
[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39070-39072]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16413]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62419; File No. SR-ISE-2010-66]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Amend ISE Rule 2102 To 
Add Additional Securities to the Pilot Rule

June 30, 2010.

    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 June 30, 2010, International Securities Exchange, LLC (the 
``Exchange'' or ``ISE'') 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 prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the

[[Page 39071]]

proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 2102 (Hours of Business) to add 
additional securities to the pilot rule. The text of the proposed rule 
change is below. [sic]
    The text of the proposed rule change is available on the Exchange's 
Internet Web site at 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, the self-regulatory organization 
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 self-regulatory organization 
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 Exchange proposes to amend ISE Rule 2102 to add securities 
included in the Russell 1000[supreg] Index (``Russell 1000'') and 
specified Exchange Traded Products (``ETP'') to the pilot rule. For 
purposes of this filing, ETPs include Exchange Traded Funds 
(``ETF''),\3\ Exchange Traded Vehicles (``ETV''),\4\ and Exchange 
Traded Notes (``ETN'').\5\
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    \3\ An ETF is an open-ended registered investment company under 
the Investment Company Act of 1940 that has received certain 
exemptive relief from the SEC to allow secondary market trading in 
the ETF shares. ETFs are generally index-based products, in that 
each ETF holds a portfolio of securities that is intended to provide 
investment results that, before fees and expenses, generally 
correspond to the price and yield performance of the underlying 
benchmark index.
    \4\ An ETV tracks the underlying performance of an asset or 
index, allowing investors exposure to underlying assets such as 
futures contracts, commodities, and currency without actually 
trading futures or taking physical delivery of the underlying asset. 
An ETV is traded intraday like an ETF. An ETV is an open-ended trust 
or partnership unit that is registered under the Securities Act of 
1933.
    \5\ An ETN is a senior unsecured debt obligation designed to 
track the total return of an underlying index, benchmark or 
strategy, minus investor fees. ETNs are registered under the 
Securities Act of 1933 and are redeemable to the issuer.
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    Amendments to ISE Rule 2102 were approved by the Commission on June 
10, 2010 on a pilot basis to end on December 10, 2010.\6\ As the 
Exchange noted in its filing to amend ISE Rule 2102, during the pilot 
period, the Exchange would continue to assess whether additional 
securities need to be added and whether the parameters of the rule 
would need to be modified to accommodate trading characteristics of 
different securities.
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    \6\ See Securities Exchange Act Release No. 62271 (June 10, 
2010), 75 FR 34493 (June 17, 2010) (SR-ISE-2010-58).
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    Currently, the pilot list of securities is all securities included 
in the S&P 500[supreg] Index (``S&P 500''). As noted in comment letters 
to the original filing to amend ISE Rule 2102, concerns were raised 
that including only securities in the S&P 500 in the pilot rule was too 
narrow. In particular, commenters noted that securities that 
experienced volatility on May 6, 2010, including ETFs, should be 
included in the pilot.
    In response to these concerns, various exchanges and national 
securities associations have collectively determined to expand the list 
of pilot securities. As part of a coordinated filing with the other 
markets, the Exchange proposes to add the securities included in the 
Russell 1000 and specified ETPs to the pilot beginning in July 2010, 
subject to Commission approval. The Exchange believes that adding these 
securities would address concerns that the scope of the pilot may be 
too narrow, while at the same time recognizing that during the pilot 
period, the markets will continue to review whether and when to add 
additional securities to the pilot and whether the parameters of the 
rule should be adjusted for different securities.
    In particular, the Exchange proposes to add securities included in 
the Russell 1000 because the Exchange believes that the securities 
included in that index have similar trading characteristics to 
securities included in the S&P 500 (many of which are the same 
securities) and therefore the existing 10% price movement applicable 
before invoking a trading pause may be appropriate for the Russell 1000 
securities.
    In addition, the Exchange, in consultation with other markets, 
proposes to add to the pilot a selected list of ETPs. The proposed 
pilot list of ETPs was developed by first identifying all ETPs across 
multiple asset classes and issuers, including domestic equity, 
international equity, fixed income, currency, and commodities and 
futures. Next, leveraged ETPs were excluded and sorted by notional 
consolidated average daily volume (``CADV'') using year-to-date CADV 
ending May 5, 2010, multiplied by the closing price on May 5, 2010. 
Then, those symbols, including inverse ETPs, that trade over $2,000,000 
CADV year to date through May 5, 2010, were selected. To ensure that 
ETPs that track similar benchmarks but that do not meet this volume 
criterion do not become subject to pricing volatility when a component 
security is the subject of a trading pause, the Exchange proposes to 
include certain non-leveraged ETPs that have traded below this volume 
criterion, but that track the same benchmark as an ETP that does meet 
the volume criterion.
    The proposed list of ETPs identify those ETPs that have component 
securities that largely track the securities included in the S&P 500 
and Russell 1000. Accordingly, if an S&P 500 or Russell 1000 security 
experiences a trading pause, any resulting price volatility in a 
related ETP, regardless of the CADV of the ETP, would also be subject 
to a trading pause trigger. As with the proposal to add the Russell 
1000 securities, the proposed ETPs were selected because they were 
consistent with the existing 10% price movement before invoking a 
trading pause for ETPs with these characteristics. The Exchange does 
not believe that the 10% price movement is an appropriate threshold for 
leveraged ETPs because by definition, leveraged ETPs are based on 
multiples of price movements in the underlying index. Accordingly, a 
10% price movement in a leveraged ETP may not signify extraordinary 
volatility. Because the Exchange is not proposing to adopt revised 
price movement thresholds at this time, the Exchange is therefore not 
proposing to include leveraged ETPs for now.
    As noted above, during the pilot, the Exchange will continue to re-
assess, in consultation with other markets, whether specific ETPs 
should be added or removed from the pilot list. The Exchange will also 
assess whether the parameters for invoking a trading pause continue to 
be the appropriate standard and whether the parameters should be 
modified.
    To effect this change, the Exchange proposes to amend ISE Rule 
2102(4) to provide that the pilot applies to all securities in the S&P 
500, securities in the Russell 1000, as well as specified ETPs. The 
pilot list of ETPs is identified in Exhibit 3.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the

[[Page 39072]]

Act,\7\ which requires the rules of an exchange to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest. The proposed 
rule change also is designed to support the principles of Section 
11A(a)(1) \8\ of the Exchange Act in that it seeks to assure fair 
competition among brokers and dealers and among exchange markets. The 
Exchange believes that the proposed rule meets these requirements in 
that it promotes uniformity across markets concerning decisions to 
pause trading in a security when there are significant price movements.
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78k-1(a)(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 unsolicited 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 self-regulatory organization 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.\9\
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    \9\ The Commission notes that the Exchange has requested 
accelerated approval of the filing.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning all aspects of the foregoing, including whether 
the proposed rule change is consistent with the Act.
    The Commission notes that ETF trades constituted a substantial 
majority of the trades that were cancelled on May 6, and the proposed 
amendments would bring certain ETFs within the scope of the trading 
pause pilot for the first time. The Commission solicits comment 
regarding the inclusion of ETFs within the trading pause pilot. The 
Commission requests comment in particular on the implications of 
including in the trading pause pilot ETFs on broad-based indices that 
also underlie options and futures products. What are the potential 
benefits and risks of including those ETFs in the pilot under 
circumstances where other products based on the same index may not be 
subject to any trading pause, or may be subject to a different type of 
trading pause? Are existing mechanisms available in the markets for 
those other products sufficient to address any cross-market linkage 
concerns? What are the potential effects on price discovery and trading 
behavior in the different markets?
    Similarly, the Commission solicits comments on the potential 
benefits and risks of excluding such ETFs from the pilot, particularly 
under circumstances where the securities underlying the ETF are 
included in the pilot. If there are trading pauses for the component 
securities of an index but not for an ETF based on that index, what 
consequences might that have for the ETF or for other products based on 
that index? If there are trading pauses in an ETF but not in the stocks 
that underlie that ETF, what consequences might that have for the 
underlying stocks or other products? What are the potential effects on 
price discovery for the ETF, the underlying stocks and other products?
    Are there other market-based characteristics or metrics that should 
be considered for purposes of determining which ETFs should be included 
in the trading pause pilot, or for re-calibrating particular features 
of the trading pause?
    In addition, the Commission solicits comments regarding the 
operation of the trading pause pilot to date with respect to stocks in 
the S&P 500.
    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-2010-66 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2010-66. 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 Web site viewing and 
printing 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 publicly available. All 
submissions should refer to File Number SR-ISE-2010-66 and should be 
submitted on or before July 19, 2010.\10\
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    \10\ The Commission believes that a 10-day comment period is 
reasonable, given the urgency of the matter. It will provide 
adequate time for comment.
    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16413 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P


