

[Federal Register: March 1, 2007 (Volume 72, Number 40)]
[Notices]               
[Page 9364-9369]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01mr07-116]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55336; File No. SR-ISE-2006-59]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change and Amendment No. 1 
Thereto Relating to Foreign Currency Options

February 23, 2007.
    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 September 29, 2006, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') 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 substantially 
prepared by the ISE. On February 23, 2007, the Exchange filed Amendment 
No. 1 to the proposed rule change.\3\ 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\ In Amendment No. 1, the Exchange: (1) Reduced the number of 
currencies on which the Exchange proposes to list and trade cash-
settled FCOs; (2) amended the position limit amounts for the 
currencies that are proposed in this Amendment No.1; (3) removed the 
listing and trading of foreign currency options that expire in 
weekly intervals from the proposed rule text; (4) made certain non-
substantive changes to the proposed rule text; and (5) adopted a 
margin rule similar to Commentary .16 of the Philadelphia Stock 
Exchange's Rule 722. Amendment No. 1 replaced and superseded the 
original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE is proposing to adopt rules for the listing and trading of 
cash-settled foreign currency options (``FCOs'') on the following 
currencies: the euro, the British pound, the Australian dollar, the New 
Zealand dollar, the Japanese yen, the Canadian dollar, the Swiss franc, 
the Chinese renminbi, the Mexican peso, the Swedish krona, the Russian 
ruble, the South African rand, the Brazilian real, the Israeli shekel, 
the Norwegian krone, the Polish zloty, the Hungarian forint, the Czech 
koruna, and the Korean won (individually, a ``Currency'' and 
collectively, the ``Currencies''). The text of the proposed rule change 
is available on the Exchange's Web site (http://www.iseoptions.com), at 

the Exchange, and at the Commission's Public Reference Room.

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 ISE 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 ISE 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 adopt rules enabling 
the Exchange to list and trade FCOs. The Exchange proposes to adopt 
rules for the listing and trading of cash-settled FCOs on the following 
currencies: the euro, the British pound, the Australian dollar, the New 
Zealand dollar, the Japanese yen, the Canadian dollar, the Swiss franc, 
the Chinese renminbi, the Mexican peso, the Swedish krona, the Russian 
ruble, the South African rand, the Brazilian real, the Israeli shekel, 
the Norwegian krone, the Polish zloty, the Hungarian forint, the Czech 
koruna and the Korean won.\4\ FCOs would, in all other respects, be 
traded pursuant to the Exchange's trading rules and procedures and be 
covered under the Exchange's existing surveillance program. The 
Exchange notes that the Philadelphia Stock Exchange (``PHLX'') 
currently has rules that permit the listing and trading of both 
physically-settled FCOs \5\ and

[[Page 9365]]

U.S. Dollar-settled FCOs on a number of foreign currencies.\6\ FCOs 
listed and traded by the Exchange pursuant to this proposed rule change 
will not be fungible with those listed and traded by PHLX.
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    \4\ The Exchange is proposing to trade cash-settled FCOs only on 
those currencies whose futures contracts, and options on such 
futures contracts, are currently traded on the Chicago Mercantile 
Exchange (``CME'').
    \5\ Unlike cash-settled FCOs, a physically-settled FCO gives its 
owner the right to receive physical delivery (if it is a call) or to 
make physical delivery (if it is a put), of the underlying foreign 
currency when the option is exercised.
    \6\ See Securities Exchange Act Release No. 54989 (December 21, 
2006), 71 FR 78506 (December 29, 2006) (SR-PHLX-2006-34). See also 
PHLX Rules 1000-1093.
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    The Exchange proposes to list and trade cash-settled FCOs using the 
Reuters Composite Currency Rate,\7\ an industry benchmark, and modify 
that rate to create an underlying value that represents the prevailing 
rate of a currency pair in an index-like format. ISE proposes to use 
modifiers of 1, 10, or 100 depending on the exchange rate level of the 
underlying foreign currency.\8\ For example, if one U.S. Dollar buys 
.84177 euros, a modifier of 100 would be used so that the modified 
exchange rate would become 84.18. Modified exchange rates are rounded 
to two decimal places (i.e., to the nearest one one-hundredth). 
Modified exchange rates are rounded up if they end in values greater 
than or equal to five one-thousandths, and rounded down if less than 
five one-thousandths. In the example above, if one U.S. Dollar buys 
.84174 euros, the modified exchange rate, using the same 100 modifier, 
would become 84.17. The Reuters data is based on an amalgamation of 
midpoint dealer quotes on its foreign exchange dealing system.
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    \7\ The Exchange notes that there are many major trading 
platforms for spot market currencies including single bank portals 
(Deutsche Bank, Citigroup, UBS, Barclays, etc.), multi-bank portals 
(FXall, Currenex, FXConnect, etc.), broker-neutral portals (Reuters 
Dealing and EBS), portal aggregators (Bloomberg, LavaFX, FlexTrade), 
as well as many online broker portals. Additionally, several major 
ISE members, including OptionsXpress and Interactive Brokers, 
provide access to CME futures products. ISE therefore believes that 
sufficient market access is available to both institutional as well 
as retail investors. Foreign exchange prices are also widely 
available via public websites, broker websites, as well as in print 
publications. Additionally, websites such as Bloomberg.com, 
Reuters.com, Yahoo! Finance, CNBC.com, OANDA.com, Nasdaq.com, and 
many others provide free currency data. Investors Business Daily, 
Wall Street Journal, and the New York Times also provide currency 
data as part of their daily coverage. Furthermore, ISE will 
disseminate real-time underlying data on OPRA for all the currency 
rates it intends to list options on.
    \8\ See Exhibit 3 to the proposed rule change (listing the 
modifiers for each Currency pair). Modifiers used for creating 
underlying values will also be posted on the Exchange's website no 
later than the first day on which FCOs begin trading on ISE. Once a 
modifier has been assigned to a currency pair, it can only be 
changed upon a filing of a proposed rule change with the Commission.
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    Under the proposed rule change, FCOs listed by the Exchange will be 
cleared by The Options Clearing Corporation (``OCC''), and will enable 
holders of options contracts to receive U.S. Dollars representing the 
difference between the modified exchange rate \9\ and the exercise 
price of the option. Specifically, upon exercise of an in-the-money 
cash-settled FCO call option, the holder will receive, from OCC, U.S. 
Dollars representing the difference between the exercise strike price 
and the closing settlement value of the cash-settled FCO contract 
multiplied by 100. Upon exercise of an in-the-money cash-settled FCO 
put option, the holder will receive, from OCC, U.S. Dollars 
representing the excess of the exercise price over the closing 
settlement value of the cash-settled FCO contract multiplied by 100. 
Additionally, cash-settled FCOs that are in-the-money by any amount on 
expiration date will be exercised automatically by OCC, while cash-
settled FCOs that are out-of-the-money on expiration date will expire 
worthless.
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    \9\ A ``modified exchange rate'' is defined in proposed ISE Rule 
2201(8).
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    The Exchange hereby proposes to adopt new rules and amend certain 
existing rules in order to list and trade FCOs. The Exchange has also 
attached an exhibit to this proposed rule change that illustrates the 
contract specifications applicable to FCOs. The Exchange's proposed ISE 
Rule 2201, Definitions, defines terms applicable to FCOs. Proposed ISE 
Rule 2202, Criteria for Foreign Currency Options, states that the 
Currencies may be approved for trading on the Exchange. Proposed ISE 
Rule 2202 also states that if any of the sovereign governments or the 
European Economic Community's European Monetary System issuing one of 
the Currencies replaces it with a new currency, that new currency, 
subject to filing a proposed rule change with the Commission, shall 
also be approved for listing and trading under these proposed rules.
    Proposed ISE Rule 2203, Foreign Currency Options Contracts To Be 
Traded, states that the Exchange may open for trading put options and 
call options on the Currencies and that only options contracts of a 
series of options approved by the Exchange and currently open for 
trading may be traded on the Exchange. Proposed ISE Rule 2204, 
Withdrawal of Approval of Foreign Currency Options, states that, in the 
interest of a fair and orderly market and for the protection of 
investors, the Exchange may withdraw approval of the trading of a 
foreign currency option. For example, in the case of the European 
Economic Community's European Monetary System, the Exchange will 
withdraw approval of the trading of a foreign currency option if such 
currency is eligible to and does in fact merge with the euro.
    Proposed ISE Rule 2205, Series of Foreign Currency Options Opened 
for Trading, states that after a class of options contracts on any of 
the Currencies has been approved for listing and trading, the Exchange 
may open for trading series of FCOs that expire in consecutive monthly 
intervals, in three or ``cycle'' month intervals, or that have up to 36 
months to expiration.\10\ Under this proposed rule change, the Exchange 
may list cash-settled FCOs with expirations that are the same as the 
expirations permitted for index options pursuant to ISE Rules 2000 and 
2001, except that cash-settled FCOs shall have expirations up to 36 
months only. Though no long-term series will be listed initially, this 
proposal would allow the Exchange to list long-term series, i.e., up to 
36 months. The expiration date for the consecutive and cycle month 
options will be 11:59 p.m. Eastern time on the Saturday immediately 
following the third Friday of the expiration month. Under Proposed ISE 
Rule 2205, as the modified exchange rate moves, the Exchange may list 
additional series of FCOs in order to maintain sufficient numbers of 
in-the-money and out-of-the-money series. Further, the strike price of 
each series of FCOs opened for trading by the Exchange shall be 
reasonably close to the modified exchange rate.
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    \10\ The Exchange notes that consecutive month and cycle month 
expirations of a given series will never overlap.
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    Proposed ISE Rule 2206, Terms of Foreign Currency Options 
Contracts, states that, among other things, all FCOs shall be quoted in 
U.S. Dollars, shall be European-style, and that the interval between 
strike prices of series of FCOs shall be no less than $0.10. 
Additionally, under the Exchange's current rules, the minimum trading 
increment for a FCO contract trading at less than $3.00 will be $0.05, 
and for a FCO contract trading at $3.00 or higher, the minimum trading 
increment will be $0.10.
    Proposed ISE Rule 2207, Dissemination of Information, states that 
the Exchange shall ensure that the current modified exchange rate is 
disseminated at least once every fifteen seconds by the Options Price 
Reporting Authority (``OPRA'') or one or more major market data vendors 
during the time FCOs are traded on the Exchange. The Exchange will also 
disseminate FCO quotes and trades over OPRA.

[[Page 9366]]

    Proposed ISE Rule 2208, Position Limits for Foreign Currency 
Options, sets the position limit for FCOs, on the same side of the 
market, as follows: 1,200,000 contracts for the euro; 600,000 contracts 
for the Australian dollar, the British pound, the Canadian dollar, the 
Israeli shekel, the Japanese yen, the Swedish krona and the Swiss 
franc; 300,000 contracts for the Brazilian real, the Chinese renminbi, 
the Czech koruna, the Hungarian forint, the Korean won, the Mexican 
peso, the New Zealand dollar, the Norwegian krone, the Polish zloty, 
the Russian ruble and the South African rand. For the purpose of 
determining which positions are on the same side of the market, under 
Proposed ISE Rule 2208, long call positions are to be aggregated with 
short put positions and short call positions are to be aggregated with 
long put positions.
    Proposed ISE Rule 2209, Exercise Limits for Foreign Currency 
Options, generally states that exercise limits for FCOs shall be 
equivalent to the position limits prescribed to that FCO. Thus, the 
exercise limit for FCOs over any five consecutive business days shall 
be as follows: 1,200,000 contracts for the euro; 600,000 contracts for 
the Australian dollar, the British pound, the Canadian dollar, the 
Israeli shekel, the Japanese yen, the Swedish krona and the Swiss 
franc; 300,000 contracts for the Brazilian real, the Chinese renminbi, 
the Czech koruna, the Hungarian forint, the Korean won, the Mexican 
peso, the New Zealand dollar, the Norwegian krone, the Polish zloty, 
the Russian ruble and the South African rand. Under Proposed ISE Rule 
2209, the Exchange may from time to time, subject to Commission 
approval, establish exercise limits that are different from the 
position limits established for FCOs on a Currency or across all 
Currencies.
    Proposed ISE Rule 2210, Trading Sessions, provides that 
transactions in FCOs may be effected on the Exchange between the hours 
of 9:30 a.m. and 4:15 p.m. Eastern Time, except that on the last 
trading day of the week during which a FCO is set to expire, trading 
shall cease at 12 p.m. Eastern Time. Trading in cash-settled FCOs will 
follow the holiday schedule of the U.S. equity markets. If Friday is an 
Exchange holiday, the settlement value for cash-settled FCOs will be 
determined on the preceding trading day, which will also be the last 
trading day for the expiring option. The Exchange's Proposed Rules 
2210(b) and (c) make certain adjustments to current processes because 
FCO openings, unlike openings of equity and index options, do not 
depend on the opening of trading of the underlying market, because the 
currency market does not have specified trading hours. Accordingly, the 
opening rotation for FCOs shall be held at or as soon as practicable 
after the Exchange's market opens, unless an Exchange official 
determines to delay the opening rotation in the interest of maintaining 
a fair and orderly market. Proposed ISE Rule 2210 lists some of the 
factors an Exchange official may consider in delaying the opening 
rotation. Additionally, in the interest of a fair and orderly market, 
an Exchange official may, under certain circumstances, halt or suspend 
trading in a FCO until such time that the circumstances that led to the 
halt or suspension no longer exist.
    Proposed ISE Rule 2211, Reporting of Foreign Currency Options 
Position, requires each Member of the Exchange to file a report with 
respect to all accounts that have an aggregate position of 12,500 or 
more FCO contracts on the same side of the market in any underlying 
foreign currency. Under this proposed rule, Members shall be required 
to file all such reports within one business day following the day that 
the reportable transactions occur.
    Proposed ISE Rule 2212, Foreign Currency Options Closing Settlement 
Value, states that the closing settlement value, which shall be posted 
by the Exchange on its Web site, shall be the Noon Buying Rate, as 
determined by the Federal Reserve Bank of New York, on the last trading 
day during expiration week.\11\ If the Noon Buying Rate is not 
announced by 2 p.m. Eastern Time, the closing settlement value will be 
the most recently announced Noon Buying Rate, unless the Exchange 
determines to apply an alternative closing settlement value as a result 
of extraordinary circumstances.\12\
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    \11\ The closing settlement value, whether based on the Noon 
Buying Rate or the WM/Reuters Closing Spot rate, will also be 
modified using the applicable modifier, i.e., 1, 10 or 100, that is 
used in calculating the respective modified exchange rate.
    \12\ The Exchange may use the WM/Reuters Closing Spot rate if 
the Noon Buying Rate is not available. The Exchange notes that the 
Commission has recently approved listing standards for securities 
issued by a trust that represent investors' discrete identifiable 
and undivided beneficial ownership interests in non-U.S. currency 
deposited into a trust that utilizes the Noon Buying Rate for the 
calculation of the Net Asset Value of the trust. See Securities 
Exchange Act Release No. 52843 (November 28, 2005), 70 FR 72486 
(December 5, 2005) (order granting accelerated approval of SR-NYSE-
2005-65).
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    In the event the Noon Buying Rate is not published for an 
underlying currency, the Exchange proposes to apply the WM/Reuters 
Closing Spot rate to determine the closing settlement value of any 
underlying currency.\13\ The WM/Reuters Closing Spot rate is determined 
at 16:00 UK time, also known as the `fix' time (1 p.m., New York time). 
WM/Reuters typically publishes its closing rates 15 minutes after the 
fix time. The Reuters System is the primary source of spot foreign 
exchange rates used in the calculation of the WM/Reuters Closing Spot 
rate. WM/Reuters, however, may use alternative sources such as a 
country's Central Bank or rates from EBS, which is another major FX 
venue and market data service provider for 156 currencies, including 
all of the currencies underlying the products proposed by ISE under 
this filing.
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    \13\ The Federal Reserve Bank of New York currently does not 
publish a Noon Buying Rate for the Czech koruna, the Hungarian 
forint, the Israeli shekel, the Korean won, the Polish zloty and the 
Russian ruble. As a result, the Exchange proposes to use the WM/
Reuters Closing Spot rate for these 6 currencies to determine their 
closing settlement value. In the event the Federal Reserve Bank of 
New York determines to publish a Noon Buying Rate for any of these 6 
currencies in the future, the Exchange shall resort to the Noon 
Buying Rate in place of the WM/Reuters Composite Spot rate to 
determine the closing settlement value for the applicable FCO.
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    WM/Reuters has two main methods for calculating its Closing Spot 
rate. The methodology used depends on whether a currency is determined 
by WM/Reuters to be a ``trade currency'' or a ``non-trade currency.'' 
\14\ WM/Reuters applies a unique methodology for each category. Closing 
Spot rates for ``non-trade currencies'' are determined primarily by 
using data from Reuters. This methodology involves taking snapshots of 
quoted bids and offers for each currency at 15-second intervals over a 
two minute period. The median is then calculated independently for each 
currency's bid and offer. The midpoint of that median bid and offer 
becomes the final value.
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    \14\ The Australian dollar, British pound, Canadian dollar, 
Czech koruna, Danish krone, euro, Japanese yen, New Zealand dollar, 
Norwegian krone, Singapore dollar, South African rand, Swedish 
krona, and Swiss franc are all considered by WM/Reuters to be 
``trade currencies,'' while all others are considered ``non-trade 
currencies.'' The instant filing proposes to trade FCOs on all the 
``trade currencies'' except the Danish krone and the Singapore 
dollar.
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    Closing Spot rates for ``trade currencies'' are determined 
primarily by using data from both Reuters and EBS. This methodology 
involves taking snapshots of actual traded rates every second for a 
period of 30 seconds before the fix to 30 seconds after the fix. Trades 
are identified as a bid or offer and a spread is applied to calculate 
the opposite bid or offer. The spread applied is determined by the 
spread between buy and sell orders captured at the same time. The 
median is then independently calculated for each currency's bid and 
offer, resulting in a

[[Page 9367]]

midpoint trade rate. The midpoint of that median bid and offer becomes 
the final value.
    Proposed ISE Rule 2212 additionally disclaims the Exchange's (and 
that of any agent of the Exchange's) liability and that of the 
Reporting Authority due to force majeure.
    Proposed ISE Rule 2213, Market Maker Trading Licenses, creates two 
new classes of market makers on the Exchange, FXPMMs and FXCMMs, who 
shall have similar obligations as the PMMs and CMMs of the Exchange's 
equity and index markets. These new memberships will entitle firms to 
quote and trade FCOs only. Proposed ISE Rule 2213 sets out the rules 
and the obligations of market makers under which a FXPMM and/or FXCMM 
may purchase a trading license from the Exchange, subject to an annual 
fee paid to the Exchange in monthly installments. Under this proposed 
rule, market maker trading licenses, which do not hold any equity 
interest in the Exchange, will be sold annually through an auction 
conducted during the fourth quarter of each year. A firm may not hold 
more than four FXPMM trading licenses across all currencies and no more 
than one FXCMM trading license per currency pair. Additionally, market 
makers may not hold and act as both a FXPMM and FXCMM in the same 
currency pair. Market maker trading licenses will not be able to be 
leased or transferred, although they will be permitted to be 
transferred to an affiliated Member, or to another qualified Member 
which continues substantially the same business as the Member that 
currently holds the market maker trading license. Additionally, market 
maker trading licenses that are sold between annual auctions shall be 
assessed a premium of ten percent of the price at which the market 
maker trading license was sold during the preceding auction.\15\
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    \15\ The sale of additional market maker trading licenses during 
the year shall be at a premium to the auction price, pro rated for 
the amount of time remaining for the year, in order to, among other 
things, ensure that the supply of market maker trading licenses is 
adequate to meet demand for market maker trading licenses should 
conditions change after an auction, and to accommodate new 
businesses that commence operations after the beginning of the year. 
The premium will help defray out-of-cycle administrative costs and 
encourage participation in the annual auction, thereby promoting the 
optimal price and quantity discovery in the auction. In accordance 
with proposed ISE Rule 2210(f)(7), market maker trading licenses 
that are sold at any time except during the fourth quarter of a 
calendar year shall expire either in December of the 3rd year if the 
auction is conducted prior to June 30th of the current year, or in 
December of the 4th year if the auction is conducted after June 30th 
of the current year. For example, a FXPMM trading license that goes 
into effect on June 1, 2007 will expire on December 31, 2009, for a 
total license period of 2 years and 7 months. A FXPMM trading 
license that goes into effect on August 1, 2007 will expire on 
December 31, 2010, for a total license period of 3 years and 5 
months.
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    Proposed ISE Rule 2213(f) relates specifically to FXPMMs and states 
that a FXPMM's trading license shall have a three year term and that at 
the end of the three year term, the incumbent FXPMM shall have the 
right of first refusal to match the highest bid and market quality 
commitment from another bidding firm, enabling that FXPMM to remain a 
market maker in the currency pair for which it has a trading license. 
Under proposed ISE Rule 2213(f), sales of FXPMM trading licenses will 
be conducted by a sealed bid auction and prospective FXPMMs will be 
required to submit both a bid amount and a market quality commitment 
using parameters similar to those currently used by the Exchange for 
ETF and index options. Proposed ISE Rule 2213(f) further states that a 
FXPMM that continuously fails to meet its stated market quality 
commitments will have its trading license terminated by the Exchange, 
which will subsequently conduct an auction to sell the failing FXPMM's 
trading license to another firm. Proposed ISE Rule 2213(f) also states 
that a FXPMM generally cannot terminate its trading license and that in 
the event a FXPMM is unable to fulfill its obligations, a backup FXPMM 
shall be designated by the Exchange.
    Under proposed ISE Rule 2213(g), which relates specifically to 
FXCMMs, the Exchange intends to initially sell ten FXCMM trading 
licenses per currency pair, with each trading license having a term of 
one year. Based on market demand, the Exchange may increase the number 
of FXCMM trading licenses available at the next regularly scheduled 
auction. Proposed ISE Rule 2213(g)(2) sets out the manner in which a 
``Dutch auction'' to sell FXCMM trading licenses will be conducted. A 
FXCMM shall have the ability to terminate its trading license prior to 
its scheduled expiration, so long as the FXCMM provides the requisite 
written notice and a pays a termination fee, as set forth in proposed 
ISE Rule 2213(g)(4).
    The Exchange believes that the procedures under which market maker 
trading licenses will be made available are calculated to comply with 
the requirements of Section 6(b)(2) of the Act regarding fair access to 
the facilities of a registered exchange. The Dutch auction, by which 
FXCMM trading licenses will be sold, is itself a fair way to determine 
access, especially given that it is subject to provisions calculated to 
ensure that market maker trading licenses are widely available, such as 
the provisions (i) Specifying a reasonable minimum Reserve Price, (ii) 
limiting the number of market maker trading licenses that may be bid by 
a single Member, and (iii) the ability to sell additional unsold market 
maker trading licenses during the year at a 10% premium. The sealed bid 
auction, by which FXPMM trading licenses will be sold, requires 
potential bidders to provide the Exchange with market quality 
commitments along with a bid. The Exchange believes that this added 
measure of qualification will enable the Exchange to sell these market 
maker trading licenses in an objective manner without solely awarding a 
trading license to the highest bidder. The procedures under which 
market maker trading licenses will be made available are also intended 
to comply with the requirements of Section 6(b)(4) of the Act, which 
requires that a registered exchange provide for the equitable 
allocation of reasonable dues, fees, and charges among its members and 
issuers and other persons using its facilities. The price of a market 
maker trading license is reasonable because it will be determined by 
``the market,'' that is, by Members that wish to obtain a market maker 
trading license. A Dutch auction allows its participants to themselves 
determine the price, while the sealed bid auction will be conducted 
with a relatively low Reserve Price established by the Exchange. The 
auctions are closely related to the way access to the Exchange was 
traditionally priced, with supply and demand governing the price at 
which memberships were purchased or leased. The pricing of market maker 
trading licenses between auctions is also reasonable, as it is based on 
the auction price, but with a premium to the auction price, which will 
encourage participation in the regular auctions, which in turn will 
strengthen the price discovery mechanism that the auctions provide.
    The Exchange is also proposing to amend its Rule 1202 regarding 
margin requirements by adopting a rule for FCOs that is substantially 
similar to the PHLX's margin rules for foreign currency options. 
Accordingly, under proposed ISE Rule 1202(d), cash-settled FCOs will 
have the same customer margin requirements as are provided in PHLX Rule 
722, ``Margin Accounts,'' Commentary.16.\16\ Chapter 6 of the

[[Page 9368]]

Exchange's rules is designed to protect public customer trading and 
shall apply to trading in FCOs. Specifically, ISE Rules 608(a) and (b) 
prohibit Members from accepting a customer order to purchase or write 
an option, including on a cash-settled FCO, unless such customer's 
account has been approved in writing by a designated Options Principal 
of the Member.\17\ Additionally, ISE's Rule 610 regarding suitability 
is designed to ensure that options, including cash-settled FCOs, are 
only sold to customers capable of evaluating and bearing the risks 
associated with trading in this instrument. Further, ISE Rule 611 
permits members to exercise discretionary power with respect to trading 
options, including trading cash-settled FCOs, in a customer's account 
only if the Member has received prior written authorization from the 
customer and the account had been accepted in writing by a designated 
Options Principal. ISE Rule 611 also requires designated Options 
Principals or Representatives of a Member to approve and initial each 
discretionary order, including discretionary orders for cash-settled 
FCOs, on the day the discretionary order is entered. Finally, ISE Rule 
609, Supervision of Accounts, Rule 612, Confirmation to Customers, and 
Rule 616, Delivery of Current Options Disclosure Documents and 
Prospectus,\18\ will also apply to trading in FCOs.
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    \16\ Similar to PHLX Rule 722, Commentary .16, the Exchange will 
calculate the margin requirement for customers that assume short FCO 
positions by adding a percentage of the current market value of the 
underlying foreign currency contract to the option premium price 
less an adjustment for the out-of-the-money amount of the option 
contract. On a quarterly calendar basis, ISE will review five-day 
price changes over the preceding three-year period for each 
underlying currency and set the add-on percentage at a level which 
would have covered those price changes at least 97.5% of the time 
(the ``confidence level''). If the results of subsequent reviews 
show that the current margin level provides a confidence level below 
97%, ISE will increase the margin requirement for that individual 
currency up to a 98% confidence level. If the confidence level is 
between 97% and 97.5%, the margin level will remain the same but 
will be subject to monthly follow-up reviews until the confidence 
level exceeds 97.5% for two consecutive months. If during the course 
of the monthly follow-up reviews, the confidence level drops below 
97%, the margin level will be increased to a 98% level and if it 
exceeds 97.5% for two consecutive months, the currency will be taken 
off monthly reviews and will be put back on the quarterly review 
cycle. If the currency exceeds 98.5%, the margin level will be 
reduced to a 98% confidence level during the most recent 3 year 
period. Finally, in order to account for large price movements 
outside the established margin level, if the quarterly review shows 
that the currency had a price movement, either positive or negative, 
greater than two times the margin level during the most recent 3 
year period, the margin requirement will be set at a level to meet a 
99% confidence level (``Extreme Outlier Test''). The Exchange will 
inform Members and the public of the margin levels for each currency 
option immediately following the quarterly reviews described in Rule 
1202(d).
    \17\ Pursuant to ISE Rule 602, Representatives of a Member may 
solicit or accept customer orders for FCOs.
    \18\ The OCC, together with the Exchange, has prepared an 
amendment to the Options Disclosure Document (``ODD''), which ISE 
expects OCC to shortly submit to the Commission for approval. The 
amended ODD will include characteristics of the Exchange's FCOs and 
trading examples.
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    As previously noted, the Exchange represents that it has an 
adequate surveillance program in place for FCOs, and intends to apply 
the same program procedures that it applies to the Exchange's index 
options. The Exchange is also a member of the Intermarket Surveillance 
Group (``ISG'') under the Intermarket Surveillance Group Agreement, 
dated June 20, 1994, and may obtain trading information via the ISG 
from other exchanges who are members or affiliates of the ISG. The 
members of the ISG include all of the U.S. registered stock and options 
markets. The ISG members work together to coordinate surveillance and 
investigative information sharing in the stock and options markets. In 
addition, the major futures exchanges are affiliated members of the 
ISG, which allows for the sharing of surveillance information for 
potential intermarket trading abuses. Specifically, ISE can obtain such 
information from the CME in connection with futures trading on that 
exchange.\19\
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    \19\ CME is an affiliate member of ISG.
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    Finally, the Exchange represents that it has the necessary systems 
capacity to support new options series that will result from the 
introduction of cash-settled FCOs. The Exchange has provided the 
Commission with system capacity information that supports its system 
capacity representations.\20\
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    \20\ See Letter from Michael Simon, General Counsel, ISE, to 
John Roeser, Assistant Director, Commission, dated February 23, 
2007.
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2. Statutory Basis
    The Exchange believes that this filing is consistent with Section 
6(b) under the Act,\21\ in general, and furthers the objectives of 
Section 6(b)(1) \22\ in particular, in that it enables the Exchange to 
be so organized as to have the capacity to be able to carry out the 
purposes of the Act and to comply, and to enforce compliance by its 
Members and persons associated with its Members, with the provisions of 
the Act, the rules and regulations thereunder, and the rules of the 
Exchange.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(1).
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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 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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change 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 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-2006-59 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-2006-59. 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

[[Page 9369]]

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 the 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-2006-59 and should be 
submitted on or before March 22, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-3558 Filed 2-28-07; 8:45 am]

BILLING CODE 8010-01-P
