
[Federal Register Volume 77, Number 242 (Monday, December 17, 2012)]
[Notices]
[Pages 74700-74703]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30268]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68398; File No. SR-ISE-2012-93]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Increase Position and Exercise Limits in EEM Options

December 11, 2012.
    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 November 28, 2012, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
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.
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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 its rules to increase position and 
exercise limits for options on the iShares MSCI Emerging Markets Index 
Fund (``EEM''). The text of the proposed rule change is available on 
the Exchange's Web site 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 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 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
    ISE proposes to amend Supplementary Material .01 to ISE Rule 412 
and Supplementary Material .01 of ISE Rule 414 to increase position and 
exercise limits, respectively, for EEM options. This filing is based on 
a filing previously submitted by the Chicago Board Options Exchange 
(``CBOE''), which the Commission recently approved.\3\
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    \3\ See Securities Exchange Act Release No. 68086 (October 23, 
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066).
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    Position limits for exchange-traded fund (``ETFs'') options, such 
as EEM options, are determined pursuant to Rule 412 and vary according 
to the number of outstanding shares and trading volume during the most 
recent six-month trading period of an underlying stock or ETF. The 
largest in capitalization and most frequently traded stocks and ETFs 
have an option position limit of 250,000 contracts (with adjustments 
for splits, re-capitalizations, etc.) on the same side of the market; 
smaller capitalization stocks and ETFs have position limits of 200,000, 
75,000, 50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. The current 
position limit for EEM options is 250,000 contracts. The purpose of the 
proposed rule change is to amend Rules 412 and 414 to increase the 
position and exercise limits for EEM options to 500,000 contracts. 
There is precedent for establishing position limits for options on 
actively-traded ETFs and these position limit levels are set forth in 
Rule 412, Supplementary Material .01.\4\
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    \4\ Rule 412, Supplementary Material .01, lists exceptions to 
standard position limits which are: put or call option contracts 
overlying the PowerShares QQQ Trust (``QQQQ''), for which the 
position limit is currently 900,000 contracts on the same side of 
the market; options overlying the Standard and Poor's Depository 
Receipts[supreg] Trust (``SPY''), which currently does not have any 
position limits; options overlying the iShares[supreg] Russell 
2000[supreg] Index Fund (``IWM''), for which the position limit is 
currently 500,000 contracts on the same side of the market; and 
options overlying the Diamonds Trust (``DIA''), for which the 
position limit is currently 300,000 contracts on the same side of 
the market.

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[[Page 74701]]

    In support of this proposed rule change, and as noted by the CBOE 
in its filing, the below trading statistics compare EEM to IWM and SPY. 
As shown in the table, the average daily volume in 2011 for EEM was 65 
million shares compared to 64.1 million shares for IWM and 213 million 
shares for SPY. The total shares outstanding for EEM are 922.9 million 
compared to 192.6 million shares for IWM and 716.1 million shares for 
SPY. Further, the fund market cap for EEM is $41.1 billion compared to 
$15.5 billion for IWM and $98.3 billion for SPY.

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                                                                     2011 ADV         Shares
                      ETF                         2011 ADV (mil.      (option       outstanding     Fund market
                                                     shares)        contracts)        (mil.)        cap  ($bil)
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EEM............................................             65           280,000           922.9            41.1
IWM............................................             64.1         662,500           192.6            15.5
SPY............................................            213         2,892,000           716.1            98.3
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    In further support of this proposal, the Exchange represents that 
EEM still qualifies for the initial listing criteria set forth in Rule 
502(h) for ETFs holding non-U.S. component securities.\5\ EEM tracks 
the performance of the MSCI Emerging Markets Index, which has 
approximately 800 component securities.\6\ ``The MSCI Emerging Markets 
Index is a free float-adjusted market capitalization index that is 
designed to measure equity market performance of emerging markets. The 
MSCI Emerging Markets Index consists of the following 21 emerging 
market country indices: Brazil, Chile, China, Colombia, Czech Republic, 
Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, 
Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and 
Turkey.'' \7\ The Exchange represents that more than 50% of the weight 
of the securities held by EEM are now subject to a comprehensive 
surveillance agreement (``CSA'').\8\ Additionally, the component 
securities of the MSCI Emerging Markets Index on which EEM is based for 
which the primary market is in any one country that is not subject to a 
CSA do not represent 20% or more of the weight of the MSCI Emerging 
Markets Index.\9\ Finally, the component securities of the MSCI 
Emerging Markets Index on which EEM is based for which the primary 
market is in any two countries that are not subject to CSAs do not 
represent 33% or more of the weight of the MSCI Emerging Markets 
Index.\10\
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    \5\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Rule 502(h) and Rule 503(h).
    \6\ See http://us.ishares.com/product_info/fund/overview/EEM.htm and http://www.msci.com/products/indices/licensing/msci_emerging_markets/. Identification of the specific securities in EEM 
and their individual concentrations can be accessed at: http://us.ishares.com/product_info/fund/holdings/EEM.htm.
    \7\ See http://www.msci.com/products/indices/tools/index.html#EM.
    \8\ See ISE Rule 502(h)(B)(1).
    \9\ See ISE Rule 502(h)(B)(2).
    \10\ See ISE Rule 502(h)(B)(3).
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    The Exchange believes that the liquidity in the underlying ETF and 
the liquidity in EEM options support its request to increase the 
position and exercise limits for EEM options. As to the underlying ETF, 
through October 17, 2012, the year-to-date average daily trading volume 
for EEM across all exchanges was 49.3 million shares. As to EEM 
options, the year-to-date average daily trading volume for EEM options 
across all exchanges was 250,304 contracts. The Exchange believes that 
increasing position limits for EEM options will lead to a more liquid 
and competitive market environment for EEM options that will benefit 
customers interested in this product.
    Under the Exchange's proposal, the options reporting requirement 
for EEM would continue unabated. Thus, the Exchange would still require 
that each Member that maintains a position in EEM options on the same 
side of the market, for its own account or for the account of a 
customer, report certain information to the Exchange. This information 
would include, but would not be limited to, the option position, 
whether such position is hedged and, if so, a description of the hedge, 
and the collateral used to carry the position, if applicable. Exchange 
Market Makers would continue to be exempt from this reporting 
requirement, as Market Maker information can be accessed through the 
Exchange's market surveillance systems. In addition, the general 
reporting requirement for customer accounts that maintain an aggregate 
position of 200 or more option contracts would remain at this level for 
EEM options.\11\
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    \11\ See ISE Rule 415(a).
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    As the anniversary of listed options trading approaches its 
fortieth year, the Exchange believes that the existing surveillance 
procedures and reporting requirements at ISE, other options exchanges, 
and at the several clearing firms are capable of properly identifying 
unusual and/or illegal trading activity. In addition, routine oversight 
inspections of the Exchange's regulatory programs by the Commission 
have not uncovered any material inconsistencies or shortcomings in the 
manner in which the Exchange's market surveillance is conducted. These 
procedures utilize daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both options 
and underlying stocks.\12\
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    \12\ These procedures have been effective for the surveillance 
of EEM options trading and will continue to be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\13\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the Exchange's requirement that Members file reports with the 
Exchange for any customer who held aggregate large long or short 
positions of any single class for the previous day will continue to 
serve as an important part of the Exchange's surveillance efforts.
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    \13\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a Member or its customer may try to maintain an 
inordinately large un-hedged position in an option, particularly on 
EEM. Current margin and risk-based haircut methodologies serve to limit 
the size of positions maintained by any one account by increasing the 
margin and/or capital that a Member must maintain for a large position 
held by it or by its customer.\14\

[[Page 74702]]

In addition, the Commission's net capital rule, Rule 15c3-1 \15\ under 
the Securities Exchange Act of 1934 (the ``Act''), imposes a capital 
charge on members to the extent of any margin deficiency resulting from 
the higher margin requirement.
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    \14\ See ISE Rule 1202.
    \15\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the Act in general, and furthers the objectives of Section 6(b)(5) 
of the Act \16\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, 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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    \16\ 15 U.S.C. 78f(b)(5).
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    Specifically, the proposed rule change will benefit large market 
makers (which generally have the greatest potential and actual ability 
to provide liquidity and depth in the product), as well as retail 
traders, investors, and public customers, by providing them with a more 
effective trading and hedging vehicle. In addition, the Exchange 
believes that the structure of EEM options and the considerable 
liquidity of the market for EEM options diminish the opportunity to 
manipulate this product and disrupt the underlying market that a lower 
position limit may protect against. The Exchange also believes that the 
proposed rule change will benefit a greater number of market 
participants who are ISE Members and members of other exchanges. This 
is because EEM is a multiply-listed options class and currently there 
is not a uniform and consistent position and exercise limits regime 
across all of the exchanges that list EEM options. The proposed filing 
will benefit market participants because it will ensure consistency and 
uniformity among the competing options exchanges as to the position and 
exercise limits for a multiply listed options class.

B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act. In this regard and as indicated above, the Exchange 
notes that the rule change is being proposed as a competitive response 
to a CBOE filing. ISE believes this proposed rule change is necessary 
to permit fair competition among the options exchanges and to establish 
uniform position limits for a multiply-listed options class.

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) 
thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange requests that the Commission waive 
the 30-day operative delay so that it can increase the position and 
exercise limits for EEM options immediately, which will result in 
consistency and uniformity among the competing options exchanges as to 
the position and exercise limits for EEM options. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest.\19\ The Commission 
notes the proposal is substantively identical to a proposal that was 
recently approved by the Commission, and does not raise any new 
regulatory issues.\20\ For these reasons, the Commission designates the 
proposed rule change as operative upon filing.
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    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \20\ See Securities Exchange Act Release No. 68086 (October 23, 
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such 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 email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2012-93 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2012-93. This file 
number should be included on the subject line if email 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.,

[[Page 74703]]

Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the 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-2012-93 and should be 
submitted on or before January 7, 2013.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30268 Filed 12-14-12; 8:45 am]
BILLING CODE 8011-01-P


