[Federal Register Volume 67, Number 137 (Wednesday, July 17, 2002)]
[Notices]
[Pages 47010-47012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17977]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46181; File No. SR-ISE-2002-18]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange, Inc. Relating to the 
Execution of Complex Orders Involving Options and Single Stock Futures

July 11, 2002.
    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 June 27, 2002, the International Securities Exchange, Inc. (``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

    The Exchange is proposing to adopt rules and procedures governing 
the execution of complex orders involving options and single stock 
futures.
    The text of the proposed rule change appears below. New text is in 
italics.
Rule 722.  Complex Orders
    (a) Complex Orders Defined. A complex order is any order for the 
same account as defined below:
* * * * *
    (5) Combination orders with non-equity options legs. One or more 
legs of a complex order may be to purchase or sell a stated number of 
units of another security.
    (i) Stock-Option Order. A stock-option order is an order to buy or 
sell a stated number of units of an underlying stock or a security 
convertible into the underlying stock (``convertible security'') 
coupled with either [(i)] (A) the purchase or sale of option 
contract(s) on the opposite side of the market representing either the 
same number of units of the underlying stock or convertible security or 
the number of units of the underlying stock necessary to create a delta 
neutral position; or [(ii)] (B) the purchase or sale of an equal number 
of put and call option contracts, each having the same exercise price, 
expiration date, and each representing the same number of units of 
stock, as and on the opposite side of the market from, the stock or 
convertible security portion of the order.
    (ii) SSF-Option Order. A SSF-option order is an order to buy or 
sell a stated number of units of a single stock future or a security 
convertible into a single stock future (``convertible SSF'') coupled 
with either (A) the purchase or sale of option contract(s) on the 
opposite side of the market representing either the same number of 
units of stock underlying the single stock future or convertible SSF, 
or the number of units of stock underlying the single stock future or 
convertible SSF necessary to create a delta neutral position; or (B) 
the purchase or sale of an equal number of put and call option 
contracts, each having the same exercise price, expiration date, and 
each representing the same number of units of underlying stock, as and 
on the opposite side of the market from, the stock underlying the 
single stock future or convertible SSF portion of the order.
* * * * *

[[Page 47011]]

    (b) Applicability of Exchange Rules. Except as otherwise provided 
in this Rule, complex orders shall be subject to all other Exchange 
Rules that pertain to orders generally.
* * * * *
    (2) Complex Order Priority. Notwithstanding the provisions of Rule 
713, a complex order, as defined in paragraph (a) of this Rule, may be 
executed at a total credit or debit price with one other Member without 
giving priority to bids or offers established in the marketplace that 
are no better than the bids or offers comprising such total credit or 
debit; provided, however, that if any of the bids or offers established 
in the marketplace consist of a Public Customer limit order, the price 
of at least one leg of the complex order must trade at a price that is 
better than the corresponding bid or offer in the marketplace. Under 
the circumstances described above, the option leg of a stock-option 
order[,] as defined in subparagraph (a)(5)(i)(A) of this Rule, or SSF-
option order as defined in subparagraph (a)(5)(ii)(A) of this Rule, has 
priority over bids and offers established in the marketplace by Non-
Customer orders and market maker quotes that are no better than the 
price of the options leg, but not over such bids and offers established 
by Public Customer Orders. The option legs of a stock-option order as 
defined in subparagraph (a)(5)(ii)(B), or SSF-option order as defined 
in subparagraph (a)(5)(ii)(B), consisting of a combination order with 
stock or single stock futures, as the case may be, may be executed in 
accordance with the first sentence of this subparagraph (b)(2).
Supplementary Material to Rule 722
    .01  This Rule 722 will be in effect until October 18, 2002.
    .02  A bid or offer made as part of a stock-option order[,] (as 
defined in (a)(5)(i) above)[,] or a SSF-option order (as defined in 
(a)(5)(ii) above) is made and accepted subject to the following 
conditions: (1) the [stock-option] order must disclose all legs of the 
order and must identify the security (which in the case of a single 
stock future requires sufficient identification to determine the 
market(s) on which the single stock future trades) and the price at 
which the non-option leg(s) of the order is to be filled; and (2) 
concurrent with the execution of the options leg of the order, the 
initiating member and each member that agrees to be a contra-party on 
the non-option leg(s) of the order must take steps immediately to 
transmit the non-option leg(s) to a non-Exchange market(s) for 
execution. Failure to observe these requirements will be considered 
conduct inconsistent with just and equitable principles of trade and a 
violation of Rule 400.
    A trade representing the execution of the options leg of a stock-
option or SSF-option order may be cancelled at the request of any 
member that is a party to that trade only if market conditions in any 
of the non-Exchange market(s) prevent the execution of the non'option 
leg(s) at the price(s) agreed upon.

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
    Last year the Commission approved Exchange rules defining various 
types of ``complex orders,'' including orders involving multiple 
options legs and stock/option orders.\3\ In addition, the Exchange 
recently adopted procedures for executing stock/option complex 
orders.\4\ The purpose of this proposed rule change is to authorize the 
execution of complex orders involving options and single stock futures 
pursuant to procedures that are virtually identical to the stock/option 
procedures. The Exchange states that this proposed rule change, if 
approved by the Commission, would become part of the complex order 
pilot program approved to operate through October 18, 2002.\5\
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    \3\ See Securities Exchange Act Release No. 44955 (October 18, 
2001), 66 FR 53819 (October 24, 2001) (File No. SR-ISE-2001-18).
    \4\ See Securities Exchange Act Release No. 45985 (May 24, 
2002), 67 FR 38533 (June 4, 2002) (File No. SR-ISE-2002-14).
    \5\ See Securities Exchange Act Release No. 44955, supra note 3.
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    The proposed rules would permit Exchange members to enter option-
stock future complex orders. As with stock/option orders, the option 
leg of the transaction would have priority over non-customer orders at 
the same price. The Exchange states that it would execute the options 
leg of the trade and the parties then would seek to execute the stock 
futures leg on an appropriate exchange. Because the stock futures 
products may not be fungible between markets, the complex order would 
need to specify the market of execution for the stock futures leg. As 
with stock/option orders, if the parties are unable to execute the 
single stock futures leg of the transaction due to a change in market 
conditions, the Exchange states that it would cancel the options leg of 
the transaction at the request of a party to the trade.
(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements under Section 6(b)(5) of the Act \6\ that an 
exchange have rules that are designed to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transaction in 
securities, to remove impediments to and perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \6\ 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.

[[Page 47012]]

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-2002-18 and 
should be submitted by August 7, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-17977 Filed 7-16-02; 8:45 am]
BILLING CODE 8010-01-P