[Federal Register Volume 70, Number 14 (Monday, January 24, 2005)]
[Notices]
[Pages 3412-3413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-255]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51042; File No. SR-ISE-2005-05]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Order Granting Accelerated Approval to a 
Proposed Rule Change Relating to Position Limits and Exercise Limits 
for Options on Standard and Poor's Depositary Receipts[reg]

January 14, 2005.
    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 12, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons. In addition, the 
Commission is granting accelerated approval of the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its rules to increase position limits and 
exercise limits for options on Standard & Poor's Depositary 
Receipts[reg] (``SPDRs[reg]''). The text of the proposed rule change is 
available on the ISE's Web site (http://www.iseoptions.com), at the 
ISE's Office of the Secretary, and at the Commission's Public Reference 
Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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 began trading options on SPDRs on January 10, 2005. 
Currently, under ISE Rule 412 and ISE Rule 414, position limits and 
exercise limits for options on SPDRs are 75,000 contracts on the same 
side of the market. The Exchange proposes to amend ISE Rule 412 and ISE 
Rule 414 to increase position limits and exercise limits for options on 
SPDRs to 300,000 contracts on the same side of the market.
    Given the expected institutional demand for options on SPDRs, the 
Exchange believes the current equity position limit of 75,000 contracts 
to be too low and a deterrent to the successful trading of the product. 
Options on SPDRs are 1/10th the size of options on the Standard and 
Poor's 500 Index (SPX) that are traded on Chicago Board Options 
Exchange (``CBOE''). Thus, a position limit of 75,000 contracts in SPDR 
options is equivalent to a 7,500 contract position limit in SPX 
options. Traders who trade SPDR options to hedge positions in SPX 
options are likely to find a position limit of 75,000 contracts in SPDR 
options too restrictive, which may adversely affect the Exchange's 
ability to provide liquidity in this product.
    Comparable products, such as options on the Nasdaq-100 Index 
Tracking Stock (``QQQQ'') that are traded at all six option exchanges 
and the DIAMONDS Trust that are traded at CBOE, are subject to a 
300,000 contract limit.\3\ The Exchange proposes that options on SPDRs 
similarly be subject to position limits and exercise limits of 300,000 
contracts. The Exchange believes that increasing position limits and 
exercise limits for SPDR options would lead to a more liquid and 
competitive market environment for SPDR options that would benefit 
customers interested in this product.
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    \3\ See Securities Exchange Act Release No. 45311 (January 18, 
2002), 67 FR 3760 (January 25, 2002) (increase of position limits 
and exercise limits to 300,000 for QQQQ options); and Securities 
Exchange Act Release No. 47346 (February 11, 2003), 68 FR 8316 
(February 20, 2003) (increase of position limits and exercise limits 
to 300,000 for DIA options).
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    Consistent with the reporting requirement for QQQ options, the 
Exchange would require that each member that maintains a position on 
the same side of the market in excess of 10,000 contracts in the SPDR 
option class, for its own account or for the account of a customer, 
report certain information.\4\ This data would include the option 
position, whether such position is hedged, and, if so, documentation as 
to how the position is hedged. Exchange market makers would continue to 
be exempt from this reporting requirement, as market maker information 
can be accessed through the Exchange's market surveillance systems. In 
addition, the general reporting requirement for customer accounts that 
maintain a position in excess of 200 contracts would remain at this 
level for SPDR options.\5\
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    \4\ See ISE Rule 415(b).
    \5\ See ISE Rule 415(a).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
and furthers the objectives of Section 6(b)(5) of the Act,\6\ in that 
it is designed to promote just and equitable principles of trade, 
remove impediments to and perfect the mechanisms 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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    \6\ 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

[[Page 3413]]

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. 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-2005-05 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-2005-05. 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 
publicly available. All submissions should refer to File Number SR-ISE-
2005-05 and should be submitted on or before February 14, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder, applicable to a national securities 
exchange,\7\ and, in particular, the requirements of Section 6(b)(5) of 
the Act.\8\ Specifically, the Commission finds that the proposed rule 
change should ensure that the Exchange's position limits and exercise 
limits on SPDR options provide its members with sufficient flexibility 
to participate in the market for such options in a manner that should 
provide greater depth and liquidity for all market participants.
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    \7\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving this proposed rule 
change prior to the thirtieth day after publication of notice thereof 
in the Federal Register. Specifically, the Commission believes that 
granting accelerated approval to the proposed rule change should permit 
greater depth and liquidity in the SPDR options market that should 
benefit all market participants, including retail investors. Because 
the higher position limits and exercise limits mirror those that the 
Commission has previously approved for like products, the Commission 
believes it is consistent with Sections 6(b)(5) \9\ and 19(b)(2) \10\ 
of the Act to approve the ISE's proposed rule change on an accelerated 
basis.
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-ISE-2005-05) is hereby 
approved on an accelerated basis.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-255 Filed 1-21-05; 8:45 am]
BILLING CODE 8010-01-P