
[Federal Register: March 6, 2008 (Volume 73, Number 45)]
[Notices]               
[Page 12240-12241]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr08-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57398; File No. SR-ISE-2007-112]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Granting Approval of a Proposed Rule Change as Modified by 
Amendment No. 1 Thereto Relating to Obvious Errors

February 28, 2008.
    On November 29, 2007, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend ISE Rule 720 (``Obvious 
Error Rule'' or ``Rule'') to address ``catastrophic errors.'' On 
January 4, 2008, the ISE submitted Amendment No. 1 to the proposed rule 
change. The proposed rule change, as amended, was published for comment 
in the Federal Register on January 16, 2008.\3\ The Commission received 
no comment letters on the proposal. This order approves the proposed 
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 57127 (January 10, 
2008), 73 FR 2967 (``Notice'').
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    The Exchange proposes to amend the Obvious Error Rule to add 
criteria for identifying catastrophic errors and making adjustments 
when they occur. The Exchange also proposes to streamline the procedure 
for reviewing actions taken when catastrophic errors occur.
    Currently, under the Obvious Error Rule, trades that result from an 
obvious error may be adjusted or nullified based on objective standards 
set forth in the Rule. Under the Rule, whether an obvious error has 
occurred is determined by comparing the execution price of the option 
to its theoretical price and assessing whether the minimum amount of 
difference that is set forth in the Rule is met. The Rule requires that 
members notify ISE Market Control within a short time period following 
the execution of a trade (five minutes for market makers and 20 minutes 
for Electronic Access Members (``EAMs'')) if they believe the trade 
qualifies as an obvious error. Trades that qualify for adjustment are 
adjusted under the Rule to a price that matches the theoretical price 
plus or minus an adjustment value, which is $.15 if the theoretical 
value is under $3 and $.30 if the theoretical value is at or above $3. 
By adjusting trades above or below the theoretical price, the Rule 
assesses a ``penalty'' in that the adjustment price is not as favorable 
as the amount the party making the error would have received had it not 
made the error.
    In some extreme situations, ISE members may not be aware of errors 
that result in very large losses within the notification time periods 
required under the Rule. The proposal will allow members experiencing 
catastrophic errors additional time to seek relief so that there is a 
greater opportunity to mitigate very large losses and reduce 
corresponding windfalls. In such cases, the proposal sets forth the 
minimum amount by which the option's execution price must differ from 
the theoretical price for a catastrophic error determination to occur. 
The proposal also sets forth the adjustment value to be used by the 
Exchange when it makes a catastrophic error determination.
    A catastrophic error will be deemed to have occurred when the 
execution price of a transaction differs from the theoretical price for 
the option by an amount equal to at least the specified

[[Page 12241]]

minimum amount indicated in the Rule and an adjustment would be made 
plus or minus the adjustment value that also is set forth in the Rule. 
The minimum amount by which the execution price must differ from the 
theoretical price and the adjustment value for catastrophic errors will 
be significantly higher than the thresholds required for obvious 
errors, which the Exchange believes will limit the application of the 
proposed rule to errors involving significant losses.
    Under the proposal, members will have until 8:30 a.m. Eastern Time 
on the day following the trade to notify Market Control of a potential 
catastrophic error. For trades that take place in an expiring series on 
expiration Friday, members must notify Market Control of a potential 
catastrophic error by 5 p.m. Eastern Time that same day. In 
consideration of the extreme nature of situations that will be 
addressed under the catastrophic error provisions, the Exchange 
proposes a streamlined one-step review process where a Catastrophic 
Error Tribunal (``Tribunal''), comprised of two representatives from 
market makers and two representatives from EAMs that are unrelated to 
the transaction in question, will make catastrophic error 
determinations and adjustments.\4\ In the event the Tribunal determines 
that a catastrophic error did not occur, the member that initiated the 
review will be charged $5,000 to reimburse the Exchange for the costs 
associated with reviewing the claim.
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    \4\ In comparison, ISE Market Control makes initial obvious 
error determinations that can then be appealed to an Obvious Error 
Panel.
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of Section 6(b) of the Act \5\ and the 
rules and regulations thereunder. Specifically, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\6\ in 
that the proposal is designed to prevent fraudulent and manipulative 
acts, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, protect 
investors and the public interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, in approving proposals relating to 
adjustment or nullification of trades involving obvious errors, it has 
stated that the determination of whether an obvious error has occurred 
and the process for reviewing such a determination should be based on 
specific and objective criteria and subject to specific and objective 
procedures.\7\ The Commission believes that the ISE's proposal provides 
specific and objective criteria and procedures for the Exchange to 
apply when members seek review of transactions involving catastrophic 
errors. The Commission also believes that the proposed Catastrophic 
Error Tribunal, which is intended to streamline the review process, and 
the proposed fee for unsuccessful claims are appropriate given the 
proposal's purpose to allow members additional time to seek relief for 
very significant errors.\8\
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    \7\ See, e.g., Securities Exchange Release Nos. 54228 (July 27, 
2006), 71 FR 44066 (August 3, 2006) (SR-ISE-2006-14) (approving 
revisions to ISE's Obvious Error Rule) and 48097 (June 26, 2003), 68 
FR 39604 (July 2, 2003) (SR-ISE-2003-10) (approving revisions to 
ISE's Obvious Error Rule).
    \8\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-ISE-2007-112), as amended, is 
hereby approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4313 Filed 3-5-08; 8:45 am]

BILLING CODE 8011-01-P
