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 List and Trade Options on Various Russell Indexes, 22947-22952 [E5-2114]
Download as PDF
<![CDATA[
Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
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 such
filing also will be available for
inspection and copying at the principal
office of the CBOE. 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–CBOE–
2002–03 and should be submitted on or
before May 24, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.33
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–2127 Filed 5–2–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51619; File No. SR–ISE–
2005–09]
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 List and
Trade Options on Various Russell
Indexes
April 27, 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 February
1, 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, II, and III below, which Items
have been prepared by the Exchange.
On March 18, 2005, the Exchange filed
33 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate jul<14>2003
15:43 May 02, 2005
Jkt 205001
Amendment No. 1 to the proposed rule
change.3 On April 22, 2005, the
Exchange filed Amendment No. 2 to the
proposed rule change.4 The Commission
is publishing this notice and order to
solicit comments on the proposed rule
change, as amended, from interested
persons and to approve the proposal on
an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
ISE is proposing to amend its rules to
list and trade new options on various
Russell Indexes. The text of the
proposed rule change is available on
ISE’s Web site (https://
www.iseoptions.com), at 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 IV 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 list and trade on the Exchange
cash-settled, European-style index
options on the full and reduced values
of each of the following Russell Indexes:
• Russell 3000 Index.
• Russell 3000 Value Index.
• Russell 3000 Growth Index.
• Russell 2500 Index.
• Russell 2500 Value Index.
• Russell 2500 Growth Index.
• Russell 2000 Index.
• Russell 2000 Value Index.
• Russell 2000 Growth Index.
• Russell 1000 Index.
• Russell 1000 Value Index.
• Russell 1000 Growth Index.
• Russell Top 200 Index.
• Russell Top 200 Value Index.
3 Amendment No. 1 made clarifications to the
Purpose section and included rule text that was
inadvertently left out of the original filing.
4 Amendment No. 2 made clarifications to the
Purpose section.
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
22947
• Russell Top 200 Growth Index.
• Russell MidCap Index.
• Russell MidCap Value Index.
• Russell MidCap Growth Index.
• Russell Small Cap Completeness
Index.
• Russell Small Cap Completeness
Value Index.
• Russell Small Cap Completeness
Growth Index
Specifically, the Exchange proposes to
list options based upon (i) full values of
the Russell Indexes (‘‘Full Value Russell
Indexes’’) and (ii) one-tenth values of
the Russell Indexes (‘‘Reduced Value
Russell Indexes’’). Each of these Russell
Indexes is a capitalization-weighted
index containing various groups of
stocks drawn from the largest 3,000
companies incorporated in the United
States. All index components are traded
on the New York Stock Exchange
(‘‘NYSE’’), the American Stock
Exchange (‘‘Amex’’), and/or the Nasdaq
Stock Market. Options on all of the
indexes, except for the Russell 2500
Index (regular, value, and growth) and
the Russell Small Cap Completeness
Index (regular, value, and growth),
currently trade on the Chicago Board
Options Exchange (‘‘CBOE’’).5 The
Exchange also is proposing to be able to
list and trade long-term options on each
of the Full Value Russell Indexes noted
above (‘‘Russell LEAPS’’).6
Index Design and Composition
The Russell Indexes are designed to
be a comprehensive representation of
the investable U.S. equity market. These
indexes are capitalization-weighted and
include only common stocks belonging
to corporations domiciled in the United
States are traded on NYSE, Nasdaq, or
Amex. Stocks are weighted by their
‘‘available’’ market capitalization, which
is calculated by multiplying the primary
market price by the ‘‘available’’ shares;
that is, total shares outstanding less
5 See Securities Exchange Act Release No. 49388
(March 10, 2004), 69 FR 12720 (March 17, 2004)
(approving listing and trading on CBOE of options,
including LEAPS, on the Russell Top 200 Index,
Russell Top 200 Growth Index, and the Russell Top
200 Value Index); Securities Exchange Act Release
No. 48591 (October 2, 2003), 68 FR 58728 (October
10, 2003) (approving listing and trading on CBOE
of options, including LEAPS, on the Russell 3000
Index, Russell 3000 Value Index, Russell 3000
Growth Index, Russell 2000 Value Index, Russell
2000 Growth Index, Russell 1000 Index, Russell
1000 Value Index, Russell 1000 Growth Index,
Russell MidCap Index, Russell MidCap Value
Index, and Russell MidCap Growth Index);
Securities Exchange Act Release No. 31382 (October
30, 1992), 57 FR 52802 (November 5, 1992)
(approving listing and trading on CBOE of options,
including LEAPS, on the Russell 2000 Index).
6 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.
E:\FR\FM\03MYN1.SGM
03MYN1
22948
Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
corporate cross-owned shares; shares
owned by Employee Stock Ownership
Plans (‘‘ESOPs’’) and Leveraged
Employee Stock Ownership Plans
(‘‘LESOPs’’) that comprise 10% or more
of shares outstanding; shares that are
part of unlisted share classes; and shares
held by an individual, a group of
individuals acting together, or a
corporation not in the index that owns
10% or more of the shares outstanding.
Below is a brief description of each
index:7
• Russell 3000 Index—Measures the
performance of the 3,000 largest U.S.
companies based on total market
capitalization, representing
approximately 98% of the investable
U.S. equity market.
• Russell 1000 Index—Measures the
performance of the 1,000 largest U.S.
companies based on total market
capitalization, representing
approximately 92% of the investable
U.S. equity market.
• Russell Top 200 Index—Measures
the performance of the 200 largest
companies in the Russell 1000 Index,
representing approximately 74% of the
total market capitalization of the Russell
1000 Index.
• Russell 2000 Index—Measures the
performance of the 2,000 smallest
companies in the Russell 3000 Index,
representing approximately 8% of the
investable U.S. equity market.
• Russell 2500 Index—Measures the
performance of the 2,500 smallest
companies in the Russell 3000 Index,
representing approximately 16% of the
investable U.S. equity market.
• Russell 3000 Value Index—
Measures the performance of those
Russell 3000 companies with lower
price-to-book ratios and lower
forecasted growth values. Each stock in
this index is also a member of either the
Russell 2500 Growth, Russell 2000
Growth, or the Russell 1000 Growth
Index.
• Russell 3000 Growth Index—
Measures the performance of those
Russell 3000 companies with higher
price-to-book ratios and higher
forecasted growth values. Each stock in
this index is also a member of either the
Russell 2500 Growth, Russell 2000
Growth, or the Russell 1000 Growth
Index.
• Russell 2500 Value Index—
Measures the performance of those
Russell 2500 companies with lower
price-to-book ratios and lower
forecasted growth values.
• Russell 2500 Growth Index—
Measures the performance of those
7 Additional information about the Russell
Indexes can also be found at https://
www.russell.com/us/indexes/us/definitions.asp.
VerDate jul<14>2003
15:43 May 02, 2005
Jkt 205001
Russell 2500 companies with higher
price-to-book ratios and higher
forecasted growth values.
• Russell 2000 Value Index—
Measures the performance of those
Russell 2000 companies with lower
price-to-book ratios and lower
forecasted growth values.
• Russell 2000 Growth Index—
Measures the performance of those
Russell 2000 companies with higher
price-to-book ratios and higher
forecasted growth values.
• Russell 1000 Value Index—
Measures the performance of those
Russell 1000 companies with lower
price-to-book ratios and lower
forecasted growth values.
• Russell 1000 Growth Index—
Measures the performance of those
Russell 1000 companies with higher
price-to-book ratios and higher
forecasted growth values.
• Russell Top 200 Value Index—
Measures the performance of those
Russell Top 200 companies with lower
price-to-book ratios and lower
forecasted growth values. Each stock in
this index is also a member of the
Russell 1000 Growth Index.
• Russell Top 200 Growth Index—
Measures the performance of those
Russell Top 200 companies with higher
price-to-book ratios and higher
forecasted growth values. Each stock in
this index is also a member of the
Russell 1000 Growth Index.
• Russell MidCap Index—Measures
the performance of the 800 smallest
companies in the Russell 1000 Index,
representing approximately 26% of the
total market capitalization of the Russell
1000 Index.
• Russell MidCap Value Index—
Measures the performance of those
Russell Midcap companies with lower
price-to-book ratios and lower
forecasted growth values. Each stock in
this index is also a member of the
Russell 1000 Growth Index.
• Russell MidCap Growth Index—
Measures the performance of those
Russell Midcap companies with higher
price-to-book ratios and higher
forecasted growth values. Each stock in
this index is also a member of the
Russell 1000 Growth Index.
• Russell Small Cap Completeness
Index—Measures the performance of the
companies in the Russell 3000 Index
excluding the companies in the
Standard & Poor’s 500 Index.
• Russell Small Cap Completeness
Value Index—Measures the performance
of those Russell Small Cap
Completeness companies with lower
price-to-book ratios and lower
forecasted growth values.
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
• Russell Small Cap Completeness
Growth Index—Measures the
performance of those Russell Small Cap
Completeness companies with higher
price-to-book ratios and higher
forecasted growth values.
All equity securities listed on NYSE,
Amex, or Nasdaq are considered for
inclusion in the Russell Indexes, with
the following exceptions: (1) Stocks
trading less than $1.00 per share on May
31 of each year, (2) stocks of non-U.S.
companies, (3) preferred and convertible
preferred stocks, (4) redeemable shares,
(5) participating preferred stocks, (6)
warrants and rights, (7) trust receipts,
(8) royalty trusts, (9) limited liability
companies, (10) Bulletin Board and Pink
Sheet stocks, (11) closed-end investment
companies, (12) limited partnerships,
and (13) foreign stocks. The Russell
3000 Index is made up of the top 3,000
eligible stocks ranked by available
market capitalization. All of these stocks
are ‘‘reported securities’’ as defined by
Rule 11Aa3–1(a)(4) under the Act.8
All of the Russell Indexes described
above are subsets of the Russell 3000
Index. The growth and value versions of
each primary index (Russell 3000,
Russell 2500, Russell 2000, Russell
1000, Russell Top 200, Russell Midcap,
and Russell Small Cap Completeness)
may contain common components, but
the capitalization of those components
is apportioned so that the sum of the
total capitalization of the growth and
value indexes equals the total
capitalization of the respective primary
index.
As of November 30, 2004, the stocks
comprising the Russell 3000 Index had
an average market capitalization of
$4.69 billion, ranging from a high of
$474.20 billion (General Electric Co.) to
a low of $40.26 million (Tripath
Technology). The number of available
shares outstanding averaged 132.56
million, ranging from a high of 10.55
billion (General Electric Co.) to a low of
354,000 (Seaboard Corp.). The sixmonth average daily trading volume for
Russell 3000 Index components was
955,069, ranging from a high of 67.5
million shares per day (Intel Corp.) to a
low of 1,113 shares per day (Seaboard
Corp.). Stocks that averaged less than
50,000 shares per day for the previous
six months accounted for 0.98% of the
index weight of the Russell 3000 Index.
Additionally, over 63% of Russell 3000
Index components have options listed
on them, representing over 95% of the
index weight.
The Russell Indexes themselves range
in capitalization from a high of $14
trillion (Russell 3000) to a low of
8 17
E:\FR\FM\03MYN1.SGM
CFR 240.11Aa3–1(a)(4).
03MYN1
Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
$895.82 billion (Russell 2000 Growth).
The number of index components range
from a high of 2985 (Russell 3000) to a
low of 135 (Russell Top 200 Value).
during regular ISE trading hours to
market information vendors via the
Options Price Reporting Authority
(‘‘OPRA’’).
The methodology used to calculate
the value of the Russell Indexes is
similar to the methodology used to
calculate the value of other well known
market-capitalization-weighted indexes.
The level of each index reflects the total
Index Calculation and Index
Maintenance
The value of each Russell Index is
currently calculated by Reuters on
behalf of the Frank Russell Company
and is disseminated every 15 seconds
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
Russell
market value of the component stocks
relative to a particular base period and
is computed by dividing the total
market value of the companies in each
index by the respective index divisor.
The divisor is adjusted periodically to
maintain consistent measurement of the
index. Below is a table of base dates and
the respective index levels as of
November 30, 2004:
Base date/base index
value
Index
3000 Index ..............................................................................................................................
2500 Index ..............................................................................................................................
2000 Index ..............................................................................................................................
1000 Index ..............................................................................................................................
Top 200 Index .........................................................................................................................
Midcap Index ..........................................................................................................................
Smallcap Completeness Index ...............................................................................................
3000 Growth Index .................................................................................................................
3000 Value Index ....................................................................................................................
2500 Growth Index .................................................................................................................
2500 Value Index ....................................................................................................................
2000 Growth Index .................................................................................................................
2000 Value Index ....................................................................................................................
1000 Growth Index .................................................................................................................
1000 Value Index ....................................................................................................................
Top 200 Growth Index ............................................................................................................
Top 200 Value Index ..............................................................................................................
Midcap Growth Index ..............................................................................................................
Midcap Value Index ................................................................................................................
Smallcap Completeness Growth Index ..................................................................................
Smallcap Completeness Value Index .....................................................................................
In recent years, the value of the
Russell Indexes has increased
significantly. As a result, the premium
for options on the Full Value Russell
Indexes has also increased, causing
these index options to trade at a level
that may be uncomfortably high for
retail investors. Therefore, the Exchange
also proposes to trade options on the
Reduced Value Russell Indexes. The
Exchange believes that listing options
on the reduced-value indexes would
attract a greater source of customer
business than if options were based only
on the Full Value Russell Indexes. The
Exchange further believes that listing
options on the reduced-value indexes
would provide an opportunity for
investors to hedge, or speculate on, the
market risk associated with the stocks
comprising the Russell Indexes and 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.9
9 The Exchange believes that reduced-value
options on the Russell Indexes have generated
considerable interest from investors, as measured
by their robust trading volume on CBOE.
VerDate jul<14>2003
15:43 May 02, 2005
Jkt 205001
Options on the Russell Indexes would
expire on the Saturday following the
third Friday of the expiration month.
Trading in options on the Russell
Indexes would normally cease at 4:15
p.m. ET on the Thursday preceding an
expiration Saturday. The exercise
settlement value at expiration of each
new index option would be calculated
by Reuters on behalf of the Frank
Russell Company, based on the opening
prices of the index’s component
securities on the last business day prior
to expiration (‘‘Settlement Day’’).10 The
Settlement Day is normally the Friday
preceding ‘‘Expiration Saturday.’’ If a
component security in a Russell Index
does not trade on Settlement Day, the
last reported sales price in the primary
market from the previous trading day
would be used to calculate both full and
reduced settlement values. Settlement
values for the Full and Reduced Value
Russell Indexes would be disseminated
by OPRA.
The Russell Indexes are monitored
and maintained by the Frank Russell
Company. The Frank Russell Company
is responsible for making all necessary
10 The aggregate exercise value of the option
contract is calculated by multiplying the index
value by the index multiplier, which is 100.
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
22949
12/31/86 = 140.00
12/31/90 = 100.00
12/31/86 = 135.00
12/31/86 = 130.00
3/16/00 = 400.00
12/31/86 = 200.00
3/31/99 = 1,000.00
3/16/00 = 700.00
3/16/00 = 700.00
5/31/95 = 1,000.00
5/31/95 = 1,000.00
3/16/00 = 500.00
3/16/00 = 500.00
8/31/92 = 200.00
8/31/92 = 200.00
3/16/00 = 400.00
3/16/00 = 400.00
3/16/00 = 500.00
3/16/00 = 500.00
3/31/99 = 1,000.00
3/31/99 = 1,000.00
November 30,
2004 index value
670.84
229.65
633.77
629.26
285.76
755.57
569.68
385.68
838.54
217.86
240.08
326.84
940.02
475.18
637.05
208.37
394.01
320.77
836.65
544.26
595.93
adjustments to the indexes to reflect
component deletions, share changes,
stock splits, stock dividends (other than
ordinary cash dividends), and stock
price adjustments due to restructuring,
mergers, or spin-offs involving the
underlying components. 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. Other corporate actions,
such as share issuances, change the
market value of an index and require the
use of an index divisor to effect
adjustments.
The Russell Indexes are re-constituted
annually on June 30, based on prices
and available shares outstanding as of
the preceding May 31. New index
components are added only as part of
the annual re-constitution, after which,
should a stock be removed from an
index for any reason, it could not be
replaced until the next re-constitution.
The Exchange represents that,
although it is not involved in the
maintenance of any of the Russell
Indexes, it would monitor each Russell
Index on a quarterly basis and notify the
Commission’s Division of Market
Regulation (‘‘Division’’) by filing a
proposed rule change pursuant to Rule
E:\FR\FM\03MYN1.SGM
03MYN1
22950
Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
19b–4 if: (i) The number of securities in
any index drops by one-third or more;
(ii) 10% or more of the weight of any
index is represented by component
securities having a market value of less
than $75 million; (iii) less than 80% of
the weight of any 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
any index is represented by component
securities trading less than 20,000
shares per day; or (v) the largest
component security in any index
accounts for more than 15% 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 also would notify the
Division immediately if the Frank
Russell Company ceases to maintain
and calculate any of the Russell Indexes
on which ISE is proposing to list and
trade options, or if the value of any of
these Russell Indexes is not
disseminated every 15 seconds by a
widely available source. If a Russell
Index ceases to be maintained or
calculated, or its values are not
disseminated every 15 seconds by a
widely available source, the Exchange
would not list any additional series for
trading and would limit all transactions
in options on that index to closing
transactions only for the purpose of
maintaining a fair and orderly market
and protecting investors.
Contract Specifications
The proposed contract specifications
for the options on the Russell Indexes
are based on the contract specifications
of similar options currently listed on
CBOE.11 The Russell Indexes are broadbased indexes, as defined in ISE Rule
2001(j). Options on the Russell Indexes
would be European-style and a.m. cashsettled. The Exchange’s standard trading
hours for index options (9:30 a.m. to
4:15 p.m. e.s.t.), as set forth in ISE Rule
2008(a), would apply to options on the
Russell Indexes. Exchange rules that
apply to the trading of options on broadbased indexes also would apply to
options on both the Full and Reduced
Value Russell Indexes.12 The trading of
these options also would be subject to,
among others, Exchange rules governing
margin requirements and trading halt
procedures for index options.
For options on the Full Value Russell
Indexes, the Exchange proposes to
establish an aggregate position limit of
50,000 contracts on the same side of the
market, provided that no more than
11 See
12 See
supra note 5.
ISE Rules 2000 through 2012.
VerDate jul<14>2003
15:43 May 02, 2005
Jkt 205001
30,000 of such contracts are in the
nearest expiration month series.13 Full
Value Russell Index contracts would be
aggregated with Reduced Value Russell
Index contracts, where ten Reduced
Value Russell Index contracts would
equal one Full Value Russell Index
contract. These limits are identical to
the limits applicable to options based on
the Russell Indexes that currently trade
on CBOE.14
However, as ISE noted in Amendment
No. 2, CBOE currently does not list and
trade options on certain Russell
Indexes—the Russell 2500 family of
indexes and the Russell Small Cap
Completeness family of indexes—on
which ISE is now proposing to list and
trade options. The Exchange believes
that the proposed position and exercise
limits for the Russell 2500 Indexes are
appropriate because those indexes
contain more components of the Russell
3000 Index than the Russell 2000
Indexes contain. For example, the
Russell 2500 Index and the Russell 2000
Index are made up of the smallest 2500
components and 2000 components of
the Russell 3000 Index, respectively.
Since the Russell 2000 Indexes already
have position and exercise limits of
50,000 contracts, with no more than
30,000 contracts for the near term, the
Exchange believes that the Russell 2500
Indexes should have the same position
and exercise limits as the Russell 2000
Indexes.
Similarly, the Exchange believes that
the proposed position and exercise
limits for the Russell Small Cap
Completeness Indexes are appropriate
because the Russell 2500 Index and the
Russell Small Cap Completeness Index
share a similar number of components.
The Russell 2500 Index is comprised of
the smallest 2500 components of the
Russell 3000 Index, and the Russell
Small Cap Completeness Index is
comprised of the Russell 3000 Index
components, minus the S&P 500 Index
components. Accordingly, the Exchange
is proposing the same position and
exercise limits for the Russell Small Cap
Completeness family of indexes as it is
for the Russell 2500 family of indexes.
Additionally, under ISE Rule 2006, an
index option hedge exemption for
public customers may be available,
which could expand the position limit
for the proposed options up to an
additional 75,000 contracts.15
13 The same limits that apply to position limits
would apply to exercise limits for these products.
14 See CBOE Rule 24.4(e).
15 See Securities Exchange Act Release No. 51121
(February 1, 2005), 70 FR 6476 (February 7, 2005)
(approving amendment to ISE Rule 2006 to allow
for a broad-based index option hedge exemption of
75,000 contracts).
PO 00000
Frm 00110
Fmt 4703
Sfmt 4703
Furthermore, proprietary accounts of
member organizations could receive an
exemption of up to 100,000 contracts for
the purpose of facilitating public
customer orders, to the extent they
comply with procedures and criteria
listed in ISE Rule 413(c).
The Exchange proposes to apply
broad-based index margin requirements
for the purchase and sale of options on
the Russell Indexes. Accordingly,
purchases of put or call options with
nine months or less until expiration
would have to be paid for in full.
Writers of uncovered put or call options
would have to deposit/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 a strike
price interval of at least 21⁄2 points for
a near-the-money series in a near-term
expiration month when the level of a
Russell Index is below 200, a 5-point
strike price interval for any options
series with an expiration up to one year,
and at least a 10-point strike price
interval for any longer-term option. The
minimum tick size for series trading
below $3 would be $0.05, and for series
trading at or above $3 would be $0.10.
The Exchange proposes to list options
on the Full and Reduced Value Russell
Indexes in the three consecutive nearterm 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.16 In
addition, long-term option series having
up to 60 months to expiration may be
traded.17 The trading of long-term
options on the Russell Indexes would be
subject to the same rules that govern all
the Exchange’s index options, including
sales practice rules, margin
requirements, and trading rules.
All of the specifications and
calculations for options on the Reduced
Value Russell Indexes would be the
same as those used for the Full Value
Russell Indexes. The reduced-value
options would trade independently of,
and in addition to, the full-value
options, and options on all the Russell
Indexes would be subject to the same
rules that presently govern all Exchange
16 See
ISE Rule 2009(a)(3).
ISE Rule 2009(b)(1). The Exchange is not
proposing to list reduced-value LEAPS on the
Russell Indexes.
17 See
E:\FR\FM\03MYN1.SGM
03MYN1
Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
index options, including sales practice
rules, margin requirements, trading
rules, and position and exercise limits.
Surveillance and Capacity
The Exchange represents that it has an
adequate surveillance program in place
for options on the Russell Indexes and
intends to apply those same 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 national securities exchanges, plus
NASD. The ISG members work together
to coordinate surveillance and share
information regarding 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 also represents that it
has the necessary systems capacity to
support the new options series that
would result from the introduction of
options on the Full and Reduced Value
Russell Indexes, including LEAPS on
the Full Value Russell Indexes. The
Exchange has provided the Commission
with system capacity information to
support this representation.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6 of the Act 18 in general, and
with Section 6(b)(5) in particular,19 in
that it would permit the trading of
options on the Full and Reduced Value
Russell Indexes 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.
18 15
19 15
U.S.C. 78f.
U.S.C. 78f(b)(5).
VerDate jul<14>2003
15:43 May 02, 2005
Jkt 205001
22951
thereunder applicable to a national
securities exchange.20 In particular, the
Commission believes that the proposal
is consistent with Section 6(b)(5) of the
Act,21 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
Electronic Comments
impediments to and perfect the
mechanism of a free and open market
• Use the Commission’s Internet
and a national market system, and in
comment form (https://www.sec.gov/
general to protect investors and the
rules/sro.shtml); or
public interest.
• Send an e-mail to ruleThe Commission notes that it
comments@sec.gov. Please include File
Number SR–ISE–2005–09 on the subject previously has found that the listing and
trading on CBOE of options on most of
line.
the Russell Indexes described above,
Paper Comments
and CBOE’s position and exercise limits
• Send paper comments in triplicate
associated with those options, are
to Jonathan G. Katz, Secretary,
consistent with the Act. ISE has
Securities and Exchange Commission,
proposed substantially the same
450 Fifth Street, NW., Washington, DC
contract specifications for these options,
20549–0609.
as well as identical position and
All submissions should refer to File
exercise limits for those options. The
Number SR–ISE–2005–09. This file
Commission presently is not aware of
number should be included on the
any issue that would cause it to revisit
subject line if e-mail is used. To help the those earlier findings or preclude the
Commission process and review your
listing and trading of these options on
comments more efficiently, please use
ISE.
only one method. The Commission will
ISE also has proposed to list and trade
post all comments on the Commission’s new options on the Russell 2500 Index,
Internet Web site (https://www.sec.gov/
Russell 2500 Value Index, Russell 2500
rules/sro.shtml). Copies of the
Growth Index, Russell Small Cap
submission, all subsequent
Completeness Index, Russell Small Cap
amendments, all written statements
Completeness Value Index, and Russell
with respect to the proposed rule
Small Cap Completeness Growth
change that are filed with the
Index—options that have not previously
Commission, and all written
been approved by the Commission for
communications relating to the
listing and trading on any national
proposed rule change between the
securities exchange. The Commission
Commission and any person, other than believes that the composition of these
those that may be withheld from the
indexes and the characteristics of ISE’s
public in accordance with the
proposed options on these indexes will
provisions of 5 U.S.C. 552, will be
minimize the potential for
available for inspection and copying in
manipulation, and that listing and
the Commission’s Public Reference
trading them on ISE is reasonable and
Section, 450 Fifth Street, NW.,
consistent with the Act. As noted above,
Washington, DC 20549. Copies of such
the Russell Indexes generally, and these
filing also will be available for
Russell Indexes in particular, are
inspection and copying at the principal
designed to represent broad segments of
office of ISE. All comments received
the U.S. equity securities markets. As
will be posted without change; the
the indexes are capitalization-weighted
Commission does not edit personal
rather than price-weighted, the index
identifying information from
values should be more difficult to
submissions. You should submit only
manipulate. Furthermore, ISE has
information that you wish to make
represented that it would notify the
available publicly. All submissions
Commission if: (1) The number of
should refer to File Number SR–ISE–
securities in any index drops by one2005–09 and should be submitted on or third or more; (2) 10% or more of the
before May 24, 2005.
weight of any index is represented by
component securities having a market
IV. Commission’s Findings and Order
value of less than $75 million; (3) less
Granting Accelerated Approval of
than 80% of the weight of any index is
Proposed Rule Change
The Commission finds that the
20 In approving this proposal, the Commission has
proposed rule change, as amended, is
considered its impact on efficiency, competition,
consistent with the requirements of the
and capital formation. See 15 U.S.C. 78c(f).
21 15 U.S.C. 78f(b)(5).
Act and the rules and regulations
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:
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
E:\FR\FM\03MYN1.SGM
03MYN1
22952
Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
represented by component securities
that are eligible for options trading
pursuant to ISE Rule 502; (4) 10% or
more of the weight of any index is
represented by component securities
trading less than 20,000 shares per day;
or (5) the largest component security
accounts for more than 15% of the
weight of any index or the largest five
components in the aggregate account for
more than 50% of the weight of the
index.
The Commission also believes that the
position and exercise limits for these
new Russell Index options, including
the index hedge exemption from such
position limits, are reasonable and
consistent with the Act. These limits are
modeled on existing position and
exercise limits for options on very
similar Russell Indexes that previously
have been approved by the Commission.
In approving this proposal, the
Commission has specifically relied on
the following representations made by
the Exchange:
1. The Exchange will notify the
Division immediately if the Frank
Russell Company ceases to maintain
and calculate any Russell Index on
which an ISE option is based, or if the
value of any such Russell Index is not
disseminated every 15 seconds by a
widely available source. If a Russell
Index ceases to be maintained or
calculated, or its values are not
disseminated every 15 seconds by a
widely available source, the Exchange
will not list any additional series on that
index and will 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 the
proposed options on the Russell
Indexes.
3. The additional quote and message
traffic that will be generated by listing
and trading the proposed options on the
Russell Indexes, including LEAPS on
the Full Value Russell Indexes, 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 the Frank
Russell Company currently calculates
the Russell Indexes. If the manner in
which any Russell Index is calculated
were to change substantially, this
approval order, with respect to any ISE
options on that index, might no longer
be effective.
The Commission finds good cause for
approving this proposal before the
thirtieth day after the publication of
VerDate jul<14>2003
15:43 May 02, 2005
Jkt 205001
notice thereof in the Federal Register.
Most of the proposed options on the
Russell Indexes already have been
approved for listing and trading on
another exchange and are governed by
contract specifications that are
substantially the same as those
proposed by ISE. The new options
proposed by ISE will be governed by
contract specifications that are
substantially the same as those that
govern the similar existing products.
Therefore, accelerating approval of ISE’s
proposal should benefit investors by
creating, without undue delay,
additional competition in the market for
the existing options, as well as an
additional investment opportunity with
regard to the new options.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,22 that the
proposed rule change, as amended (SR–
ISE–2005–09), is hereby approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.23
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–2114 Filed 5–2–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51620; File No. SR–MSRB–
2005–03]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change and Amendment No. 1 Thereto
Relating to Amendment to Rule G–41,
on Anti-Money Laundering Compliance
Programs
April 27, 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 March 4,
2005, the Municipal Securities
Rulemaking Board (‘‘MSRB’’ or
‘‘Board’’) filed with the Securities and
Exchange Commission (‘‘Commission’’
or ‘‘SEC’’) the proposed rule change as
described in Items I, II and III below,
which Items have been prepared by the
MSRB. The MSRB filed an amendment
to the proposed rule change on April 25,
PO 00000
22 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
23 17
Frm 00112
Fmt 4703
Sfmt 4703
2005.3 The MSRB has designated this
proposal as constituting a stated policy,
practice, or interpretation with respect
to the meaning, administration, or
enforcement of an existing rule of the
MSRB under Section 19(b)(3)(A)(i) of
the Act 4 and Rule 19b–4(f)(1)
thereunder,5 which renders the proposal
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The MSRB is filing with the
Commission an amendment to Rule G–
41, on anti-money laundering
compliance programs. The text of the
proposed rule change is available on the
MSRB’s Web site (https://www.msrb.org),
at the MSRB’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
MSRB 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 MSRB 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
On July 11, 2003, the SEC approved
proposed rule change SR–MSRB–2003–
04 establishing Rule G–41, on antimoney laundering compliance. The
MSRB proposed Rule G–41 to ensure
that all brokers, dealers and municipal
securities dealers (‘‘dealers’’) that effect
transactions in municipal securities,
and in particular those that only effect
transactions in municipal securities
(‘‘sole municipal dealers’’), are aware of,
and in compliance with, anti-money
laundering compliance program
3 The amendment replaces part of the previously
filed proposed rule language of Rule G–41 to
comply with requests by representatives of the
Commission and NASD to revise certain language
to assist in enforcement of the rule (‘‘Amendment
No. 1’’).
4 15 U.S.C. 78s(b)(3)(A)(i).
5 17 CFR 240.19b–4(f)(1).
E:\FR\FM\03MYN1.SGM
03MYN1
]]>Agencies
[Federal Register Volume 70, Number 84 (Tuesday, May 3, 2005)]
[Notices]
[Pages 22947-22952]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-2114]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51619; File No. SR-ISE-2005-09]
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
List and Trade Options on Various Russell Indexes
April 27, 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 February 1, 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, II, and III below, which Items have been prepared
by the Exchange. On March 18, 2005, the Exchange filed Amendment No. 1
to the proposed rule change.\3\ On April 22, 2005, the Exchange filed
Amendment No. 2 to the proposed rule change.\4\ The Commission is
publishing this notice and order to solicit comments on the proposed
rule change, as amended, from interested persons and to approve the
proposal on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 made clarifications to the Purpose section
and included rule text that was inadvertently left out of the
original filing.
\4\ Amendment No. 2 made clarifications to the Purpose section.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
ISE is proposing to amend its rules to list and trade new options
on various Russell Indexes. The text of the proposed rule change is
available on ISE's Web site (https://www.iseoptions.com), at 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 IV 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 list and trade on the
Exchange cash-settled, European-style index options on the full and
reduced values of each of the following Russell Indexes:
Russell 3000 Index.
Russell 3000 Value Index.
Russell 3000 Growth Index.
Russell 2500 Index.
Russell 2500 Value Index.
Russell 2500 Growth Index.
Russell 2000 Index.
Russell 2000 Value Index.
Russell 2000 Growth Index.
Russell 1000 Index.
Russell 1000 Value Index.
Russell 1000 Growth Index.
Russell Top 200 Index.
Russell Top 200 Value Index.
Russell Top 200 Growth Index.
Russell MidCap Index.
Russell MidCap Value Index.
Russell MidCap Growth Index.
Russell Small Cap Completeness Index.
Russell Small Cap Completeness Value Index.
Russell Small Cap Completeness Growth Index
Specifically, the Exchange proposes to list options based upon (i)
full values of the Russell Indexes (``Full Value Russell Indexes'') and
(ii) one-tenth values of the Russell Indexes (``Reduced Value Russell
Indexes''). Each of these Russell Indexes is a capitalization-weighted
index containing various groups of stocks drawn from the largest 3,000
companies incorporated in the United States. All index components are
traded on the New York Stock Exchange (``NYSE''), the American Stock
Exchange (``Amex''), and/or the Nasdaq Stock Market. Options on all of
the indexes, except for the Russell 2500 Index (regular, value, and
growth) and the Russell Small Cap Completeness Index (regular, value,
and growth), currently trade on the Chicago Board Options Exchange
(``CBOE'').\5\ The Exchange also is proposing to be able to list and
trade long-term options on each of the Full Value Russell Indexes noted
above (``Russell LEAPS'').\6\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 49388 (March 10,
2004), 69 FR 12720 (March 17, 2004) (approving listing and trading
on CBOE of options, including LEAPS, on the Russell Top 200 Index,
Russell Top 200 Growth Index, and the Russell Top 200 Value Index);
Securities Exchange Act Release No. 48591 (October 2, 2003), 68 FR
58728 (October 10, 2003) (approving listing and trading on CBOE of
options, including LEAPS, on the Russell 3000 Index, Russell 3000
Value Index, Russell 3000 Growth Index, Russell 2000 Value Index,
Russell 2000 Growth Index, Russell 1000 Index, Russell 1000 Value
Index, Russell 1000 Growth Index, Russell MidCap Index, Russell
MidCap Value Index, and Russell MidCap Growth Index); Securities
Exchange Act Release No. 31382 (October 30, 1992), 57 FR 52802
(November 5, 1992) (approving listing and trading on CBOE of
options, including LEAPS, on the Russell 2000 Index).
\6\ 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 Russell Indexes are designed to be a comprehensive
representation of the investable U.S. equity market. These indexes are
capitalization-weighted and include only common stocks belonging to
corporations domiciled in the United States are traded on NYSE, Nasdaq,
or Amex. Stocks are weighted by their ``available'' market
capitalization, which is calculated by multiplying the primary market
price by the ``available'' shares; that is, total shares outstanding
less
[[Page 22948]]
corporate cross-owned shares; shares owned by Employee Stock Ownership
Plans (``ESOPs'') and Leveraged Employee Stock Ownership Plans
(``LESOPs'') that comprise 10% or more of shares outstanding; shares
that are part of unlisted share classes; and shares held by an
individual, a group of individuals acting together, or a corporation
not in the index that owns 10% or more of the shares outstanding. Below
is a brief description of each index:\7\
---------------------------------------------------------------------------
\7\ Additional information about the Russell Indexes can also be
found at https://www.russell.com/us/indexes/us/definitions.asp.
---------------------------------------------------------------------------
Russell 3000 Index--Measures the performance of the 3,000
largest U.S. companies based on total market capitalization,
representing approximately 98% of the investable U.S. equity market.
Russell 1000 Index--Measures the performance of the 1,000
largest U.S. companies based on total market capitalization,
representing approximately 92% of the investable U.S. equity market.
Russell Top 200 Index--Measures the performance of the 200
largest companies in the Russell 1000 Index, representing approximately
74% of the total market capitalization of the Russell 1000 Index.
Russell 2000 Index--Measures the performance of the 2,000
smallest companies in the Russell 3000 Index, representing
approximately 8% of the investable U.S. equity market.
Russell 2500 Index--Measures the performance of the 2,500
smallest companies in the Russell 3000 Index, representing
approximately 16% of the investable U.S. equity market.
Russell 3000 Value Index--Measures the performance of
those Russell 3000 companies with lower price-to-book ratios and lower
forecasted growth values. Each stock in this index is also a member of
either the Russell 2500 Growth, Russell 2000 Growth, or the Russell
1000 Growth Index.
Russell 3000 Growth Index--Measures the performance of
those Russell 3000 companies with higher price-to-book ratios and
higher forecasted growth values. Each stock in this index is also a
member of either the Russell 2500 Growth, Russell 2000 Growth, or the
Russell 1000 Growth Index.
Russell 2500 Value Index--Measures the performance of
those Russell 2500 companies with lower price-to-book ratios and lower
forecasted growth values.
Russell 2500 Growth Index--Measures the performance of
those Russell 2500 companies with higher price-to-book ratios and
higher forecasted growth values.
Russell 2000 Value Index--Measures the performance of
those Russell 2000 companies with lower price-to-book ratios and lower
forecasted growth values.
Russell 2000 Growth Index--Measures the performance of
those Russell 2000 companies with higher price-to-book ratios and
higher forecasted growth values.
Russell 1000 Value Index--Measures the performance of
those Russell 1000 companies with lower price-to-book ratios and lower
forecasted growth values.
Russell 1000 Growth Index--Measures the performance of
those Russell 1000 companies with higher price-to-book ratios and
higher forecasted growth values.
Russell Top 200 Value Index--Measures the performance of
those Russell Top 200 companies with lower price-to-book ratios and
lower forecasted growth values. Each stock in this index is also a
member of the Russell 1000 Growth Index.
Russell Top 200 Growth Index--Measures the performance of
those Russell Top 200 companies with higher price-to-book ratios and
higher forecasted growth values. Each stock in this index is also a
member of the Russell 1000 Growth Index.
Russell MidCap Index--Measures the performance of the 800
smallest companies in the Russell 1000 Index, representing
approximately 26% of the total market capitalization of the Russell
1000 Index.
Russell MidCap Value Index--Measures the performance of
those Russell Midcap companies with lower price-to-book ratios and
lower forecasted growth values. Each stock in this index is also a
member of the Russell 1000 Growth Index.
Russell MidCap Growth Index--Measures the performance of
those Russell Midcap companies with higher price-to-book ratios and
higher forecasted growth values. Each stock in this index is also a
member of the Russell 1000 Growth Index.
Russell Small Cap Completeness Index--Measures the
performance of the companies in the Russell 3000 Index excluding the
companies in the Standard & Poor's 500 Index.
Russell Small Cap Completeness Value Index--Measures the
performance of those Russell Small Cap Completeness companies with
lower price-to-book ratios and lower forecasted growth values.
Russell Small Cap Completeness Growth Index--Measures the
performance of those Russell Small Cap Completeness companies with
higher price-to-book ratios and higher forecasted growth values.
All equity securities listed on NYSE, Amex, or Nasdaq are
considered for inclusion in the Russell Indexes, with the following
exceptions: (1) Stocks trading less than $1.00 per share on May 31 of
each year, (2) stocks of non-U.S. companies, (3) preferred and
convertible preferred stocks, (4) redeemable shares, (5) participating
preferred stocks, (6) warrants and rights, (7) trust receipts, (8)
royalty trusts, (9) limited liability companies, (10) Bulletin Board
and Pink Sheet stocks, (11) closed-end investment companies, (12)
limited partnerships, and (13) foreign stocks. The Russell 3000 Index
is made up of the top 3,000 eligible stocks ranked by available market
capitalization. All of these stocks are ``reported securities'' as
defined by Rule 11Aa3-1(a)(4) under the Act.\8\
---------------------------------------------------------------------------
\8\ 17 CFR 240.11Aa3-1(a)(4).
---------------------------------------------------------------------------
All of the Russell Indexes described above are subsets of the
Russell 3000 Index. The growth and value versions of each primary index
(Russell 3000, Russell 2500, Russell 2000, Russell 1000, Russell Top
200, Russell Midcap, and Russell Small Cap Completeness) may contain
common components, but the capitalization of those components is
apportioned so that the sum of the total capitalization of the growth
and value indexes equals the total capitalization of the respective
primary index.
As of November 30, 2004, the stocks comprising the Russell 3000
Index had an average market capitalization of $4.69 billion, ranging
from a high of $474.20 billion (General Electric Co.) to a low of
$40.26 million (Tripath Technology). The number of available shares
outstanding averaged 132.56 million, ranging from a high of 10.55
billion (General Electric Co.) to a low of 354,000 (Seaboard Corp.).
The six-month average daily trading volume for Russell 3000 Index
components was 955,069, ranging from a high of 67.5 million shares per
day (Intel Corp.) to a low of 1,113 shares per day (Seaboard Corp.).
Stocks that averaged less than 50,000 shares per day for the previous
six months accounted for 0.98% of the index weight of the Russell 3000
Index. Additionally, over 63% of Russell 3000 Index components have
options listed on them, representing over 95% of the index weight.
The Russell Indexes themselves range in capitalization from a high
of $14 trillion (Russell 3000) to a low of
[[Page 22949]]
$895.82 billion (Russell 2000 Growth). The number of index components
range from a high of 2985 (Russell 3000) to a low of 135 (Russell Top
200 Value).
Index Calculation and Index Maintenance
The value of each Russell Index is currently calculated by Reuters
on behalf of the Frank Russell Company and is disseminated every 15
seconds during regular ISE trading hours to market information vendors
via the Options Price Reporting Authority (``OPRA'').
The methodology used to calculate the value of the Russell Indexes
is similar to the methodology used to calculate the value of other well
known market-capitalization-weighted indexes. The level of each index
reflects the total market value of the component stocks relative to a
particular base period and is computed by dividing the total market
value of the companies in each index by the respective index divisor.
The divisor is adjusted periodically to maintain consistent measurement
of the index. Below is a table of base dates and the respective index
levels as of November 30, 2004:
------------------------------------------------------------------------
Base date/base index November 30,
Index value 2004 index value
------------------------------------------------------------------------
Russell 3000 Index.......... 12/31/86 = 140.00 670.84
Russell 2500 Index.......... 12/31/90 = 100.00 229.65
Russell 2000 Index.......... 12/31/86 = 135.00 633.77
Russell 1000 Index.......... 12/31/86 = 130.00 629.26
Russell Top 200 Index....... 3/16/00 = 400.00 285.76
Russell Midcap Index........ 12/31/86 = 200.00 755.57
Russell Smallcap 3/31/99 = 1,000.00 569.68
Completeness Index.........
Russell 3000 Growth Index... 3/16/00 = 700.00 385.68
Russell 3000 Value Index.... 3/16/00 = 700.00 838.54
Russell 2500 Growth Index... 5/31/95 = 1,000.00 217.86
Russell 2500 Value Index.... 5/31/95 = 1,000.00 240.08
Russell 2000 Growth Index... 3/16/00 = 500.00 326.84
Russell 2000 Value Index.... 3/16/00 = 500.00 940.02
Russell 1000 Growth Index... 8/31/92 = 200.00 475.18
Russell 1000 Value Index.... 8/31/92 = 200.00 637.05
Russell Top 200 Growth Index 3/16/00 = 400.00 208.37
Russell Top 200 Value Index. 3/16/00 = 400.00 394.01
Russell Midcap Growth Index. 3/16/00 = 500.00 320.77
Russell Midcap Value Index.. 3/16/00 = 500.00 836.65
Russell Smallcap 3/31/99 = 1,000.00 544.26
Completeness Growth Index..
Russell Smallcap 3/31/99 = 1,000.00 595.93
Completeness Value Index...
------------------------------------------------------------------------
In recent years, the value of the Russell Indexes has increased
significantly. As a result, the premium for options on the Full Value
Russell Indexes has also increased, causing these index options to
trade at a level that may be uncomfortably high for retail investors.
Therefore, the Exchange also proposes to trade options on the Reduced
Value Russell Indexes. The Exchange believes that listing options on
the reduced-value indexes would attract a greater source of customer
business than if options were based only on the Full Value Russell
Indexes. The Exchange further believes that listing options on the
reduced-value indexes would provide an opportunity for investors to
hedge, or speculate on, the market risk associated with the stocks
comprising the Russell Indexes and 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.\9\
---------------------------------------------------------------------------
\9\ The Exchange believes that reduced-value options on the
Russell Indexes have generated considerable interest from investors,
as measured by their robust trading volume on CBOE.
---------------------------------------------------------------------------
Options on the Russell Indexes would expire on the Saturday
following the third Friday of the expiration month. Trading in options
on the Russell Indexes would normally cease at 4:15 p.m. ET on the
Thursday preceding an expiration Saturday. The exercise settlement
value at expiration of each new index option would be calculated by
Reuters on behalf of the Frank Russell Company, based on the opening
prices of the index's component securities on the last business day
prior to expiration (``Settlement Day'').\10\ The Settlement Day is
normally the Friday preceding ``Expiration Saturday.'' If a component
security in a Russell Index does not trade on Settlement Day, the last
reported sales price in the primary market from the previous trading
day would be used to calculate both full and reduced settlement values.
Settlement values for the Full and Reduced Value Russell Indexes would
be disseminated by OPRA.
---------------------------------------------------------------------------
\10\ The aggregate exercise value of the option contract is
calculated by multiplying the index value by the index multiplier,
which is 100.
---------------------------------------------------------------------------
The Russell Indexes are monitored and maintained by the Frank
Russell Company. The Frank Russell Company is responsible for making
all necessary adjustments to the indexes to reflect component
deletions, share changes, stock splits, stock dividends (other than
ordinary cash dividends), and stock price adjustments due to
restructuring, mergers, or spin-offs involving the underlying
components. 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. Other corporate
actions, such as share issuances, change the market value of an index
and require the use of an index divisor to effect adjustments.
The Russell Indexes are re-constituted annually on June 30, based
on prices and available shares outstanding as of the preceding May 31.
New index components are added only as part of the annual re-
constitution, after which, should a stock be removed from an index for
any reason, it could not be replaced until the next re-constitution.
The Exchange represents that, although it is not involved in the
maintenance of any of the Russell Indexes, it would monitor each
Russell Index on a quarterly basis and notify the Commission's Division
of Market Regulation (``Division'') by filing a proposed rule change
pursuant to Rule
[[Page 22950]]
19b-4 if: (i) The number of securities in any index drops by one-third
or more; (ii) 10% or more of the weight of any index is represented by
component securities having a market value of less than $75 million;
(iii) less than 80% of the weight of any 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 any index is
represented by component securities trading less than 20,000 shares per
day; or (v) the largest component security in any index accounts for
more than 15% 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 also would notify the Division immediately if the
Frank Russell Company ceases to maintain and calculate any of the
Russell Indexes on which ISE is proposing to list and trade options, or
if the value of any of these Russell Indexes is not disseminated every
15 seconds by a widely available source. If a Russell Index ceases to
be maintained or calculated, or its values are not disseminated every
15 seconds by a widely available source, the Exchange would not list
any additional series for trading and would limit all transactions in
options on that index to closing transactions only for the purpose of
maintaining a fair and orderly market and protecting investors.
Contract Specifications
The proposed contract specifications for the options on the Russell
Indexes are based on the contract specifications of similar options
currently listed on CBOE.\11\ The Russell Indexes are broad-based
indexes, as defined in ISE Rule 2001(j). Options on the Russell Indexes
would be 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. e.s.t.), as set
forth in ISE Rule 2008(a), would apply to options on the Russell
Indexes. Exchange rules that apply to the trading of options on broad-
based indexes also would apply to options on both the Full and Reduced
Value Russell Indexes.\12\ The trading of these options also would be
subject to, among others, Exchange rules governing margin requirements
and trading halt procedures for index options.
---------------------------------------------------------------------------
\11\ See supra note 5.
\12\ See ISE Rules 2000 through 2012.
---------------------------------------------------------------------------
For options on the Full Value Russell Indexes, the Exchange
proposes to establish an aggregate position limit of 50,000 contracts
on the same side of the market, provided that no more than 30,000 of
such contracts are in the nearest expiration month series.\13\ Full
Value Russell Index contracts would be aggregated with Reduced Value
Russell Index contracts, where ten Reduced Value Russell Index
contracts would equal one Full Value Russell Index contract. These
limits are identical to the limits applicable to options based on the
Russell Indexes that currently trade on CBOE.\14\
---------------------------------------------------------------------------
\13\ The same limits that apply to position limits would apply
to exercise limits for these products.
\14\ See CBOE Rule 24.4(e).
---------------------------------------------------------------------------
However, as ISE noted in Amendment No. 2, CBOE currently does not
list and trade options on certain Russell Indexes--the Russell 2500
family of indexes and the Russell Small Cap Completeness family of
indexes--on which ISE is now proposing to list and trade options. The
Exchange believes that the proposed position and exercise limits for
the Russell 2500 Indexes are appropriate because those indexes contain
more components of the Russell 3000 Index than the Russell 2000 Indexes
contain. For example, the Russell 2500 Index and the Russell 2000 Index
are made up of the smallest 2500 components and 2000 components of the
Russell 3000 Index, respectively. Since the Russell 2000 Indexes
already have position and exercise limits of 50,000 contracts, with no
more than 30,000 contracts for the near term, the Exchange believes
that the Russell 2500 Indexes should have the same position and
exercise limits as the Russell 2000 Indexes.
Similarly, the Exchange believes that the proposed position and
exercise limits for the Russell Small Cap Completeness Indexes are
appropriate because the Russell 2500 Index and the Russell Small Cap
Completeness Index share a similar number of components. The Russell
2500 Index is comprised of the smallest 2500 components of the Russell
3000 Index, and the Russell Small Cap Completeness Index is comprised
of the Russell 3000 Index components, minus the S&P 500 Index
components. Accordingly, the Exchange is proposing the same position
and exercise limits for the Russell Small Cap Completeness family of
indexes as it is for the Russell 2500 family of indexes.
Additionally, under ISE Rule 2006, an index option hedge exemption
for public customers may be available, which could expand the position
limit for the proposed options up to an additional 75,000
contracts.\15\ Furthermore, proprietary accounts of member
organizations could receive an exemption of up to 100,000 contracts for
the purpose of facilitating public customer orders, to the extent they
comply with procedures and criteria listed in ISE Rule 413(c).
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 51121 (February 1,
2005), 70 FR 6476 (February 7, 2005) (approving amendment to ISE
Rule 2006 to allow for a broad-based index option hedge exemption of
75,000 contracts).
---------------------------------------------------------------------------
The Exchange proposes to apply broad-based index margin
requirements for the purchase and sale of options on the Russell
Indexes. Accordingly, purchases of put or call options with nine months
or less until expiration would have to be paid for in full. Writers of
uncovered put or call options would have to deposit/maintain 100% of
the option proceeds, plus 15% of the aggregate contract value (current
index level x $100), less any out-of-the-money amount, subject to a
minimum of the option proceeds plus 10% of the aggregate contract value
for call options and a minimum of the option proceeds plus 10% of the
aggregate exercise price amount for put options.
The Exchange proposes to set a strike price interval of at least
2\1/2\ points for a near-the-money series in a near-term expiration
month when the level of a Russell Index is below 200, a 5-point strike
price interval for any options series with an expiration up to one
year, and at least a 10-point strike price interval for any longer-term
option. The minimum tick size for series trading below $3 would be
$0.05, and for series trading at or above $3 would be $0.10.
The Exchange proposes to list options on the Full and Reduced Value
Russell Indexes 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.\16\ In
addition, long-term option series having up to 60 months to expiration
may be traded.\17\ The trading of long-term options on the Russell
Indexes would be subject to the same rules that govern all the
Exchange's index options, including sales practice rules, margin
requirements, and trading rules.
---------------------------------------------------------------------------
\16\ See ISE Rule 2009(a)(3).
\17\ See ISE Rule 2009(b)(1). The Exchange is not proposing to
list reduced-value LEAPS on the Russell Indexes.
---------------------------------------------------------------------------
All of the specifications and calculations for options on the
Reduced Value Russell Indexes would be the same as those used for the
Full Value Russell Indexes. The reduced-value options would trade
independently of, and in addition to, the full-value options, and
options on all the Russell Indexes would be subject to the same rules
that presently govern all Exchange
[[Page 22951]]
index options, including sales practice rules, margin requirements,
trading rules, and position and exercise limits.
Surveillance and Capacity
The Exchange represents that it has an adequate surveillance
program in place for options on the Russell Indexes and intends to
apply those same 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 national securities exchanges, plus NASD. The
ISG members work together to coordinate surveillance and share
information regarding 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 also represents that it has the necessary systems
capacity to support the new options series that would result from the
introduction of options on the Full and Reduced Value Russell Indexes,
including LEAPS on the Full Value Russell Indexes. The Exchange has
provided the Commission with system capacity information to support
this representation.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act \18\ in general, and with Section 6(b)(5) in
particular,\19\ in that it would permit the trading of options on the
Full and Reduced Value Russell Indexes pursuant to rules designed to
prevent fraudulent and manipulative acts and practices and to promote
just and equitable principles of trade.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f.
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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-2005-09 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-2005-09. 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 such filing also will be
available for inspection and copying at the principal office of 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-2005-09
and should be submitted on or before May 24, 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.\20\ In particular, the Commission believes that the proposal
is consistent with Section 6(b)(5) of the Act,\21\ 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.
---------------------------------------------------------------------------
\20\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission notes that it previously has found that the listing
and trading on CBOE of options on most of the Russell Indexes described
above, and CBOE's position and exercise limits associated with those
options, are consistent with the Act. ISE has proposed substantially
the same contract specifications for these options, as well as
identical position and exercise limits for those options. The
Commission presently is not aware of any issue that would cause it to
revisit those earlier findings or preclude the listing and trading of
these options on ISE.
ISE also has proposed to list and trade new options on the Russell
2500 Index, Russell 2500 Value Index, Russell 2500 Growth Index,
Russell Small Cap Completeness Index, Russell Small Cap Completeness
Value Index, and Russell Small Cap Completeness Growth Index--options
that have not previously been approved by the Commission for listing
and trading on any national securities exchange. The Commission
believes that the composition of these indexes and the characteristics
of ISE's proposed options on these indexes will minimize the potential
for manipulation, and that listing and trading them on ISE is
reasonable and consistent with the Act. As noted above, the Russell
Indexes generally, and these Russell Indexes in particular, are
designed to represent broad segments of the U.S. equity securities
markets. As the indexes are capitalization-weighted rather than price-
weighted, the index values should be more difficult to manipulate.
Furthermore, ISE has represented that it would notify the Commission
if: (1) The number of securities in any index drops by one-third or
more; (2) 10% or more of the weight of any index is represented by
component securities having a market value of less than $75 million;
(3) less than 80% of the weight of any index is
[[Page 22952]]
represented by component securities that are eligible for options
trading pursuant to ISE Rule 502; (4) 10% or more of the weight of any
index is represented by component securities trading less than 20,000
shares per day; or (5) the largest component security accounts for more
than 15% of the weight of any index or the largest five components in
the aggregate account for more than 50% of the weight of the index.
The Commission also believes that the position and exercise limits
for these new Russell Index options, including the index hedge
exemption from such position limits, are reasonable and consistent with
the Act. These limits are modeled on existing position and exercise
limits for options on very similar Russell Indexes that previously have
been approved by the Commission.
In approving this proposal, the Commission has specifically relied
on the following representations made by the Exchange:
1. The Exchange will notify the Division immediately if the Frank
Russell Company ceases to maintain and calculate any Russell Index on
which an ISE option is based, or if the value of any such Russell Index
is not disseminated every 15 seconds by a widely available source. If a
Russell Index ceases to be maintained or calculated, or its values are
not disseminated every 15 seconds by a widely available source, the
Exchange will not list any additional series on that index and will
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
the proposed options on the Russell Indexes.
3. The additional quote and message traffic that will be generated
by listing and trading the proposed options on the Russell Indexes,
including LEAPS on the Full Value Russell Indexes, 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 the Frank Russell Company
currently calculates the Russell Indexes. If the manner in which any
Russell Index is calculated were to change substantially, this approval
order, with respect to any ISE options on that index, might no longer
be effective.
The Commission finds good cause for approving this proposal before
the thirtieth day after the publication of notice thereof in the
Federal Register. Most of the proposed options on the Russell Indexes
already have been approved for listing and trading on another exchange
and are governed by contract specifications that are substantially the
same as those proposed by ISE. The new options proposed by ISE will be
governed by contract specifications that are substantially the same as
those that govern the similar existing products. Therefore,
accelerating approval of ISE's proposal should benefit investors by
creating, without undue delay, additional competition in the market for
the existing options, as well as an additional investment opportunity
with regard to the new options.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change, as amended (SR-ISE-2005-09), is
hereby approved.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2114 Filed 5-2-05; 8:45 am]
BILLING CODE 8010-01-P
