand the Index 
hedge exemption, and eliminate the near-term position limits).
---------------------------------------------------------------------------

    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of the notice thereof in the 
Federal Register. Because options on the NDX, MNX, and the RUT already 
trade on other exchanges, accelerating approval of the BSE's proposal 
should benefit investors by creating, without due delay, additional 
competition in the market for these options.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-BSE-2005-11), as amended, is 
approved on an accelerated basis.
---------------------------------------------------------------------------

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

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-14878 Filed 9-7-06; 8:45 am]

BILLING CODE 8010-01-P
