
[Federal Register: October 5, 2010 (Volume 75, Number 192)]
[Notices]               
[Page 61533-61536]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc10-147]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63002; File No. SR-ISE-2010-81]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Granting Approval of Proposed Rule Change Relating to 
Trading Options on a Reduced Value of the DAX Index, Including Long-
Term Options

September 28, 2010.

I. Introduction

    On August 3, 2010, the International Securities Exchange, Inc. (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ a proposed rule

[[Page 61534]]

change to amend its rules to trade options on a reduced value DAX 
Index. The proposed rule change was published for comment in the 
Federal Register on August 18, 2010.\2\ The Commission received no 
comment letters on the proposed rule change. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Securities Exchange Act Release No. 62703 (August 12, 
2010), 75 FR 51134.
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II. Description

    The Exchange proposes to amend certain of its rules to allow the 
listing and trading of options on the Mini DAX, which represents \1/10\ 
of the full value of the DAX Index. In addition to options on the Mini 
DAX, the Exchange proposes to list long-term options on the Mini DAX 
(the ``Mini DAX LEAPS'').\3\ Options on the Mini DAX will be A.M. cash-
settled and will have European-style exercise provisions.
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    \3\ Under ISE Rule 2009(b), ``Long-Term Index Options Series,'' 
the Exchange may list long-term options that expire from 12 to 60 
months from the date of issuance.
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Index Design and Composition

    The DAX Index is a capitalization-weighted index where the weight 
of any individual component is proportional to its respective share in 
the total market capitalization of all the components. The DAX Index 
consists of the 30 most highly liquid and capitalized German stocks 
ranked by float-adjusted market capitalization.\4\ The management board 
of Deutsche B[ouml]rse AG (``DBAG'') decides whether changes are to be 
made to the composition of the index on an annual basis in September 
but also performs quarterly reviews of the components' free float.
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    \4\ Float-adjusted market capitalization (as opposed to an 
unadjusted methodology) refers to the number of free-float shares 
available multiplied by the share price. A ``free-float'' index 
methodology usually excludes shares held by strategic investors by 
way of cross ownership, government ownership, private ownership and 
restricted share ownership.
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Index Calculation and Index Maintenance

    Index levels for options on the Mini DAX will be calculated by DBAG 
or its agent, and disseminated by ISE every 15 seconds during the 
Exchange's regular trading hours to market information vendors via the 
Options Price Reporting Authority (``OPRA'').\5\ The level of the DAX 
Index reflects the float-adjusted market value of the component stocks 
relative to a particular base period and is computed by dividing the 
total market value of the companies in each index by its respective 
index divisor.\6\
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    \5\ The Exchange shall also disseminate these values to its 
members.
    \6\ A divisor is an arbitrary number chosen at the starting date 
of an index to fix the index starting value. The divisor is adjusted 
periodically when capitalization amendments are made to the 
constituents of the index in order to allow the index value to 
remain comparable over time. Without a divisor the index value would 
change when corporate actions took place and would not reflect the 
true value of an underlying portfolio based upon the index.
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    The DAX Index is calculated using the last traded price of the 
component securities. If a component security does not open for 
trading, the price of that security at the close or the index on the 
previous day is used in the calculation.\7\
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    \7\ The DAX Index is published daily and is available real-time 
on ThomsonReuters, Bloomberg, and other market information systems 
which disseminate information on a real time basis.
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    The DAX Index is currently updated on a real-time basis from 9 a.m. 
to 5:45 p.m. (Frankfurt time), which generally corresponds to 3 a.m. to 
11:45 a.m. (New York time). The Exchange, or its agent, shall 
disseminate Mini DAX Index values via OPRA or major market data vendors 
between 3 a.m. and 11:45 a.m. (New York time). After 11:45 a.m. (New 
York time), the Exchange, or its agent, shall disseminate a static 
value of the Mini DAX until the close of trading each day.
    The DAX Index is monitored and maintained by DBAG. DBAG makes all 
necessary adjustments to the indexes to reflect component deletions, 
share changes, stock splits, stock dividends (other than an ordinary 
cash dividend), and stock price adjustments due to restructuring, 
mergers, or spin-offs involving the underlying components.
    The DAX Index is subject to a full review and, if necessary, 
ordinary adjustments are made once a year in September, where all 
components are screened for eligibility and ranked based on liquidity 
and market capitalization. Quarterly reviews are also performed in 
March, June, September and December, where components' free float 
levels are reviewed and extraordinary adjustments may be made. If a 
component company is deleted from the DAX Index between reviews as a 
result of a merger, takeover or other corporate action, the highest 
ranking company will replace it in the index.
    The Exchange has represented that it will monitor the DAX Index on 
a quarterly basis. The Exchange will notify the staff of the Division 
of Trading and Markets of the Commission by filing a proposed rule 
change pursuant to Rule 19b-4 and will cease to list any additional 
series for trading, if, with respect to the DAX Index: (i) The number 
of securities in the DAX Index drops by \1/3\ or more; (ii) 10% or more 
of the weight of the DAX Index is represented by component securities 
having a market value of less than [euro]50 million; (iii) 10% or more 
of the weight of the DAX Index is represented by component securities 
trading less than 20,000 shares per day; or (iv) the largest component 
security accounts for more than 15% of the weight of the DAX Index or 
the largest five components in the aggregate account for more than 50% 
of the weight of the DAX Index.
    The Exchange will also notify the staff of the Division of Trading 
and Markets of the Commission immediately in the event DBAG ceases to 
maintain and calculate the DAX Index, or in the event values of the DAX 
Index are not disseminated every 15 seconds by a widely available 
source. In such cases, the Exchange will not list any additional series 
for trading and will limit all transactions in the options to closing 
transactions for the purpose of maintaining a fair and orderly market 
and protecting investors.

Contract Specifications

    The Mini DAX is a broad-based index. Options on the Mini DAX are 
European-style and A.M. cash-settled. The Exchange's standard trading 
hours for broad-based index options (9:30 a.m. to 4:15 p.m., New York 
time), as set forth in ISE Rule 2008(a), will apply to the trading of 
options on the Mini DAX.
    The Exchange proposes to list options on the Mini DAX in the three 
consecutive near-term expiration months, plus up to three successive 
expiration months in the March cycle. For example, consecutive 
expirations of January, February, March, plus June, September, and 
December expirations would be listed.\8\
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    \8\ See Rule ISE 2009(a)(3).
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    The Exchange proposes to set minimum strike price intervals for 
Mini DAX options at 1 point intervals. The minimum tick size for series 
trading below $3 shall be $0.05, and for series trading at or above $3 
shall be $0.10.

Exercise and Settlement Value

    Options on the Mini DAX will expire on the Saturday following the 
third Friday of the expiration month. Trading in options on the Mini 
DAX will normally cease at 4:15 p.m. (New York time) on the Thursday 
preceding an expiration Saturday. The index value for exercise of the 
Mini DAX options will be calculated by DBAG based on the Xetra intra-
day auction prices for each of the component companies. That value is 
also used as the basis for

[[Page 61535]]

settlement of DAX Index futures and options contracts traded on Eurex.
    The intra-day auction occurs between 1 p.m. and 1:05 p.m. (German 
time) on the third Friday of the expiration month, which generally 
corresponds to 7 a.m. to 7:05 a.m. (New York time). Therefore, because 
trading in the expiring contract months will normally cease on a 
Thursday at 4:15 p.m. (New York time), the index value for exercise 
will be determined the day after trading has ceased, i.e., during the 
Friday afternoon Xetra trading session, or generally by 7:05 a.m. (New 
York time). If no price is established for a component company during 
the Xetra intraday auction, then the next available price is used. If 
no price is available by the end of the Xetra trading session then the 
last price available is used for calculation. When the auction is 
finished, the index values are disseminated as the settlement values. 
The settlement values are widely disseminated through major market data 
vendors including ThomsonReuters and Bloomberg.
    If the Frankfurt Stock Exchange is closed on the Friday before 
expiration, but the ISE remains open, then the last trading day for 
expiring Mini DAX options will be moved earlier to Wednesday as if the 
ISE had had a Friday holiday. The settlement index value used for 
exercise will be calculated during Xetra's intra-day auction on 
Thursday morning.

Position Limits

    For options on the Mini DAX, the Exchange proposes to establish 
aggregate position limits at 250,000 contracts on the same side of the 
market, provided no more than 150,000 of such contracts are in the 
nearest expiration month series. Additionally, under ISE Rule 2006, an 
index option hedge exemption for public customers may be available 
which may expand the position limit up to an additional 750,000 
contracts.\9\ Furthermore, proprietary accounts of members may receive 
an exemption of up to 500,000 contracts for the purpose of facilitating 
public customer orders.\10\
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    \9\ The same limits that apply to position limits shall apply to 
exercise limits for these
    products.
    \10\ See ISE Rule 413(c).
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Exchange Rules Applicable

    Exchange rules that are applicable to the trading of options on 
broad-based indexes will also apply to the trading of Mini DAX 
options.\11\ Specifically, the trading of Mini DAX options will be 
subject to, among others, Exchange rules governing margin requirements 
and trading halt procedures for index options.
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    \11\ See ISE Rules 2000 through 2012.
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    The Exchange proposes to apply broad-based index margin 
requirements for the purchase and sale of options on the Mini DAX. 
Accordingly, purchases of put or call options with nine months or less 
until expiration must be paid for in full. Writers of uncovered put or 
call options must deposit/maintain 100% of the option proceeds, plus 
15% of the aggregate contract value (current index level x $100), less 
any out-of-the-money amount, subject to a minimum of the option 
proceeds plus 10% of the aggregate contract value for call options and 
a minimum of the option proceeds plus 10% of the aggregate exercise 
price amount for put options.
    The trading of options on the Mini DAX shall be subject to the same 
rules that presently govern the trading of Exchange index options, 
including sales practice rules, margin requirements, trading rules, and 
position and exercise limits. In addition, long-term option series 
having up to sixty months to expiration may be traded.\12\ The trading 
of long-term Mini DAX options shall also be subject to the same rules 
that govern the trading of all the Exchange's index options, including 
sales practice rules, margin requirements, and trading rules.
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    \12\ See Rule 2009(b)(1). The Exchange is not listing reduced 
value LEAPS on the Mini DAX pursuant to Rule 2009(b)(2).
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    Chapter Six of the Exchange's rules is designed to protect public 
customer trading and shall apply to the trading of options on the Mini 
DAX. Specifically, ISE Rules 608(a) and (b) prohibit Members from 
accepting a customer order to purchase or write an option unless such 
customer's account has been approved in writing by a designated Options 
Principal of the Member.\13\ Additionally, ISE's Rule 610 regarding 
suitability is designed to ensure that options 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 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 on the day the discretionary order 
is entered. Finally, ISE Rule 609, Supervision of Accounts, Rule 612, 
Confirmation to Customers, and ISE Rule 616, Delivery of Current 
Options Disclosure Documents and Prospectus, will also apply to trading 
in of options on the Mini DAX.
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    \13\ Pursuant to ISE Rule 602, Representatives of a Member may 
solicit or accept customer orders for FCOs.
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Capacity

    The Exchange has represented that it has the necessary systems 
capacity to support new options series that will result from the 
introduction of options on the Mini DAX, including LEAPS.

Surveillance

    The Exchange has represented that it has an adequate surveillance 
program in place for options traded on the Mini DAX. Index products and 
their respective symbols are integrated into the Exchange's existing 
surveillance system architecture and are thus subject to the relevant 
surveillance processes. Further, both ISE and the Frankfurt Stock 
Exchange, operated by DBAG, are members of the Intermarket Surveillance 
Group (``ISG''). Through its membership in the ISG, ISE may obtain 
trading information via the ISG from other exchanges who are members or 
affiliates of the ISG.

III. Discussion

    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.\14\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\15\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, 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.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation.
    \15\ 15 U.S.C. 78f(b)(5).
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    As a national securities exchange, the ISE is required, under 
Section 6(b)(1) of the Act,\16\ to enforce compliance by its members, 
and persons associated with its members, with the provisions of the 
Act, Commission rules and regulations thereunder, and its own rules. In 
addition, brokers that trade Mini DAX options will also be subject to 
best

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execution obligations and FINRA rules.\17\ Applicable exchange rules 
also require that customers receive appropriate disclosure before 
trading Mini DAX options.\18\ Furthermore, brokers opening accounts and 
recommending options transactions must comply with relevant customer 
suitability standards.\19\
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    \16\ 15 U.S.C. 78f(b)(1).
    \17\ See NASD Rule 2320.
    \18\ See ISE Rule 616.
    \19\ See ISE Rule 610. See also ISE Rulebook Chapter Six for 
rules designed to protect public customer trading that shall apply 
to the trading of options on the Mini DAX.
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    The trading of options on the Mini DAX will be subject to the same 
rules that currently govern the trading of Exchange index options, as 
will the trading of long-term Mini DAX options. The Commission believes 
that the listing rules proposed by ISE are consistent with the Act. One 
point strike price intervals for Mini DAX options should provide 
investors with flexibility in the trading of Mini DAX options and 
further the public interest by allowing investors to establish 
positions that are better tailored to meet their investment objectives. 
The listing of options on a reduced value should provide an opportunity 
for investors to hedge, or speculate on, the market risk associated 
with the stocks comprising the DAX Index, and with the reduction in the 
value of the DAX Index, investors will be able to use this trading 
vehicle while extending a smaller outlay of capital. This may attract 
additional investors, and, in turn, create a more active and liquid 
trading environment.
    The Commission notes that index levels for options on the Mini DAX 
will be calculated by DBAG, or its agent, and updated on a real time 
basis, and will be disseminated by ISE at 15-second intervals to market 
information vendors via OPRA.
    The Commission believes that the Exchange's proposed position and 
exercise limits for Mini DAX Options are appropriate and consistent 
with the Act. The Commission also notes that ISE has represented that 
it has an adequate surveillance program to monitor trading of Mini DAX 
Options and intends to apply its existing surveillance program to 
support the trading for these options.
    Finally, the Commission believes that the proposal strikes a 
reasonable balance between the Exchange's desire to offer a wider array 
of products with the need to avoid unnecessary proliferation of options 
series and the corresponding increase in quotes. In approving the 
proposed rule change, the Commission has relied on the Exchange's 
representation that it has the necessary systems capacity to support 
the new options series that will be listed under this proposal. This 
approval order is conditioned on ISE's adherence to this 
representation. The Commission expects the Exchange to continue to 
monitor for options with little or no open interest and trading 
activity and to act promptly to delist such options. In addition, the 
Commission expects that ISE will monitor the trading volume associated 
with the additional options series listed as a result of this proposal 
and the effect of these additional series on market fragmentation and 
on the capacity of the Exchange's, OPRA's, and vendors' automated 
systems.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-ISE-2010-81) be, and hereby 
is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-24882 Filed 10-4-10; 8:45 am]
BILLING CODE 8010-01-P

