Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to Obvious Errors, 2967-2969 [E8-647]

Download as PDF Federal Register / Vol. 73, No. 11 / Wednesday, January 16, 2008 / Notices 3. ISE would require its members to deliver a prospectus or product description to investors purchasing the Shares prior to or concurrently with a transaction in the Shares. This approval order is based on these representations. The Commission finds good cause for approving this proposal before the 30th day after the publication of notice thereof in the Federal Register. As noted previously, the Commission previously found that the listing and trading of the Shares on Amex is consistent with the Act. Additionally, the Commission has approved the trading of the Shares pursuant to UTP on another national securities exchange.18 The Commission presently is not aware of any regulatory issue that should cause it to revisit those findings or would preclude the trading of the Shares on the Exchange pursuant to UTP. Therefore, accelerating approval of this proposal should benefit investors by creating, without undue delay, additional competition in the market for the Shares. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,19 that the proposed rule change (SR–ISE–2007– 103), as modified by Amendment No. 1 thereto, be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Florence E. Harmon, Deputy Secretary. [FR Doc. E8–646 Filed 1–15–08; 8:45 am] SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to Obvious Errors January 10, 2008. jlentini on PROD1PC65 with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 18 See Securities Exchange Act Release No. 56601 (October 2, 2007), 72 FR 51625 (October 10, 2007) (SR–NYSEArca–2007–79). 19 Id. 20 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. Jkt 214001 The Exchange proposes to amend its Obvious Error rule to address ‘‘Catastrophic Errors.’’ The text of the proposed rule change is available at the Exchange, the Commission’s Public Reference Room, and http:// www.ise.com. 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. 1. Purpose [Release No. 34–57127; File No. SR–ISE– 2007–112] 17:55 Jan 15, 2008 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change BILLING CODE 8011–01–P VerDate Aug<31>2005 notice is hereby given that on November 29, 2007, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. On January 4, 2008, the ISE submitted Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. The Exchange states that the purpose of the proposed rule change is to amend ISE Rule 720 (the ‘‘Obvious Error Rule’’) to address certain extreme circumstances. In particular, the Exchange proposes to add criteria for identifying ‘‘Catastrophic Errors’’ and making adjustments when Catastrophic Errors occur, as well as a streamlined procedure for reviewing actions taken in these extreme circumstances. The Exchange notes that, currently under the Obvious Error Rule, trades that result from an Obvious Error may be adjusted or busted according to objective standards. Under the rule, whether an Obvious Error has occurred is determined by comparing the execution price to the theoretical price of the option. The rule requires that PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 2967 members notify ISE Market Control within a short time period following the execution of a trade (five minutes for market makers and 20 minutes for Electronic Access Members (‘‘EAMs’’)) if they believe the trade qualifies as an Obvious Error. Trades that qualify for adjustment are adjusted under the rule to a price that matches the theoretical price plus or minus an adjustment value, which is $.15 if the theoretical value is under $3 and $.30 if the theoretical value is at or above $3. By adjusting trades above or below the theoretical price, the rule assesses a ‘‘penalty’’ in that the adjustment price is not as favorable as what the party making the error would have received had it not made the error. In formulating the Obvious Error Rule, the Exchange has weighed carefully the need to assure that one market participant is not permitted to receive a wind-fall at the expense of another market participant that made an Obvious Error, against the need to assure that market participants are not simply being given an opportunity to reconsider poor trading decisions. The Exchange states that, while it believes that the Obvious Error Rule strikes the correct balance in most situations, in some extreme situations, members may not be aware of errors that result in very large losses within the time periods required under the rule. In this type of extreme situation, ISE believes members should be given more time to seek relief so that there is a greater opportunity to mitigate very large losses and reduce the corresponding large wind-falls. However, to maintain the appropriate balance, the Exchange believes members should only be given more time when the execution price is much further away from the theoretical price than is required for Obvious Errors, and that the adjustment ‘‘penalty’’ should be much greater, so that relief is only provided in extreme circumstances.3 Accordingly, the Exchange proposes to amend the Obvious Error Rule to address ‘‘Catastrophic Errors.’’ Under the proposed rule, Members will have until 8:30 a.m. Eastern Time on the day following the trade to notify Market Control of a potential Catastrophic Error. For trades that take place in an expiring series on expiration Friday, Members must notify Market Control of a potential Catastrophic Error by 5 p.m. Eastern Time that same day. Once a 3 The Exchange does not believe the type of extreme situation that is covered by the proposed rule would occur in the normal course of trading. Rather, this type of situation could potentially occur as a result of, for example, an error in a member’s quotation system that causes a market maker to severely misprice an option. E:\FR\FM\16JAN1.SGM 16JAN1 2968 Federal Register / Vol. 73, No. 11 / Wednesday, January 16, 2008 / Notices member has notified Market Control of a Catastrophic Error within the required time period, a tribunal comprised of two representatives from market makers and two representatives from EAMs that are unrelated to the transaction in question (the ‘‘Tribunal’’) will review the Catastrophic Error claim. In the event the Tribunal determines that a Catastrophic Error did not occur, the member that initiated the review will be charged $5,000 to reimburse the Exchange for the costs associated with reviewing the claim. A Catastrophic Error would be deemed to have occurred when the execution price of a transaction is higher or lower than the theoretical price for the option by an amount equal to at least the amount shown in the second column of the chart below (the ‘‘Minimum Amount’’), and the adjustment would be made plus or minus the amount shown in column three of the chart below (the ‘‘Adjustment Value’’). At all price levels, the Minimum Amount and the Adjustment Value for Catastrophic Errors would be significantly higher than for Obvious Errors, which the Exchange believes, would limit the application of the proposed rule to situations where the losses are very large. Minimum amount Theoretical price Below $2 ............................................................................................................................................................................ $2 to $5 .............................................................................................................................................................................. Above $5 to $10 ................................................................................................................................................................ Above $10 to $50 .............................................................................................................................................................. Above $50 to $100 ............................................................................................................................................................ Above $100 ........................................................................................................................................................................ jlentini on PROD1PC65 with NOTICES The following example demonstrates how the proposed Catastrophic Error provisions would operate within the Obvious Error framework. Assume a member notifies ISE Market Control within 2 minutes of a trade where 100 contracts of an option with a theoretical price of $9 were purchased for $17, resulting in an $80,000 error.4 The trade would qualify as an Obvious Error because the purchase price is more than $.50 above the theoretical price and the member notified ISE Market Control within the required time period. Market Control would review the trade and either bust it or adjust it to a purchase price of $9.30,5 which reduces the cost of the error to $3,000.6 If, however, the member failed to identify the same error and notify Market Control until four hours after the trade, it could not be reviewed under the current Obvious Error Rule. Under the proposal, this trade would qualify as a Catastrophic Error because the purchase price is more than $5 above the theoretical price. Under the proposal, the Tribunal would review the trade and adjust the purchase price to $12, which reduces the cost of the error to $30,000.7 The Exchange believes that the proposed longer time period is appropriate to allow members to discover, and seek relief from, trading errors that result in extreme losses. At the same time, the Exchange believes that the proposed Minimum Amounts 4 One hundred contracts equal 10,000 shares, and the purchase price is $8 per share above the theoretical price. Therefore, the purchaser paid $80,000 over the theoretical value. 5 ISE Rule 720(c)(2). 6 10,000 shares at $.30 per share over the theoretical value. 7 10,000 shares at $3.00 per share over the theoretical value. VerDate Aug<31>2005 17:55 Jan 15, 2008 Jkt 214001 required for a trade to qualify as a Catastrophic Error, in combination with the large Adjustment Values, assures that only those transactions where the price of the execution results in very high losses will be eligible for adjustment under the new provisions. While the Exchange believes it is important to identify and resolve trading errors quickly, it also believes it is important to the integrity of the marketplace to have the authority to mitigate extreme losses resulting from errors. In this respect, the Exchange believes that the above example illustrates how market participants would continue to be encouraged to identify errors quickly, as losses will be significantly lower if the erroneous trades are busted or adjusted under the Obvious Error provisions of the rule. In consideration of the extreme nature of situations that will be addressed under the proposed Catastrophic Error provisions, the Exchange proposes a streamlined procedure for making determinations and adjustments. Under the current rule for Obvious Errors, ISE Market Control makes determinations that can then be appealed to a panel of member representatives. For Catastrophic Errors, the Exchange proposes to have a one-step process where the Tribunal makes determinations and adjustments. Additionally, given the burden that reviews under the Catastrophic Error provisions of the rule will have on exchange staff and member representatives, the Exchange proposes to include a $5000 fee in the event that the Tribunal determines that a Catastrophic Error did not occur. The Exchange believes that this is reasonable to encourage Members to requests PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 $1 $2 $5 $10 $20 $30 Adjustment value $1 $2 $3 $5 $7 $10 reviews only in appropriate situations, particularly given the objective criteria used to determine whether a Catastrophic Error occurred and the considerable amount of time members are given under the proposal to assess whether a trade falls within that criteria. The Exchange also amended Supplementary Material .02, .03, and .04 to ISE Rule 720 to reflect the proposed creation of the Tribunal. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with Section 6(b) of the Act,8 in general, and furthers the objectives of Section 6(b)(5) of the Act,9 in particular, in that it is designed to prevent fraudulent and manipulative acts, 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. In particular, the proposal will allow members a longer opportunity to seek relief from errors that result in large losses. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received by the Exchange with respect to the proposed rule change. 8 15 9 15 E:\FR\FM\16JAN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 16JAN1 Federal Register / Vol. 73, No. 11 / Wednesday, January 16, 2008 / Notices III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which the Exchange consents, the Commission will: A. By order approve the proposed rule change or 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 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments jlentini on PROD1PC65 with NOTICES • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–ISE–2007–112 on the subject line. 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–ISE–2007–112 and should be submitted on or before February 6, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Florence E. Harmon, Deputy Secretary. [FR Doc. E8–647 Filed 1–15–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–57128; File No. SR–ISE– 2008–02] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Fee Changes January 10, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 Paper Comments (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 2, • Send paper comments in triplicate 2008, the International Securities to Nancy M. Morris, Secretary, Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) Securities and Exchange Commission, filed with the Securities and Exchange 100 F Street, NE., Washington, DC Commission (‘‘Commission’’) the 20549–1090. proposed rule change as described in All submissions should refer to File Items I, II, and III below, which Items Number SR–ISE–2007–112. This file have been substantially prepared by the number should be included on the subject line if e-mail is used. To help the ISE. The ISE has designated this proposal as one establishing or changing Commission process and review your a due, fee, or other charge imposed by comments more efficiently, please use only one method. The Commission will the ISE under section 19(b)(3)(A)(ii) of 3 post all comments on the Commission’s the Act, and Rule 19b–4(f)(2) thereunder,4 which renders the proposal Internet Web site (http://www.sec.gov/ effective upon filing with the rules/sro.shtml). Copies of the Commission. The Commission is submission, all subsequent publishing this notice to solicit amendments, all written statements comments on the proposed rule change with respect to the proposed rule from interested persons. change that are filed with the Commission, and all written I. Self-Regulatory Organization’s communications relating to the Statement of the Terms of Substance of proposed rule change between the the Proposed Rule Change Commission and any person, other than The ISE is proposing to amend its those that may be withheld from the Schedule of Fees to increase the public Accordance with the provisions surcharge fee for transactions in options of 5 U.S.C. 552, will be available for inspection and copying in the 10 17 CFR 200.30–3(a)(12). Commission’s Public Reference Room, 1 15 U.S.C. 78s(b)(1). 100 F Street, NE., Washington, DC 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 20549, on official business days 4 17 CFR 240.19b–4(f)(2). between the hours of 10 a.m. and 3 p.m. VerDate Aug<31>2005 17:55 Jan 15, 2008 Jkt 214001 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 2969 on the Nasdaq–100 Stock Index. The text of the proposed rule change is available on the Exchange’s Web site (www.ise.com), at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the ISE 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 ISE 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 is proposing to amend its Schedule of Fees to increase the surcharge fee for transactions in options on the Nasdaq–100 Stock Index, both full value (‘‘NDX’’) and 1/10 value (‘‘MNX’’).5 The Exchange currently charges an execution fee and a comparison fee for all transactions in options on NDX and MNX.6 Specifically, the amount of the execution fee and comparison fee for transactions in options on NDX and MNX is $0.15 and $0.03 per contract, respectively, for all Public Customer Orders 7 and Firm Proprietary orders. The current amount of the execution fee and comparison fee for all ISE Market Maker transactions in options on NDX and MNX is equal to the execution fee and comparison fee currently charged by the Exchange for ISE Market Maker 5 See Securities Exchange Act Release No. 51121 (February 1, 2005), 70 FR 6476 (February 7, 2005), (SR–ISE–2005–01) (Order approving the trading of options on full and reduced values of the Nasdaq– 100 Stock Index). 6 See Securities Exchange Act Release No. 51397 (March 18, 2005), 70 FR 15372 (March 25, 2005), (SR–ISE–2005–13) (Notice of Filing and Immediate Effectiveness of proposed fee changes related to NDX and MNX options). These fees are charged only to Exchange members. Under a pilot program that is set to expire on July 31, 2008, these fees will also be charged to Linkage Orders (as defined in ISE Rule 1900). See Securities Exchange Act Release No. 56128 (July 24, 2007), 72 FR 42161 (August 1, 2007) (SR–ISE–2007–55). 7 Public Customer Order is defined in Exchange Rule 100(a)(39) as an order for the account of a Public Customer. Public Customer is defined in Exchange Rule 100(a)(38) as a person that is not a broker or dealer in securities. E:\FR\FM\16JAN1.SGM 16JAN1

Agencies

[Federal Register Volume 73, Number 11 (Wednesday, January 16, 2008)]
[Notices]
[Pages 2967-2969]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-647]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57127; File No. SR-ISE-2007-112]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of a Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, Relating to Obvious Errors

 January 10, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 29, 2007, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by the Exchange. On January 4, 2008, the ISE submitted 
Amendment No. 1 to the proposed rule change. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Obvious Error rule to address 
``Catastrophic Errors.'' The text of the proposed rule change is 
available at the Exchange, the Commission's Public Reference Room, and 
http://www.ise.com.

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 states that the purpose of the proposed rule change is 
to amend ISE Rule 720 (the ``Obvious Error Rule'') to address certain 
extreme circumstances. In particular, the Exchange proposes to add 
criteria for identifying ``Catastrophic Errors'' and making adjustments 
when Catastrophic Errors occur, as well as a streamlined procedure for 
reviewing actions taken in these extreme circumstances.
    The Exchange notes that, currently under the Obvious Error Rule, 
trades that result from an Obvious Error may be adjusted or busted 
according to objective standards. Under the rule, whether an Obvious 
Error has occurred is determined by comparing the execution price to 
the theoretical price of the option. The rule requires that members 
notify ISE Market Control within a short time period following the 
execution of a trade (five minutes for market makers and 20 minutes for 
Electronic Access Members (``EAMs'')) if they believe the trade 
qualifies as an Obvious Error. Trades that qualify for adjustment are 
adjusted under the rule to a price that matches the theoretical price 
plus or minus an adjustment value, which is $.15 if the theoretical 
value is under $3 and $.30 if the theoretical value is at or above $3. 
By adjusting trades above or below the theoretical price, the rule 
assesses a ``penalty'' in that the adjustment price is not as favorable 
as what the party making the error would have received had it not made 
the error.
    In formulating the Obvious Error Rule, the Exchange has weighed 
carefully the need to assure that one market participant is not 
permitted to receive a wind-fall at the expense of another market 
participant that made an Obvious Error, against the need to assure that 
market participants are not simply being given an opportunity to 
reconsider poor trading decisions. The Exchange states that, while it 
believes that the Obvious Error Rule strikes the correct balance in 
most situations, in some extreme situations, members may not be aware 
of errors that result in very large losses within the time periods 
required under the rule. In this type of extreme situation, ISE 
believes members should be given more time to seek relief so that there 
is a greater opportunity to mitigate very large losses and reduce the 
corresponding large wind-falls. However, to maintain the appropriate 
balance, the Exchange believes members should only be given more time 
when the execution price is much further away from the theoretical 
price than is required for Obvious Errors, and that the adjustment 
``penalty'' should be much greater, so that relief is only provided in 
extreme circumstances.\3\
---------------------------------------------------------------------------

    \3\ The Exchange does not believe the type of extreme situation 
that is covered by the proposed rule would occur in the normal 
course of trading. Rather, this type of situation could potentially 
occur as a result of, for example, an error in a member's quotation 
system that causes a market maker to severely misprice an option.
---------------------------------------------------------------------------

    Accordingly, the Exchange proposes to amend the Obvious Error Rule 
to address ``Catastrophic Errors.'' Under the proposed rule, Members 
will have until 8:30 a.m. Eastern Time on the day following the trade 
to notify Market Control of a potential Catastrophic Error. For trades 
that take place in an expiring series on expiration Friday, Members 
must notify Market Control of a potential Catastrophic Error by 5 p.m. 
Eastern Time that same day. Once a

[[Page 2968]]

member has notified Market Control of a Catastrophic Error within the 
required time period, a tribunal comprised of two representatives from 
market makers and two representatives from EAMs that are unrelated to 
the transaction in question (the ``Tribunal'') will review the 
Catastrophic Error claim. In the event the Tribunal determines that a 
Catastrophic Error did not occur, the member that initiated the review 
will be charged $5,000 to reimburse the Exchange for the costs 
associated with reviewing the claim.
    A Catastrophic Error would be deemed to have occurred when the 
execution price of a transaction is higher or lower than the 
theoretical price for the option by an amount equal to at least the 
amount shown in the second column of the chart below (the ``Minimum 
Amount''), and the adjustment would be made plus or minus the amount 
shown in column three of the chart below (the ``Adjustment Value''). At 
all price levels, the Minimum Amount and the Adjustment Value for 
Catastrophic Errors would be significantly higher than for Obvious 
Errors, which the Exchange believes, would limit the application of the 
proposed rule to situations where the losses are very large.

------------------------------------------------------------------------
                                                  Minimum    Adjustment
               Theoretical price                   amount       value
------------------------------------------------------------------------
Below $2.......................................         $1            $1
$2 to $5.......................................         $2            $2
Above $5 to $10................................         $5            $3
Above $10 to $50...............................        $10            $5
Above $50 to $100..............................        $20            $7
Above $100.....................................        $30           $10
------------------------------------------------------------------------

    The following example demonstrates how the proposed Catastrophic 
Error provisions would operate within the Obvious Error framework. 
Assume a member notifies ISE Market Control within 2 minutes of a trade 
where 100 contracts of an option with a theoretical price of $9 were 
purchased for $17, resulting in an $80,000 error.\4\ The trade would 
qualify as an Obvious Error because the purchase price is more than 
$.50 above the theoretical price and the member notified ISE Market 
Control within the required time period. Market Control would review 
the trade and either bust it or adjust it to a purchase price of 
$9.30,\5\ which reduces the cost of the error to $3,000.\6\ If, 
however, the member failed to identify the same error and notify Market 
Control until four hours after the trade, it could not be reviewed 
under the current Obvious Error Rule. Under the proposal, this trade 
would qualify as a Catastrophic Error because the purchase price is 
more than $5 above the theoretical price. Under the proposal, the 
Tribunal would review the trade and adjust the purchase price to $12, 
which reduces the cost of the error to $30,000.\7\
---------------------------------------------------------------------------

    \4\ One hundred contracts equal 10,000 shares, and the purchase 
price is $8 per share above the theoretical price. Therefore, the 
purchaser paid $80,000 over the theoretical value.
    \5\ ISE Rule 720(c)(2).
    \6\ 10,000 shares at $.30 per share over the theoretical value.
    \7\ 10,000 shares at $3.00 per share over the theoretical value.
---------------------------------------------------------------------------

    The Exchange believes that the proposed longer time period is 
appropriate to allow members to discover, and seek relief from, trading 
errors that result in extreme losses. At the same time, the Exchange 
believes that the proposed Minimum Amounts required for a trade to 
qualify as a Catastrophic Error, in combination with the large 
Adjustment Values, assures that only those transactions where the price 
of the execution results in very high losses will be eligible for 
adjustment under the new provisions. While the Exchange believes it is 
important to identify and resolve trading errors quickly, it also 
believes it is important to the integrity of the marketplace to have 
the authority to mitigate extreme losses resulting from errors. In this 
respect, the Exchange believes that the above example illustrates how 
market participants would continue to be encouraged to identify errors 
quickly, as losses will be significantly lower if the erroneous trades 
are busted or adjusted under the Obvious Error provisions of the rule.
    In consideration of the extreme nature of situations that will be 
addressed under the proposed Catastrophic Error provisions, the 
Exchange proposes a streamlined procedure for making determinations and 
adjustments. Under the current rule for Obvious Errors, ISE Market 
Control makes determinations that can then be appealed to a panel of 
member representatives. For Catastrophic Errors, the Exchange proposes 
to have a one-step process where the Tribunal makes determinations and 
adjustments. Additionally, given the burden that reviews under the 
Catastrophic Error provisions of the rule will have on exchange staff 
and member representatives, the Exchange proposes to include a $5000 
fee in the event that the Tribunal determines that a Catastrophic Error 
did not occur. The Exchange believes that this is reasonable to 
encourage Members to requests reviews only in appropriate situations, 
particularly given the objective criteria used to determine whether a 
Catastrophic Error occurred and the considerable amount of time members 
are given under the proposal to assess whether a trade falls within 
that criteria.
    The Exchange also amended Supplementary Material .02, .03, and .04 
to ISE Rule 720 to reflect the proposed creation of the Tribunal.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\8\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\9\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts, 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. 
In particular, the proposal will allow members a longer opportunity to 
seek relief from errors that result in large losses.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 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 will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received by the Exchange with 
respect to the proposed rule change.

[[Page 2969]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve the proposed rule change or
    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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ISE-2007-112 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2007-112. 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 (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public Accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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-ISE-2007-112 and should be 
submitted on or before February 6, 2008. 

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-647 Filed 1-15-08; 8:45 am]
BILLING CODE 8011-01-P