Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the International Securities Exchange, Inc. to Trade Options, Including LEAPS, on Full and Reduced Values of the Nasdaq 100 Index, 6476-6480 [E5-464]
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2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Act,13 in general, and Section 6(b)(5) of
the Act,14 in particular, in that it is
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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition 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 neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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) does not become operative for 30
days from the date on which it was
filed, 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 15 and
Rule 19b–4(f)(6) thereunder.16
A proposed rule change filed under
Rule 19b–4(f)(6) 17 normally does not
become operative prior to 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 has requested that the
Commission waive the five-day prefiling requirement and the 30-day
operative delay, as specified in Rule
19b–4(f)(6)(iii), and designate the
proposed rule change immediately
operative.
The Commission believes that
waiving the five-day pre-filing provision
and the 30-day operative delay is
13 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
15 15 U.S.C. 78s(b)(3)(A).
16 17 CFR 240.19b–4(f)(6).
17 Id.
14 15
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consistent with the protection of
investors and the public interest.18 By
waiving the pre-filing requirement and
accelerating the operative date, the Pilot
Program can continue without
interruption. The Commission believes
that allowing the pilot to continue will
allow Participants to either gather
sufficient information to justify the need
for the pilot program or determine that
the exemption from trade-through
liability is no longer necessary.
Increasing the maximum number of
contracts to be satisfied with respect to
Satisfaction Orders in the last seven
minutes of trading in options to 50
contracts will enhance customer order
protection.
At any time within 60 days of the
filing of such proposed rule change, the
Commission may summarily abrogate
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.19
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–BSE–2005–08 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Number SR–BSE–2005–08. 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
18 For purposes of accelerating the operative date
of this proposal, the Commission has considered
the proposed rule’s impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
19 For purposes of calculating the 60-day period
within which the Commission may summarily
abrogate the proposed rule change under Section
19(b)(3)(C) of the Act, the Commission considers
the period to commence on January 31, 2005, the
date the Exchange filed Amendment No. 1 to the
proposed rule change. See 15 U.S.C. 78s(c)(3)(C).
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post all comments on the Commission’s
Internet Web site (https://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. Copies of the filing also will be
available for inspection and copying at
the principal office of the BSE. 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 SR–
BSE–2005–08 and should be submitted
on or before February 28, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.20
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–475 Filed 2–4–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51121; File No. SR-ISE–
2005–01]
Self-Regulatory Organizations; Notice
of Filing and Order Granting
Accelerated Approval of Proposed
Rule Change and Amendment Nos. 1
and 2 Thereto by the International
Securities Exchange, Inc. to Trade
Options, Including LEAPS, on Full and
Reduced Values of the Nasdaq 100
Index
February 1, 2005.
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 January 4,
2005, the International Securities
Exchange, Inc. (‘‘ISE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the Exchange.
On January 18, 2005, the Exchange filed
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Amendment No. 1 to the proposed rule
change.3 On January 19, 2005, the
Exchange filed Amendment No. 2 to the
proposed rule change.4 The Commission
is publishing this notice to solicit
comments on the proposed rule change,
as amended, from interested persons
and to approve the proposal, as
amended, on an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The ISE is proposing to amend its
rules to trade options on the full and
reduced values of the Nasdaq 100 Index
(‘‘Index’’). The Exchange also proposes
to list and trade long-term options on
full and reduced values of the Index.
Options on the Index would be cashsettled and have European-style exercise
provisions. The text of the proposed
rule change is available on the ISE’s
website (https://www.iseoptions.com), at
the ISE’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 III 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 Exchange proposes to amend its
rules to provide for the listing and
trading on the Exchange of cash-settled,
European-style, index options on the
full and reduced values of the Nasdaq
100 Index, a stock index calculated and
maintained by The Nasdaq Stock
Market, Inc. (‘‘Nasdaq’’).5 Specifically,
the Exchange proposes to list options
3 Amendment No. 1 was a partial amendment that
modified the proposed index hedge exemption for
options on the Nasdaq 100 Index. A conforming
change was proposed to the contract specifications
in the filing.
4 Amendment No. 2 replaced Amendment No. 1
in its entirety. In Amendment No. 2, the ISE again
revised the proposed hedge exemption.
5 A description of the Index is available on
Nasdaq’s Web site at https://dynamic.nasdaq.com/
dynamic/nasdaq100_activity.stm.
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based upon the full value of the Nasdaq
100 Index (‘‘Full-size Nasdaq 100
Index’’ or ‘‘NDX’’) as well as one-tenth
of the value of the Nasdaq 100 Index
(‘‘Mini Nasdaq 100 Index’’ or ‘‘MNX’’).6
The Exchange also proposes to list longterm options based upon the full value
of the Nasdaq 100 Index (‘‘NDX
LEAPS’’) and one-tenth of the value of
the Nasdaq 100 Index (‘‘MNX LEAPS’’).7
Index Design and Composition
The Nasdaq 100 Index, launched in
January 1985, represents the largest nonfinancial domestic and international
issues listed on Nasdaq based on market
capitalization. The Index reflects
companies across major industry
groups, including computer hardware
and software, telecommunications,
retail/wholesale trade, and
biotechnology.
The Index is calculated using a
modified capitalization-weighted
methodology. The value of the Index
equals the aggregate value of the Index
share weights, also known as the
Depository Receipt Multiplier, of each
of the component securities multiplied
by each security’s respective last sale
price on Nasdaq or the Nasdaq Official
Closing Price (‘‘NOCP’’), divided by
Adjusted Base Period Market Value
(‘‘ABPMV’’), and multiplied by the base
value. The ABPMV serves the purpose
of scaling such aggregate value
(otherwise in the trillions) to a lower
order of magnitude which is more
desirable for Index reporting purposes.
If trading in an Index security is halted
while the market is open, the last
Nasdaq traded price for that security is
used for all index computations until
trading resumes. If trading is halted
before the market is open, the previous
day’s NOCP is used. Additionally, the
Index is calculated without regard to
any dividends on component securities.
The methodology is expected to retain,
in general, the economic attributes of
capitalization weighting, while
providing enhanced diversification. To
accomplish this, Nasdaq reviews the
composition of the Index on a quarterly
basis and adjusts the weighting of Index
components using a proprietary
algorithm, if certain pre-established
weight distribution requirements are not
met.
6 Options on NDX and MNX are currently listed
for trading on the Chicago Board Options Exchange
(‘‘CBOE’’). Options on NDX and MNX listed on the
Exchange would be identical to the NDX and MNX
options listed on CBOE.
7 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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Nasdaq has certain eligibility
requirements for inclusion in the
Index.8 For example, to be eligible for
inclusion in the Index, a component
security must be exclusively listed on
the Nasdaq National Market, or dually
listed on a national securities exchange
prior to January 1, 2004.9 Only one class
of security per issuer is considered for
inclusion in the Index.
Additionally, the issuer of a
component security cannot be a
financial or investment company and
cannot currently be involved in
bankruptcy proceedings. Criteria for
inclusion also require the average daily
trading volume of a component security
to be at least 200,000 shares on Nasdaq.
If a component security is of a foreign
issuer, based on its country of
incorporation, it must have listed
options or be eligible for listed-options
trading. In addition, the issuer of a
component security must not have
entered into any definitive agreement or
other arrangement which would result
in the security no longer being eligible
for inclusion in the Index within the
next six months. An issuer of a
component security also must not have
annual financial statements with an
audit opinion where the auditor or the
issuer has indicated that the audit
opinion cannot be currently relied
upon.
As of September 21, 2004, the
following were characteristics of the
Index:
Æ The total capitalization of all
components of the Index was $1.693
trillion;
Æ Regarding component
capitalization, (a) the highest
capitalization of a component was
$296.39 billion (Microsoft Corp.), (b) the
lowest capitalization of a component
was $1.48 billion (First Health Group
Corp.), (c) the mean capitalization of the
components was $16.93 billion, and (d)
the median capitalization of the
components was $6.34 billion;
Æ Regarding component price per
share, (a) the highest price per share of
a component was $90.65 (eBay, Inc.), (b)
the lowest price per share of a
component was $2.68 (Level 3
Communications, Inc.), (c) the mean
price per share of the components was
8 The initial eligibility criteria and continued
eligibility criteria are available on Nasdaq’s Web
site at https://dynamic.nasdaq.com/dynamic/
nasdaq100_activity.stm.
9 In the case of spin-offs, the operating history of
the spin-off would be considered. Additionally, if
a component security would otherwise qualify to be
in the top 25% of securities included in the Index
by market capitalization for the six prior
consecutive months, it would be eligible if it had
been listed for one year.
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$35.00, and (d) the median price per
share of the components was $29.95;
Æ Regarding component weightings,
(a) the highest weighting of a
component was 8.73% (Microsoft
Corp.), (b) the lowest weighting of a
component was 0.10% (Compuware
Corp.), (c) the mean weighting of the
components was 1.00%, (d) the median
weighting of the components was
0.52%, and (e) the total weighting of the
top five highest weighted components
was 27.30% (Microsoft Corp.,
Qualcomm, Inc., Cisco Systems, Inc.,
Intel Corp., and eBay, Inc.);
Æ Regarding component available
shares, (a) the most available shares of
a component was 10.86 billion shares
(Microsoft Corp.), (b) the least available
shares of a component was 43.74
million shares (Henry Schein, Inc.), (c)
the mean available shares of the
components was 675.31 million shares,
and (d) the median available shares of
the components was 250.05 million
shares;
Æ Regarding the six-month average
daily volumes of the components, (a)
the highest six-month average daily
volume of a component was 64.62
million shares (Microsoft Corp.), (b) the
lowest six-month average daily volume
of a component was 348,583 shares
(Ryanair Holdings PLC), (c) the mean
six-month average daily volume of the
components was 7.14 million shares, (d)
the median six-month average daily
volume of the components was 3.05
million shares, (e) the average of sixmonth average daily volumes of the five
most heavily traded components was
260.46 million shares (Microsoft Corp.,
Intel Corp., Cisco Systems, Inc., Oracle
Corp., and Sun Microsystems, Inc.), and
(f) 100% of the components had a sixmonth average daily volume of at least
50,000; and
Æ Regarding option eligibility, (a)
99.3% of the components were options
eligible, as measured by weighting, and
(b) 96.0% of the components were
options eligible, as measured by
number.
Index Calculation and Index
Maintenance
In recent years, the value of the Fullsize Nasdaq 100 Index has increased
significantly, such that the value of the
Index stood at 804.64, as of October 7,
2002. As a result, the premium for the
Full-size Nasdaq 100 Index options also
has increased. The Exchange believes
that this has caused Full-size Nasdaq
100 Index options to trade at a level that
may be uncomfortably high for retail
investors. The Exchange believes that
listing options on reduced values would
attract a greater source of customer
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business than if the options were based
only on the full value of the Index. The
Exchange further believes that listing
options on reduced values would
provide an opportunity for investors to
hedge, or speculate on, the market risk
associated with the stocks comprising
the Index. Additionally, by reducing the
values of the Index, investors would be
able to use this trading vehicle while
extending a smaller outlay of capital.
The Exchange believes that this should
attract additional investors and, in turn,
create a more active and liquid trading
environment.10
The Full-size Nasdaq 100 Index and
the Mini Nasdaq 100 Index levels are
calculated continuously, using the last
sale price for each component stock in
the Index, and are disseminated every
15 seconds throughout the trading
day.11 The Full-size Nasdaq-100 Index
level equals the current market value of
component stocks multiplied by 125
and then divided by the stocks’ market
value of the adjusted base period. The
adjusted base period market value is
determined by multiplying the current
market value after adjustments times the
previous base period market value and
then dividing that result by the current
market value before adjustments. To
calculate the value of the Mini Nasdaq
100 Index, the full value of the Index is
divided by ten. To maintain continuity
for the Index’s value, the divisor is
adjusted periodically to reflect events
such as changes in the number of
common shares outstanding for
component stocks, company additions
or deletions, corporate restructurings, or
other capitalization changes.
The settlement values for purposes of
settling both Full-size Nasdaq 100 Index
(‘‘Full-size Settlement Value’’) and Mini
Nasdaq 100 Index (‘‘Mini Settlement
Value’’) are calculated based on a
volume-weighted average of prices
reported in the first five minutes of
trading for each of the component
securities on the last business day
before the expiration date (‘‘Settlement
10 The Exchange believes that options trading on
MNX have generated considerable interest from
investors, as measured by its robust trading volume
on CBOE.
11 Full-size Nasdaq 100 Index and Mini Nasdaq
100 Index levels are disseminated through the
Nasdaq Index Dissemination Services (‘‘NIDS’’)
during normal Nasdaq trading hours (9:30 a.m. to
4 p.m. ET). The Index is calculated using Nasdaq
prices (not consolidated) during the day and the
NOCP for the close. The closing value of the Index
may change until 5:15 p.m. ET due to corrections
to the NOCP of the component securities. In
addition, the Index is published daily on Nasdaq’s
Web site and through major quotation vendors such
as Reuters and Thomson’s ILX.
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Day’’).12 The Settlement Day is normally
the Friday preceding ‘‘Expiration
Saturday.’’ 13 If a component security in
the Index does not trade on Settlement
Day, the closing price from the previous
trading day would be used to calculate
both the Full-size Settlement Value and
Mini Settlement Value.14 Accordingly,
trading in options on the Index will
normally cease on the Thursday
preceding an Expiration Saturday.
Nasdaq monitors and maintains the
Index. Nasdaq is responsible for making
all necessary adjustments to the Index to
reflect component deletions; share
changes; stock splits; stock dividends;
stock price adjustments due to
restructuring, mergers, or spin-offs
involving the underlying components;
and other corporate actions. Some
corporate actions, such as stock splits
and stock dividends, require simple
changes to the available shares
outstanding and the stock prices of the
underlying components.
The component securities are
evaluated on an annual basis, except
under extraordinary circumstances
which may result in an interim
evaluation, as follows: Securities listed
on Nasdaq that meet its eligibility
criteria are ranked by market value
using closing prices as of the end of
October and publicly available total
shares outstanding as of the end of
November. Eligible component
securities which are already in the
Index and ranked in the top 100 (based
on market value) are retained in the
Index. Component securities that are
ranked from 101 to 150 are also retained
provided that each such component
security was ranked in the top 100
during the previous ranking review.
Components that do not meet these
criteria are replaced. The replacement
securities chosen are those Indexeligible securities that have the largest
market capitalization and are not
currently in the Index.
The list of annual additions and
deletions to the Index is publicly
announced in early December. Changes
to the Index are made effective after the
close of trading on the third Friday in
December. If at any time during the year
a component security no longer trades
on Nasdaq, or is otherwise determined
by Nasdaq to become ineligible for
inclusion in the Index, that component
security would be replaced with the
12 The aggregate exercise value of the option
contract is calculated by multiplying the Index
value by the Index multiplier, which is 100.
13 For any given expiration month, options on the
Nasdaq 100 Index will expire on the third Saturday
of the month.
14 Full-size Settlement Values and Mini
Settlement Values are disseminated by CBOE.
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largest market capitalization component
not currently in the Index that met the
eligibility criteria described earlier.
Although the Exchange is not
involved in the maintenance of the
Index, the Exchange represents that it
will monitor the Index on a quarterly
basis and file a proposed rule change
with the Commission pursuant to Rule
19b–4 if: (i) The number of securities in
the Index drops by one-third or more;
(ii) 10% or more of the weight of the
Index is represented by component
securities having a market value of less
than $75 million; (iii) less than 80% of
the weight of the Index is represented
by component securities that are eligible
for options trading pursuant to ISE Rule
502; (iv) 10% or more of the weight of
the Index is represented by component
securities trading less than 20,000
shares per day; or (v) the largest
component security accounts for more
than 25% of the weight of the Index or
the largest five components in the
aggregate account for more than 50% of
the weight of the Index.
The Exchange will further notify the
Commission’s Division of Market
Regulation if Nasdaq determines to
cease maintaining and calculating the
Index, or if the Index values are not
disseminated every 15 seconds by a
widely available source. The ISE has
represented that, if the Index ceases to
be maintained or calculated, or if the
Index values are not disseminated every
15 seconds by a widely available source,
it would not list any additional series
for trading and would limit all
transactions in such options to closing
transactions only for the purpose of
maintaining a fair and orderly market
and protecting investors.
Contract Specifications
The contract specifications for options
on the Index are set forth as an Exhibit
to the proposed rule change. The
proposed contract specifications are
identical to the contract specifications
of NDX and MNX options that are
currently listed on CBOE. The Index is
a broad-based index, as defined in
Exchange Rule 2001(j). Options on the
Nasdaq 100 Index are European-style
and A.M. cash-settled. The Exchange’s
standard trading hours for index options
(9:30 a.m. to 4:15 p.m. ET), as set forth
in ISE Rule 2008(a), would apply to
options on the Nasdaq 100 Index.
Exchange rules that are applicable to the
trading of options on broad-based
indexes would apply to both NDX and
MNX.15 Specifically, the trading of NDX
and MNX options would be subject to,
among others, Exchange rules governing
15 See
Exchange Rules 2000 through 2012.
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margin requirements and trading halt
procedures for index options.
For NDX, the Exchange proposes to
establish aggregate position limits at
75,000 contracts on the same side of the
market. The Full-size Nasdaq Index
contracts would be aggregated with
Mini Nasdaq 100 Index contracts, where
ten Mini Nasdaq 100 Index contracts
equal one Full-size Nasdaq 100 Index
contract.16 The Exchange also is
proposing to amend its Rule 2006(a)(5)
to conform it to CBOE Rule 24.4(e) with
regard to hedge exemptions for options
on NDX and MNX. Specifically, the
Exchange seeks to add a table in its Rule
2006(a)(5), similar to the one provided
by CBOE Rule 24.4(e), that enumerates
the hedge exemption available for NDX
and MNX and other broad-based
indexes. A hedge exemption of 150,000
contracts and 1,500,000 contracts is
available for NDX and MNX,
respectively. The Exchange plans to
retain its standard limit of 75,000
contracts for other broad-based
indexes.17
The Exchange proposes to apply
broad-based index margin requirements
for the purchase and sale of options on
the Index. 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 would be required to deposit or
maintain 100% of the option proceeds,
plus 15% of the aggregate contract value
(current index level × $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 Exchange proposes to set strike
price intervals at least 21⁄2 points for
certain near-the-money series in nearterm expiration months when the Fullsize Nasdaq 100 Index or Mini Nasdaq
100 Index is at a level below 200, and
5 point strike price intervals for other
options series with expirations up to
one year, and at least 10 point strike
price intervals for longer-term options.
The minimum tick size for series trading
below $3 is $0.05, and for series trading
at or above $3 is $0.10. Based on the
current index levels, the Exchange plans
to set strike price intervals of 5 points
and 21⁄2 points for NDX and MNX,
respectively.
16 The position limits proposed by the Exchange
for Nasdaq 100 Index options are identical to those
established by CBOE.
17 See Amendment No. 2. The same limits that
apply to position limits would apply to exercise
limits for these products.
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6479
The Exchange proposes to list options
on both the Full-size Nasdaq 100 Index
and the Mini Nasdaq 100 Index 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.18 In addition, longerterm option series having up to 60
months to expiration may be traded.19
The trading of any long-term Nasdaq
100 Index options would 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.
Surveillance and Capacity
The Exchange represents that it has an
adequate surveillance program in place
for options traded on the Index and
intends to apply those same program
procedures that it applies to the
Exchange’s other index options.
Additionally, the Exchange is a member
of the Intermarket Surveillance Group
(‘‘ISG’’) under the Intermarket
Surveillance Group Agreement, dated
June 20, 1994. The members of the ISG
include all of the U.S. registered stock
and options markets: The American
Stock Exchange, the Boston Stock
Exchange, CBOE, the Chicago Stock
Exchange, the National Stock Exchange,
NASD, the New York Stock Exchange,
the Pacific Stock Exchange, and the
Philadelphia Stock Exchange. The ISG
members work together to coordinate
surveillance and investigative
information sharing in the stock and
options markets. In addition, the major
futures exchanges are affiliated
members of the ISG, which allows for
the sharing of surveillance information
for potential intermarket trading abuses.
The Exchange represents that it has
the necessary systems capacity to
support new options series that would
result from the introduction of NDX,
MNX, NDX LEAPS, and MNX LEAPS.
The Exchange has provided the
Commission with system capacity
information to support its system
capacity representations.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6 of the Act 20 in general, and
with Section 6(b)(5) in particular,21 in
that it will permit the trading of options
on the Full-size Nasdaq 100 Index and
18 See
ISE Rule 2009(a)(3).
LEAPS and MNX LEAPS are listed
pursuant to ISE Rule 2009(b)(1) rather than Rule
2009(b)(2).
20 15 U.S.C. 78f.
21 15 U.S.C. 78f(b)(5).
19 NDX
E:\FR\FM\07FEN1.SGM
07FEN1
6480
Federal Register / Vol. 70, No. 24 / Monday, February 7, 2005 / Notices
Mini Nasdaq 100 Index pursuant to
rules designed to prevent fraudulent
and manipulative acts and practices and
to promote just and equitable principles
of trade.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any inappropriate burden on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited
comments on this proposed rule change.
The Exchange has not received any
unsolicited written comments from
members or other interested parties.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–ISE–2005–01 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Number SR–ISE–2005–01. 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 (https://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
VerDate jul<14>2003
21:04 Feb 04, 2005
Jkt 205001
the Commission’s Public Reference
Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of this
filing also will be available for
inspection and copying at the principal
office of the ISE. 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–
2005–01 and should be submitted on or
before February 28, 2005.
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the
proposed rule change, as amended, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.22 In particular, the
Commission believes that the proposal
is consistent with Section 6(b)(5) of the
Act,23 which requires that the rules of
an 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. The Commission notes
that it previously approved the listing
and trading of options on the Nasdaq
100 Index on another exchange.24 The
Commission presently is not aware of
any regulatory issue that should cause it
to revisit that earlier finding or preclude
the trading of such options on the ISE.
In approving this proposal, the
Commission has specifically relied on
the following representations made by
the Exchange:
1. The Exchange will notify the
Commission’s Division of Market Regulation
immediately if Nasdaq determines to cease
maintaining and calculating the Nasdaq 100
Index, or if the Nasdaq 100 Index values are
not disseminated every 15 seconds by a
widely available source. If the Index ceases
to be maintained or calculated, or if the Index
values are not disseminated every 15 seconds
by a widely available source, the Exchange
will not list any additional series for trading
and limit all transactions in such options to
closing transactions only for the purpose of
maintaining a fair and orderly market and
protecting investors.
22 In approving this proposal, the Commission has
considered its impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
23 15 U.S.C. 78f(b)(5).
24 See Securities Exchange Act Release No. 33428
(January 5, 1994), 59 FR 1576 (January 11, 1994).
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
2. The Exchange has an adequate
surveillance program in place for options
traded on the Nasdaq 100 Index.
3. The additional quote and message traffic
that will be generated by listing and trading
NDX, MNX, NDX LEAPS, and MNX LEAPS
will not exceed the Exchange’s current
message capacity allocated by the
Independent System Capacity Advisor.
The Commission further notes that in
approving this proposal, it relied on the
Exchange’s discussion of how Nasdaq
currently calculates the Index. If the
manner in which Nasdaq calculates the
Index were to change substantially, this
approval order might no longer be
effective.
In addition, the Commission believes
that the position limits for these new
options, and the hedge exemption from
such position limits, are reasonable and
consistent with the Act. The
Commission previously has found
identical provisions for NDX and MNX
options to be consistent with the Act.25
The Commission finds good cause for
approving this proposal before the
thirtieth day after the publication of
notice thereof in the Federal Register.
Because options on the Nasdaq 100
Index already trade on another
exchange, accelerating approval of the
ISE’s proposal should benefit investors
by creating, without undue delay,
additional competition in the market for
these options.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,26 that the
proposed rule change, as amended (SR–
ISE–2005–01), is hereby approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.27
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–464 Filed 2–4–05; 8:45 am]
BILLING CODE 8010–01–P
25 See Securities Exchange Act Release No. 44156
(April 6, 2001), 66 FR 19261 (April 13, 2001) (SR–
CBOE–00–14) (order approving a proposed rule
change by CBOE to increase position and exercise
limits for Nasdaq 100 Index options, expand the
Index hedge exemption, and eliminate the nearterm position limit restriction).
26 15 U.S.C. 78s(b)(2).
27 17 CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 70, Number 24 (Monday, February 7, 2005)]
[Notices]
[Pages 6476-6480]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-464]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51121; File No. SR-ISE-2005-01]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto by the International Securities Exchange, Inc. to
Trade Options, Including LEAPS, on Full and Reduced Values of the
Nasdaq 100 Index
February 1, 2005.
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 January 4, 2005, the International Securities Exchange, Inc.
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. On January 18, 2005, the Exchange filed
[[Page 6477]]
Amendment No. 1 to the proposed rule change.\3\ On January 19, 2005,
the Exchange filed Amendment No. 2 to the proposed rule change.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons and to
approve the proposal, as amended, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 was a partial amendment that modified the
proposed index hedge exemption for options on the Nasdaq 100 Index.
A conforming change was proposed to the contract specifications in
the filing.
\4\ Amendment No. 2 replaced Amendment No. 1 in its entirety. In
Amendment No. 2, the ISE again revised the proposed hedge exemption.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE is proposing to amend its rules to trade options on the
full and reduced values of the Nasdaq 100 Index (``Index''). The
Exchange also proposes to list and trade long-term options on full and
reduced values of the Index. Options on the Index would be cash-settled
and have European-style exercise provisions. The text of the proposed
rule change is available on the ISE's website (https://
www.iseoptions.com), at the ISE'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 III 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 Exchange proposes to amend its rules to provide for the listing
and trading on the Exchange of cash-settled, European-style, index
options on the full and reduced values of the Nasdaq 100 Index, a stock
index calculated and maintained by The Nasdaq Stock Market, Inc.
(``Nasdaq'').\5\ Specifically, the Exchange proposes to list options
based upon the full value of the Nasdaq 100 Index (``Full-size Nasdaq
100 Index'' or ``NDX'') as well as one-tenth of the value of the Nasdaq
100 Index (``Mini Nasdaq 100 Index'' or ``MNX'').\6\ The Exchange also
proposes to list long-term options based upon the full value of the
Nasdaq 100 Index (``NDX LEAPS'') and one-tenth of the value of the
Nasdaq 100 Index (``MNX LEAPS'').\7\
---------------------------------------------------------------------------
\5\ A description of the Index is available on Nasdaq's Web site
at https://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm.
\6\ Options on NDX and MNX are currently listed for trading on
the Chicago Board Options Exchange (``CBOE''). Options on NDX and
MNX listed on the Exchange would be identical to the NDX and MNX
options listed on CBOE.
\7\ 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.
---------------------------------------------------------------------------
Index Design and Composition
The Nasdaq 100 Index, launched in January 1985, represents the
largest non-financial domestic and international issues listed on
Nasdaq based on market capitalization. The Index reflects companies
across major industry groups, including computer hardware and software,
telecommunications, retail/wholesale trade, and biotechnology.
The Index is calculated using a modified capitalization-weighted
methodology. The value of the Index equals the aggregate value of the
Index share weights, also known as the Depository Receipt Multiplier,
of each of the component securities multiplied by each security's
respective last sale price on Nasdaq or the Nasdaq Official Closing
Price (``NOCP''), divided by Adjusted Base Period Market Value
(``ABPMV''), and multiplied by the base value. The ABPMV serves the
purpose of scaling such aggregate value (otherwise in the trillions) to
a lower order of magnitude which is more desirable for Index reporting
purposes. If trading in an Index security is halted while the market is
open, the last Nasdaq traded price for that security is used for all
index computations until trading resumes. If trading is halted before
the market is open, the previous day's NOCP is used. Additionally, the
Index is calculated without regard to any dividends on component
securities. The methodology is expected to retain, in general, the
economic attributes of capitalization weighting, while providing
enhanced diversification. To accomplish this, Nasdaq reviews the
composition of the Index on a quarterly basis and adjusts the weighting
of Index components using a proprietary algorithm, if certain pre-
established weight distribution requirements are not met.
Nasdaq has certain eligibility requirements for inclusion in the
Index.\8\ For example, to be eligible for inclusion in the Index, a
component security must be exclusively listed on the Nasdaq National
Market, or dually listed on a national securities exchange prior to
January 1, 2004.\9\ Only one class of security per issuer is considered
for inclusion in the Index.
---------------------------------------------------------------------------
\8\ The initial eligibility criteria and continued eligibility
criteria are available on Nasdaq's Web site at https://
dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm.
\9\ In the case of spin-offs, the operating history of the spin-
off would be considered. Additionally, if a component security would
otherwise qualify to be in the top 25% of securities included in the
Index by market capitalization for the six prior consecutive months,
it would be eligible if it had been listed for one year.
---------------------------------------------------------------------------
Additionally, the issuer of a component security cannot be a
financial or investment company and cannot currently be involved in
bankruptcy proceedings. Criteria for inclusion also require the average
daily trading volume of a component security to be at least 200,000
shares on Nasdaq. If a component security is of a foreign issuer, based
on its country of incorporation, it must have listed options or be
eligible for listed-options trading. In addition, the issuer of a
component security must not have entered into any definitive agreement
or other arrangement which would result in the security no longer being
eligible for inclusion in the Index within the next six months. An
issuer of a component security also must not have annual financial
statements with an audit opinion where the auditor or the issuer has
indicated that the audit opinion cannot be currently relied upon.
As of September 21, 2004, the following were characteristics of the
Index:
[cir] The total capitalization of all components of the Index was
$1.693 trillion;
[cir] Regarding component capitalization, (a) the highest
capitalization of a component was $296.39 billion (Microsoft Corp.),
(b) the lowest capitalization of a component was $1.48 billion (First
Health Group Corp.), (c) the mean capitalization of the components was
$16.93 billion, and (d) the median capitalization of the components was
$6.34 billion;
[cir] Regarding component price per share, (a) the highest price
per share of a component was $90.65 (eBay, Inc.), (b) the lowest price
per share of a component was $2.68 (Level 3 Communications, Inc.), (c)
the mean price per share of the components was
[[Page 6478]]
$35.00, and (d) the median price per share of the components was
$29.95;
[cir] Regarding component weightings, (a) the highest weighting of
a component was 8.73% (Microsoft Corp.), (b) the lowest weighting of a
component was 0.10% (Compuware Corp.), (c) the mean weighting of the
components was 1.00%, (d) the median weighting of the components was
0.52%, and (e) the total weighting of the top five highest weighted
components was 27.30% (Microsoft Corp., Qualcomm, Inc., Cisco Systems,
Inc., Intel Corp., and eBay, Inc.);
[cir] Regarding component available shares, (a) the most available
shares of a component was 10.86 billion shares (Microsoft Corp.), (b)
the least available shares of a component was 43.74 million shares
(Henry Schein, Inc.), (c) the mean available shares of the components
was 675.31 million shares, and (d) the median available shares of the
components was 250.05 million shares;
[cir] Regarding the six-month average daily volumes of the
components, (a) the highest six-month average daily volume of a
component was 64.62 million shares (Microsoft Corp.), (b) the lowest
six-month average daily volume of a component was 348,583 shares
(Ryanair Holdings PLC), (c) the mean six-month average daily volume of
the components was 7.14 million shares, (d) the median six-month
average daily volume of the components was 3.05 million shares, (e) the
average of six-month average daily volumes of the five most heavily
traded components was 260.46 million shares (Microsoft Corp., Intel
Corp., Cisco Systems, Inc., Oracle Corp., and Sun Microsystems, Inc.),
and (f) 100% of the components had a six-month average daily volume of
at least 50,000; and
[cir] Regarding option eligibility, (a) 99.3% of the components
were options eligible, as measured by weighting, and (b) 96.0% of the
components were options eligible, as measured by number.
Index Calculation and Index Maintenance
In recent years, the value of the Full-size Nasdaq 100 Index has
increased significantly, such that the value of the Index stood at
804.64, as of October 7, 2002. As a result, the premium for the Full-
size Nasdaq 100 Index options also has increased. The Exchange believes
that this has caused Full-size Nasdaq 100 Index options to trade at a
level that may be uncomfortably high for retail investors. The Exchange
believes that listing options on reduced values would attract a greater
source of customer business than if the options were based only on the
full value of the Index. The Exchange further believes that listing
options on reduced values would provide an opportunity for investors to
hedge, or speculate on, the market risk associated with the stocks
comprising the Index. Additionally, by reducing the values of the
Index, investors would be able to use this trading vehicle while
extending a smaller outlay of capital. The Exchange believes that this
should attract additional investors and, in turn, create a more active
and liquid trading environment.\10\
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\10\ The Exchange believes that options trading on MNX have
generated considerable interest from investors, as measured by its
robust trading volume on CBOE.
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The Full-size Nasdaq 100 Index and the Mini Nasdaq 100 Index levels
are calculated continuously, using the last sale price for each
component stock in the Index, and are disseminated every 15 seconds
throughout the trading day.\11\ The Full-size Nasdaq-100 Index level
equals the current market value of component stocks multiplied by 125
and then divided by the stocks' market value of the adjusted base
period. The adjusted base period market value is determined by
multiplying the current market value after adjustments times the
previous base period market value and then dividing that result by the
current market value before adjustments. To calculate the value of the
Mini Nasdaq 100 Index, the full value of the Index is divided by ten.
To maintain continuity for the Index's value, the divisor is adjusted
periodically to reflect events such as changes in the number of common
shares outstanding for component stocks, company additions or
deletions, corporate restructurings, or other capitalization changes.
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\11\ Full-size Nasdaq 100 Index and Mini Nasdaq 100 Index levels
are disseminated through the Nasdaq Index Dissemination Services
(``NIDS'') during normal Nasdaq trading hours (9:30 a.m. to 4 p.m.
ET). The Index is calculated using Nasdaq prices (not consolidated)
during the day and the NOCP for the close. The closing value of the
Index may change until 5:15 p.m. ET due to corrections to the NOCP
of the component securities. In addition, the Index is published
daily on Nasdaq's Web site and through major quotation vendors such
as Reuters and Thomson's ILX.
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The settlement values for purposes of settling both Full-size
Nasdaq 100 Index (``Full-size Settlement Value'') and Mini Nasdaq 100
Index (``Mini Settlement Value'') are calculated based on a volume-
weighted average of prices reported in the first five minutes of
trading for each of the component securities on the last business day
before the expiration date (``Settlement Day'').\12\ The Settlement Day
is normally the Friday preceding ``Expiration Saturday.'' \13\ If a
component security in the Index does not trade on Settlement Day, the
closing price from the previous trading day would be used to calculate
both the Full-size Settlement Value and Mini Settlement Value.\14\
Accordingly, trading in options on the Index will normally cease on the
Thursday preceding an Expiration Saturday.
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\12\ The aggregate exercise value of the option contract is
calculated by multiplying the Index value by the Index multiplier,
which is 100.
\13\ For any given expiration month, options on the Nasdaq 100
Index will expire on the third Saturday of the month.
\14\ Full-size Settlement Values and Mini Settlement Values are
disseminated by CBOE.
---------------------------------------------------------------------------
Nasdaq monitors and maintains the Index. Nasdaq is responsible for
making all necessary adjustments to the Index to reflect component
deletions; share changes; stock splits; stock dividends; stock price
adjustments due to restructuring, mergers, or spin-offs involving the
underlying components; and other corporate actions. Some corporate
actions, such as stock splits and stock dividends, require simple
changes to the available shares outstanding and the stock prices of the
underlying components.
The component securities are evaluated on an annual basis, except
under extraordinary circumstances which may result in an interim
evaluation, as follows: Securities listed on Nasdaq that meet its
eligibility criteria are ranked by market value using closing prices as
of the end of October and publicly available total shares outstanding
as of the end of November. Eligible component securities which are
already in the Index and ranked in the top 100 (based on market value)
are retained in the Index. Component securities that are ranked from
101 to 150 are also retained provided that each such component security
was ranked in the top 100 during the previous ranking review.
Components that do not meet these criteria are replaced. The
replacement securities chosen are those Index-eligible securities that
have the largest market capitalization and are not currently in the
Index.
The list of annual additions and deletions to the Index is publicly
announced in early December. Changes to the Index are made effective
after the close of trading on the third Friday in December. If at any
time during the year a component security no longer trades on Nasdaq,
or is otherwise determined by Nasdaq to become ineligible for inclusion
in the Index, that component security would be replaced with the
[[Page 6479]]
largest market capitalization component not currently in the Index that
met the eligibility criteria described earlier.
Although the Exchange is not involved in the maintenance of the
Index, the Exchange represents that it will monitor the Index on a
quarterly basis and file a proposed rule change with the Commission
pursuant to Rule 19b-4 if: (i) The number of securities in the Index
drops by one-third or more; (ii) 10% or more of the weight of the Index
is represented by component securities having a market value of less
than $75 million; (iii) less than 80% of the weight of the Index is
represented by component securities that are eligible for options
trading pursuant to ISE Rule 502; (iv) 10% or more of the weight of the
Index is represented by component securities trading less than 20,000
shares per day; or (v) the largest component security accounts for more
than 25% of the weight of the Index or the largest five components in
the aggregate account for more than 50% of the weight of the Index.
The Exchange will further notify the Commission's Division of
Market Regulation if Nasdaq determines to cease maintaining and
calculating the Index, or if the Index values are not disseminated
every 15 seconds by a widely available source. The ISE has represented
that, if the Index ceases to be maintained or calculated, or if the
Index values are not disseminated every 15 seconds by a widely
available source, it would not list any additional series for trading
and would limit all transactions in such options to closing
transactions only for the purpose of maintaining a fair and orderly
market and protecting investors.
Contract Specifications
The contract specifications for options on the Index are set forth
as an Exhibit to the proposed rule change. The proposed contract
specifications are identical to the contract specifications of NDX and
MNX options that are currently listed on CBOE. The Index is a broad-
based index, as defined in Exchange Rule 2001(j). Options on the Nasdaq
100 Index are European-style and A.M. cash-settled. The Exchange's
standard trading hours for index options (9:30 a.m. to 4:15 p.m. ET),
as set forth in ISE Rule 2008(a), would apply to options on the Nasdaq
100 Index. Exchange rules that are applicable to the trading of options
on broad-based indexes would apply to both NDX and MNX.\15\
Specifically, the trading of NDX and MNX options would be subject to,
among others, Exchange rules governing margin requirements and trading
halt procedures for index options.
---------------------------------------------------------------------------
\15\ See Exchange Rules 2000 through 2012.
---------------------------------------------------------------------------
For NDX, the Exchange proposes to establish aggregate position
limits at 75,000 contracts on the same side of the market. The Full-
size Nasdaq Index contracts would be aggregated with Mini Nasdaq 100
Index contracts, where ten Mini Nasdaq 100 Index contracts equal one
Full-size Nasdaq 100 Index contract.\16\ The Exchange also is proposing
to amend its Rule 2006(a)(5) to conform it to CBOE Rule 24.4(e) with
regard to hedge exemptions for options on NDX and MNX. Specifically,
the Exchange seeks to add a table in its Rule 2006(a)(5), similar to
the one provided by CBOE Rule 24.4(e), that enumerates the hedge
exemption available for NDX and MNX and other broad-based indexes. A
hedge exemption of 150,000 contracts and 1,500,000 contracts is
available for NDX and MNX, respectively. The Exchange plans to retain
its standard limit of 75,000 contracts for other broad-based
indexes.\17\
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\16\ The position limits proposed by the Exchange for Nasdaq 100
Index options are identical to those established by CBOE.
\17\ See Amendment No. 2. The same limits that apply to position
limits would apply to exercise limits for these products.
---------------------------------------------------------------------------
The Exchange proposes to apply broad-based index margin
requirements for the purchase and sale of options on the Index.
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 would be required to deposit or 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 Exchange proposes to set strike price intervals at least 2\1/2\
points for certain near-the-money series in near-term expiration months
when the Full-size Nasdaq 100 Index or Mini Nasdaq 100 Index is at a
level below 200, and 5 point strike price intervals for other options
series with expirations up to one year, and at least 10 point strike
price intervals for longer-term options. The minimum tick size for
series trading below $3 is $0.05, and for series trading at or above $3
is $0.10. Based on the current index levels, the Exchange plans to set
strike price intervals of 5 points and 2\1/2\ points for NDX and MNX,
respectively.
The Exchange proposes to list options on both the Full-size Nasdaq
100 Index and the Mini Nasdaq 100 Index 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.\18\ In addition, longer-term option series having up to 60
months to expiration may be traded.\19\ The trading of any long-term
Nasdaq 100 Index options would 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.
---------------------------------------------------------------------------
\18\ See ISE Rule 2009(a)(3).
\19\ NDX LEAPS and MNX LEAPS are listed pursuant to ISE Rule
2009(b)(1) rather than Rule 2009(b)(2).
---------------------------------------------------------------------------
Surveillance and Capacity
The Exchange represents that it has an adequate surveillance
program in place for options traded on the Index and intends to apply
those same program procedures that it applies to the Exchange's other
index options. Additionally, the Exchange is a member of the
Intermarket Surveillance Group (``ISG'') under the Intermarket
Surveillance Group Agreement, dated June 20, 1994. The members of the
ISG include all of the U.S. registered stock and options markets: The
American Stock Exchange, the Boston Stock Exchange, CBOE, the Chicago
Stock Exchange, the National Stock Exchange, NASD, the New York Stock
Exchange, the Pacific Stock Exchange, and the Philadelphia Stock
Exchange. The ISG members work together to coordinate surveillance and
investigative information sharing in the stock and options markets. In
addition, the major futures exchanges are affiliated members of the
ISG, which allows for the sharing of surveillance information for
potential intermarket trading abuses.
The Exchange represents that it has the necessary systems capacity
to support new options series that would result from the introduction
of NDX, MNX, NDX LEAPS, and MNX LEAPS. The Exchange has provided the
Commission with system capacity information to support its system
capacity representations.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act \20\ in general, and with Section 6(b)(5) in
particular,\21\ in that it will permit the trading of options on the
Full-size Nasdaq 100 Index and
[[Page 6480]]
Mini Nasdaq 100 Index pursuant to rules designed to prevent fraudulent
and manipulative acts and practices and to promote just and equitable
principles of trade.
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\20\ 15 U.S.C. 78f.
\21\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited comments on this proposed rule
change. The Exchange has not received any unsolicited written comments
from members or other interested parties.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-ISE-2005-01 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-ISE-2005-01. 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 (https://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 Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of this filing also will be available
for inspection and copying at the principal office of the ISE. 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-2005-01 and should be
submitted on or before February 28, 2005.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\22\ In particular, the Commission believes that the proposal
is consistent with Section 6(b)(5) of the Act,\23\ which requires that
the rules of an 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. The Commission notes that
it previously approved the listing and trading of options on the Nasdaq
100 Index on another exchange.\24\ The Commission presently is not
aware of any regulatory issue that should cause it to revisit that
earlier finding or preclude the trading of such options on the ISE.
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\22\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
\23\ 15 U.S.C. 78f(b)(5).
\24\ See Securities Exchange Act Release No. 33428 (January 5,
1994), 59 FR 1576 (January 11, 1994).
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In approving this proposal, the Commission has specifically relied
on the following representations made by the Exchange:
1. The Exchange will notify the Commission's Division of Market
Regulation immediately if Nasdaq determines to cease maintaining and
calculating the Nasdaq 100 Index, or if the Nasdaq 100 Index values
are not disseminated every 15 seconds by a widely available source.
If the Index ceases to be maintained or calculated, or if the Index
values are not disseminated every 15 seconds by a widely available
source, the Exchange will not list any additional series for trading
and limit all transactions in such options to closing transactions
only for the purpose of maintaining a fair and orderly market and
protecting investors.
2. The Exchange has an adequate surveillance program in place
for options traded on the Nasdaq 100 Index.
3. The additional quote and message traffic that will be
generated by listing and trading NDX, MNX, NDX LEAPS, and MNX LEAPS
will not exceed the Exchange's current message capacity allocated by
the Independent System Capacity Advisor.
The Commission further notes that in approving this proposal, it
relied on the Exchange's discussion of how Nasdaq currently calculates
the Index. If the manner in which Nasdaq calculates the Index were to
change substantially, this approval order might no longer be effective.
In addition, the Commission believes that the position limits for
these new options, and the hedge exemption from such position limits,
are reasonable and consistent with the Act. The Commission previously
has found identical provisions for NDX and MNX options to be consistent
with the Act.\25\
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\25\ See Securities Exchange Act Release No. 44156 (April 6,
2001), 66 FR 19261 (April 13, 2001) (SR-CBOE-00-14) (order approving
a proposed rule change by CBOE to increase position and exercise
limits for Nasdaq 100 Index options, expand the Index hedge
exemption, and eliminate the near-term position limit restriction).
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The Commission finds good cause for approving this proposal before
the thirtieth day after the publication of notice thereof in the
Federal Register. Because options on the Nasdaq 100 Index already trade
on another exchange, accelerating approval of the ISE's proposal should
benefit investors by creating, without undue delay, additional
competition in the market for these options.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change, as amended (SR-ISE-2005-01), is
hereby approved.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-464 Filed 2-4-05; 8:45 am]
BILLING CODE 8010-01-P
