[Federal Register Volume 70, Number 41 (Thursday, March 3, 2005)]
[Notices]
[Pages 10447-10449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-848]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51256; File No. SR-ISE-2005-10]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 Thereto by the International Securities Exchange, Inc., Relating 
to Listing Standards for Options on Narrow-Based Securities Indexes

February 25, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 14, 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 ISE. 
On February 23, 2005, the Exchange amended its proposal.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons, and is 
approving the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1, dated February 23, 2005 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange supplemented its 
description of the modified market capitalization methodology. 
Amendment No. 1 replaced the ISE's original filing in its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE is proposing to amend its rules relating to listing 
standards for options on narrow-based security indexes. The text of the 
proposed rule change is as follows (italics indicate additions; 
[brackets] indicate deletions):
* * * * *

Rule 2002. Designation of an Index

    (a) No Change.
    (b) The Exchange may trade options on a narrow-based index pursuant 
to Rule 19b-4(e) of the Securities Exchange Act of 1934, if each of the 
following conditions is satisfied:
    (1) No Change.
    (2) The index is capitalization-weighted, price-weighted, [or] 
equal dollar-weighted, or modified capitalization-weighted, and 
consists of 10 or more component securities;
    (3)-(4) No Change.
    (5) In a capitalization-weighted index or a modified 
capitalization-weighted index, the lesser of the five highest weighted 
component securities in the index or the highest weighted component 
securities in the index that in the aggregate represent at least 30 
percent of the total number of component securities in the index each 
have had an average monthly trading volume of at least 2,000,000 shares 
over the past six months;
    (6)-(12) No Change.
    (c) The following maintenance listing standards shall apply to each 
class of index options originally listed pursuant to paragraph (b) 
above:
    (1)-(3) No Change.
    (4) In a capitalization-weighted index or a modified 
capitalization-weighted index, the lesser of the five highest weighted 
component securities in the index or the highest weighted component 
securities in the index that in the aggregate represent at least 30 
percent of the total number of stocks in the index each have had an 
average

[[Page 10448]]

monthly trading volume of at least 1,000,000 shares over the past six 
months. In the event a class of index options listed on the Exchange 
fails to satisfy the maintenance listing standards set forth herein, 
the Exchange shall not open for trading any additional series of 
options of that class unless such failure is determined by the Exchange 
not to be significant and the SEC concurs in that determination, or 
unless the continued listing of that class of index options has been 
approved by the SEC under Section 19(b)(2) of the Exchange Act.
* * * * *

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 self-regulatory organization 
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, as amended. The text of these 
statements may be examined at the places specified in item III below. 
The self-regulatory organization 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 is proposing to amend ISE Rule 2002(b). ISE Rule 2002(b) 
contains generic listing standards for narrow-based index options 
pursuant to Rule 19b-4(e) of the Act.\4\ Rule 19b-4(e) provides that 
the listing and trading of a new derivative securities product by a 
self-regulatory organization shall not be deemed a proposed rule 
change, pursuant to paragraph (c)(1) of Rule 19b-4,\5\ if the 
Commission has approved, pursuant to section 19(b) of the Act,\6\ the 
self-regulatory organization's trading rules, procedures and listing 
standards for the product class that would include the new derivatives 
securities product, and the self-regulatory organization has a 
surveillance program for the product class.\7\ Thus, ISE Rule 2002(b) 
allows the Exchange to list options on a narrow-based securities index 
pursuant to Rule 19b-4(e) under the Act without having to submit a 
formal rule change under section 19(b) of the Act as long as the 
requisite criteria provided for under ISE Rule 2002(b) are met.\8\ One 
of these criteria, provided under ISE Rule 2002(b)(2), requires that 
the subject index be capitalization-weighted, price-weighted, or equal-
dollar weighted and consist of ten or more component securities.
---------------------------------------------------------------------------

    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ 15 U.S.C. 78s(b).
    \7\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (the ``19b-4(e) Order''). 
Telephone conversation between Samir Patel, Assistance General 
Counsel, ISE, and Florence E. Harmon, Senior Special Counsel, 
Division of Market Regulation (``Division''), Commission, on 
February 24, 2005.
    \8\ See Securities Exchange Act Release No. 47749 (April 25, 
2003); 68 FR 23507 (May 2, 2003) (Order approving rules relating to 
trading options on indices, including ISE Rule 2002(b)--Generic 
Narrow-Based Index Option Listing Criteria).
---------------------------------------------------------------------------

    The Exchange hereby proposes to amend ISE Rule 2002(b)(2) to 
include a ``modified capitalization-weighted'' methodology as an 
acceptable generic listing standard for options on a narrow-based 
index.\9\ The modified capitalization-weighted methodology is already 
an approved criterion for securities indexes \10\ and is an established 
method of weighting securities indexes.\11\ Accordingly, the ISE 
proposes to adopt the modified capitalization-weighted methodology as a 
standard for listing options on narrow-based indexes that satisfy the 
Exchange's generic listing criteria for options on narrow-based 
securities indexes under ISE Rule 2002(b).
---------------------------------------------------------------------------

    \9\ A modified capitalization-weighted index is similar to a 
capitalization-weighted index where the components are weighted 
according to the total market value of the outstanding shares, 
except that an adjustment to the weighting of one or more of the 
component occurs. This type of methodology is expected to: (1) 
Retain the economic attributes of capitalization weighting; (2) 
promote portfolio weight diversification; (3) reduce performance 
distortion by preserving the capitalization ranking of companies; 
and (4) reduce market impact on the smallest component securities 
from necessary weight rebalancing.
    \10\ The Chicago Board Options Exchange's (``CBOE'') generic 
listing standards for micro narrow-based securities indexes, CBOE 
Rule 24.2(d)(2), includes modified capitalization-weighted 
methodology as an approved criteria. See Securities Exchange Act 
Release No. 49932 (June 28, 2004); 69 FR 40994 (July 7, 2004) (Order 
approving CBOE's micro narrow-based securities index generic listing 
standards).
    \11\ For example, the Nasdaq-100 Index is calculated using the 
modified capitalization-weighted methodology.
---------------------------------------------------------------------------

2. Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with the Act and the rules and regulations thereunder and, 
in particular, the requirements of section 6(b) of the Act. 
Specifically, the Exchange believes the proposed rule change, as 
amended, is consistent with section 6(b)(5) requirements that the rules 
of an exchange be designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism for a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. The adoption of the proposed 
rule change, as amended, would enable the ISE to begin listing and 
trading options on new narrow-based indexes.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change, as amended, 
does not 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, as amended. 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-2005-10 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-2005-10. 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 Commissions 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

[[Page 10449]]

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 Room. 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-
2005-10 and should be submitted by March 24, 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, 
and, in particular, the requirements of section 6(b)(5) thereunder.\12\ 
The proposed rule change would facilitate the listing and trading of 
options on certain types of narrow-based securities indexes on the 
Exchange for the benefit of its members and their customers, 
specifically those that are calculated using the modified 
capitalization-weighted methodology and otherwise meet all applicable 
generic listing standards under ISE Rule 2002(b). Accordingly, the 
Commission believes that approving this proposed rule change, as 
amended, would promote a fair, orderly, and competitive options market.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange has requested that this proposed rule change be given 
accelerated effectiveness pursuant to section 19(b)(2) of the Act.\13\ 
The Commission finds good cause for approving this proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The Commission 
believes that accelerating the effectiveness of the proposed rule 
change, as amended, would facilitate the availability of additional 
investment choices to investors. In addition, the Commission notes that 
it has previously approved the modified market capitalization 
methodology in generic listing standards for other derivative products. 
Accordingly, the Commission believes that there is good cause, 
consistent with sections 6(b)(5) and 19(b)(2) of the Act,\14\ to 
approve the proposal, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(1).
    \14\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-ISE-2005-10), as amended, is 
hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-848 Filed 3-2-05; 8:45 am]
BILLING CODE 8010-01-P