[Federal Register Volume 66, Number 235 (Thursday, December 6, 2001)]
[Notices]
[Pages 63423-63424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30274]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45119; File No. SR-ISE-2001-33]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC To Amend the 
Original Criteria for Underlying Securities Contained in ISE Rule 502

November 30, 2001.
    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 19, 2001, 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 prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Currently, paragraph (b)(5) of ISE Rule 502, ``Criteria for 
Underlying Securities,'' provides that the market price per share of a 
security underlying an option must have been at least $7.50 for the 
majority of business days during the three calendar months preceding 
the date of the selection, as measured by the lowest closing price 
reported in any market in which the underlying security traded on each 
of the subject days. The ISE proposes to amend ISE Rule 502(b)(5) to 
provide an alternative listing requirement for underlying securities 
that satisfy all of the initial listing requirements in ISE Rule 502 
other than the $7.50 per share requirement. Specifically, the ISE 
proposes to amend ISE Rule 502(b)(5) to permit the ISE to list options 
on securities that satisfy all of the initial listing requirements 
other than the $7.50 per share requirement so long as: (1) The 
underlying security meets the guidelines for continued approval in ISE 
Rule 503, ``Withdrawal of Approval of Underlying Securities;'' (2) 
options on such underlying security are traded on at least one other 
registered national securities exchange; and (3) the average daily 
volume for such options over the last three calendar months preceding 
the date of selection has been at least 5,000 contracts.
    The text of the proposed rule change appears below. New text is in 
italics.

Rule 502. Criteria for Underlying Securities

* * * * *
    (b) In addition, the Exchange shall from time to time establish 
guidelines to be considered in evaluating potential underlying 
securities for Exchange options transactions. There are many relevant 
factors which must be considered in arriving at such a determination, 
and the fact that a particular security may meet the guidelines 
established by the Exchange does not necessarily mean that it will be 
selected as an underlying security. Further, in exceptional 
circumstances an underlying security may be selected by the Exchange 
even though it does not meet all of the guidelines. The Exchange may 
also give consideration to maintaining diversity among various 
industries and issuers in selecting underlying securities. 
Notwithstanding the forgoing, however, absent exceptional 
circumstances, an underlying security will not be selected unless:
* * * * *
    (b) Either:
    (i) The market price per share of the underlying security has been 
at least $7.50 for the majority of business days during the three 
calendar months preceding the date of selection, as measured by the 
lowest closing price reported in any market in which the underlying 
security traded on each of the subject days; or
    (ii) The underlying security meets the guidelines for continued 
approval in Rule 503; options on such underlying security are traded on 
at least one other registered national securities exchange; and the 
average daily volume for such options over the last three calendar 
months preceding the date of selection has been at least 5,000 
contracts.

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
    ISE Rule 502 contains the criteria that an underlying security must 
meet before the Exchange may initially list options on that security. 
The ISE states that these criteria are uniform among the five options 
exchanges. The ISE notes that after an exchange lists options on an 
underlying security, the underlying security must continue to meet 
another set of uniform, but somewhat less stringent, requirements for 
the exchange to list additional series of options on the security (the 
``continued listing requirements'').
    The ISE believes that although the continued listing requirements 
are uniform among the five options exchanges, the application of these

[[Page 63424]]

standards in the current market environment has had an anticompetitive 
effect on the ISE. Specifically, the Exchange states that it cannot 
list several of the more actively-traded options classes because the 
price of the underlying securities has fallen below the initial listing 
requirement since the time the options were listed on the other 
exchanges. Because the underlying securities remain above the continue 
listing criteria, the other options exchanges may continue to trade 
options on these securities--and list additional series--while the ISE 
cannot begin listing any options on these securities.\3\
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    \3\ According to the Exchange, two of the 50 most-actively 
traded securities, Lucent and Northern Telecom, currently fall into 
this category. The Exchange asserts that the only reason they fail 
to meet the initial listing criteria is that they do not meet the 
$7.50 per share stock price test.
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    To address this situation, the Exchange proposes an alternative 
listing requirement solely with respect to the underlying security's 
price during the three calendar months preceding listing. Specifically, 
ISE Rule 502(b)(5) currently provides that the market price per share 
of the underlying security must have been at least $7.50 for the 
majority of business days during the three calendar months preceding 
the date of selection for listing. The ISE proposes to amend ISE Rule 
502(b)(5) to provide that, for underlying securities that satisfy all 
of the initial listing requirements other than the $7.50 per share 
price requirement, the ISE would be permitted to list options on the 
securities so long as: (1) The underlying security meets the guidelines 
for continued approval contained in ISE Rule 503; (2) options on such 
underlying security are traded on at least one other registered 
national securities exchange; and (3) the average daily trading volume 
for such options over the last three calendar months preceding the date 
of selection has been at least 5,000 contracts.
    The ISE states that it has narrowly drafted the proposed rule 
change to address the circumstances where an actively-traded options 
class is currently ineligible for listing on the ISE. The ISE notes 
that when an underlying security meets the continued listing 
requirements and at least one other exchange trades options on the 
underlying security, the options already are available to the investing 
public. Therefore, the ISE notes that the current proposal will not 
introduce any additional listed options classes.
    The ISE notes that it has limited the proposed rule change to 
options that are actively-traded by requiring that the average daily 
trading volume for the options be at least 5,000 contracts over the 
last three calendar months. Thus, the ISE maintains that the proposed 
alternative listing standard would be limited to options with volume in 
the top half of all options, indicating that there is widespread 
investor interest in the options. Because these options are actively-
traded in other markets, the ISE believes that there would be no 
investor protection concerns with listing the options on the ISE. In 
addition, the ISE believes that listing these options on the ISE would 
enhance competition and benefit investors.
(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements under section 6(b)(5) of the Act \4\ that an 
exchange have rules that are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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    \4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    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 such 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 filings will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-ISE-2001-33 and 
should be submitted by December 21, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30274 Filed 12-5-01; 8:45 am]
BILLING CODE 8010-01-M