

[Federal Register: January 11, 2008 (Volume 73, Number 8)]
[Notices]               
[Page 2070-2072]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja08-80]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57104; File No. SR-ISE-2007-113]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change as Modified by Amendment No. 1 Thereto To Allow the Exchange To 
List Up to Seven Expiration Months for Broad-Based Security Index 
Options Upon Which an Exchange Calculates a Constant Three-Month 
Volatility Index

 January 4, 2008.
    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 November 30, 2007, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
ISE. On January 4, 2008, the Exchange filed Amendment No. 1 to the 
proposed rule change. The Exchange has filed the proposal pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its Rule 2009(a)(3) (Terms of Index 
Option Contracts) to allow the Exchange to list up to seven expiration 
months for broad-based security index options upon which an exchange 
calculates a constant three-month volatility index. The text of the 
proposed rule change is available on the Exchange's Web site http://www.ise.com
, at the principal office of 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, 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. 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 this rule filing is to amend Rule 2009(a)(3) (Terms 
of Index Options Contracts) to allow the Exchange to list up to seven 
expiration months for broad-based security index options upon which a 
constant three-month volatility index is calculated. Currently, Rule 
2009(a)(3) permits the Exchange to list only six expiration months in 
any index options at any one time.
    Volatility products offer investors a unique set of tools for 
speculating and hedging. For example, the Chicago Board Options 
Exchange (``CBOE'') Volatility Index (``VIX'') options, first 
introduced in February 2006, have proven to be one of CBOE's most 
successful new products ever listed, currently averaging over 90,000 
contracts traded per day. CBOE has stated that it plans to introduce 
new volatility products and new volatility indexes in the near future. 
One such index is the CBOE S&P 500 Three-Month Volatility Index 
(``VXV'').\5\ Similar to the VIX, the VXV is a measure of S&P 500 
implied volatility--the volatility implied by S&P option prices--but 
instead of reflecting a constant 1-month implied volatility period, VXV 
is designed to reflect the implied volatility of an option with a 
constant 3 months to expiration. Since there is only one day on which 
an option has exactly 3 months to expiration, VXV is calculated as a 
weighted average of options expiring immediately before and immediately 
after the three-month standard.
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    \5\ CBOE calculates volatility indexes on other broad-based 
security indexes, such as the Dow Jones Industrial Average index 
(``DJX''), the Nasdaq-100 index (``NDX''), and the Russell 2000 
index (``RUT''). CBOE may calculate a constant three-month 
volatility index on DJX, NDX, or RUT in the future. See Securities 
Exchange Act Release No. 56821 (November 20, 2007), 72 FR 66210 
(November 27, 2007).
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    Accordingly, an index calculator would need to use four consecutive 
expiration months in order to calculate a constant three-month 
volatility index. Under the current application of ISE Rule 2009(a)(3), 
the Exchange generally lists three consecutive near term months and 
three months on a quarterly expiration cycle. One of the three 
consecutive near term months is always a quarterly month; however, that 
near term contract month (which is also a quarterly month) is not 
included as part of the three months listed on a quarterly expiration 
cycle. Therefore, in order to permit the addition of four consecutive 
near term months under current Rule 2009(a)(3), the Exchange would only 
be able to list two months on a quarterly expiration cycle. Because of 
customer demand and other investment strategy reasons for having three 
months on a quarterly expiration cycle, the Exchange is seeking to 
increase, from six to seven, the number of expiration months for broad-
based security index options upon which a constant three-month 
volatility index is calculated.
    Without this proposed rule change, if a three-month volatility 
index is calculated using only three consecutive near term months, this 
would result in the VXV being calculated with options

[[Page 2071]]

expiring three months apart about one-third of the time. Another one-
third of the time, VXV would be calculated with options expiring two 
months apart. And the final one-third of the time, VXV would be 
calculated with options expiring one month apart. As a result, the 
calculation of the three-month VXV under the current rules would render 
the VXV subject to inconsistencies that may make the index unattractive 
as an underlying for volatility products. The proposed rule change will 
permit the Exchange, eight times a year, to add an additional seventh 
month in order to maintain four consecutive near term contract 
months.\6\
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    \6\ Examples illustrating the need for a seventh month in order 
to maintain four consecutive near term contract months can be found 
in Securities Exchange Act Release No. 56821 (SR-CBOE-2007-82), 
supra note 5.
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    Therefore, the Exchange believes that the addition of a fourth 
consecutive near-term month for broad-based security index options upon 
which a constant three-month volatility index is calculated will result 
in a consistent calculation in which the option series that bracket 
three months to expiration will always expire one month apart. In order 
to accommodate the listing of a fourth consecutive near term month and 
to maintain the listing of three months on a quarterly expiration 
cycle, the Exchange proposes the increase, from six to seven, the 
number of expiration months for broad-based security indexes on which a 
constant three-month volatility index is calculated.
Capacity
    ISE has analyzed its capacity and represents that it believes the 
Exchange and the Options Price Reporting Authority have the necessary 
systems capacity to handle the additional traffic associated with the 
additional listing of a seventh contract month in order to maintain 
four consecutive near term contract months for those broad-based 
security index options upon which a constant three-month volatility 
index is calculated.

2. Statutory Basis

    Because the increase in the number of expiration months is limited 
to broad-based security indexes upon which a constant three-month 
volatility index is calculated and because the series could be added 
without presenting capacity problems, the Exchange believes the rule 
proposal is consistent with the Act and the rules and regulations under 
the Act applicable to a national securities exchange and, in 
particular, the requirements of Section 6(b) of the Act.\7\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) of the Act \8\ requirements that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and, 
in general, to protect investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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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 unsolicited written comments from members or other interested 
parties.

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

    Because the foregoing rule change does not: (1) Significantly 
affect the protection of investors or the public interest; (2) impose 
any significant burden on competition; and (3) become operative for 30 
days after the date of this filing, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\11\ 
However, Rule 19b-4(f)(6)(iii) \12\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay, to permit the Exchange to 
list options on the Fund immediately. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest. The proposal is substantially 
similar to a proposal recently submitted by CBOE and approved by the 
Commission,\13\ and it raises no new regulatory issues.
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    \11\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Commission has determined to waive this five-day 
pre-filing notice requirement.
    \12\ Id.
    \13\ See supra note 5.
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    The Commission believes that increasing, from six to seven, the 
number of expiration months for broad-based security indexes on which 
an Exchange calculates a constant three-month volatility index (to 
accomodate a fourth consecutive near-term month while maintaining the 
listing of three months on a quarterly expiration cycle) will result in 
a more consistent and predictable calculation in which the option 
series that bracket three months to expiration will always expire one 
month apart, thereby promoting just and equitable principles of trade 
while protecting investors and the public interest.
    The Commission also notes ISE's representations that it possesses 
the necessary systems capacity to handle the additional traffic 
associated with the additional listing of a seventh contract month in 
order to maintain four consecutive near term contract months for those 
broad-based security index options upon which the Exchange calculates a 
constant three-month volatility index.
    For these reasons, the Commission designates the proposed rule 
change to be operative upon filing with the Commission.\14\
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    \14\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors or otherwise in 
furtherance of the purposes of the Act.\15\
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    \15\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the proposed rule change to have been filed 
on January 4, 2008, the date ISE filed Amendment No. 1.
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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


[[Page 2072]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ISE-2007-113 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-2007-113. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of ISE. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-ISE 2007-113 and 
should be submitted on or before February 1, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-303 Filed 1-10-08; 8:45 am]

BILLING CODE 8011-01-P
