[Federal Register Volume 69, Number 179 (Thursday, September 16, 2004)]
[Notices]
[Pages 55853-55855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2223]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50339; File No. SR-ISE-2004-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change, and Amendments No. 1 and 2 Thereto, by the International 
Securities Exchange, Inc. Relating to Minimum Size Guarantees for 
Linkage Orders

September 9, 2004.
    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 January 13, 2004, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') submitted to 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 ISE. 
On May 10, 2004, the ISE submitted Amendment No. 1 to the proposed rule 
change.\3\ On July 30, 2004, the Exchange submitted Amendment No. 2 to 
the proposed rule change.\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 J. Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated May 7, 2004 
(``Amendment No. 1''). In Amendment No. 1, the ISE amended the 
proposed rule text to clarify that the general requirement that the 
Exchange's Firm Customer Quote Size (``FCQS'') and Firm Principal 
Quote Size (``FPQS'') be at least 10 contracts would not apply if 
the ISE were disseminating a quotation of fewer than 10 contracts. 
In that case, the Exchange may establish a FQCS or FPQS equal to its 
disseminated size.
    \4\ See Letter from Michael J. Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated July 28, 2004 (``Amendment No. 2''). In Amendment 
No. 2, the Exchange submitted a new Form 19b-4, which replaced and 
superceded the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its rules regarding the minimum size of 
firm quotes for Principal Orders and Principal Acting as Agent Orders 
(``P/A Orders'') received through the intermarket options linkage 
(``Linkage''). The ISE proposes that this rule change take effect upon 
approval by the Commission of both the instant proposal and the 
corresponding Joint Amendment No. 13 to the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Linkage 
Plan'').
    The text of the proposed rule change, as amended, is below. 
Proposed additions are in italics.
* * * * *
Chapter 19 Intermarket Linkage
Rule 1900. Definitions
    The following terms shall have the meaning specified in this Rule 
solely for purposes of this Chapter 19:
* * * * *
    (7) ``Firm Customer Quote Size'' with respect to a P/A Order means 
the lesser of: (a) The number of option contracts that the Participant 
Exchange sending a P/A Order guarantees it will automatically execute 
at its disseminated quotation in a series of an Eligible Option Class 
for Public Customer orders entered directly for execution in that 
market; or (b) the number of option contracts that the Participant 
Exchange receiving a P/A Order guarantees it will automatically execute 
at its disseminated quotation in a series of an Eligible Option Class 
for Public Customer orders entered directly for execution in that 
market. This number shall be at least 10 unless the receiving 
Participant Exchange is disseminating a quotation of less than 10 
contracts, in which case this number may equal such quotation size.

[[Page 55854]]

    (8) ``Firm Principal Quote Size'' means the number of option 
contracts that a Participant Exchange guarantees it will execute at its 
disseminated quotation for incoming Principal Orders in an Eligible 
Option Class. This number shall be 10, however if the Participant 
Exchange is disseminating a quotation size of less than 10 contracts, 
this number may equal such quotation size.

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 had 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 purpose of the proposed rule change is to limit the requirement 
that ISE Primary Market Makers provide minimum size guarantees for 
Principal and P/A Orders received through Linkage. This proposal would 
implement pending Amendment No. 13 to the Linkage Plan into the ISE 
rules, while providing uniformity between the minimum size guarantees 
that market makers provide for orders received through Linkage and 
orders received through other means.\5\
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    \5\ Telephone conversation between Michael J. Simon, Senior Vice 
President and General Counsel, ISE, and Tim Fox, Attorney, Division, 
Commission on August 3, 2004.
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    Until recently, the ISE required its Primary Market Makers to 
disseminate quotations assuring that the Exchange's best bid and offer 
(``BBO'') be for a size of at least 10 contracts. However, the 
Commission recently approved an amendment to the Exchange rules that 
significantly changed those restrictions and obligations, permitting 
the dissemination of a BBO of less than 10 contracts.\6\ 
Notwithstanding that rule change, the Linkage Plan continues to require 
that the ISE provide an automatic execution for at least 10 contracts 
for Principal and P/A Orders, regardless of the size of the Exchange's 
disseminated quotation (the ``10-up requirement''). This is not a 
requirement that the ISE can unilaterally change; rather, any change to 
a Linkage Plan rule requires that the six options exchanges that are 
participants in the Linkage Plan (``Participants'') unanimously agree 
to a Linkage Plan amendment, followed by corresponding changes to the 
rules of all the Participants.
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    \6\ See Securities Exchange Act Release No. 49602 (April 22, 
2004), 69 FR 23841 (April 30, 2004) (SR-ISE-2003-26) (the ``Real 
Size Filing'').
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    While the Real Size Filing was pending at the Commission, the 
Participants agreed to submit Joint Amendment No. 13 to amend the 
Linkage Plan to eliminate the 10-up requirement. This proposed rule 
filing would implement that Linkage Plan Amendment by amending the ISE 
Rule definitions of FCQS and FPQS to recognize that an exchange's 
disseminated quotation size may be less than 10 contracts. However, as 
with Principal and P/A Orders today, if an order is of a size eligible 
for automatic execution at both the sending and receiving exchanges, 
the ISE will provide an automated execution of the Linkage order. If 
this is not the case, while the Exchange may allow the order to drop to 
manual handling, the ISE still must provide a manual execution for at 
least the FCQS or FPQS, as appropriate.
2. Statutory Basis
    The ISE believes that the proposed rule is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) \8\ in particular in that 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 for a free and open market and a national market system, and, 
in general, to protect investors and the public interest. In 
particular, the proposed rule change would provide uniformity between 
the minimum size guarantees that market makers provide for orders 
received through Linkage and orders received through other means.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE does not believe that the proposed rule change will impose 
any burden on competition 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 with respect to the 
proposed rule change.

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 ISE consents, the Commission will:
    (A) By order approve such proposed rule change, as amended; or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, 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 [email protected]. Please include 
File Number SR-ISE-2004-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-ISE-2004-01. 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

[[Page 55855]]

Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the ISE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-ISE-2004-01 and should be submitted on or before October 
7, 2004.

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E4-2223 Filed 9-15-04; 8:45 am]
BILLING CODE 8010-01-P