
[Federal Register Volume 76, Number 56 (Wednesday, March 23, 2011)]
[Notices]
[Pages 16464-16466]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6786]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64091; File No. SR-ISE-2011-04]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving a Proposed Rule Change To Establish New Classes of 
Market Makers for Index Options

March 17, 2011.

I. Introduction

    On January 12, 2011, 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 its rules to establish 
two new classes of market makers for index options traded on the 
Exchange. The proposed rule change was published for comment in the 
Federal Register on January 31, 2011.\3\ The Commission received no 
comments regarding the proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63761 (January 25, 
2011), 76 FR 5412 (``Notice'').
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II. Description of the Proposal

    The Exchange proposed to amend its rules to establish the following 
new classes of market makers for certain index options traded on the 
Exchange: Index Options Primary Market Makers (``IXPMM'') \4\ and Index 
Options Competitive Market Makers (``IXCMM''),\5\ collectively referred 
to as IXMMs.
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    \4\ An IXPMM is defined in new ISE Rule 2013(a) as a primary 
market maker in Eligible Index Options traded on the Exchange 
pursuant to new ISE Rule 2013.
    \5\ An IXCMM is defined in new ISE Rule 2013(a) as a competitive 
market maker in Eligible Index Options traded on the Exchange 
pursuant to new ISE Rule 2013.
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    The Exchange's proposal to separate out and introduce a new class 
of market maker trading licenses that are specific to index options is 
intended to allow an opportunity for additional market

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participants, who are not currently maker makers on the Exchange's 
First Market, to trade new index options as index-specific market 
makers.\6\
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    \6\ See Notice, supra note 3, 76 FR at 5412. An IXMM license, by 
itself, would not allow the holder thereof to trade in equity or ETF 
options traded on the Exchange.
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    Because the Exchange's proposal primarily focuses on newly-listed 
index products, the proposal describes how the existing 28 cash-settled 
indexes traded on the Exchange will be treated. Specifically, index 
options listed on the Exchange prior to December 31, 2010 (``Legacy 
Index Options'') already have an PMM assigned. The proposal does not 
affect those assignments, and such PMMs will simply continue to 
function as PMMs (i.e., as an IXPMM) in its currently-assigned index 
option(s). In addition, except as provided above, the proposal provides 
that all current and future First Market PMMs and CMMs may trade (as an 
IXCMM) all existing and future index products, including both Legacy 
Index Options and Eligible Index Options without having to purchase a 
separate IXCMM trading license. Market participants that are not 
currently a PMM or CMM on the Exchange's First Market will be required 
to purchase a new IXMM license in order to trade in index options on 
the Exchange.\7\
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    \7\ IXMM trading licenses will not represent ownership of any 
equity interest in the Exchange.
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    Eligible Index Options. New ISE Rule 2013(c) defines ``Eligible 
Index Options'' as: (i) Index options that have a 6-month average daily 
volume of less than 10,000 contracts in the US market; and (ii) index 
options that have a trading history of less than 6 months, in which 
case the eligibility threshold would be prorated proportionately over 
the time that an index was listed in the US market.\8\ Prior to the 
listing of an Eligible Index Option, the Exchange will conduct a one-
time eligibility test to determine whether an index product is an 
Eligible Index Option. The Exchange will conduct the eligibility test 
when an index product is qualified for listing under ISE rules and 
prior to its certification with the Options Clearing Corporation.\9\ 
The following index products are not Eligible Index Options: Russell 
2000 Index (``RUT''), the NASDAQ-100 Index (``NDX''), and the Mini-
NASDAQ-100 Index (``MNX'').\10\
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    \8\ For example, if an index has a trading history for just 
three months in the US market, the prorated eligibility threshold 
applied by ISE would be 20,000 ADV.
    \9\ The Exchange currently follows this process with regards to 
the listing of all equity (including ETF) and index option products 
traded on the Exchange.
    \10\ See new ISE Rule 2013(c)(2).
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    Legacy Index Options. ISE defines Legacy Index Options as index 
options listed on the Exchange prior to December 31, 2010.\11\ New ISE 
Rule 2013(c)(3) provides that the current First Market PMM that has an 
allocation as PMM in a particular Legacy Index Option will be deemed to 
be the IXPMM for Legacy Index Options and, accordingly, will not need 
to purchase an IXPMM license to continue to trade as an IXPMM in that 
Legacy Index Option. In the event a Legacy Index Option is de-listed 
and subsequently re-listed, ISE will allocate the IXPMM license for 
that index through the auction process described in Rule 2013.\12\
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    \11\ As of December 31, 2010, the following indexes are Legacy 
Index Options: Mini FTSE 100 (symbol, UKX); ISE Semiconductors 
(BYT); ISE Electronic Trading (DMA); ISE-Revere Natural Gas (FUM); 
ISE Water (HHO); ISE Homeland Security (HSX); ISE Long Gold (HVY); 
ISE 250 (IXZ); ISE U.S. Regional Banks (JLO); ISE Oil and Gas 
Services (OOG); ISE Integrated Oil and Gas (PMP); ISE Bio-
Pharmaceuticals (RND); ISE Homebuilders (RUF); ISE SINdex (SIN); ISE 
Nanotechnology (TNY); ISE Revere Wal-Mart Supplier (WMX); KBW Bank 
Index (BKX); KBW Mortgage Finance Index (MFX); Morgan Stanley 
Technology Index (MSH); Morgan Stanley Retail Index (MVR); Nasdaq Q-
50 Index (NXTQ); Mini-Russell 2000 (RMN); Russell 1000 Index (RUI); 
S&P Mid Cap 400 Index (MID); Standard & Poor's Small Cap 600 Index 
(SML).
    \12\ In other words, the delisting of a Legacy Index Option 
terminates its status as a Legacy Index Option for purposes of new 
ISE Rule 2013.
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    There will be one IXPMM per each Eligible Index Option and Legacy 
Index Option.\13\ IXPMM trading licenses shall be permanently granted 
as long as the IXPMM meets its stated market quality commitments.\14\ 
By contrast, all IXCMM trading licenses will be for a term of one year.
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    \13\ See new ISE Rule 2013(c)(3) and (e)(1).
    \14\ See new ISE Rule 2013(e)(1). The Board or designated 
committee, however, may suspend or terminate any trading license of 
a market maker whenever, in the Board's or designated committee's 
judgment, the interests of a fair and orderly market are best served 
by such action. See new ISE Rule 2013(e)(1).
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    Allocations Generally. Traditionally, new index products on the 
Exchange have been allocated as part of the general allocation to ISE's 
``First Market,'' which is the general market for higher-volume equity, 
ETF and index options. The Exchange states that it will offer IXMM 
trading licenses in a manner similar to how it offers foreign currency 
(``FX'') options trading licenses to FX market makers.\15\ IXPMM 
allocations will be based on the same methodology ISE currently uses 
for FXPMMs in its FX products, which is based, in part, on market 
quality commitments.
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    \15\ See Securities Exchange Act Release No. 55575 (April 3, 
2007), 72 FR 17963, 17964 (April 10, 2007) (SR-ISE-2006-59).
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    IXPMM Allocations for Eligible Index Options. Current and future 
First Market PMMs/CMMs may acquire an IXPMM trading license by 
participating in an auction, which involves the submission of a 
monetary bid and market quality commitments.
    IXPMM trading licenses will be sold by means of a sealed bid 
auction conducted by the Exchange. A separate auction would be 
conducted for each index option for which ISE seeks to allocate an 
IXPMM. The ``winning'' bid at which an IXPMM trading license is sold is 
referred to as the ``Auction Price.'' Together with its bid, a member 
seeking an IXPMM trading license must provide, at a minimum, market 
quality commitments regarding: (1) The average quotation size it will 
disseminate in an Eligible Index Option; and (2) the maximum quotation 
spread it will disseminate in such product at least 90% of the time. At 
the end of the auction, the Exchange will determine the winning bidder 
for an IXPMM trading license based on bid amount and market quality 
commitment, and may reject a bid if the Exchange deems a market quality 
commitment to be unrealistic or significantly inferior to market 
quality commitments submitted by other bidding members. In an auction 
for a trading right for an Eligible Index Option, ISE will give 
preferred consideration to a First Market PMM/CMM where bid and quality 
commitments are equal to those submitted by a new member who is not a 
First Market PMM/CMM.
    Once allocated, the IXPMM may change its market quality commitment 
only to the extent that the new commitments are an improvement to its 
existing commitment. Under new Rule 2013(e)(4), the Exchange will 
review and assess market quality commitments on a quarterly basis to 
ensure IXPMMs are in compliance with their stated commitments. At the 
discretion of the Exchange and subject to the procedural protections 
provided under the rules of the Exchange,\16\ failure to meet stated 
commitments may result in ISE terminating an allocation and conducting 
an auction to reallocate the failing IXPMM's index option.\17\
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    \16\ See Chapter 17 of ISE Rules.
    \17\ See supra note 14.
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    IXCMM Allocations. Current and future First Market PMMs may 
request, and if requested will be allocated, an IXCMM trading license 
without having to pay any additional fee. A member who is not a First 
Market PMM/CMM will be required to purchase an IXCMM trading license to 
trade as an IXCMM on the Exchange. IXCMM trading licenses will be 
available for purchase at any

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time during a calendar year.\18\ All IXCMM trading licenses will expire 
at the end of the calendar year in which they are issued but, upon 
request by a PMM or CMM, will be renewed for subsequent years on an 
annual basis.\19\
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    \18\ IXCMM trading licenses sold during a calendar year will be 
prorated to reflect the number of trading days in the year. See new 
ISE Rule 2013(f)(2).
    \19\ See Notice, supra note 3, 76 FR at 5414.
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    IXMM Duties and Privileges. By amending ISE Rule 802(b) to permit 
the allocation of Eligible Index Options, subject to new Rule 2013, ISE 
is subjecting market makers in Eligible Index Options to the 
obligations imposed on Exchange market makers under Chapter 8 of the 
Exchange's rules. Accordingly, once an IXPMM obtains a trading license 
in an Eligible Index Option, the IXPMM will have all of the 
responsibilities and privileges of a PMM under the Exchange's 
rules.\20\ Similarly, once an IXCMM obtains a trading license in an 
Eligible Index Option, the IXCMM will have all the responsibilities and 
privileges under the Exchange's rules.
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    \20\ For example, IXPMMs will enjoy privileges that include, 
among other things, participation rights and small order execution 
preference while accepting responsibilities that include, among 
other things, the obligation to provide continuous quotations in an 
Eligible Index Option for which it has been allocated, to conducting 
the opening rotation on a daily basis for as long as the IXPMM 
retains an allocation in an Eligible Index Option.
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    After an IXPMM has purchased a trading license, the IXPMM may 
terminate its status as IXPMM in an index option if the IXPMM is unable 
to meet its obligations, provided the IXPMM gives at least 60 days 
prior written notice to the Exchange of such termination. In the event 
the Exchange is unable to re-allocate the IXPMM's index option product 
within the notice period and the index option product is singly listed 
on ISE, then the IXPMM will be required to continue to fulfill its 
obligations in that product until all open interest has been closed. An 
IXCMM may terminate its trading license prior to its scheduled 
expiration by providing at least 10 days prior written notice to the 
Exchange.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 6(b)(5) of the Act,\21\ which 
requires, among other things, that the rules of a national securities 
exchange be designed 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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    \21\ 15 U.S.C. 78f(b)(5). In approving this proposed rule 
change, 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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    The Commission believes that the provisions governing the two new 
classes of market makers that will be permitted to trade Eligible Index 
Options and Legacy Index Options on the Exchange, IXPMMs and IXCMMs, 
are consistent with the Act. The Commission notes that IXPMMs and 
IXCMMs will be subject to identical obligations that correspond to the 
market making obligations applicable to First Market PMMs and CMMs, 
respectively.\22\ The Commission notes that, to obtain a trading 
license, IXPMMs will be required to provide the Exchange with market 
quality commitments \23\ and, if an IXPMM continuously fails to meet 
its stated market quality commitments, the Exchange may terminate its 
IXPMM allocation.\24\
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    \22\ See supra note 20.
    \23\ See new ISE Rule 2013(e)(3).
    \24\ See new ISE Rule 2013(e)(4).
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    The Commission believes that the procedures under which the 
Exchange proposes to offer IXMM licenses are reasonably designed to 
award such allocations in a fair and reasonable manner. In particular, 
the Commission believes that provisions governing IXCMM trading 
licenses are designed to ensure that market maker trading licenses will 
be widely available because the Exchange will make an unlimited amount 
of IXCMM licenses available for purchase by members who are not PMMs or 
CMMs on the Exchange's First Market.\25\ In addition, the requirement 
that bidders provide market quality commitment in addition to their bid 
for an IXPMM allocation will allow the Exchange to grant IXPMM trading 
licenses in an objective manner without awarding a trading license 
solely based on the highest bid.
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    \25\ See new ISE Rule 2013(f).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-ISE-2011-04) be, and hereby 
is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6786 Filed 3-22-11; 8:45 am]
BILLING CODE 8011-01-P


