[Federal Register Volume 70, Number 24 (Monday, February 7, 2005)]
[Notices]
[Pages 6476-6480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-464]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51121; File No. SR-ISE-2005-01]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the International Securities Exchange, Inc. to 
Trade Options, Including LEAPS, on Full and Reduced Values of the 
Nasdaq 100 Index

February 1, 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 4, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') 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 January 18, 2005, the Exchange filed

[[Page 6477]]

Amendment No. 1 to the proposed rule change.\3\ On January 19, 2005, 
the Exchange filed 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 and to 
approve the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was a partial amendment that modified the 
proposed index hedge exemption for options on the Nasdaq 100 Index. 
A conforming change was proposed to the contract specifications in 
the filing.
    \4\ Amendment No. 2 replaced Amendment No. 1 in its entirety. In 
Amendment No. 2, the ISE again revised the proposed hedge exemption.
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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 trade options on the 
full and reduced values of the Nasdaq 100 Index (``Index''). The 
Exchange also proposes to list and trade long-term options on full and 
reduced values of the Index. Options on the Index would be cash-settled 
and have European-style exercise provisions. The text of the proposed 
rule change is available on the ISE's website (http://www.iseoptions.com), at the ISE's principal office, 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 received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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 amend its rules to provide for the listing 
and trading on the Exchange of cash-settled, European-style, index 
options on the full and reduced values of the Nasdaq 100 Index, a stock 
index calculated and maintained by The Nasdaq Stock Market, Inc. 
(``Nasdaq'').\5\ Specifically, the Exchange proposes to list options 
based upon the full value of the Nasdaq 100 Index (``Full-size Nasdaq 
100 Index'' or ``NDX'') as well as one-tenth of the value of the Nasdaq 
100 Index (``Mini Nasdaq 100 Index'' or ``MNX'').\6\ The Exchange also 
proposes to list long-term options based upon the full value of the 
Nasdaq 100 Index (``NDX LEAPS'') and one-tenth of the value of the 
Nasdaq 100 Index (``MNX LEAPS'').\7\
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    \5\ A description of the Index is available on Nasdaq's Web site 
at http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm.
    \6\ Options on NDX and MNX are currently listed for trading on 
the Chicago Board Options Exchange (``CBOE''). Options on NDX and 
MNX listed on the Exchange would be identical to the NDX and MNX 
options listed on CBOE.
    \7\ Under ISE Rule 2009(b), ``Long-Term Index Options Series,'' 
the Exchange may list long-term options that expire from 12 to 60 
months from the date of issuance.
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Index Design and Composition
    The Nasdaq 100 Index, launched in January 1985, represents the 
largest non-financial domestic and international issues listed on 
Nasdaq based on market capitalization. The Index reflects companies 
across major industry groups, including computer hardware and software, 
telecommunications, retail/wholesale trade, and biotechnology.
    The Index is calculated using a modified capitalization-weighted 
methodology. The value of the Index equals the aggregate value of the 
Index share weights, also known as the Depository Receipt Multiplier, 
of each of the component securities multiplied by each security's 
respective last sale price on Nasdaq or the Nasdaq Official Closing 
Price (``NOCP''), divided by Adjusted Base Period Market Value 
(``ABPMV''), and multiplied by the base value. The ABPMV serves the 
purpose of scaling such aggregate value (otherwise in the trillions) to 
a lower order of magnitude which is more desirable for Index reporting 
purposes. If trading in an Index security is halted while the market is 
open, the last Nasdaq traded price for that security is used for all 
index computations until trading resumes. If trading is halted before 
the market is open, the previous day's NOCP is used. Additionally, the 
Index is calculated without regard to any dividends on component 
securities. The methodology is expected to retain, in general, the 
economic attributes of capitalization weighting, while providing 
enhanced diversification. To accomplish this, Nasdaq reviews the 
composition of the Index on a quarterly basis and adjusts the weighting 
of Index components using a proprietary algorithm, if certain pre-
established weight distribution requirements are not met.
    Nasdaq has certain eligibility requirements for inclusion in the 
Index.\8\ For example, to be eligible for inclusion in the Index, a 
component security must be exclusively listed on the Nasdaq National 
Market, or dually listed on a national securities exchange prior to 
January 1, 2004.\9\ Only one class of security per issuer is considered 
for inclusion in the Index.
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    \8\ The initial eligibility criteria and continued eligibility 
criteria are available on Nasdaq's Web site at http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm.
    \9\ In the case of spin-offs, the operating history of the spin-
off would be considered. Additionally, if a component security would 
otherwise qualify to be in the top 25% of securities included in the 
Index by market capitalization for the six prior consecutive months, 
it would be eligible if it had been listed for one year.
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    Additionally, the issuer of a component security cannot be a 
financial or investment company and cannot currently be involved in 
bankruptcy proceedings. Criteria for inclusion also require the average 
daily trading volume of a component security to be at least 200,000 
shares on Nasdaq. If a component security is of a foreign issuer, based 
on its country of incorporation, it must have listed options or be 
eligible for listed-options trading. In addition, the issuer of a 
component security must not have entered into any definitive agreement 
or other arrangement which would result in the security no longer being 
eligible for inclusion in the Index within the next six months. An 
issuer of a component security also must not have annual financial 
statements with an audit opinion where the auditor or the issuer has 
indicated that the audit opinion cannot be currently relied upon.
    As of September 21, 2004, the following were characteristics of the 
Index:
    [cir] The total capitalization of all components of the Index was 
$1.693 trillion;
    [cir] Regarding component capitalization, (a) the highest 
capitalization of a component was $296.39 billion (Microsoft Corp.), 
(b) the lowest capitalization of a component was $1.48 billion (First 
Health Group Corp.), (c) the mean capitalization of the components was 
$16.93 billion, and (d) the median capitalization of the components was 
$6.34 billion;
    [cir] Regarding component price per share, (a) the highest price 
per share of a component was $90.65 (eBay, Inc.), (b) the lowest price 
per share of a component was $2.68 (Level 3 Communications, Inc.), (c) 
the mean price per share of the components was

[[Page 6478]]

$35.00, and (d) the median price per share of the components was 
$29.95;
    [cir] Regarding component weightings, (a) the highest weighting of 
a component was 8.73% (Microsoft Corp.), (b) the lowest weighting of a 
component was 0.10% (Compuware Corp.), (c) the mean weighting of the 
components was 1.00%, (d) the median weighting of the components was 
0.52%, and (e) the total weighting of the top five highest weighted 
components was 27.30% (Microsoft Corp., Qualcomm, Inc., Cisco Systems, 
Inc., Intel Corp., and eBay, Inc.);
    [cir] Regarding component available shares, (a) the most available 
shares of a component was 10.86 billion shares (Microsoft Corp.), (b) 
the least available shares of a component was 43.74 million shares 
(Henry Schein, Inc.), (c) the mean available shares of the components 
was 675.31 million shares, and (d) the median available shares of the 
components was 250.05 million shares;
    [cir] Regarding the six-month average daily volumes of the 
components, (a) the highest six-month average daily volume of a 
component was 64.62 million shares (Microsoft Corp.), (b) the lowest 
six-month average daily volume of a component was 348,583 shares 
(Ryanair Holdings PLC), (c) the mean six-month average daily volume of 
the components was 7.14 million shares, (d) the median six-month 
average daily volume of the components was 3.05 million shares, (e) the 
average of six-month average daily volumes of the five most heavily 
traded components was 260.46 million shares (Microsoft Corp., Intel 
Corp., Cisco Systems, Inc., Oracle Corp., and Sun Microsystems, Inc.), 
and (f) 100% of the components had a six-month average daily volume of 
at least 50,000; and
    [cir] Regarding option eligibility, (a) 99.3% of the components 
were options eligible, as measured by weighting, and (b) 96.0% of the 
components were options eligible, as measured by number.
Index Calculation and Index Maintenance
    In recent years, the value of the Full-size Nasdaq 100 Index has 
increased significantly, such that the value of the Index stood at 
804.64, as of October 7, 2002. As a result, the premium for the Full-
size Nasdaq 100 Index options also has increased. The Exchange believes 
that this has caused Full-size Nasdaq 100 Index options to trade at a 
level that may be uncomfortably high for retail investors. The Exchange 
believes that listing options on reduced values would attract a greater 
source of customer business than if the options were based only on the 
full value of the Index. The Exchange further believes that listing 
options on reduced values would provide an opportunity for investors to 
hedge, or speculate on, the market risk associated with the stocks 
comprising the Index. Additionally, by reducing the values of the 
Index, investors would be able to use 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.\10\
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    \10\ The Exchange believes that options trading on MNX have 
generated considerable interest from investors, as measured by its 
robust trading volume on CBOE.
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    The Full-size Nasdaq 100 Index and the Mini Nasdaq 100 Index levels 
are calculated continuously, using the last sale price for each 
component stock in the Index, and are disseminated every 15 seconds 
throughout the trading day.\11\ The Full-size Nasdaq-100 Index level 
equals the current market value of component stocks multiplied by 125 
and then divided by the stocks' market value of the adjusted base 
period. The adjusted base period market value is determined by 
multiplying the current market value after adjustments times the 
previous base period market value and then dividing that result by the 
current market value before adjustments. To calculate the value of the 
Mini Nasdaq 100 Index, the full value of the Index is divided by ten. 
To maintain continuity for the Index's value, the divisor is adjusted 
periodically to reflect events such as changes in the number of common 
shares outstanding for component stocks, company additions or 
deletions, corporate restructurings, or other capitalization changes.
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    \11\ Full-size Nasdaq 100 Index and Mini Nasdaq 100 Index levels 
are disseminated through the Nasdaq Index Dissemination Services 
(``NIDS'') during normal Nasdaq trading hours (9:30 a.m. to 4 p.m. 
ET). The Index is calculated using Nasdaq prices (not consolidated) 
during the day and the NOCP for the close. The closing value of the 
Index may change until 5:15 p.m. ET due to corrections to the NOCP 
of the component securities. In addition, the Index is published 
daily on Nasdaq's Web site and through major quotation vendors such 
as Reuters and Thomson's ILX.
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    The settlement values for purposes of settling both Full-size 
Nasdaq 100 Index (``Full-size Settlement Value'') and Mini Nasdaq 100 
Index (``Mini Settlement Value'') are calculated based on a volume-
weighted average of prices reported in the first five minutes of 
trading for each of the component securities on the last business day 
before the expiration date (``Settlement Day'').\12\ The Settlement Day 
is normally the Friday preceding ``Expiration Saturday.'' \13\ If a 
component security in the Index does not trade on Settlement Day, the 
closing price from the previous trading day would be used to calculate 
both the Full-size Settlement Value and Mini Settlement Value.\14\ 
Accordingly, trading in options on the Index will normally cease on the 
Thursday preceding an Expiration Saturday.
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    \12\ The aggregate exercise value of the option contract is 
calculated by multiplying the Index value by the Index multiplier, 
which is 100.
    \13\ For any given expiration month, options on the Nasdaq 100 
Index will expire on the third Saturday of the month.
    \14\ Full-size Settlement Values and Mini Settlement Values are 
disseminated by CBOE.
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    Nasdaq monitors and maintains the Index. Nasdaq is responsible for 
making all necessary adjustments to the Index to reflect component 
deletions; share changes; stock splits; stock dividends; stock price 
adjustments due to restructuring, mergers, or spin-offs involving the 
underlying components; and other corporate actions. 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.
    The component securities are evaluated on an annual basis, except 
under extraordinary circumstances which may result in an interim 
evaluation, as follows: Securities listed on Nasdaq that meet its 
eligibility criteria are ranked by market value using closing prices as 
of the end of October and publicly available total shares outstanding 
as of the end of November. Eligible component securities which are 
already in the Index and ranked in the top 100 (based on market value) 
are retained in the Index. Component securities that are ranked from 
101 to 150 are also retained provided that each such component security 
was ranked in the top 100 during the previous ranking review. 
Components that do not meet these criteria are replaced. The 
replacement securities chosen are those Index-eligible securities that 
have the largest market capitalization and are not currently in the 
Index.
    The list of annual additions and deletions to the Index is publicly 
announced in early December. Changes to the Index are made effective 
after the close of trading on the third Friday in December. If at any 
time during the year a component security no longer trades on Nasdaq, 
or is otherwise determined by Nasdaq to become ineligible for inclusion 
in the Index, that component security would be replaced with the

[[Page 6479]]

largest market capitalization component not currently in the Index that 
met the eligibility criteria described earlier.
    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 file a proposed rule change with the Commission 
pursuant to Rule 19b-4 if: (i) The number of securities in the Index 
drops by one-third 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 25% 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.
    The Exchange will further notify the Commission's Division of 
Market Regulation if Nasdaq determines to cease maintaining and 
calculating the Index, or if the Index values are not disseminated 
every 15 seconds by a widely available source. The ISE has represented 
that, if the Index ceases to be maintained or calculated, or if the 
Index values are not disseminated every 15 seconds by a widely 
available source, it would not list any additional series for trading 
and would limit all transactions in such options to closing 
transactions only for the purpose of maintaining a fair and orderly 
market and protecting investors.
Contract Specifications
    The contract specifications for options on the Index are set forth 
as an Exhibit to the proposed rule change. The proposed contract 
specifications are identical to the contract specifications of NDX and 
MNX options that are currently listed on CBOE. The Index is a broad-
based index, as defined in Exchange Rule 2001(j). Options on the Nasdaq 
100 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. ET), 
as set forth in ISE Rule 2008(a), would apply to options on the Nasdaq 
100 Index. Exchange rules that are applicable to the trading of options 
on broad-based indexes would apply to both NDX and MNX.\15\ 
Specifically, the trading of NDX and MNX options would be subject to, 
among others, Exchange rules governing margin requirements and trading 
halt procedures for index options.
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    \15\ See Exchange Rules 2000 through 2012.
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    For NDX, the Exchange proposes to establish aggregate position 
limits at 75,000 contracts on the same side of the market. The Full-
size Nasdaq Index contracts would be aggregated with Mini Nasdaq 100 
Index contracts, where ten Mini Nasdaq 100 Index contracts equal one 
Full-size Nasdaq 100 Index contract.\16\ The Exchange also is proposing 
to amend its Rule 2006(a)(5) to conform it to CBOE Rule 24.4(e) with 
regard to hedge exemptions for options on NDX and MNX. Specifically, 
the Exchange seeks to add a table in its Rule 2006(a)(5), similar to 
the one provided by CBOE Rule 24.4(e), that enumerates the hedge 
exemption available for NDX and MNX and other broad-based indexes. A 
hedge exemption of 150,000 contracts and 1,500,000 contracts is 
available for NDX and MNX, respectively. The Exchange plans to retain 
its standard limit of 75,000 contracts for other broad-based 
indexes.\17\
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    \16\ The position limits proposed by the Exchange for Nasdaq 100 
Index options are identical to those established by CBOE.
    \17\ See Amendment No. 2. The same limits that apply to position 
limits would apply to exercise limits for these products.
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    The Exchange proposes to apply broad-based index margin 
requirements for the purchase and sale of options on the Index. 
Accordingly, purchases of put or call options with nine months or less 
until expiration must be paid for in full. Writers of uncovered put or 
call options would be required to deposit or 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 
for call options and a minimum of the option proceeds plus 10% of the 
aggregate exercise price amount for put options.
    The Exchange proposes to set strike price intervals at least 2\1/2\ 
points for certain near-the-money series in near-term expiration months 
when the Full-size Nasdaq 100 Index or Mini Nasdaq 100 Index is at a 
level below 200, and 5 point strike price intervals for other options 
series with expirations up to one year, and at least 10 point strike 
price intervals for longer-term options. The minimum tick size for 
series trading below $3 is $0.05, and for series trading at or above $3 
is $0.10. Based on the current index levels, the Exchange plans to set 
strike price intervals of 5 points and 2\1/2\ points for NDX and MNX, 
respectively.
    The Exchange proposes to list options on both the Full-size Nasdaq 
100 Index and the Mini Nasdaq 100 Index 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.\18\ In addition, longer-term option series having up to 60 
months to expiration may be traded.\19\ The trading of any long-term 
Nasdaq 100 Index options would 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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    \18\ See ISE Rule 2009(a)(3).
    \19\ NDX LEAPS and MNX LEAPS are listed pursuant to ISE Rule 
2009(b)(1) rather than Rule 2009(b)(2).
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    Surveillance and Capacity
    The Exchange represents that it has an adequate surveillance 
program in place for options traded on the Index 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 
American Stock Exchange, the Boston Stock Exchange, CBOE, the Chicago 
Stock Exchange, the National Stock Exchange, NASD, the New York Stock 
Exchange, 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 necessary systems capacity 
to support new options series that would result from the introduction 
of NDX, MNX, NDX LEAPS, and MNX LEAPS. The Exchange has provided the 
Commission with system capacity information to support its system 
capacity representations.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \20\ in general, and with Section 6(b)(5) in 
particular,\21\ in that it will permit the trading of options on the 
Full-size Nasdaq 100 Index and

[[Page 6480]]

Mini Nasdaq 100 Index pursuant to rules designed to prevent fraudulent 
and manipulative acts and practices and to promote just and equitable 
principles of trade.
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    \20\ 15 U.S.C. 78f.
    \21\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited comments on this proposed rule 
change. The Exchange has not received any unsolicited written comments 
from members or other interested parties.

III. 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-2005-01 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-2005-01. 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 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 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-2005-01 and should be 
submitted on or before February 28, 2005.

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

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\22\ In particular, the Commission believes that the proposal 
is consistent with Section 6(b)(5) of the Act,\23\ which requires that 
the rules of an exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, 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. The Commission notes that 
it previously approved the listing and trading of options on the Nasdaq 
100 Index on another exchange.\24\ The Commission presently is not 
aware of any regulatory issue that should cause it to revisit that 
earlier finding or preclude the trading of such options on the ISE.
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    \22\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ See Securities Exchange Act Release No. 33428 (January 5, 
1994), 59 FR 1576 (January 11, 1994).
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    In approving this proposal, the Commission has specifically relied 
on the following representations made by the Exchange:

    1. The Exchange will notify the Commission's Division of Market 
Regulation immediately if Nasdaq determines to cease maintaining and 
calculating the Nasdaq 100 Index, or if the Nasdaq 100 Index values 
are not disseminated every 15 seconds by a widely available source. 
If the Index ceases to be maintained or calculated, or if the Index 
values are not disseminated every 15 seconds by a widely available 
source, the Exchange will not list any additional series for trading 
and limit all transactions in such options to closing transactions 
only for the purpose of maintaining a fair and orderly market and 
protecting investors.
    2. The Exchange has an adequate surveillance program in place 
for options traded on the Nasdaq 100 Index.
    3. The additional quote and message traffic that will be 
generated by listing and trading NDX, MNX, NDX LEAPS, and MNX LEAPS 
will not exceed the Exchange's current message capacity allocated by 
the Independent System Capacity Advisor.

    The Commission further notes that in approving this proposal, it 
relied on the Exchange's discussion of how Nasdaq currently calculates 
the Index. If the manner in which Nasdaq calculates the Index were to 
change substantially, this approval order might no longer be effective.
    In addition, the Commission believes that the position limits for 
these new options, and the hedge exemption from such position limits, 
are reasonable and consistent with the Act. The Commission previously 
has found identical provisions for NDX and MNX options to be consistent 
with the Act.\25\
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    \25\ See Securities Exchange Act Release No. 44156 (April 6, 
2001), 66 FR 19261 (April 13, 2001) (SR-CBOE-00-14) (order approving 
a proposed rule change by CBOE to increase position and exercise 
limits for Nasdaq 100 Index options, expand the Index hedge 
exemption, and eliminate the near-term position limit restriction).
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    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. Because options on the Nasdaq 100 Index already trade 
on another exchange, accelerating approval of the ISE's proposal should 
benefit investors by creating, without undue delay, additional 
competition in the market for these options.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change, as amended (SR-ISE-2005-01), is 
hereby approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-464 Filed 2-4-05; 8:45 am]
BILLING CODE 8010-01-P