[Federal Register Volume 69, Number 224 (Monday, November 22, 2004)]
[Notices]
[Pages 67974-67979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3274]



[[Page 67974]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50674; File No. SR-ISE-2004-09]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendments No. 1 and No. 2 by the International 
Securities Exchange, Inc., Relating to the Listing and Trading of 
Options on the S&P 1000 Index

November 16, 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 April 5, 2004, the International Securities Exchange, Inc. 
(``Exchange'' or ``ISE'') 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 ISE. 
The ISE submitted Amendments No. 1 and No. 2 to the proposal on July 
16, 2004,\3\ and August 2, 2004, respectively.\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 J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated July 
15, 2004, and accompanying Form 19b-4 (``Amendment No. 1''). 
Amendment No. 1 replaced the filing in its entirety.
    \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''). Amendment No. 
2 made technical changes clarifying the description of the Index and 
the calculation of the Index Settlement Value.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE is proposing to amend its rules to list and trade options 
on the Standard & Poor's 1000 Index (``S&P 1000'' or ``Index''). 
Specifically, the ISE proposes to list and trade options based on: (i) 
One-tenth of the value of the Index (``Reduced Value Index Options'' or 
``Reduced Value S&P 1000 Options''); and (ii) one one-hundredth of the 
value of the Index (``Micro Index Options'' or ``Micro S&P 1000 
Options''). The ISE also proposes to list and trade long-term Reduced 
Value Index Options and long-term Micro Index Options (the Reduced 
Value Index Options, Micro Index Options, long-term Reduced Value Index 
Options, and long-term Micro Index Options may be referred to, 
collectively, as the ``Index Options''). The Index Options will be 
cash-settled and have European-style exercise provisions. The text of 
the proposed rule change appears below; additions are italicized.
* * * * *

Rule 2001. Definitions

* * * * *
Supplementary Material to Rule 2001
    .01 The reporting authorities designated by the Exchange in respect 
of each index underlying an index options contract traded on the 
Exchange are as provided in the chart below.

------------------------------------------------------------------------
             Underlying index                    Reporting authority
------------------------------------------------------------------------
S&P SmallCap 600 Index....................  Standard & Poor's.
Morgan Stanley Technology Index...........  American Stock Exchange.
S&P MidCap 400 Index......................  Standard & Poor's.
S&P 1000 Index............................  Standard & Poor's.
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Rule 2004. Position Limits for Broad-Based Index Options

    (a) Rule 412 generally shall govern position limits for broad-based 
index options, as modified by this Rule 2004. There may be no position 
limit for certain Specified (as provided in Rule 2000) broad-based 
index options contracts. All other broad-based index options contracts 
shall be subject to a contract limitation fixed by the Exchange, which 
shall not be larger than the limits provided in the chart below.

------------------------------------------------------------------------
                                  Standard limit (on
  Broad-based underlying index     the same side of      Restrictions
                                      the market)
------------------------------------------------------------------------
S&P SmallCap 600 Index..........  100,000 contracts.  No more than
                                                       60,000 near-term.
S&P MidCap 400 Index............  45,000 contracts..  No more than
                                                       25,000 near-term.
Reduced Value S&P 1000 Index....  50,000 contracts..  No more than
                                                       30,000 near-term.
Micro S&P 1000 Index............  500,000 contracts.  No more than
                                                       300,000 near-
                                                       term.
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* * * * *

Rule 2009. Terms of Index Options Contracts

    (a) General.
* * * * *
    (4) ``European-Style Exercise.'' The following European-style index 
options, some of which may be A.M.-settled as provided in paragraph 
(a)(5), are approved for trading on the Exchange:
    (i) S&P SmallCap 600 Index
    (ii) Morgan Stanley Technology Index
    (iii) S&P MidCap 400 Index
    (iv) Reduced Value S&P 1000 Index
    (v) Micro S&P 1000 Index
    (5) A.M.-Settled Index Options. The last day of trading for A.M.-
settled index options shall be the business day preceding the last day 
of trading in the underlying securities prior to expiration. The 
current index value at the expiration of an A.M.-settled index option 
shall be determined, for all purposes under these Rules and the Rules 
of the Clearing Corporation, on the last day of trading in the 
underlying securities prior to expiration, by reference to the reported 
level of such index as derived from first reported sale (opening) 
prices of the underlying securities on such day, except that:
    (i) In the event that the primary market for an underlying security 
does not open for trading on that day, the price of that security shall 
be determined, for the purposes of calculating the current index value 
at expiration, as set forth in Rule 2008(g), unless the current index 
value at expiration is fixed in accordance with the Rules and By-Laws 
of the Clearing Corporation; and
    (ii) In the event that the primary market for an underlying 
security is open for trading on that day, but that particular security 
does not open for trading on that day, the price of that security, for 
the purposes of calculating the current index value at expiration, 
shall be the last reported sale price of the security.
    The following A.M.-settled index options are approved for trading 
on the Exchange:
    (i) S&P SmallCap 600 Index
    (ii) Morgan Stanley Technology Index
    (iii) S&P MidCap 400 Index
    (iv) Reduced Value S&P 1000 Index
    (v) Micro S&P 1000 Index
* * * * *

[[Page 67975]]

    (c) Procedures for Adding and Deleting Strike Prices. The 
procedures for adding and deleting strike prices for index options are 
provided in Rule 504, as amended by the following:
    (1) The interval between strike prices will be no less than $5.00; 
provided, that in the case of the following classes of index options, 
the interval between strike prices will be no less than $2.50:
    (i) S&P SmallCap 600, if the strike price is less then $200.00
    (ii) Morgan Stanley Technology Index, if the strike price is less 
then $200.00
    (iii) S&P MidCap 400 Index, if the strike price is less than $200
    (iv) Reduced Value S&P 1000 Index, if the strike price is less then 
$200.00
    (v) Micro S&P 1000 Index, if the strike price is less then $200.00
* * * * *

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 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 ISE proposes to amend its rules to provide for the listing and 
trading on the Exchange of cash-settled, European-style Index Options. 
Specifically, the Exchange proposes to list and trade Reduced Value 
Index Options, Micro Index Options, long-term Reduced Value Index 
Options, and long-term Micro Index Options.\5\
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    \5\ Under ISE Rule 506, ``Long-Term Options Contracts,'' the ISE 
may list long-term options that expire from 12 to 39 months from the 
time they are listed.
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Index Design and Composition
    The S&P 1000 is a market capitalization-weighted index.\6\ The S&P 
1000 is a combination of the S&P MidCap 400 Index and the S&P SmallCap 
600 Index. The S&P MidCap 400 Index represents approximately 70% of the 
Index and the S&P SmallCap 600 Index represents approximately 30% of 
the Index.\7\ The combination is designed to address the needs of 
investors who want to allocate assets between large capitalization 
stocks, on the one hand, and small and middle capitalization stocks, on 
the other hand.\8\ As of February 18, 2004, 607 components in the Index 
were listed on the New York Stock Exchange (``NYSE''); 384 were listed 
on Nasdaq; and nine were listed on the American Stock Exchange 
(``Amex''). All Nasdaq stocks in the Index are designated as national 
market system securities by the National Association of Securities 
Dealers (``NASD''), meaning, among other things, that real-time last 
sale reports are available for these stocks. The Commission previously 
approved the Exchange's proposals to list and trade options on the S&P 
SmallCap 600 Index and the S&P MidCap 400 Index.\9\
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    \6\ The calculation of a market capitalization-weighted index 
involves taking the summation of the product of the price of each 
stock in the index and the shares outstanding for each issue. In 
contrast, a price-weighted index involves taking the summation of 
the prices of the stocks in the index.
    \7\ See S&P 1000 Index description published by Standard & 
Poor's (``S&P'') on S&P's Web site at www.standardandpoors.com.
    \8\ See Amendment No. 2, supra note 4.
    \9\ See Exchange Act Release Nos. 48587 (October 2, 2003), 68 FR 
58154 (October 8, 2003) (order approving File No. SR-ISE-2003-18) 
(approving the listing and trading of options on the S&P SmallCap 
600 Index); and 49696 (May 13, 2004), 69 FR 28962 (May 19, 2004) 
(order approving File No. SR-ISE-2004-08) (approving the listing and 
trading of options on the S&P MidCap 400 Index).
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    Although Standard & Poor's (``S&P'') introduced the S&P 1000 in 
2003, S&P calculated the Index internally for two years prior to its 
introduction. Because the Index is a combination of the S&P MidCap 400 
Index and the S&P SmallCap 600 Index, the 1000 components of the Index 
consist of the 400 components included in the S&P MidCap 400 Index and 
the 600 components included in the S&P SmallCap 600 Index. Stated 
differently, when a component is added to (deleted from) either the S&P 
MidCap 400 Index or the S&P SmallCap 600 Index, the component is 
simultaneously added to (deleted from) the S&P 1000. As a result, the 
S&P 1000 does not have its own component inclusion or exclusion 
criteria. Rather, the inclusion and exclusion criteria for the S&P 
MidCap 400 Index and the S&P SmallCap 600 Index determine the 
components of the S&P 1000.
    The components of the S&P MidCap 400 Index and the S&P SmallCap 600 
Index are chosen on the basis of market capitalization, liquidity and 
industry group representation. The criteria for a component to be added 
to the S&P MidCap 400 Index and the S&P SmallCap 600 Index (and as a 
result, to the S&P 1000 Index) are as follows: The component must (i) 
be a U.S. company; (ii) have adequate liquidity and a reasonable 
price--the ratio of annual dollar value traded to market capitalization 
should be 0.3 or greater (very low stock prices can affect a stock's 
liquidity); (iii) have a market capitalization of $1 billion to $4 
billion for the S&P MidCap 400 and $300 million to $1 billion for the 
S&P SmallCap 600 (these ranges are reviewed from time to time to assure 
consistency with market conditions); (iv) have financial viability, 
usually measured as four consecutive quarters of positive as-reported 
earnings (as-reported earnings are GAAP Net Income excluding 
discontinued operations and extraordinary items); (v) have a public 
float of at least 40% of the total issued and outstanding shares; (vi) 
maintain sector balance for each index as measured by a comparison of 
the Global Industry Classification Standard sectors and the relevant 
market capitalization ranges for each index; and (vii) be an operating 
company and not a closed-end fund, holding company, partnership, 
investment vehicle or royalty trust (real estate investment trusts are 
eligible for inclusion in the Index).
    The following are the criteria for a component to be deleted from 
the Index: The component must (i) be involved in a merger, become 
acquired or significantly restructured such that it no longer meets the 
inclusion criteria; or (ii) substantially violate one or more of the 
addition criteria.\10\ Finally, the Index may not contain any component 
that is presently a component of the S&P 500 index.
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    \10\ See S&P's Web site at www.standardandpoors.com under a link 
entitled ``Index Methodology, Criteria for Additions to and 
Deletions from a U.S. Index.''
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    As of March 25, 2004, the Index's components were classified in the 
following ten market sectors, along with their respective weightings in 
the Index: Energy (6.37%); Materials (4.32%); Industrials (13.96%); 
Consumer Discretionary (18.52%); Consumer Staples (4.45%); Health Care 
(12.15%); Financials (18.15%); Information Technology (16.06%); 
Telecommunications Services (0.51%); and Utilities (5.51%).\11\ A 
complete list of the 1000 component stocks in the Index is available at 
the Exchange, on the Exchange's Web site, and on S&P's Web site.
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    \11\ These calculations are based on the index descriptions of 
the S&P MidCap 400 and the S&P SmallCap 600 on S&P's Web site at 
www.standardandpoors.com.
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    As set forth in Exhibit B to the proposal, as of February 18, 2004, 
the

[[Page 67976]]

Index had the following characteristics: (i) The total capitalization 
of all of the components in the Index was $1.474 trillion; (ii) 
regarding component capitalization, (a) the highest capitalization of a 
component was $11.801 billion (Gilead Sciences Corp.), (b) the lowest 
capitalization of a component was $72.109 million (Huffy Corp.), (c) 
the mean capitalization of the components was $1.474 billion, (d) and 
the median capitalization of the components was $1.019 billion; (iii) 
regarding component price per share, (a) the highest price per share of 
a component was $910.04 (Washington Post Co.), (b) the lowest price per 
share of a component was $3.40 (Milacron Inc.), (c) the mean price per 
share of the components was $30.76, (d) and the median price per share 
of the components was $27.61; (iv) regarding component weightings, (a) 
the highest weighting of a component was 0.80% (Gilead Sciences Corp.), 
(b) the lowest weighting of a component was 0.005% (Huffy Corp.), (c) 
the mean weighting of the components was 0.10%, (d) the median 
weighting of the components was 0.07%, and (e) the total weighting of 
the top five highest weighted components (Gilead Sciences Corp., M&T 
Bank Corp., New York Community Bancorp Inc., Coach Inc., and D.R. 
Horton Inc.) was 3.14%; (v) regarding component available shares 
(public float), (a) the most available shares of a component was 416.90 
million shares (Amtel Corp.), (b) the least available shares of a 
component is 3.3 million shares (Haggar Corp.), (c) the mean available 
shares of the components was 45.78 million shares, (d) and the median 
available shares of the components was 32.80 million shares; (vi) 
regarding the six-month average daily volumes of the components, (a) 
the highest six-month average daily volume of a component was 12.326 
million shares (Rf Micro Devices Inc.), (b) the lowest six month-
average daily volume of a component was 6,910 shares (Green Mountain 
Power Corp.), (c) the mean six-month average daily volume of the 
components was 466,190 shares, (d) the median six-month average daily 
volume of the components was 252,180 shares, (e) the six-month average 
daily volumes of the five most heavily traded components was 7.479 
million shares (Rf Micro Devices Inc. (12.326 million shares), Amtel 
Corp. (8.69 million shares), 3Com Corp. (5.76 million shares), Sandisk 
Corp. (5.50 million shares), E*Trade Financial Corp. (5.11 million 
shares)), and (f) 93.6%, or 936 out of 1000, of the Index's components 
had a six-month average daily volume of at least 50,000 shares; (vii) 
regarding options eligibility, (a) 98.95% of the Index's components 
were options eligible, as measured by weighting, and (b) 98.4% of the 
Index's components were options eligible, as measured by number.
    The S&P 1000 Index is presently a ``full'' market capitalization-
weighted index. That is, the value of the Index is calculated by 
multiplying, for each component, the total number of shares outstanding 
by the price per share, adding these values together, and dividing the 
result by the Index divisor. However, on March 1, 2004, S&P announced 
that it would shift the S&P 500 Index, S&P MidCap 400 Index, S&P 
SmallCap 600 Index, and its other U.S. indexes to ``float-adjusted'' 
market capitalization weighting.\12\ After the transition to float-
adjusted market capitalization weighting, the value of the Index will 
be calculated by multiplying, for each component, the number of shares 
in the public float of the component by the price per share, adding 
these values together, and dividing the result by the Index divisor.
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    \12\ See S&P's press release dated March 1, 2004, (``Press 
Release'') on S&P's Web site at http://www.standardandpoors.com. As 
indicated below, the ISE expects S&P's float adjustment to adjust 
for cross-holdings and insider holdings.
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    S&P will implement the transition from full market capitalization 
weighting to float-adjusted market capitalization weighting over an 18-
month period. In September 2004, S&P began publishing procedures and 
float adjustment factors and will begin calculating provisional float 
adjusted indexes. The float adjustment factors include, among other 
things, information regarding the adjustments that will be made to each 
component to determine what each component's float will be. At that 
time, S&P will begin calculating provisional indexes alongside of the 
regular indexes so that passive indexers (institutional investors that 
model their portfolio construction and weighting according to S&P 
indexes) can control the timing of adjustments.
    In March 2005, the official index series for S&P's U.S. indexes 
will shift to partial float adjustment, using float adjustment factors 
that represent half of the total adjustment, based on the information 
published in September 2004. In September 2005, the shift to float 
adjustment will be completed, the official indexes will be fully float-
adjusted, and the provisional indexes will be discontinued. Float 
adjustment factors will be reviewed annually in September.\13\
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    \13\ See Press Release, supra note 12.
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    The Exchange does not intend to trade options on any provisional 
index calculated during the transition period. Further, based on 
conversations with S&P, the Exchange does not expect that any 
securities or futures exchange will trade products on any provisional 
index during the transition period. S&P has stated that, 
notwithstanding the simultaneous calculation of provisional indexes, 
there will still be only one official set of S&P indexes.
    During the transition period, S&P will adjust the divisor of the 
indexes to maintain continuity across the adjustments. Therefore, as a 
result of the divisor adjustments, the Index value will maintain 
continuity immediately following both adjustments (in March 2005 and 
September 2005). Because the Index value will maintain continuity, the 
value of options traded on the Index will not change as a direct result 
of the float adjustment. S&P does not expect any companies to be 
removed from the Index as a result of the adjustments. Adjusting the 
divisor ensures that the Index level is affected by the performance of 
individual components, rather than by share changes or component 
replacements.
    The Exchange expects S&P's float adjustment to adjust for cross-
holdings and insider holdings. The Exchange will provide a link on its 
Internet Web site to the page on S&P's Web site page where float 
adjustment information will be displayed.
    According to the ISE, changes to the indexes have already been 
widely discussed. Major broker-dealers, including Merrill Lynch, Morgan 
Stanley, Lehman Brothers, JP Morgan, and others, have performed 
research and published material regarding the changes. Attached as 
Exhibit E to the proposal are copies of some of that research. S&P 
intends to publish more detailed procedures for the adjustments in 
September 2004, well before it begins making its first set of changes 
in March 2005. S&P also intends to announce all related information by 
press release and to post that information to its Web site. Due to 
current and anticipated coverage, the Exchange does not believe that 
the adjustment will surprise investors.
    On March 18, 2004, the Index value was 3,370.88. The Exchange 
believes that this level is too high for successful options trading. 
Accordingly, the Exchange proposes to base trading in Index options on 
fractions of the Index value. In particular, the Exchange proposes to 
list (i) Reduced Value S&P 1000 Options that are based on one-tenth of 
the value of the Index, and (ii) Micro S&P 1000 Options that are based 
on one one-hundredth of the value of

[[Page 67977]]

the Index.\14\ The Exchange believes that listing options on reduced 
values of the Index will attract a greater source of customer business 
than if options were based on the full value of the Index. The Exchange 
also believes that listing options on reduced values of the Index will 
provide an opportunity for investors to hedge, or speculate on, the 
market risk associated with the stocks comprising the Index. Further, 
by reducing the values of the Index, the ISE notes that investors will 
be able to utilize this trading vehicle, while extending a smaller 
outlay of capital. The Exchange believes that this should attract 
additional investors, and, in turn, create a more active and liquid 
trading environment.\15\
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    \14\ As noted above, the ISE also proposes to list long-term 
Reduced Value S&P 1000 Options and long-term Reduced Value Micro S&P 
1000 Options.
    \15\ The concept of listing reduced value options on an index is 
not a novel one. See, e.g., Securities Exchange Act Release Nos. 
32893 (September 14, 1993), 58 FR 49070 (September 21, 1993) (order 
approving File No. SR-CBOE-93-12) (approving the listing and trading 
of options based on one-tenth the value of the S&P 500 Index); 43000 
(June 30, 2000), 65 FR 42409 (July 10, 2000) (notice of filing and 
immediate effectiveness of File No. SR-CBOE-00-15) (listing and 
trading of options based on one-tenth of the value of the Nasdaq 100 
Index); and 48681 (October 22, 2003), 68 FR 62337 (November 3, 2003) 
(order approving File No. SR-CBOE-2003-14) (approving the listing 
and trading of options based on one-tenth of the value of the NYSE 
Composite Index).
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Index Calculation and Index Maintenance
    The values of the Reduced Value S&P 1000 Index and the Micro S&P 
1000 Index will each be calculated continuously, using the last sale 
price for each component stock in the Index, and will be disseminated 
every 15 seconds throughout the trading day.\16\ To calculate the full 
Index value, the sum of the market value of the stocks in the Index is 
divided by the base period market value (divisor), and the result is 
multiplied by 100. To calculate the value of the Reduced Value S&P 
1000, the full Index value is divided by ten. To calculate the value of 
the Micro S&P 1000, the full Index value is divided by 100. To provide 
continuity for the Index's value, the divisor is adjusted periodically 
to reflect such events as changes in the number of common shares 
outstanding for component stocks, company additions or deletions, 
corporate restructurings and other capitalization changes.
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    \16\ The values of the Reduced Value S&P 1000 and the Micro S&P 
1000 will be calculated by S&P and disseminated to Reuters. The 
Exchange will receive those values from Reuters and disseminate them 
every 15 seconds between the hours of 9:30 a.m. and 4:15 p.m. to the 
Options Price Reporting Authority (``OPRA'') and to its members. The 
Index is published daily in, among other places, The Wall Street 
Journal and The New York Times, and is available during trading 
hours from quotation vendors such as Reuters. Telephone conversation 
between Joseph W. Ferraro III, Assistant General Counsel, ISE, and 
Florence Harmon, Senior Special Counsel, Division, Commission 
(November 9, 2004).
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    S&P will calculate the settlement value for purposes of settling 
Reduced Value S&P 1000 Options (``Reduced Value Settlement Value'') and 
Micro S&P 1000 Options (``Micro Settlement Value'') on the basis of 
opening market prices on the business day prior to the expiration date 
of such options (``Settlement Day'').\17\ The Settlement Day is 
normally the Friday preceding ``Expiration Saturday.'' \18\ In the 
event that a component security in the Index does not trade on 
Settlement Day, the closing price from the previous trading day is used 
to calculate the Settlement Value. Accordingly, trading in Reduced 
Value S&P 1000 Options and Micro S&P 1000 Options will normally cease 
on the Thursday preceding an Expiration Saturday. S&P will calculate, 
and the Exchange will disseminate, both the Reduced Value Settlement 
Value and the Micro Settlement Value.\19\
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    \17\ The aggregate exercise value of the option contract is 
calculated by multiplying the Index value by the Index multiplier, 
which is 100.
    \18\ For any given expiration month, the Index Options will 
expire on the third Saturday of the month.
    \19\ See Amendment No. 2, supra note 4.
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    S&P will monitor and maintain the S&P 1000. S&P is responsible for 
making all necessary adjustments to the Index to reflect component 
deletions, share changes, stock splits, stock dividends (other than an 
ordinary cash dividend), and stock price adjustments due to 
restructuring, mergers, or spin-offs involving the underlying 
components. Some corporate actions, such as stock splits and stock 
dividends, require simple changes to the available shares outstanding 
and the stock prices of the underlying components. Other corporate 
actions, such as share issuances, change the market value of the Index 
and would require a change in the Index divisor to effect adjustments.
    Although the Exchange is not involved in the maintenance of the 
Index, the Exchange represents that it will monitor the Index on a 
quarterly basis and will notify the staff in the Commission's Division 
of Market Regulation (``Division''), pursuant to filing a proposed rule 
change pursuant to Rule 19b-4,\20\ if: (i) The number of securities in 
the Index drops by \1/3\ or more; (ii) 10% or more of the weight of the 
Index is represented by component securities having a market value of 
less than $75 million; (iii) less than 80% of the weight of the Index 
is represented by component securities that are eligible for options 
trading pursuant to ISE Rule 502; (iv) 10% or more of the weight of the 
Index is represented by component securities trading less than 20,000 
shares per day; or (v) the largest component security accounts for more 
than 15% of the weight of the Index or the largest five components in 
the aggregate account for more than 50% of the weight of the Index.
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    \20\ Telephone conversation between Joseph W. Ferraro III, 
Assistant General Counsel, ISE, and Florence Harmon, Senior Special 
Counsel, Division, Commission (November 9, 2004).
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    The Exchange will notify the Division immediately in the event S&P 
determines to cease maintaining or calculating the Index or in the 
event the Index values are not disseminated every 15 seconds by a 
widely available source. In the event the Index ceases to be maintained 
or calculated, or disseminated every 15 seconds by a widely available 
source, the Exchange agrees not to list any additional series for 
trading and agrees to limit all transactions in such options to closing 
transactions only for the purpose of maintaining a fair and orderly 
market and protecting investors.\21\
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    \21\ 21 Id.
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Contract Specifications
    The contract specifications for both Reduced Value S&P 1000 Options 
and Micro S&P 1000 Options are set forth in Exhibit C to the proposal. 
The ISE proposes to characterize the Index as a broad-based index, as 
defined in ISE Rule 2001(j).\22\ Options on the Index are European-
style and A.M. cash-settled. The Exchange's standard trading hours for 
index options (9:30 a.m. to 4:15 p.m., New York time), as set forth in 
ISE Rule 2008(a), will apply to Index Options. Exchange rules that are 
applicable to the trading of options on broad-based indexes will apply 
to the trading of Index Options.\23\ Specifically, among others, 
Exchange rules governing margin requirements and trading halt 
procedures that are applicable to the trading of broad-based index 
options will apply to Index Options.
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    \22\ ISE Rule 2001(j) defines a ``market index'' or a ``broad-
based index'' to mean an index designed to be representative of a 
stock market as a whole or of a range of companies in unrelated 
industries.
    \23\ See ISE Rules 2000 through 2012.
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    The Exchange proposes to establish aggregate position limits for 
options on the Reduced Value S&P 1000 Index at 50,000 Reduced Value S&P 
1000 contracts on the same side of the market, provided no more than 
30,000 of such Reduced Value S&P 1000 contracts are in the nearest 
expiration month series. The Exchange also

[[Page 67978]]

proposes to establish aggregate position limits for options on the 
Micro S&P 1000 Index at 500,000 Micro S&P 1000 contracts on the same 
side of the market, provided that no more than 300,000 of the S&P 1000 
Index contracts are in the nearest expiration month series. Reduced 
Value S&P 1000 contracts will be aggregated with Micro S&P 1000 
contracts, where 10 Micro S&P 1000 contracts equal one Reduced Value 
S&P 1000 contract. These limits are similar to the limits applicable to 
options on the Russell 2000 Index, a similarly capitalized index.\24\
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    \24\ The same limits that apply to position limits shall apply 
to exercise limits for these products. Telephone conversation 
between Joseph W. Ferraro III, Associate General Counsel, ISE, 
Florence Harmon, Senior Special Counsel, and A. Michael Pierson, 
Attorney, Division, Commission (November 16, 2004).
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    The Exchange proposes to apply broad-based index margin 
requirements for the purchase and sale of Index Options. Accordingly, 
purchases of put or call Index Options with nine months or less until 
expiration must be paid for in full. Writers of uncovered put or call 
Index Options must deposit/maintain 100% of the option proceeds, plus 
15% of the aggregate contract value (current Index level x $100), less 
any out-of-the-money amount, subject to a minimum of the option 
proceeds plus 10% of the aggregate contract value.
    The Exchange proposes to set strike price intervals at 2\1/2\ 
points for certain near-the-money series in near-term expiration months 
when the Index is at a level below 200, and 5-point strike price 
intervals for other Index Options series with expirations up to one 
year, and 25-to 50-point strike price intervals for longer-term Index 
Options. Accordingly, because the current Reduced Value S&P 1000 level 
is 337.1, the Exchange will set strike price intervals at five points 
for Reduced Value S&P 1000 Options. Because the current Micro S&P 1000 
level is 33.71, the Exchange will set strike price intervals at 2\1/2\ 
points for Micro S&P 1000 Options. The minimum tick size for series 
trading below $3 will be 0.05, and for series trading at or above $3 
the minimum tick size will be 0.10.
    The Exchange proposes to list both Reduced Value S&P 1000 Options 
and Micro S&P 1000 Options in the three consecutive near-term 
expiration months plus up to three successive expiration months in the 
March cycle. For example, consecutive expirations of January, February, 
March, plus June, September, and December expirations would be 
listed.\25\ In addition, long-term Index Options series having up to 39 
months to expiration may be traded.\26\ The interval between expiration 
months for Reduced Value S&P 1000 Index Options or Micro S&P 1000 Index 
Options will not be less than six months. The trading of any long-term 
Reduced Value S&P 1000 Options and Micro S&P 1000 Options will be 
subject to the same rules that govern the trading of all the Exchange's 
index options, including sales practice rules, margin requirements, and 
trading rules.
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    \25\ See ISE Rule 2009(a)(3).
    \26\ See ISE Rule 2009(b)(1). The Exchange is not listing 
reduced value LEAPS on either of the Reduced Value S&P 1000 Indexes 
or Reduced Value Micro S&P 1000 Indexes pursuant to ISE Rule 
2009(b)(2). Telephone conversation between Joseph W. Ferraro III, 
Associate General Counsel, ISE, Florence Harmon, Senior Special 
Counsel, and A. Michael Pierson, Attorney, Division, Commission 
(November 16, 2004).
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    Except for the further reduced value given to the Micro S&P 1000 
Options, all of the specifications and calculations for the Micro S&P 
1000 Options will be the same as those used for the Reduced Value S&P 
1000 Options. The Micro S&P 1000 Options will trade independently of 
and in addition to the Reduced Value S&P 1000 Options, and both 
products will be subject to the same rules that presently govern the 
trading of Exchange index options, including sales practice rules, 
margin requirements, trading rules, and position and exercise limits.
Surveillance and Capacity
    The Exchange represents that it has an adequate surveillance 
program in place for Index Options and intends to apply those same 
program procedures that it applies to the Exchange's other index 
options. Additionally, the Exchange is a member of the Intermarket 
Surveillance Group (``ISG'') under the Intermarket Surveillance Group 
Agreement, dated June 20, 1994. The members of the ISG include all of 
the U.S. registered stock and options markets: the Amex, the Boston 
Stock Exchange, the Chicago Board Options Exchange, the Chicago Stock 
Exchange, the National Stock Exchange, the NASD, the NYSE, the Pacific 
Stock Exchange and the Philadelphia Stock Exchange. The ISG members 
work together to coordinate surveillance and investigative information 
sharing in the stock and options markets. In addition, the major 
futures exchanges are affiliated members of the ISG, which allows for 
the sharing of surveillance information for potential intermarket 
trading abuses.
    The Exchange represents that it has the system capacity to 
adequately handle all series that would be permitted to be added by 
this proposal (including LEAPS). The Exchange provided to the 
Commission information in a confidential submission that supports its 
system capacity representations.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\27\ in general, and furthers the 
objectives of Section 6(b)(5),\28\ in particular, in that it will 
permit trading in both Reduced Value S&P 1000 Options and Micro S&P 
1000 Options pursuant to rules designed to prevent fraudulent and 
manipulative acts and practices and promote just and equitable 
principals of trade.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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A. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE believes that the proposed rule change does not impose any 
burden on competition.

B. 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, 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

[[Page 67979]]

     Send e-mail to [email protected]. Please include File 
Number SR-ISE-2004-09 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-2004-09. 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 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-
2004-09 and should be submitted on or before December 13, 2004.

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3274 Filed 11-19-04; 8:45 am]
BILLING CODE 8010-01-P