Self-Regulatory Organizations; International Securities Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 4 to the Proposed Rule Change Relating to Listing Standards for Broad-Based Index Options, 60590-60592 [05-20775]

Download as PDF 60590 Federal Register / Vol. 70, No. 200 / Tuesday, October 18, 2005 / Notices (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. 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: For the Commission, by the Division of Market Regulation, pursuant to delegated authority.12 Jill M. Peterson, Assistant Secretary. [FR Doc. E5–5728 Filed 10–17–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52578; File No. SR–ISE– 2005–27] 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–CBOE–2005–60 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–CBOE–2005–60. 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 Room. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2005–60 and should be submitted on or before November 8, 2005. VerDate Aug<31>2005 17:22 Oct 17, 2005 Jkt 208001 Self-Regulatory Organizations; International Securities Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 4 to the Proposed Rule Change Relating to Listing Standards for Broad-Based Index Options October 7, 2005. I. Introduction On May 19, 2005, the International Securities Exchange, Inc. (‘‘ISE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to establish listing and maintenance standards and position limits for options on broad-based indexes. The ISE filed Amendment No. 1 to the proposed rule change on July 13, 2005.3 The proposed rule change, as amended by Amendment No. 1, was published for comment in the Federal Register on July 27, 2005.4 The Commission received no comments regarding the proposal, as amended. The ISE filed Amendment No. 2 to the proposed rule change on September 26, 2005, and withdrew Amendment No. 2 on September 28, 2005. The ISE filed Amendment No. 3 to the proposed rule change on September 28, 2005, and withdrew Amendment No. 3 on October 6, 2005. The ISE filed Amendment No. 4 to the proposal on October 6, 2005.5 This CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1 makes technical corrections to the proposal, including revisions that clarify the applicability of the market capitalization and options eligibility requirements in ISE Rule 2002(d). 4 See Securities Exchange Act Release No. 52084 (July 20, 2005), 70 FR 43481. 5 Amendment No. 4 revises the proposal to: (1) Provide that an index’s component securities must be ‘‘NMS stocks’’ rather than ‘‘reported securities;’’ (2) identify the entities or services that will disseminate index values; (3) state that the ISE has an adequate surveillance program for broad-based order approves the proposed rule change, as amended. In addition, the Commission is publishing notice to solicit comments on, and is simultaneously approving, on an accelerated basis, Amendment No. 4 to the proposal. II. Description of the Proposed Rule Change The ISE proposes to adopt ISE Rule 2002(d) to establish initial listing standards for broad-based index options. The proposal will allow the ISE to list, pursuant to Rule 19b–4(e) under the Act,6 broad-based index options that meet the listing standards in ISE Rule 2002(d). The listing standards require, among other things, that the underlying index be broad-based, as defined in ISE Rule 2001(j); that options on the index be a.m.-settled; that the index be capitalization-weighted, modified capitalization-weighted, price-weighted, or equal dollar-weighted; and that the index be comprised of at least 50 securities, all of which must be ‘‘NMS stocks,’’ as defined in Rule 600 of Regulation NMS.7 In addition, ISE Rule 2002(d) requires that the index’s component securities meet certain minimum market capitalization and average daily trading volume requirements; that no single component account for more than 10% of the weight of the index and that the five highest weighed components represent no more than 33% of the weight of the index; that the index value be widely disseminated at least every 15 seconds; and that the ISE have written surveillance procedures in place with respect to the index options. The ISE also proposes to adopt ISE Rule 2002(e), which establishes maintenance standards for broad-based index options listed pursuant to ISE Rule 2002(d). In addition, the ISE proposes to amend ISE Rule 2004(a) to establish a position limit of 25,000 contracts on the same side of the market for broad-based index options listed pursuant to ISE Rule 2002(d).8 12 17 1 15 PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 index options; and (4) clarify that the position limits for broad-based index options apply to option contracts on the same side of the market. 6 17 CFR 240.19b–4(e). 7 See Amendment No. 4, supra note 5. Rule 600 of Regulation NMS defines an ‘‘NMS stock’’ to mean ‘‘any NMS security other than an option.’’ An ‘‘NMS security’’ is ‘‘any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.’’ See 17 CFR 242.600. 8 See Amendment No. 4, supra note 5. E:\FR\FM\18OCN1.SGM 18OCN1 Federal Register / Vol. 70, No. 200 / Tuesday, October 18, 2005 / Notices III. Discussion After careful review, 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. In particular, the Commission finds that the proposed rule change, as amended, is consistent with Section 6(b)(5) of the Act,9 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. To list options on a particular broadbased index, the ISE currently must file a proposed rule change with the Commission pursuant to Section 19(b)(1) of the Act and Rule 19b–4 thereunder. However, Rule 19b–4(e) provides that the listing and trading of a new derivative securities product by a self-regulatory organization (‘‘SRO’’) will not be deemed a proposed rule change pursuant to Rule 19b–4(c)(1) if the Commission has approved, pursuant to Section 19(b) of the Act, the SRO’s trading rules, procedures, and listing standards for the product class that would include the new derivative securities product, and the SRO has a surveillance program for the product class. As described more fully above, the ISE proposes to establish listing standards for broad-based index options. The Commission’s approval of the ISE’s listing standards for broadbased index options will allow options that satisfy the listing standards to begin trading pursuant to Rule 19b–4(e), without constituting a proposed rule change within the meaning of Section 19(b) of the Act and Rule 19b–4, for which notice and comment and Commission approval is necessary.10 The ISE’s ability to rely on Rule 19b– 4(e) to list broad-based index options that meet the requirements of ISE Rule 2002(d) potentially reduces the time frame for bringing these securities to the market, thereby promoting competition and making new broad-based index 9 15 U.S.C. 78f(b)(5). relying on Rule 19b–4(e), the SRO must submit Form 19b–4(e) to the Commission within five business days after the SRO begins trading the new derivative securities product. See Securities Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 (December 22, 1998) (File No. S7–13–98). 10 When VerDate Aug<31>2005 17:22 Oct 17, 2005 Jkt 208001 options available to investors more quickly. The Commission notes that the ISE has represented that it has adequate trading rules, procedures, listing standards, and surveillance program for broad-based index options. ISE’s existing index option trading rules and procedures will apply to broad-based index options listed pursuant to ISE Rule 2002(d). Other existing ISE rules, including provisions addressing sales practices and margin requirements, also will apply to these options. In addition, the ISE proposes to establish position and exercise limits of 25,000 contracts on the same side of the market for broad-based index options listed pursuant to ISE Rule 2002(d).11 The Commission believes that the proposed position and exercise limits should serve to minimize potential manipulation concerns. The ISE represents that it has adequate surveillance procedures for broad-based index options and that it intends to apply its existing surveillance procedures for index options to monitor trading in broad-based index options listed pursuant to ISE Rule 2002(d).12 In addition, because ISE Rule 2002(d) requires that each component of an index be an ‘‘NMS stock,’’ as defined in Rule 600 of Regulation NMS under the Act, each index component must trade on a registered national securities exchange or through Nasdaq. Accordingly, the ISE will have access to information concerning trading activity in the component securities of an underlying index through the Intermarket Surveillance Group (‘‘ISG’’).13 ISE Rule 2002(d) also provides that non-U.S. index components that are not subject to a comprehensive surveillance sharing agreement between the ISE and the primary market(s) trading the index components may comprise no more than 20% of the weight of the index.14 The Commission believes that these 11 See Amendment No. 4, supra note 5. Under ISE Rule 2007, the exercise limits for index options are equivalent to the position limits prescribed for option contracts with the nearest expiration in ISE Rule 2004 or ISE Rule 2005. 12 See Amendment No. 4, supra note 5. 13 The ISG was formed on July 14, 1983, to, among other things, coordinate more effectively surveillance and investigative information sharing arrangements in the stock and options markets. All of the registered national securities exchanges and the National Association of Securities Dealers, Inc., are members of the ISG. In addition, futures exchanges and non-U.S. exchanges and associations are affiliate members of the ISG. 14 However, such non-U.S. index components, as ‘‘NMS stocks,’’ would be registered under Section 12 of the Act and listed and traded on a national securities exchange or Nasdaq, where there is last sale reporting. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 60591 requirements will help to ensure that the ISE has the ability to monitor trading in broad-based index options listed pursuant to ISE Rule 2002(d) and in the component securities of the underlying indexes. The Commission believes that the requirements in ISE Rule 2002(d) regarding, among other things, the minimum market capitalization, trading volume, and relative weightings of an underlying index’s component stocks are designed to ensure that the markets for the index’s component stocks are adequately capitalized and sufficiently liquid, and that no one stock dominates the index. In addition, ISE Rule 2002(d) requires that the underlying index be ‘‘broad-based,’’ as defined in ISE Rule 2001(j).15 The Commission believes that these requirements minimize the potential for manipulating the underlying index. The Commission believes that the requirement in ISE Rule 2002(d) that the current index value be widely disseminated at least once every 15 seconds by the Options Price Reporting Authority, the Consolidated Tape Association, the Nasdaq Index Dissemination Service or by one or more major market data vendors during the time an index option trades on the ISE should provide transparency with respect to current index values and contribute to the transparency of the market for broad-based index options.16 In addition, the Commission believes, as it has noted in other contexts, that the requirement in ISE Rule 2002(d) that an index option be settled based on the opening prices of the index’s component securities, rather than on closing prices, could help to reduce the potential impact of expiring index options on the market for the index’s component securities.17 Accelerated Approval of Amendment No. 4 The Commission finds good cause for approving Amendment No. 4 to the 15 ISE Rule 2001(j) defines ‘‘broad-based index’’ to mean ‘‘an index designed to be representative of a stock market as a whole or of a range of companies in unrelated industries.’’ 16 See Amendment No. 4, supra note 5. The Commission notes, however, that if the ISE designated a data vendor, on an exclusive basis, to disseminate index values on behalf of the ISE, such vendor would be an ‘‘exclusive processor’’ under Section 3(a)(22)(B) of the Act and, absent an exemption, would be required to register as a securities information processor under Section 11A(b)(1) of the Act. 17 See, e.g., Securities Exchange Act Release No. 30944 (July 21, 1992), 57 FR 33376 (July 28, 1992) (order approving a Chicago Board Options Exchange, Incorporated proposal to establish opening price settlement for S&P 500 Index options). E:\FR\FM\18OCN1.SGM 18OCN1 60592 Federal Register / Vol. 70, No. 200 / Tuesday, October 18, 2005 / Notices proposed rule change prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register. Amendment No. 4 strengthens and clarifies the proposal by revising the proposal to: (1) Provide that an index’s component securities must be ‘‘NMS stocks’’ rather than ‘‘reported securities;’’ (2) identify the entities or services that will disseminate index values; (3) state that the ISE has an adequate surveillance program for broad-based index options; and (4) clarify that the position limits for broadbased index options apply to option contracts on the same side of the market. Accordingly, the Commission finds that it is consistent with Sections 6(b)(5) and 19(b) of the Act to approve Amendment No. 4 on an accelerated basis. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 4, including whether Amendment No. 4 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–2005–27 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–ISE–2005–27. 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 VerDate Aug<31>2005 17:22 Oct 17, 2005 Jkt 208001 Section, 100 F Street, NE., Washington, DC 20549. Copies of such 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–2005–27 and should be submitted on or before November 8, 2005. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,18 that the proposed rule change (SR–ISE–2005– 27), as amended, is approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.19 Jill M. Peterson, Assistant Secretary. [FR Doc. 05–20775 Filed 10–17–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52581; File No. SR–NASD– 2005–101] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to Expansion of OATS Reporting Requirements to OTC Equity Securities October 11, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 2 thereunder, notice is hereby given that on August 25, 2005, the National Association of Securities Dealers, Inc. (‘‘NASD’’) 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 NASD. 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 NASD is proposing to amend NASD Rules 6951 and 6952 to require members to record and report to the Order Audit Trail System (‘‘OATS’’) 18 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. 19 17 PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 order information relating to OTC equity securities. Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in brackets. * * * * * 6950. Order Audit Trail System 6951. Definitions For purposes of Rules 6950 through 6957: (a) through (i) No change. (j) ‘‘Order’’ shall mean any oral, written, or electronic instruction to effect a transaction in a Nasdaq Stock Market equity security or OTC equity security that is received by a member from another person for handling or execution, or that is originated by a department of a member for execution by the same or another member, other than any such instruction to effect a proprietary transaction originated by a trading desk in the ordinary course of a member’s market making activities. (k) ‘‘Order Audit Trail System’’ shall mean the automated system owned and operated by the Association that is designed to capture order information reported by members for integration with trade [information reported to the Nasdaq Market Center] and quotation information [disseminated by members in order] to provide the Association with an accurate time sequenced record of orders and transactions. (l) ‘‘OTC equity security’’ shall mean: (1) any equity security that is not listed on The Nasdaq Stock Market or a national securities exchange; (2) any equity security that is listed on one or more regional stock exchanges and does not qualify for dissemination of transaction reports via the facilities of the Consolidated Tape; or (3) any Direct Participation Program as defined in Rule 6910 that is not listed on The Nasdaq Stock Market or a national securities exchange. [(l)] (m) ‘‘Program Trade’’ shall mean a trading strategy involving the related purchase or sale of a group of 15 or more securities having a total market value of $1 million or more, as further defined in New York Stock Exchange Rule 80A. [(m)] (n) ‘‘Reporting Agent’’ shall mean a third party that enters into any agreement with a member pursuant to which the Reporting Agent agrees to fulfill such member’s obligations under Rule 6955. [(n)] (o) ‘‘Reporting Member’’ shall mean a member that receives or originates an order and has an obligation to record and report information under Rules 6954 and 6955. E:\FR\FM\18OCN1.SGM 18OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 200 (Tuesday, October 18, 2005)]
[Notices]
[Pages 60590-60592]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-20775]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52578; File No. SR-ISE-2005-27]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 4 to the Proposed Rule Change Relating to Listing Standards for 
Broad-Based Index Options

October 7, 2005.

I. Introduction

    On May 19, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish listing and 
maintenance standards and position limits for options on broad-based 
indexes. The ISE filed Amendment No. 1 to the proposed rule change on 
July 13, 2005.\3\ The proposed rule change, as amended by Amendment No. 
1, was published for comment in the Federal Register on July 27, 
2005.\4\ The Commission received no comments regarding the proposal, as 
amended. The ISE filed Amendment No. 2 to the proposed rule change on 
September 26, 2005, and withdrew Amendment No. 2 on September 28, 2005. 
The ISE filed Amendment No. 3 to the proposed rule change on September 
28, 2005, and withdrew Amendment No. 3 on October 6, 2005. The ISE 
filed Amendment No. 4 to the proposal on October 6, 2005.\5\ This order 
approves the proposed rule change, as amended. In addition, the 
Commission is publishing notice to solicit comments on, and is 
simultaneously approving, on an accelerated basis, Amendment No. 4 to 
the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 makes technical corrections to the proposal, 
including revisions that clarify the applicability of the market 
capitalization and options eligibility requirements in ISE Rule 
2002(d).
    \4\ See Securities Exchange Act Release No. 52084 (July 20, 
2005), 70 FR 43481.
    \5\ Amendment No. 4 revises the proposal to: (1) Provide that an 
index's component securities must be ``NMS stocks'' rather than 
``reported securities;'' (2) identify the entities or services that 
will disseminate index values; (3) state that the ISE has an 
adequate surveillance program for broad-based index options; and (4) 
clarify that the position limits for broad-based index options apply 
to option contracts on the same side of the market.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The ISE proposes to adopt ISE Rule 2002(d) to establish initial 
listing standards for broad-based index options. The proposal will 
allow the ISE to list, pursuant to Rule 19b-4(e) under the Act,\6\ 
broad-based index options that meet the listing standards in ISE Rule 
2002(d). The listing standards require, among other things, that the 
underlying index be broad-based, as defined in ISE Rule 2001(j); that 
options on the index be a.m.-settled; that the index be capitalization-
weighted, modified capitalization-weighted, price-weighted, or equal 
dollar-weighted; and that the index be comprised of at least 50 
securities, all of which must be ``NMS stocks,'' as defined in Rule 600 
of Regulation NMS.\7\ In addition, ISE Rule 2002(d) requires that the 
index's component securities meet certain minimum market capitalization 
and average daily trading volume requirements; that no single component 
account for more than 10% of the weight of the index and that the five 
highest weighed components represent no more than 33% of the weight of 
the index; that the index value be widely disseminated at least every 
15 seconds; and that the ISE have written surveillance procedures in 
place with respect to the index options.
---------------------------------------------------------------------------

    \6\ 17 CFR 240.19b-4(e).
    \7\ See Amendment No. 4, supra note 5. Rule 600 of Regulation 
NMS defines an ``NMS stock'' to mean ``any NMS security other than 
an option.'' An ``NMS security'' is ``any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan, or an effective national market system plan for reporting 
transactions in listed options.'' See 17 CFR 242.600.
---------------------------------------------------------------------------

    The ISE also proposes to adopt ISE Rule 2002(e), which establishes 
maintenance standards for broad-based index options listed pursuant to 
ISE Rule 2002(d). In addition, the ISE proposes to amend ISE Rule 
2004(a) to establish a position limit of 25,000 contracts on the same 
side of the market for broad-based index options listed pursuant to ISE 
Rule 2002(d).\8\
---------------------------------------------------------------------------

    \8\ See Amendment No. 4, supra note 5.

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[[Page 60591]]

III. Discussion

    After careful review, 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. In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\9\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    To list options on a particular broad-based index, the ISE 
currently must file a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder. However, Rule 
19b-4(e) provides that the listing and trading of a new derivative 
securities product by a self-regulatory organization (``SRO'') will not 
be deemed a proposed rule change pursuant to Rule 19b-4(c)(1) if the 
Commission has approved, pursuant to Section 19(b) of the Act, the 
SRO's trading rules, procedures, and listing standards for the product 
class that would include the new derivative securities product, and the 
SRO has a surveillance program for the product class.
    As described more fully above, the ISE proposes to establish 
listing standards for broad-based index options. The Commission's 
approval of the ISE's listing standards for broad-based index options 
will allow options that satisfy the listing standards to begin trading 
pursuant to Rule 19b-4(e), without constituting a proposed rule change 
within the meaning of Section 19(b) of the Act and Rule 19b-4, for 
which notice and comment and Commission approval is necessary.\10\ The 
ISE's ability to rely on Rule 19b-4(e) to list broad-based index 
options that meet the requirements of ISE Rule 2002(d) potentially 
reduces the time frame for bringing these securities to the market, 
thereby promoting competition and making new broad-based index options 
available to investors more quickly.
    The Commission notes that the ISE has represented that it has 
adequate trading rules, procedures, listing standards, and surveillance 
program for broad-based index options. ISE's existing index option 
trading rules and procedures will apply to broad-based index options 
listed pursuant to ISE Rule 2002(d). Other existing ISE rules, 
including provisions addressing sales practices and margin 
requirements, also will apply to these options. In addition, the ISE 
proposes to establish position and exercise limits of 25,000 contracts 
on the same side of the market for broad-based index options listed 
pursuant to ISE Rule 2002(d).\11\ The Commission believes that the 
proposed position and exercise limits should serve to minimize 
potential manipulation concerns.
---------------------------------------------------------------------------

    \10\ When relying on Rule 19b-4(e), the SRO must submit Form 
19b-4(e) to the Commission within five business days after the SRO 
begins trading the new derivative securities product. See Securities 
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 
(December 22, 1998) (File No. S7-13-98).
    \11\ See Amendment No. 4, supra note 5. Under ISE Rule 2007, the 
exercise limits for index options are equivalent to the position 
limits prescribed for option contracts with the nearest expiration 
in ISE Rule 2004 or ISE Rule 2005.
---------------------------------------------------------------------------

    The ISE represents that it has adequate surveillance procedures for 
broad-based index options and that it intends to apply its existing 
surveillance procedures for index options to monitor trading in broad-
based index options listed pursuant to ISE Rule 2002(d).\12\ In 
addition, because ISE Rule 2002(d) requires that each component of an 
index be an ``NMS stock,'' as defined in Rule 600 of Regulation NMS 
under the Act, each index component must trade on a registered national 
securities exchange or through Nasdaq. Accordingly, the ISE will have 
access to information concerning trading activity in the component 
securities of an underlying index through the Intermarket Surveillance 
Group (``ISG'').\13\ ISE Rule 2002(d) also provides that non-U.S. index 
components that are not subject to a comprehensive surveillance sharing 
agreement between the ISE and the primary market(s) trading the index 
components may comprise no more than 20% of the weight of the 
index.\14\ The Commission believes that these requirements will help to 
ensure that the ISE has the ability to monitor trading in broad-based 
index options listed pursuant to ISE Rule 2002(d) and in the component 
securities of the underlying indexes.
---------------------------------------------------------------------------

    \12\ See Amendment No. 4, supra note 5.
    \13\ The ISG was formed on July 14, 1983, to, among other 
things, coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
All of the registered national securities exchanges and the National 
Association of Securities Dealers, Inc., are members of the ISG. In 
addition, futures exchanges and non-U.S. exchanges and associations 
are affiliate members of the ISG.
    \14\ However, such non-U.S. index components, as ``NMS stocks,'' 
would be registered under Section 12 of the Act and listed and 
traded on a national securities exchange or Nasdaq, where there is 
last sale reporting.
---------------------------------------------------------------------------

    The Commission believes that the requirements in ISE Rule 2002(d) 
regarding, among other things, the minimum market capitalization, 
trading volume, and relative weightings of an underlying index's 
component stocks are designed to ensure that the markets for the 
index's component stocks are adequately capitalized and sufficiently 
liquid, and that no one stock dominates the index. In addition, ISE 
Rule 2002(d) requires that the underlying index be ``broad-based,'' as 
defined in ISE Rule 2001(j).\15\ The Commission believes that these 
requirements minimize the potential for manipulating the underlying 
index.
---------------------------------------------------------------------------

    \15\ ISE Rule 2001(j) defines ``broad-based index'' to mean ``an 
index designed to be representative of a stock market as a whole or 
of a range of companies in unrelated industries.''
---------------------------------------------------------------------------

    The Commission believes that the requirement in ISE Rule 2002(d) 
that the current index value be widely disseminated at least once every 
15 seconds by the Options Price Reporting Authority, the Consolidated 
Tape Association, the Nasdaq Index Dissemination Service or by one or 
more major market data vendors during the time an index option trades 
on the ISE should provide transparency with respect to current index 
values and contribute to the transparency of the market for broad-based 
index options.\16\ In addition, the Commission believes, as it has 
noted in other contexts, that the requirement in ISE Rule 2002(d) that 
an index option be settled based on the opening prices of the index's 
component securities, rather than on closing prices, could help to 
reduce the potential impact of expiring index options on the market for 
the index's component securities.\17\
---------------------------------------------------------------------------

    \16\ See Amendment No. 4, supra note 5. The Commission notes, 
however, that if the ISE designated a data vendor, on an exclusive 
basis, to disseminate index values on behalf of the ISE, such vendor 
would be an ``exclusive processor'' under Section 3(a)(22)(B) of the 
Act and, absent an exemption, would be required to register as a 
securities information processor under Section 11A(b)(1) of the Act.
    \17\ See, e.g., Securities Exchange Act Release No. 30944 (July 
21, 1992), 57 FR 33376 (July 28, 1992) (order approving a Chicago 
Board Options Exchange, Incorporated proposal to establish opening 
price settlement for S&P 500 Index options).
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Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving Amendment No. 4 to 
the

[[Page 60592]]

proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 4 strengthens and clarifies the proposal by revising the 
proposal to: (1) Provide that an index's component securities must be 
``NMS stocks'' rather than ``reported securities;'' (2) identify the 
entities or services that will disseminate index values; (3) state that 
the ISE has an adequate surveillance program for broad-based index 
options; and (4) clarify that the position limits for broad-based index 
options apply to option contracts on the same side of the market. 
Accordingly, the Commission finds that it is consistent with Sections 
6(b)(5) and 19(b) of the Act to approve Amendment No. 4 on an 
accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
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-2005-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-ISE-2005-27. 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such 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-2005-27 and should be 
submitted on or before November 8, 2005.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-ISE-2005-27), as amended, is 
approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
Jill M. Peterson,
Assistant Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 05-20775 Filed 10-17-05; 8:45 am]
BILLING CODE 8010-01-P

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