
[Federal Register: March 10, 2008 (Volume 73, Number 47)]
[Notices]               
[Page 12783-12786]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr08-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57425; File No. SR-ISE-2008-19]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change to Amend the Quarterly Options Series Pilot Program To Permit 
the Listing of Additional Series

March 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 March 3, 2008, the International Securities Exchange, LLC 
(``Exchange'' or ``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 
the Exchange. The Exchange has designated this proposal as non-
controversial under Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders the proposed rule change 
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)(iii).
    \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 Supplementary Material .03 to Rule 504, 
Quarterly Options Series Pilot Program, to permit the Exchange to list 
strike prices for Quarterly Options Series (``QOS'') in exchange traded 
fund (``ETF'') options that fall within a percentage range (30%) above 
and below the price of the underlying ETF. Additionally, upon 
demonstrated customer interest, the Exchange also will be permitted to 
open additional strike prices of QOS in ETF options that are more than 
30% above or below the current price of the ETF. Market Makers trading 
for their own account will not be considered when determining customer 
interest under this provision. In addition to the initial listed 
series, the Exchange may list up to sixty (60) additional series per 
expiration month for each QOS in ETF options. Further, the proposal 
includes a delisting program to be undertaken by the

[[Page 12784]]

Exchange in connection with QOS in ETF options.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.ise.com), at the Exchange's principal office, 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 Exchange 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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule filing is to amend Supplementary Material 
.03 to Rule 504, Quarterly Options Series Pilot Program to allow the 
Exchange to open additional strike prices of QOS in ETF options that 
are within thirty percent (30%) above or below the closing price of the 
underlying ETF on the preceding business day. Additionally, upon 
demonstrated customer interest, the Exchange also will be permitted to 
open additional strike prices of QOS in ETF options that are more than 
30% above or below the current price of the underlying ETF. Market 
Makers trading for their own account will not be considered when 
determining customer interest under this provision. The Exchange will 
be permitted to list up to sixty (60) additional series per expiration 
month for each QOS in ETF options.
    On May 2, 2006, the Exchange filed with the Commission a pilot 
program proposal to permit the listing and trading of QOS in options on 
indexes or options on ETFs that satisfy the applicable listing criteria 
under ISE rules.\5\ QOS trade based on calendar quarters that end in 
March, June, September and December. The Exchange lists QOS that expire 
at the end of the next consecutive four calendar quarters, as well as 
the fourth quarter of the next calendar year. For example, if the 
Exchange were trading QOS in iShares Russell 2000 Index Fund (``IWM'') 
in the month of April 2008, it would list series at the end of the 
second quarter 2008 (June), third quarter 2008 (September), fourth 
quarter 2008 (December) and first quarter 2009 (March) and fourth 
quarter 2009 (December).
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    \5\ See Securities Exchange Act Release No. 54113 (July 7, 
2006), 71 FR 39694 (July 13, 2006) (SR-ISE-2006-24) (``Pilot Program 
Approval Order''). Under the pilot program, the Exchange lists QOS 
in up to five currently listed option classes that are either 
options on ETFs or indexes. The Exchange also is permitted to list 
QOS in any options class that is selected by other securities 
exchanges that employ a similar pilot program under their respective 
rules.
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    Currently, the Exchange lists QOS in five ETF options: (1) Nasdaq-
100 Index Tracking Stock (``QQQQ''); (2) IWM; (3) DIAMONDS Trust, 
Series 1 (``DIA''); (4) Standard & Poor's Depository Receipts/SPDRs 
(``SPY''); and (5) Energy Select SPDR (``XLE''). The average trading 
volume and total volume for QOS in IWM options significantly exceeds 
the volumes for QOS in other ETF options that are listed and traded on 
the Exchange. The chart below provides trading volume figures for the 
fourth quarter in 2007, demonstrating that QOS in IWM options are by 
far the most popular and heavily traded QOS on the Exchange.


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                                          October 2007              November 2007             December 2007
                QOS                -----------------------------------------------------------------------------
                                        ADV       Total vol.      ADV       Total vol.      ADV       Total vol.
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IWM...............................       19,132      440,035       23,529      494,107       28,970      579,399
QQQQ..............................        7,943      182,689       12,510      262,707       18,856      377,123
SPY...............................        3,740       86,022       15,067      316,399       19,984      399,686
DIA...............................          709       16,314        1,671       35,092        2,202       44,043
XLE...............................          778       17,901        6,141      128,966        1,925       38,507
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    Over time, the Exchange has continually received requests from 
market participants to add additional strike prices for QOS in IWM 
options that would be outside of the price range for setting strikes as 
provided under Supplementary Material .03 to Rule 504 (hereinafter ``+/
-$5 range'').\6\
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    \6\ Supplementary Material .03 to Rule 504 provides that the 
Exchange shall list strike prices for a QOS that are within $5 from 
the closing price of the underlying on the preceding day.
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    Investors and other market participants have advised the Exchange 
that they are buying and selling QOS in IWM options to trade 
volatility. In order to adequately replicate the desired volatility 
exposure, these market participants need to trade several IWM options 
series, many having strike prices that fall outside of the +/-$5 range 
currently allowed under the QOS rules.
    In addition, other participants have advised the Exchange that 
their investment strategies involve trading options tied to a 
particular option ``delta,'' \7\ rather than a particular level of the 
underlying security or index. At issue is the fact that delta depends 
on both the relative difference between the level of the underlying 
security or index and the option strike price, and time to expiration. 
For example, with IWM trading at $85 per share, the strike price 
corresponding to a ``25-delta'' IWM call (i.e., a call option with a 
delta of 25) with one month to expiration would be 89. However, the 
strike price corresponding to a ``25-delta'' IWM call with 3 months to 
expiration would be 93, and the strike price of a ``25-delta'' IWM call 
with 1 year to expiration would be 106. In short, ISE has been advised 
that the +/-$5 range for QOS in IWM options is insufficient to satisfy 
customer demand.
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    \7\ ``Delta'' is a measure of how an option price will change in 
response to a $1 price change in the underlying security or index. 
For example, an ABC option with a delta of ``50'' can be expected to 
change by $0.50 in response to a $1 change in the price of ABC.
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    In order to meet customer demand, the Exchange proposes to amend 
Supplementary Material .03 to Rule 504, which governs the Quarterly 
Options Series Pilot Program. Specifically, the Exchange proposes to 
revise Supplementary Material .03 to Rule 504 to allow the Exchange to 
open

[[Page 12785]]

additional strike prices of QOS in ETF options that are within thirty 
percent (30%) above or below the closing price of the underlying ETF 
Shares as defined in Rule 502(h) on the preceding business day. The 
Exchange also will be permitted to open additional strike prices of QOS 
in ETF options that are more than 30% above or below the current price 
of the underlying ETF, provided that demonstrated customer interest 
exists for such series, as expressed by institutional, corporate or 
individual customers or their brokers. Market Makers trading for their 
own account will not be considered when determining customer interest 
under this proposed provision. The Exchange will be permitted to list 
up to sixty (60) additional series per expiration month for each QOS in 
ETF options.
    The Exchange also is proposing to add new paragraph (g) to 
Supplementary Material .03 to Rule 504, which will set forth a 
delisting policy. Specifically, with respect to QOS in ETF options, the 
Exchange will, on a monthly basis, review series that are outside a 
range of five (5) strikes above and five (5) strikes below the current 
price of the underlying ETF, and delist series with no open interest in 
both the put and the call series having a: (1) Strike higher than the 
highest strike price with open interest in the put and/or call series 
for a given expiration month; or (2) strike lower than the lowest 
strike price with open interest in the put and/or call series for a 
given expiration month.
    To illustrate how the proposed delisting program will work, assume 
that IWM closed at $70 on the day the Exchange conducts the monthly 
review of QOS in ETF options. Series having strike prices above $75 and 
below $65 would be reviewed by the Exchange for possible delisting. 
Assume that the Exchange lists the following QOS in IWM options that 
expire in June 2008:

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                     Calls--Jun 08 exp                                         Puts--Jun 08 exp
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                Strike                    Open  Interest?              Strike                Open  Interest?
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62....................................  No                   62.......................  No.
63....................................  No                   63.......................  Yes.
64....................................  Yes                  64.......................  Yes.
*****                                   *****                *****                      *****
76....................................  Yes                  76.......................  Yes.
77....................................  Yes                  77.......................  Yes.
78....................................  Yes                  78.......................  Yes.
79....................................  Yes                  79.......................  Yes.
80....................................  Yes                  80.......................  Yes.
81....................................  Yes                  81.......................  Yes.
82....................................  Yes                  82.......................  Yes.
83....................................  No                   83.......................  No.
84....................................  No                   84.......................  No.
85....................................  No                   85.......................  Yes.
86....................................  Yes                  86.......................  No.
87....................................  Yes                  87.......................  Yes.
88....................................  Yes                  88.......................  Yes.
89....................................  Yes                  89.......................  No.
90....................................  Yes                  90.......................  No.
91....................................  No                   91.......................  No.
92....................................  No                   92.......................  No.
93....................................  No                   93.......................  No.
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    The Exchange would delist the first series listed above, as well as 
the last three: $62, $91, $92 and $93. The Exchange would not, however, 
delist the $83 and $84 series because there are series having open 
interest with strike prices higher than these two series. In addition, 
the Exchange would not delist the $63 series because there is open 
interest in the put series.
    Notwithstanding the proposed delisting policy, customer requests to 
add strikes and/or maintain strikes in QOS in ETF options in series 
eligible for delisting shall be granted.
    Further, in connection with the proposed delisting policy, if the 
Exchange identifies series for delisting, the Exchange shall notify 
other options exchanges with similar delisting policies regarding 
eligible series for listing, and shall work with such other exchanges 
to develop a uniform list of series to be delisted, so as to ensure 
uniform series delisting of multiply listed QOS in ETF options. It is 
expected that all options exchanges that have a QOS Pilot Program will 
adopt the proposed delisting policy.
    The Exchange represents that it has the necessary systems capacity 
to support new options series that will result from this proposal. 
Further, as proposed, the Exchange notes that this rule change will 
become part of the pilot program and, going forward, will be considered 
by the Commission when the Exchange seeks to renew or make permanent 
the pilot program in the future.\8\
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    \8\ To the extent the Commission views the proposed rule change 
as an expansion of the pilot program, thus triggering the 
requirement under the terms of the Pilot Program Approval Order that 
the Exchange submit a pilot program report, the Exchange notes that 
it submitted a report on June 27, 2007, in connection with its 
filing to extend the pilot program through July 10, 2008. See 
Securities Exchange Act Release No. 56031 (July 9, 2007), 72 FR 
38637 (July 13, 2007) (Notice of Filing and Immediate Effectiveness 
of SR-ISE-2007-53).
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2. Statutory Basis
    Because the additional new series can be added without presenting 
capacity problems and because the Exchange has proposed a delisting 
policy with respect to QOS in ETF options, the Exchange believes the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder. Specifically, the Exchange believes the 
proposed rule change is consistent with Section 6(b)(5)\9\ of the Act's 
requirements that the rules of a national securities 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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    \9\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that 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

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\11\ The Exchange notes that the proposed rule change 
is based on a similar proposal recently approved by the Commission.\12\ 
The Exchange has asked the Commission to waive the operative delay to 
permit the proposed

[[Page 12786]]

rule change to become operative prior to the 30th day after filing.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with 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 Exchange has fulfilled this requirement.
    \12\ See Securities Exchange Act Release No. 34-57410 (March 3, 
2008) (SR-CBOE-2007-96).
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    The Commission has determined that waiving the 30-day operative 
delay of the Exchange's proposal is consistent with the protection of 
investors and the public interest and will promote competition because 
such waiver will allow the Exchange to list additional series in 
Quarterly Options at the same time as other exchanges.\13\ Therefore, 
the Commission designates the proposal operative upon filing.
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    \13\ For 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 the proposed rule 
change, the Commission may summarily abrogate the 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.

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 No. SR-ISE-2008-19 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-2008-19. 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 such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2008-19 and should be 
submitted on or before March 31, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4599 Filed 3-7-08; 8:45 am]

BILLING CODE 8011-01-P
