[Federal Register Volume 68, Number 187 (Friday, September 26, 2003)]
[Notices]
[Pages 55680-55685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24378]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48505; File No. SR-ISE-2003-20]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the International Securities Exchange, Inc. To Simplify the Manner in 
Which a Contrary Exercise Advice Is Submitted and To Extend by One Hour 
the Time for Members To Submit Contrary Exercise Advices

September 17, 2003.
    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 August 12, 2003, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') submitted to the Securities and

[[Page 55681]]

Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
by the ISE. The Exchange amended its proposal on September 9, 2003.\3\ 
The Exchange filed the proposed rule change, as amended, under 
paragraph (f)(6) of Rule 19b-4 under the Act.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation, Commission, dated September 6, 2003 
(``Amendment No. 1''). In Amendment No. 1, the ISE added footnotes 
to clarify terminology used in its discussion and made technical 
corrections to its rule text.
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend ISE Rule 1100: (i) To simplify the 
manner in which a contrary exercise advice (``CEA'') is submitted to 
the Exchange;\5\ (ii) to extend by one hour the cut-off time for 
Members to submit CEAs to the Exchange; and (iii) to add new paragraphs 
(g) and (h) for the purpose of establishing different cut-off times for 
options holders to decide whether to exercise or not exercise an 
expiring option and for members to submit CEAs based on a modified 
trading session or due to ``unusual circumstances.'' Below is the text 
of the proposed rule change, as amended. Proposed new language is 
italicized; proposed deleted text is [bracketed].
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    \5\ The term CEA as used in the filing may also include ``Advice 
Cancels.'' Advice Cancels are documents used to cancel CEAs. See 
Amendment No. 1, supra note 3.
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* * * * *

Rule 1100. Exercise of Options Contracts

    (a) Subject to the restrictions set forth in Rule 413 (Exercise 
Limits) and to such restrictions as may be imposed pursuant to Rule 417 
(Other Restrictions on Options Transactions and Exercises) or pursuant 
to the Rules of the Clearing Corporation, an outstanding options 
contract may be exercised during the time period specified in the Rules 
of the Clearing Corporation by the tender to the Clearing Corporation 
of an exercise notice in accordance with the Rules of the Clearing 
Corporation. An exercise notice may be tendered to the Clearing 
Corporation only by the Clearing Member in whose account such options 
contract is carried with the Clearing Corporation. Members may 
establish fixed procedures as to the latest time they will accept 
exercise instructions from customers.
    [(b) The exercise cut-off time for all noncash-settled options 
shall be 5:30 p.m. Eastern Time on the business day immediately prior 
to the expiration date. This is the latest time at which an exercise 
instruction for expiring noncash-settled options positions may be:
    (1) prepared by a Clearing Member for positions in its proprietary 
trading account;
    (2) submitted to a Clearing Member by a market maker or broker for 
positions in the market maker's account or the broker's error account; 
or
    (3) accepted by a Member from any customer for its positions in the 
customer's account.]
    (b) Special procedures apply to the exercise of equity options on 
the last business day before their expiration (``expiring options''). 
Unless waived by the Clearing Corporation, expiring options are subject 
to the Exercise-by-Exception (``Ex-by-Ex'') procedure under Clearing 
Corporation Rule 805. This Rule provides that, unless contrary 
instructions are given, option contracts that are in-the-money by 
specified amounts shall be automatically exercised. In addition to the 
Rules of the Clearing Corporation, the following Exchange requirements 
apply with respect to expiring options. Option holders desiring to 
exercise or not exercise expiring options must either:
    (1) take no action and allow exercise determinations to be made in 
accordance with the Clearing Corporation's Ex-by-Ex procedure where 
applicable; or
    (2) submit a ``Contrary Exercise Advice'' to the Exchange by the 
deadline specified in paragraph (c) below. A Contrary Exercise Advice 
is a communication either: (A) to not exercise an option that would be 
automatically exercised under the Clearing Corporation's Ex-by-Ex 
procedure, or (B) to exercise an option that would not be automatically 
exercised under the Clearing Corporation's Ex-by-Ex procedure. A 
Contrary Exercise Advice may be submitted by a Member by using the 
Exchange's Contrary Exercise Advice Form, the Clearing Corporation's 
ENCORE system, a Contrary Exercise Advice form of any other national 
securities exchange of which the firm is a member and where the option 
is listed, or such other method as the Exchange may prescribe. A 
Contrary Exercise Advice may be canceled by filing an ``Advice Cancel'' 
with the Exchange or resubmitted at any time up to the submission cut-
off times specified below.
    (c) Exercise cut-off time. Option holders have until 5:30 p.m. 
Eastern Time on the business day immediately prior to the expiration 
date to make a final decision to exercise or not exercise an expiring 
option. For customer accounts, Members may not accept exercise 
instructions after 5:30 p.m. Eastern Time but have until 6:30 p.m. 
Eastern Time to submit a Contrary Exercise Advice. For non-customer 
accounts, Members may not accept exercise instructions after 5:30 p.m. 
Eastern Time but have until 6:30 p.m. Eastern Time to submit a Contrary 
Exercise Advice if such Member employs an electronic submission 
procedure with time stamp for the submission of exercise instructions 
by option holders. Consistent with Supplemental Material .03, Members 
are required to submit a Contrary Exercise Advice by 5:30 p.m. for non-
customer accounts if such Members do not employ an electronic 
submission procedure with time stamp for the submission of exercise 
instructions by option holders.
    (d) If the Clearing Corporation has waived the Ex-by-Ex procedure 
for an options class, Members must either:
    (1) submit to the Exchange, a Contrary Exercise Advice, in a manner 
specified by the Exchange, within the time limits specified in 
paragraph (c) above if the holder intends to exercise the option; or
    (2) take no action and allow the option to expire without being 
exercised.
In cases where the Ex-by-Ex procedure has been waived, the Rules of the 
Clearing Corporation require that Members wishing to exercise such 
options must submit an affirmative Exercise Notice to the Clearing 
Corporation, whether or not a Contrary Exercise Advice has been filed 
with the Exchange.
    (e) A Member that has accepted the responsibility to indicate final 
exercise decisions on behalf of another Member or non-member broker-
dealer shall take the necessary steps to ensure that such decisions are 
properly indicated to the Exchange. Such Member may establish a 
processing cut-off time prior to the Exchange's exercise cut-off time 
at which it will no longer accept final exercise decisions in expiring 
options from option holders for whom it indicates final exercise 
decisions. Each Member that indicates final exercise decisions through 
another broker-dealer is responsible for ensuring that final exercise 
decisions for all of its proprietary (including market maker) and 
public customer account positions

[[Page 55682]]

are indicated in a timely manner to such broker-dealer.
    [(c)] (f) Notwithstanding the foregoing, Members may [receive and 
Members may submit exercise instructions] make final exercise decisions 
after the exercise cut-off time but prior to expiration without having 
submitted a Contrary Exercise Advice in the circumstances listed below. 
A memorandum setting forth the circumstance giving rise to instructions 
after the exercise cut-off time shall be maintained by the Member and a 
copy thereof shall be [promptly] filed with the Exchange no later than 
12:00 noon Eastern Time on the first business day following the 
respective expiration. An exercise [instruction] decision after the 
exercise cut-off time may be [received or submitted] made:
    (1) in order to remedy mistakes or errors made in good faith; or
    (2) where exceptional circumstances [relating to a customer's or 
associated person's ability to communicate exercise instructions to the 
Member (or the Member's ability to receive exercise instructions) prior 
to such cut-off time warrant such action] have restricted an option 
holder's ability to inform a Member of a decision regarding exercise, 
or a Member's ability to receive an option holder's decision by the 
cut-off time. The burden of establishing any of the above exceptions 
rests solely on the Member seeking to rely on such exceptions.
    (g) In the event the Exchange provides advance notice on or before 
5:30 p.m. Eastern Time on the business day immediately prior to the 
last business day before the expiration date indicating that a modified 
time for the close of trading in equity options on such last business 
day before expiration will occur, then the deadline to make a final 
decision to exercise or not exercise an expiring option shall be 1 hour 
28 minutes following the time announced for the close of trading on 
that day instead of the 5:30 p.m. Eastern Time deadline found in Rule 
1100(c). However, Members may deliver a Contrary Exercise Advice or 
Advice Cancel to the Exchange within 2 hours 28 minutes following the 
time announced for the close of trading in equity options on that day 
instead of the 6:30 p.m. Eastern Time deadline found in Rule 1100(c) 
for customer accounts and non-customer accounts where such Member 
employs an electronic submission procedure with time stamp for the 
submission of exercise instructions. For non-customer accounts, Members 
that do not employ an electronic procedure with time stamp for the 
submission of exercise instructions are required to deliver a Contrary 
Exercise Advice or Advice Cancel within 1 hour and 28 minutes following 
the time announced for the close of trading on that day instead of the 
5:30 p.m. Eastern Time deadline found in Rule 1100(c).
    (h) Modification of cut-off time.
    (1) The Exchange may establish extended cut-off times for decision 
to exercise or not exercise an expiring option and for the submission 
of Contrary Exercise Advices on a case-by-case basis due to unusual 
circumstances. For purposes of this subparagraph (h)(1), an ``unusual 
circumstance'' includes, but is not limited to, increased market 
volatility; significant order imbalances; significant volume surges 
and/or systems capacity constraints; significant spreads between the 
bid and offer in underlying securities; internal system malfunctions 
affecting the ability to disseminate or update market quotes and/or 
deliver orders; or other similar occurrences.
    (2) The Exchange with at least one (1) business day prior advance 
notice, by 12:00 noon on such day, may establish a reduced cut-off time 
for the decision to exercise or not exercise an expiring option and for 
the submission of Contrary Exercise Advices on a case-by-case basis due 
to unusual circumstances; provided, however, that under no 
circumstances should the exercise cut-off time and the time for 
submission of a Contrary Exercise Advice be before the close of 
trading. For purposes of this subparagraph (h)(2), an ``unusual 
circumstance'' includes, but is not limited to, a significant news 
announcement concerning the underlying security of an option contract 
that is scheduled to be released just after the close on the business 
day immediately prior to expiration.
    [(d)] (i) Submitting or preparing an exercise instruction, Contrary 
Exercise Advice or Advice Cancel after the applicable exercise cut-off 
time in any expiring options on the basis of material information 
released after the cut-off time is activity inconsistent with just and 
equitable principles of trade.
    [(e) For purposes of this Rule with respect to any Member, the word 
``customer'' shall mean every person or organization other than a 
market maker, broker or the Member itself. The term ``exercise 
instruction,'' with respect to a market maker, broker and Clearing 
Member, shall also mean a notice either not to exercise an options 
position which would otherwise be exercised, or to exercise an options 
position which would otherwise not be exercised, by operation of the 
Rules of the Clearing Corporation, or to modify or withdraw a 
previously submitted instruction. All exercise instructions must be 
time stamped at the time they are prepared.]
    [(f) No Member may prepare, time stamp or submit an exercise 
instruction prior to the purchase of the exercised contracts if the 
Member knew or had reason to know that the contracts had not yet been 
purchased.]
    [(g) Clearing Members must follow the procedures of the Clearing 
Corporation when exercising expiring noncash-settled equity options 
contracts. Members must also follow the procedures set forth below with 
respect to the exercise of noncash-settled equity options contracts 
which would otherwise not be exercised, or the nonexercise of contracts 
which otherwise would be exercised, by operation of Clearing 
Corporation Rule 804:
    (1) For all contracts so exercised or not exercised, a ``contrary 
exercise advice,'' must be delivered by the market maker, broker or 
clearing firm, as applicable, in such form or manner prescribed by the 
Exchange no later than 5:30 p.m. Eastern Time.
    (2) Subsequent to the delivery of a ``contrary exercise advice,'' 
should the market maker, broker, customer or firm determine to act 
other than as reflected on the original advice form, the market maker, 
broker, or clearing firm, as applicable, must also deliver an ``advice 
cancel,'' in such form or manner prescribed by the Exchange no later 
than 5:30 p.m. Eastern Time.
    (3) Members shall properly communicate to the Exchange final 
exercise decisions in respect of positions for which they are 
responsible.
    (4) The preparation, time stamping or submission of a ``contrary 
exercise advice'' prior to the purchase of the contracts to be 
exercised or not exercised shall be deemed a violation of this Rule.
    (5) All of the above procedures of this paragraph (g) are in full 
force and effect whether or not the Clearing Corporation waives the 
exercise by exception provisions of its Rule 804; in the event of such 
waiver the procedures of this paragraph shall be followed as if such 
provisions of Clearing Corporation Rule 804 were in full force and 
effect. The Clearing Corporation rules may require the submission of an 
affirmative exercise notice even in circumstances where a contrary 
exercise advice is not submitted.]
    [(6)] (j) The failure of any Member to follow the procedures in 
this [paragraph (g)] Rule 1100 may result in the assessment of a fine, 
which may include

[[Page 55683]]

but is not limited to disgorgement of potential economic gain obtained 
or loss avoided by the subject exercise, as determined by the Exchange.

Supplemental Material to Rule 1100

    .01 For purposes of this Rule 1100, the terms ``customer account'' 
and ``non-customer account'' have the same meaning as defined in the 
Clearing Corporation By-Laws Article I(C)(28) and Article I(N)(2), 
respectively.
    .02 Each Member shall prepare a memorandum of every exercise 
instruction received showing the time when such instruction was so 
received. Such memoranda shall be subject to the requirements of SEC 
Rule 17a-4(b).
    .03 Although the deadline for all option holders to make a final 
decision to exercise or not exercise is 5:30 p.m. Eastern Time, the 
deadline for the submission of the Contrary Exercise Advice in the case 
of non-customer accounts will depend on the manner of the decision to 
exercise or not exercise.
    (i) For electronic time stamp submissions of the exercise decision 
by non-customer option holders, a Contrary Exercise Advice submitted by 
Members must be received by the Exchange by 6:30 p.m. Eastern Time.
    (ii) For manual submissions of the exercise decision by non-
customer option holders, a Contrary Exercise Advice submitted by 
Members must be received by the Exchange by 5:30 p.m. Eastern Time.
    .04 Each Member shall establish fixed procedures to insure secure 
time stamps in connection with their electronic systems employed for 
the recording of submissions to exercise or not exercise expiring 
options.
    .05 The filing of a Contrary Exercise Advice required by this Rule 
does not serve to substitute as the effective notice to the Clearing 
Corporation for the exercise or non-exercise of expiring options.
* * * * *

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, as 
amended. The text of these statements may be examined at the places 
specified in Item IV below. The Exchange has prepared summaries, set 
forth in sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to simplify the manner in which a CEA is 
submitted to the Exchange and to extend the cut-off time for submitting 
CEAs for customer accounts. The Exchange represents that this proposed 
rule change, as amended, corresponds to an American Stock Exchange LLC 
(``Amex'') rule change recently approved by the Commission.\6\ The ISE 
is proposing to modify ISE Rule 1100 to mirror the changes to Amex Rule 
980.
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    \6\ See Securities Exchange Act Release No. 47885 (May 16, 
2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92).
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    The Options Clearing Corporation (``OCC'') has an established 
procedure, pursuant to OCC Rule 805, known as ``Exercise-by-Exception'' 
or ``Ex-by-Ex'' that provides for the automatic exercise of certain 
options that are in-the-money by a specified amount. Under the Ex-by-Ex 
process, option holders holding option contracts that are in-the-money 
by a requisite amount and who wish to have their contracts 
automatically exercised need to take no further action.\7\
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    \7\ ``In-the-money'' for a call option occurs if the current 
market value of the underlying security is above the exercise price 
of the option. For put options, ``in-the-money'' means the current 
value of the underlying security is below the exercise price of the 
option. See Amendment No. 1, supra note 3.
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    However, under OCC Rule 805, option holders who do not want their 
options automatically exercised or who want their options to be 
exercised under different parameters than the Ex-by-Ex procedure must 
file a CEA with the ISE in accordance with ISE Rule 1100 and instruct 
OCC of their ``contrary intention.'' \8\ The Exchange states that the 
rule is designed, in part, to deter individuals from taking improper 
advantage of late breaking news by requiring evidence of an option 
holder's intention to exercise or not exercise expiring equity options 
via the submission of a CEA. Members satisfy the filing requirement by 
submitting a CEA form directly to the ISE or by electronically 
submitting the CEA through OCC's electronic communications system.
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    \8\ A CEA may be canceled by filing an ``Advice Cancel'' with 
the Exchange at any time up to the submission cut-off deadline 
specified in proposed amended ISE Rule 1100(c). See Amendment No. 1, 
supra note 3.
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    The Exchange states that one of the primary goals of ISE Rule 1100 
is to maintain a level playing field between holders of long and short 
positions in expiring equity options. The ISE believes that, after 
trading has ended on the final trading day before expiration, persons 
who are short the option have no way to close out their short 
positions. To put option holders on equal footing, ISE Rule 1100 
attempts to minimize the time period in which a holder can exercise an 
equity option after the close of trading on the last business day prior 
to expiration.\9\
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    \9\ Expiration, commonly known as ``Expiration Friday,'' is 
generally the last business day prior to the expiration of an option 
contract.
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    The current exercise cut-off time for an option holder to decide 
whether or not to exercise an equity option is 5:30 p.m. Eastern Time 
(``ET'') on the business day immediately prior to the expiration 
date.\10\ Under the proposed rule change, the exercise cut-off time 
established in ISE Rule 1100(c) will not change except in cases of a 
modified trading session or due to ``unusual circumstances.'' Current 
ISE Rule 1100 imposes a uniform 5:30 p.m. ET cut-off time for the 
submission of CEAs for all accounts without differentiation between 
customer and non-customer accounts.
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    \10\ The ``expiration date'' of an options contract generally is 
the Saturday immediately following the third Friday of the 
expiration month of such options. See OCC By-Laws Article I(E)(16). 
See also Amendment No. 1, supra note 3.
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    The Exchange believes that this proposed rule change is necessary 
to address a concern that the existing deadline for submitting CEAs is 
problematic for customer accounts due to logistical difficulties in 
receiving customer exercise instructions and processing them through 
retail branch systems and back offices before submitting them to the 
Exchange.\11\ Therefore, the Exchange proposes to adopt a cut-off time 
of 6:30 p.m. ET for Members to submit CEAs for customer accounts. The 
Exchange also proposes to allow Members to submit CEAs for non-customer 
accounts by 6:30 p.m. ET provided such Member employs an electronic 
procedure with time stamp recording for the submission of exercise 
instructions by options holders.\12\ In

[[Page 55684]]

those cases where Members do not employ an electronic submission 
procedure for the submission of exercise instructions, CEAs for non-
customer accounts must be submitted to the Exchange by 5:30 p.m. ET. 
The different CEA submission deadlines are set forth in proposed ISE 
Rule 1100(c) and Supplemental Material .03.
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    \11\ A ``customer account'' is defined in OCC By-Laws Article 
I(C)(28) as an account of a Clearing Member which is confined to 
Exchange Transactions cleared and positions carried by the Clearing 
Member on behalf of its securities customers, other than those 
transactions of market-makers which are cleared through a market-
markers account. OCC By-Laws define a ``securities customer'' as a 
person having a securities account at a broker or dealer other than 
a non-customer of such broker or dealer. See OCC By-Laws Article 
I(S)(1). See also Amendment No. 1, supra note 3.
    \12\ A ``non-customer account'' generally means a person that is 
not a customer of a broker or dealer defined in Rule 8c-1 and 15c2-1 
under the Act. See OCC By-Laws Article I(N)(2). See also Amendment 
No. 1, supra note 3.
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    Although most firms have electronic submission procedures, the 
Exchange is concerned that those firms that manually submit CEAs could 
have an opportunity to improperly extend the 5:30 p.m. ET deadline for 
options holders to submit their exercise instructions. This concern on 
the part of the Exchange is based on the difficulty in monitoring a 
manual procedure that has different times for deciding whether or not 
to exercise the option and for the submission of the CEA.
    Accordingly, in the case of non-customer accounts, the Exchange 
proposes to limit the 6:30 p.m. ET deadline for submitting CEAs to 
those Members that have an electronic submission procedure for option 
holders to communicate their decisions whether to exercise or not 
exercise an option. In connection with the use of an electronic 
submission procedure by Members, the Exchange proposes the addition of 
new Supplemental Material .04 to ISE Rule 1100 to require Members 
employing electronic submissions to establish procedures to secure time 
stamps in connection with their electronic systems.
    OCC on occasion will suspend the use of its Ex-by-Ex procedure, 
such as when trading in the underlying stock has been halted or if 
accurate price data is unavailable for the determination of closing 
prices. When this occurs and there is no automatic exercise, all 
options contract holders must send an exercise notice to OCC if they 
want to exercise, regardless of whether the option is in or out-of-the-
money. Currently, when OCC suspends its Ex-by-Ex procedure for an 
option class, ISE Rule 1100(g)(5) requires the submission of a CEA. 
Thus, when OCC has waived the Ex-by-Ex procedure, option holders must 
determine what price would have been used, even though the only 
available price might be a stale last sale price (a price OCC did not 
feel comfortable using). Option holders then must determine whether a 
CEA needs to be submitted to the Exchange evidencing the intention to 
exercise or not exercise.
    The Exchange proposes to eliminate the requirement that a CEA be 
submitted if the holder does not want to exercise the option when OCC 
has waived its Ex-by Ex procedure for that options class. As a result, 
when the Ex-by-Ex procedure has been suspended, submission of CEAs to 
the Exchange will be required only when the options holder wants to 
exercise the option contract.
    The proposed rule change would also permit the Exchange to 
establish different cut-off times as an exception to amended ISE Rule 
1100(c) to address situations where the Exchange has advance prior 
knowledge or warning of a modified trading session at expiration, or in 
the case of ``unusual circumstances.''
    Specifically, proposed ISE Rule 1100(g) would apply when a 
different or modified close of trading is announced due to a market-
wide event. In such cases, the Exchange would have forewarning of the 
event and would be required to provide notice of a change in cut-off 
times by 5:30 p.m. ET on the business day prior to the last trading day 
before expiration. For example, if the day after Thanksgiving is the 
last trading day prior to expiration with a close of trading of 1 p.m. 
ET, then the Exchange would, with prior notice by 5:30 ET on the 
Wednesday before Thanksgiving, be able to establish the cut-off time 
for option holders to decide whether to exercise or not exercise 
expiring options to 1 hour 28 minutes after the close of trading. With 
respect to the submission of CEAs by Members, the cut-off time would be 
2 hours and 28 minutes after the close of trading for customer accounts 
and non-customer accounts where the Member employs an electronic 
procedure with time stamp for the submission of exercise instructions. 
Members that do not employ an electronic submission procedure for 
exercise instructions would be required to submit a CEA within 1 hour 
and 28 minutes after the close of trading for its non-customer 
accounts. Accordingly, the normal exercise cut-off time would not apply 
and, similar to amended ISE Rule 1100(c), the deadline for submitting 
CEAs to the Exchange for non-customer accounts would depend on the use 
of an electronic submission procedure for the submission of exercise 
instructions.
    Proposed ISE Rule 1100(h)(1) would permit the Exchange to extend 
the cut-off time periods for options holders to decide whether to 
exercise or not exercise expiring options, as well as, for Members to 
submit CEAs due to unusual circumstances. Situations that may arise 
that are deemed to be ``unusual circumstances'' are set forth in 
proposed ISE Rule 1100(h)(1). An ``unusual circumstance'' for purposes 
of proposed paragraph (h)(1) includes, but is not limited to, increased 
market volatility; significant order imbalances; significant volume 
surges and/or systems capacity constraints; significant spreads between 
the bid and offer in underlying securities; internal system 
malfunctions affecting the ability to disseminate or update market 
quotes and/or deliver orders; or other similar occurrences.
    Proposed ISE Rule 1100(h)(2) would permit the Exchange, with one 
(1) business day prior advance notice by 12 noon ET, to establish a 
cut-off time for option holders to decide whether to exercise or not 
exercise expiring options as well as for Members to submit CEAs. The 
reduced cut-off time under this new paragraph for both exercise 
decisions and CEA submissions may not occur before the close of 
trading. The primary purpose of this proposed paragraph (h)(2) is to 
permit the Exchange to reduce cut-off times because of an ``unusual 
circumstance,'' such as a significant news event occurring after the 
close. Proposed ISE Rule 1100(h)(2) provides that an ``unusual 
circumstance'' is a significant news announcement concerning the 
underlying security of an option contract that is scheduled to be 
released after the close on the last trading day prior to expiration. 
For example, a decision on whether a particular merger will be approved 
or whether a new product will receive regulatory approval after the 
close of trading would justify a reduced cut-off time so that persons 
holding short positions are not prejudiced by being unable to close out 
their positions. The Exchange believes that this would maintain a level 
playing field between persons holding long and short positions in 
expiring options.
2. Statutory Basis
    The Exchange believes that its proposed rule change, as amended, is 
consistent with section 6(b) of the Act in general \13\ and furthers 
the objectives of section 6(b)(5) in particular,\14\ because it is 
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 of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change, as amended, 
does

[[Page 55685]]

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, as amended. 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

    The proposed rule change, as amended, has been filed by the 
Exchange pursuant to section 19(b)(3)(A) of the Act \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\ Because the foregoing 
proposed rule change: (1) Does not significantly affect the protection 
of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
for thirty days from the date on which it was filed, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest, it has become effective pursuant 
to section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) \18\ 
thereunder.\19\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6)
    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6)\20\ normally 
does not become operative prior to thirty days after the date of 
filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action in consistent with the 
protection of investors and the public interest. The ISE has requested 
that the Commission accelerate the implementation of the proposed rule 
change to take effect prior to the thirty days specified in Rule 19b-
4(f)(6)(iii)\21\ so that members will be subject to uniform CEA rules 
among the options exchanges.
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the thirty-day operative date 
is consistent with the protection of investors and the public 
interest.\22\ Accelerating the operative date will allow the ISE to 
immediately implement rules similar to ones already in place at the 
Amex,\23\ and will simplify and clarify the process by which Members 
accept exercise decisions from options holders and submit such 
decisions to the Exchange. For these reasons, the Commission designates 
the proposed rule change as effective and operative immediately. At any 
time within 60 days of the filing of the proposed rule change, as 
amended, the Commission may summarily abrogate such proposed rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\24\
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    \22\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation.15 U.S.C. 
78c(f).
    \23\ See supra note .
    \24\ For purposes of calculating the sixty-day abrogation 
period, the Commission considers the period to commence on September 
9, 2003, the date at which the Exchange filed Amendment No. 1.
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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. 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 
filing will also be available for inspection and copying at the 
principal office of the ISE. All submissions should refer to File No. 
SR-ISE-2003-20 and should be submitted by October 17, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24378 Filed 9-25-03; 8:45 am]
BILLING CODE 8010-01-P