[Federal Register Volume 69, Number 223 (Friday, November 19, 2004)]
[Notices]
[Pages 67768-67770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3255]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50658; File No. SR-ISE-2004-32]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by 
International Securities Exchange, Inc., Relating to Fee Changes

November 12, 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 September 30, 2004, the International Securities Exchange, Inc. (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. On November 8, 2004, the ISE filed Amendment No. 1 to the 
proposed rule change.\3\ The ISE filed the proposal pursuant to section 
19(b)(3)(A) under the Act,\4\ which renders the proposal effective upon 
filing the amended

[[Page 67769]]

proposal with the Commission.\5\ 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 November 8, 
2004 (``Amendment No. 1''). In Amendment No. 1, the ISE clarified: 
(1) That the phrase ``customer order'' should be replaced with the 
phrase ``Public Customer Order,'' relating to the Payment for Order 
Flow execution fee on the ISE schedule of fees; (2) the meaning of 
``member refresh program;'' (3) that the Cabinet Lease/Maintenance 
and the Additional Servers fees are the only computer fees subject 
to the waiver; and (4) the list of fee waivers that have expired and 
the list of delisted products that are proposed to be deleted.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the proposal to have been filed on November 
8, 2004, the date the ISE filed Amendment No. 1.
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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 amend its Schedule of Fees (i) to 
eliminate payment for order flow fees for certain transactions where 
there is a corresponding linkage transaction, (ii) for a pilot period, 
to cap and waive the facilitation execution fee when a member transacts 
a certain number of contracts through the Exchange's Facilitation 
Mechanism, (iii) to provide up to two months of equipment fee rebates 
to members that ``refresh'' certain computer equipment they use to 
connect to the Exchange within certain prescribed time periods under 
the Exchange's member refresh program, (iv) to adopt a surcharge fee 
for options on exchange traded funds based on indexes developed by the 
New York Stock Exchange (``NYSE''), and (v) to delete references to 
expired fee waivers and delisted products. The text of the proposed 
rule change is available at the ISE and at the Commission.

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, as 
amended, 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 proposes to amend the Exchange's Schedule of Fees (i) 
to eliminate payment for order flow fees for certain linkage 
transactions, (ii) for a pilot period, to reduce and waive the 
facilitation execution fee and comparison fee when a member transacts a 
certain number of contracts through the Exchange's Facilitation 
Mechanism, (iii) to rebate up to two months of computer equipment lease 
fees to members that ``refresh'' certain computer equipment they use to 
connect to the Exchange within certain prescribed time periods under 
the Exchange's member firm refresh program, (iv) to adopt a surcharge 
fee for options on exchange traded funds based on indexes developed by 
the New York Stock Exchange (the ``NYSE''), and (v) to delete 
references to expired fee waivers and delisted products.
    Specifically, the Exchange proposes to eliminate the payment for 
order flow fee for public customer transactions that Primary Market 
Makers (``PMMs'') effect after sending a Principal Acting as Agent 
Linkage order to an away exchange on behalf of the public customer.\6\ 
For these transactions, PMMs currently pay the Exchange's transaction 
fees, the away exchange's transaction fees, and two sets of clearing 
fees. The Exchange believes that it is appropriate to lessen the costs 
on PMMs by not imposing a payment for order flow fee in addition to 
those charges.
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    \6\ See Amendment No. 1, supra note 3.
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    The Exchange also proposes to reduce and waive the facilitation 
execution fee and the comparison fee when a member transacts a certain 
number of contracts through the Exchange's Facilitation Mechanism for a 
pilot period ending November 30, 2005. The structure of the reduction 
and waiver of the facilitation execution fee and the comparison fee is 
based on the structure of the reduction and waiver of the Nasdaq-100 
Tracking Stock (``QQQ'') execution fee and the comparison fee that the 
Exchange instituted in November 2003 and extended in May 2004.\7\ That 
is, when a member's monthly average daily volume (``ADV'') in the 
Facilitation Mechanism reaches 8,000 contracts, the member's 
facilitation execution fee for the next 2,000 contracts transacted in 
the Facilitation Mechanism would be reduced by $.10 per contract. 
Further, when a member's monthly ADV in the Facilitation Mechanism 
reaches 10,000 contracts, the Exchange would waive the entire 
facilitation execution fee and the comparison fee for each contract 
transacted in the Facilitation Mechanism thereafter. As with the QQQ 
incentives, the Exchange is proposing this fee change to encourage 
members to use the Facilitation Mechanism. The pilot period would 
expire on November 30, 2005.
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    \7\ See Securities Exchange Act Release Nos. 49147 (January 29, 
2004), 69 FR 5629 (February 5, 2004) (File No. SR-ISE 2003-32); and 
49853 (June 14, 2004), 69 FR 35087 (June 23, 2004) (File No. SR-ISE-
2004-15).
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    Moreover, the Exchange proposes to rebate up to two months of 
computer equipment lease fees to members that ``refresh'' certain 
computer equipment they use to connect to the Exchange within certain 
prescribed time periods under the Exchange's ``member refresh 
program.'' The Exchange clarifies that ``member refresh program'' is a 
voluntary program developed by the Exchange in which the Exchange seeks 
to have its members update their existing, obsolete computer equipment 
that they use to connect to the Exchange with new, state-of-the-art 
computer equipment.\8\ Since the Exchange is fully-electronic, it 
believes that it is in its and investors' best interest to enable its 
members to have the most efficient, reliable, and fastest computer 
connection to the Exchange.\9\ Since updating this computer equipment 
is costly and time consuming for members, the Exchange is proposing to 
adopt certain fee waivers to create an incentive for members to 
participate.\10\ The Exchange recently implemented a voluntary member 
firm refresh program in which the Exchange seeks to have its members 
``refresh'' their computer equipment that they use to connect to the 
Exchange with newer computer equipment. To induce members to 
participate in the program in a timely fashion, the Exchange proposes 
to rebate one month's computer equipment lease fees to members who 
agree to refresh their computer equipment no later than November 30, 
2004.\11\ Further, the Exchange proposes to rebate an additional one 
month's computer equipment lease fees to members who complete the 
refresh within two months of such agreement. The Exchange clarifies 
that only the Cabinet Lease/Maintenance fee of $400 per Gateway per 
month and the Additional Servers fee of $250 per server per month would 
be subject to the proposed fee waiver.\12\
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    \8\ See Amendment No. 1, supra note 3.
    \9\ Id.
    \10\ Id.
    \11\ The Exchange extended the date by which a Member must 
contract with the Exchange to refresh its equipment from October 29, 
2004 to November 30, 2004. See Amendment No. 1, supra note 3.
    \12\ See Amendment No. 1, supra note 3. To make that evident on 
the Schedule of Fees, the Exchange has placed an asterisk next to 
those fee items and the Notes on the Schedule of Fees.
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    The Exchange proposes to adopt a ten cent ($0.10) per contract 
surcharge fee for non-customer transactions in options on exchange-
traded-funds (``ETFs'') based on two indexes developed by the NYSE, as 
discussed below. The Exchange recently signed a license

[[Page 67770]]

agreement with the NYSE that grants the Exchange the right to, among 
other things, list options on ETFs based on indexes developed by the 
NYSE. The Exchange is listing two such products--the iShares NYSE 100 
Index Fund (symbol: NY), and the iShares NYSE Composite Index Fund 
(symbol: NYC). The Exchange believes that adopting the surcharge fee 
for transactions in these products is the best way to off-set the 
license fee for these products.
    Furthermore, the Exchange proposes to delete references to the 
following expired fee waivers: a Market Maker and Firm Proprietary 
Execution Fee waiver for Firm Proprietary trades in the iShares S&P 100 
Index Fund through June 30, 2004; and a Surcharge for Firm Proprietary 
trades in the iShares S&P 100 Index Fund through June 30, 2004. The 
Exchange also proposes to delete references to the following delisted 
products: GS $ InvesTop Index, Technology Select Sector SPDR Fund 
(XLK), Utilities Select Sector SPDR Fund (XLU), Health Care Select 
Sector SPDR Fund (XLV), Industrial Select Sector SPDR Fund (XLI), 
Consumer Discretionary Select Sector SPDR Fund (XLY), Materials Select 
Sector SPDR Fund (XLB), Consumer Staples Select Sector SPDR Fund (XLP); 
Russell 2000 Value iShares (IWN), Russell 1000 Growth iShares (IWF), 
Russell 1000 Value iShares (IWD), Russell Midcap Index Fund iShares 
(IWR), Russell 3000 Value Index Fund iShares (IWW), Russell 3000 Growth 
Index Fund iShares (IWZ), Russell Midcap Growth Index Fund iShares 
(IWP), Russell Midcap Value Index Fund iShares (IWS), Russell 1000 
Index Fund iShares (IWB), and Russell 3000 Index Fund iShares 
(IWV).\13\
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    \13\ See Amendment No. 1, supra note 3.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \14\ in general, and furthers the 
objectives of the Act \15\ in particular, in that it is an equitable 
allocation of reasonable dues, fees and other charges among its members 
and other persons using its facilities. In particular, except in the 
case of the surcharge fee (which is, however, consistent with the 
Exchange's treatment of other licensed products), these fees generally 
would eliminate, reduce, waive, or rebate fees.
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    \14\ 15 U.S.C. 78s(b).
    \15\ 15 U.S.C. 78f(b)(4).
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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 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

    The foregoing proposed rule change has been designated as a fee 
change pursuant to section 19(b)(3)(A)(ii) of the Act \16\ and Rule 
19b-4(f)(2) \17\ thereunder because it establishes or changes a due, 
fee, or other charge imposed by the Exchange. Accordingly, the proposal 
will take effect upon filing the amended proposal with the Commission. 
At any time within 60 days of the filing of such amended proposed rule 
change, the Commission may summarily abrogate such rule change, as 
amended, 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.\18\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \17\ 17 CFR 240.19b-4(f)(2).
    \18\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the proposal to have been filed on November 
8, 2004, the date the ISE 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. 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-2004-32 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-2004-32. 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 in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference. Copies of this 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-
2004-32 and should be submitted on or before December 10, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3255 Filed 11-18-04; 8:45 am]
BILLING CODE 8010-01-P