[Federal Register Volume 70, Number 59 (Tuesday, March 29, 2005)]
[Notices]
[Pages 15962-15968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1380]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51410; File No. SR-ISE-2004-27]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and No. 2 by the International Securities 
Exchange, Inc., Relating to Trading Options on Reduced Values of the 
NYSE U.S. 100 Index, the NYSE International 100 Index, the NYSE World 
Leaders Index, and the NYSE TMT Index, Including Long-Term Options

March 22, 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 July 23, 2004, 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. The ISE 
submitted Amendments No. 1 and No. 2 to the proposal on January 5, 
2005,\3\ and March 1, 2005, respectively.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 set forth a list of the underlying 
components of the NYSE Indexes.
    \4\ Amendment No. 2 replaced the original filing in its 
entirety, proposed a reduce number of contracts for position and 
exercise limits, addressed one of the events that the Exchange will 
monitor on an annual basis, and made other technical corrections to 
the filing.
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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 three 
broad-based indexes and one narrow-based index, whose components 
currently trade on the New York Stock Exchange, Inc (``NYSE''). The 
NYSE U.S. 100 Index, the NYSE International 100 Index and the NYSE 
World Leaders Index are all broad-based indexes. The NYSE TMT Index is 
a narrow-based index. Options on these indexes would be cash-settled 
and would have European-style exercise provisions.
    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.

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 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 NYSE U.S. 100 Index, the NYSE International 100 Index, 
and the NYSE World Leaders Index (the ``Broad Based NYSE Indexes'') and 
the NYSE TMT Index (the ``Narrow Based NYSE Index'') (collectively, the 
``NYSE Indexes'').\5\ Specifically, the Exchange proposes to list 
options based upon (i) one-tenth of the value of the NYSE Indexes 
(``Mini Index Options'') and (ii) one one-hundredth of the value of the 
NYSE Indexes (``Micro Index Options''). In Amendment No. 2, which 
replaced the original filing in its entirety, the ISE proposed a 
reduced number of contracts for position and exercise limits, addressed 
one of the events that the Exchange will monitor on an annual basis, 
and made other technical corrections to the filing.
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    \5\ A description of each of the NYSE Indexes can be found on 
the NYSE's Web site at http://www.nyseindexes.com.
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Index Design and Composition

    The NYSE Indexes are designed to be a comprehensive representation 
of the investable United States equity market. Each NYSE Index is a 
float-adjusted capitalization-weighted index,\6\ whose components are 
all traded on the NYSE.
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    \6\ The calculation of a float-adjusted, market-weighted index 
involves taking the summation of the product of the price of each 
stock in the index and the number of shares available to the public 
for trading, rather than the total shares oustanding for each issue. 
In contrast, a price-weighted index involves taking the summation of 
the prices of the stocks in the index.
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NYSE U.S. 100 Index

    The NYSE U.S. 100 Index tracks the top 100 U.S. stocks trading on 
the NYSE. The companies represented have a market capitalization of 
$5.95 trillion, which covers 47% of the entire market capitalization of 
U.S. companies and over 62% of U.S. companies listed on the NYSE. 
Additionally, these companies are major market participants, most of 
which are well-known household names. This fact, along with the NYSE's 
significant U.S. market penetration, ensures that this index will 
closely track the entire U.S. market. This index is designed to assist 
investors looking to track the U.S. market across 10 industry sectors, 
as defined by Dow Jones & Company (``Dow Jones'').
    The NYSE U.S. 100 Index is calculated using a rules-based 
methodology that is fully transparent. Its original selection pool 
includes all U.S. stocks listed on the NYSE. The entire index universe 
is ranked in descending order by unadjusted market capitalization. If a 
component has multiple share classes, the most liquid issue for that 
company is included. Companies that fail a liquidity test, i.e., 
average trading volume of 100,000 shares for the preceding three 
months, are removed. The top 100 companies are then selected from the 
remaining universe, and the index is weighted by float-adjusted market 
capitalization.
    The index is reviewed quarterly, with an 80-120 buffer applied to 
limit

[[Page 15963]]

turnover. When the universe is ranked by market capitalization, all 
stocks in the top 80 are automatically included in the index, while all 
stocks ranked below 120 are automatically excluded. The remaining 
components are selected from stocks falling between 80 and 120, 
starting with the highest ranked component. In addition to the 
scheduled quarterly review, the index is reviewed on an ongoing basis 
to accommodate extraordinary events, such as delistings, bankruptcies, 
mergers or acquisitions involving index components.
    The NYSE U.S. 100 Index components are classified in ten market 
sectors. As of March 18, 2004, these sectors and their respective 
weightings were: Basic Materials (1.9%); Consumer, Cyclical (13.4%); 
Consumer, Non-Cyclical (11.4%); Energy (7.5%); Financial (23.3%); 
Healthcare (18.7%); Industrial (10.7%); Technology (5.9%); 
Telecommunication (6.7%); and Utilities (0.5%).
    As set forth in Exhibit 3 to the proposal, as of March 18, 2004, 
following are the characteristics of the NYSE U.S. 100 Index: (i) The 
total capitalization of all of the components in the Index is $6.166 
trillion; (ii) regarding component capitalization, (a) the highest 
capitalization of a component is $310.02 billion (General Electric), 
(b) the lowest capitalization of a component is $17.13 billion (Kohl's 
Corp.), (c) the mean capitalization of the components is $61.665 
billion, and (d) the median capitalization of the components is $40.673 
billion; (iii) regarding component price per share, (a) the highest 
price per share of a component is $106.82 (Genentech), (b) the lowest 
price per share of a component is $11.16 (Liberty Media Group), (c) the 
mean price per share of the components is $48.53, and (d) the median 
price per share of the components is $44.40; (iv) regarding component 
weightings, (a) the highest weighting of a component is 5.03% (General 
Electric), (b) the lowest weighting of a component is 0.28% (Kohl's 
Corp.), (c) the mean weighting of the components is 1.0%, (d) the 
median weighting of the components is 0.66%, and (e) the total 
weighting of the top five highest weighted components is 22.2% (General 
Electric, ExxonMobil, Pfizer, Citigroup, Wal-Mart Stores); (v) 
regarding component available shares, (a) the most available shares of 
a component is 9.98 billion (General Electric), (b) the least available 
shares of a component is 206 million (Genentech), (c) the mean 
available shares of the components is 1.396 billion, and (d) the median 
available shares of the components is 918.3 million; (vi) regarding the 
six month average daily volumes of the components, (a) the highest six 
month average daily volume of a component is 22.428 million (AT&T 
Wireless), (b) the lowest six month average daily volume of a component 
is 906,810 (SunTrust Banks), (c) the mean six month average daily 
volume of the components is 5.376 million, (d) the median six month 
average daily volume of the components is 4.082 million, (e) the 
average of six month average daily volumes of the five most heavily 
traded components is 18.953 million (AT&T Wireless, General Electric, 
Pfizer, Time Warner, Motorola), and (f) 100% of the components had a 
six month average daily volume of at least 50,000; and (vii) regarding 
option eligibility, (a) 100% of the components are options eligible, as 
measured by weighting and (b) 100% of the components are options 
eligible, as measured by number.

NYSE International 100 Index

    The NYSE International 100 Index is designed to assist investors 
seeking to track international markets. This index tracks the 100 
largest non-U.S. stocks trading on the NYSE. It covers 27.1% of the 
international stock market and has a total market capitalization of 
$3.8 trillion. Currently, the components of the NYSE International 100 
Index represent 18 countries.\7\ All of the components of this index 
are priced on the NYSE during U.S. trading hours. ISE believes its 
limited number of components and intraday pricing makes the NYSE 
International 100 Index suitable for tracking the non-U.S. market and 
for use as the basis for investable products.
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    \7\ According to the ISE, 98 of the 100 underlying components in 
the NYSE International 100 Index meet ISE's listing criteria for 
equity options as set forth in ISE Rule 502. This represents 97.93% 
of the index by market capitalization weight and 98% by number. Two 
American Depository Receipts (``ADRs'') underlying the NYSE 
International 100 Index, Allianz AG (``AZ'') and Telefonica Moviles 
SA (``TEM''), do not meet the requirements of ISE Rule 502, because 
the NYSE does not have in place an effective surveillance sharing 
agreement with the primary exchange in the home country where AZ and 
TEM are traded. However, the U.S. market for the underlying ADRs is 
at least 50% or more of the worldwide trading volume. The Commission 
believes that it is appropriate to permit the listing of options on 
an ADR without the existence of a comprehensive surveillance 
agreement with the foreign market where the underlying component 
trades, as long as the U.S. market for the underlying ADR is at 
least 50% or more of the worldwide trading volume. Telephone 
conversation between Samir Patel, Assistant General Counsel, ISE, 
and A. Michael Pierson, Attorney, Division, Commission (March 21, 
2005).
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    The NYSE International 100 Index is also calculated using a rules-
based methodology that is fully transparent. Its original selection 
pool includes all non-U.S. stocks listed on the NYSE. The entire index 
universe is ranked in descending order by unadjusted market 
capitalization. If a component has multiple share classes, the most 
liquid issue for that company is included. Companies that fail a 
liquidity test, i.e., average trading volume of 100,000 shares for the 
preceding three months, are removed. The top 100 companies are then 
selected from the remaining universe, and the index is weighted by 
float-adjusted market capitalization.
    The index is reviewed quarterly, with an 80-120 buffer applied to 
limit turnover. When the universe is ranked by market capitalization, 
all stocks in the top 80 are automatically included in the index, while 
all stocks ranked below 120 are automatically excluded. The remaining 
components are selected from stocks falling between 80 and 120, 
starting with the highest ranked component. In addition to the 
scheduled quarterly review, the index is reviewed on an ongoing basis 
to accommodate extraordinary events, such as delistings, bankruptcies, 
mergers or acquisitions involving index components.
    The NYSE International 100 Index components are classified in ten 
market sectors. As of March 18, 2004, these sectors and their 
respective weightings were: Basic Materials (3.1%); Consumer, Cyclical 
(11.1%); Consumer, Non-Cyclical (5.2%); Energy (17.7%); Financial 
(27.7%); Healthcare (12.0%); Industrial (1.1%); Technology (8.3%); 
Telecommunication (10.6%); and Utilities (3.2%).
    As set forth in Exhibit 3 to the proposal, as of March 18, 2004, 
following are the characteristics of the NYSE International 100 Index: 
(i) The total capitalization of all of the components in the Index is 
$4.308 trillion; (ii) regarding component capitalization, (a) the 
highest capitalization of a component is $182.444 billion (BP plc), (b) 
the lowest capitalization of a component is $4.99 billion (Rinker 
Group), (c) the mean capitalization of the components is $43.086 
million, and (d) the median capitalization of the components is $30.612 
million; (iii) regarding component price per share, (a) the highest 
price per share of a component is $117.73 (National Australia Bank), 
(b) the lowest price per share of a component is $5.33 (United 
Microelectronics), (c) the mean price per share of the components is 
$37.73, and (d) the median price per share of the components is $33.91; 
(iv) regarding component weightings, (a) the highest weighting of a 
component is 4.23% (BP

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plc), (b) the lowest weighting of a component is 0.05% (Rinker Group), 
(c) the mean weighting of the components is 1.0%, (d) the median 
weighting of the components is 0.71%, and (e) the total weighting of 
the top five highest weighted components is 16.96% (BP plc, Vodafone, 
HSBC Holdings, Toyota, and GlaxoSmithKline); (v) regarding component 
available shares, (a) the most available shares of a component is 6.82 
billion (Vodafone), (b) the least available shares of a component is 
93.55 million (Rinker Group), (c) the mean available shares of the 
components is 1.581 billion, and (d) the median available shares of the 
components is 1.079 million; (vi) regarding the six month average daily 
volumes of the components, (a) the highest six month average daily 
volume of a component is 39.803 million (Nortel), (b) the lowest six 
month average daily volume of a component is 9,150 (Westpac Banking), 
(c) the mean six month average daily volume of the components is 1.054 
million, (d) the median six month average daily volume of the 
components is 197,450, (e) the average of six month average daily 
volumes of the five most heavily traded components is 13.023 million 
(Nortel, Nokia, Taiwan Semiconductor, United Microelectronics, BP plc), 
and (f) 79% of the components had a six month average daily volume of 
at least 50,000; and (vii) regarding option eligibility, (a) 88.15% of 
the components are options eligible, as measured by weighting and (b) 
79% of the components are options eligible, as measured by number.

NYSE World Leaders Index

    The NYSE World Leaders is designed to serve as a benchmark to 
track, as a single asset class, the performance of 200 world leaders 
across 10 industry sectors and all regions of the world. This index is 
constructed by combining the NYSE U.S. 100 Index and NYSE International 
100 Indexes. The components of the NYSE World Leaders Index have a 
total market capitalization of $9.7 trillion and cover 36.7% of the 
market capitalization of the world markets. It is well diversified 
across 10 industry sectors, as defined by Dow Jones, and currently 
represents 19 countries, including the United States. All of the 
components of this index are priced on the NYSE during U.S. trading 
hours. The ISE believes the limited number of components and intraday 
pricing makes the NYSE World Leaders Index suitable for tracking the 
global market and for use as the basis for investable products.
    The NYSE World Leaders Index is also calculated using a rules-based 
methodology that is fully transparent. Its original selection pool 
includes all stocks listed on the NYSE. The index universes for the 
NYSE U.S. 100 and NYSE International 100 are each ranked in descending 
order by unadjusted market capitalization. If a component has multiple 
share classes, the most liquid issue for that company is included. 
Companies that fail a liquidity test, i.e., average trading volume of 
100,000 shares for the preceding three months, are removed. The top 100 
companies are then selected from the remaining stocks in each universe, 
and the index is weighted by float-adjusted market capitalization.
    The NYSE U.S. 100 and the NYSE International 100 Indexes are 
reviewed quarterly, with an 80-120 buffer applied to limit turnover. 
When the universes are ranked by market capitalization, all stocks in 
the top 80 are automatically included in the index, while all stocks 
ranked below 120 are automatically excluded. The remaining components 
are selected from stocks falling between 80 and 120, starting with the 
highest ranked component. In addition to the scheduled quarterly 
review, the index is reviewed on an ongoing basis to accommodate 
extraordinary events, such as delistings, bankruptcies, mergers or 
acquisitions involving index components.
    The NYSE World Leaders Index components are classified in ten 
market sectors. As of March 18, 2004, these sectors and their 
respective weightings were: Basic Materials (2.3%); Consumer, Cyclical 
(12.6%); Consumer, Non-Cyclical (9.2%); Energy (11.2%); Financial 
(24.1%); Healthcare (16.3%); Industrial (7.2%); Technology (6.8%); 
Telecommunication (8.1%); and Utilities (1.5%).
    As set forth in Exhibit 3 to the proposal, as of March 18, 2004, 
following are the characteristics of the NYSE World Leaders Index: (i) 
The total capitalization of all of the components in the Index is 
$10.533 trillion; (ii) regarding component capitalization, (a) the 
highest capitalization of a component is $310.02 billion (General 
Electric), (b) the lowest capitalization of a component is $4.99 
billion (Rinker Group), (c) the mean capitalization of the components 
is $52.668 billion, and (d) the median capitalization of the components 
is $37.291 billion; (iii) regarding component price per share, (a) the 
highest price per share of a component is $117.73 (National Australia 
Bank), (b) the lowest price per share of a component is $5.33 (United 
Microelectronics), (c) the mean price per share of the components is 
$43.39, and (d) the median price per share of the components is $40.59; 
(iv) regarding component weightings, (a) the highest weighting of a 
component is 2.94% (General Electric), (b) the lowest weighting of a 
component is 0.05% (Rinker Group), (c) the mean weighting of the 
components is 1.08%, (d) the median weighting of the components is 
0.36%, and (e) the total weighting of the top five highest weighted 
components is 12.99% (General Electric, ExxonMobil, Pfizer, Citigroup, 
Wal-Mart Stores); (v) regarding component available shares, (a) the 
most available shares of a component is 9.98 billion (General 
Electric), (b) the least available shares of a component is 93.55 
million (Rinker Group), (c) the mean available shares of the components 
is 1.326 billion, and (d) the median available shares of the components 
is 865.3 million; (vi) regarding the six month average daily volumes of 
the components, (a) the highest six month average daily volume of a 
component is 39.803 million (Nortel), (b) the lowest six month average 
daily volume of a component is 9,150 (Westpac Banking), (c) the mean 
six month average daily volume of the components is 3.218 million, (d) 
the median six month average daily volume of the components is 1.73 
million, (e) the average of six month average daily volumes of the five 
most heavily traded components is 24.16 million (Nortel, AT&T Wireless, 
General Electric, Pfizer, Time Warner), and (f) 89.5% of the components 
had a six month average daily volume of at least 50,000; and (vii) 
regarding option eligibility, (a) 95.1% of the components are options 
eligible, as measured by weighting, and (b) 89.5% of the components are 
options eligible, as measured by number.

NYSE TMT Index

    The NYSE TMT Index is a narrow-based index. For narrow-based 
indexes that meet the standards of an exchange's rules, an SRO need 
only complete Form 19b-4(e) at least five business days after 
commencement of trading the new product. Since the listing of this 
product does not meet all of the requirements of ISE Rule 2002(b), Form 
19b-4(e) is not available for the listing of this product, giving rise 
to the need for this filing.
    The NYSE TMT Index is designed to track the top 100 technology, 
media and telecommunications stocks listed on the NYSE. The companies 
represented have a market capitalization of $2.3 trillion, which covers 
45.7% of the entire market capitalization of technology, media and 
telecommunication companies globally and is approximately the same size 
as the nearly 4,000 companies in the Nasdaq Composite Index. All of the

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components of this index are priced on the NYSE during U.S. trading 
hours.
    The NYSE TMT Index is also calculated using a rules-based 
methodology that is fully transparent. Its original selection pool 
includes all technology, media and telecommunication stocks listed on 
the NYSE. The entire index universe is ranked in descending order by 
unadjusted market capitalization. If a component has multiple share 
classes, the most liquid issue for that company is included. Companies 
that fail a liquidity test, i.e., average trading volume of 100,000 
shares for the preceding three months, are removed. The top 100 
companies are then selected from the remaining universe, and the index 
is weighted by float-adjusted market capitalization.
    The index is reviewed quarterly, with an 80-120 buffer applied to 
limit turnover. When the universe is ranked by market capitalization, 
all stocks in the top 80 are automatically included in the index, while 
all stocks ranked below 120 are automatically excluded. The remaining 
components are selected from stocks falling between 80 and 120, 
starting with the highest ranked component. At the quarterly 
rebalancing, market sector weights for technology, media and 
telecommunications are capped at no more than 40% and the sub-group 
weights are capped at no more than 20%. This ensures that one sector or 
sub-group does not dominate the index. In addition to the scheduled 
quarterly review, the index is also reviewed on an ongoing basis to 
accommodate extraordinary events, such as delistings, bankruptcies, 
mergers or acquisitions involving index components.
    The NYSE TMT Index components are classified in 14 industry sub-
groups within the technology, media and telecommunication sectors. As 
of March 18, 2004, the sub-groups and their respective weightings were: 
Advertising (1.9%); Broadcasting (18.9%); Communications Technology 
(11.8%); Computers (13.0%); Diversified Technology Services (2.4%); 
Entertainment (0.3%); Fixed-line Communications (20.9%); Internet 
Services (0.0%); Office Equipment (1.2%); Publishing (6.1%); 
Semiconductors (10.8%); Technology, Software (2.8%); Wireless 
Communications (9.9%); and Other: Non-Technology, Media and 
Telecommunication (0.0%).
    As set forth in Exhibit 3 to the proposal, as of March 18, 2004, 
following are the characteristics of the NYSE TMT Index: (i) The total 
capitalization of all of the components in the Index is $2.701 
trillion; (ii) regarding component capitalization, (a) the highest 
capitalization of a component is $165.12 billion (Vodafone Group), (b) 
the lowest capitalization of a component is $2.89 billion (Westwood 
One, Inc.), (c) the mean capitalization of the components is $27.01 
billion, and (d) the median capitalization of the components is $15.38 
billion; (iii) regarding component price per share, (a) the highest 
price per share of a component is $115.13 (Mobile Telesystems), (b) the 
lowest price per share of a component is $3.93 (Lucent Technologies 
Inc.), (c) the mean price per share of the components is $30.05, and 
(d) the median price per share of the components is $25.98; (iv) 
regarding component weightings, (a) the highest weighting of a 
component is 6.11% (Vodafone Group), (b) the lowest weighting of a 
component is 0.11% (Westwood One Inc.), (c) the mean weighting of the 
components is 1.0%, (d) the median weighting of the components is 
0.57%, and (e) the total weighting of the top five highest weighted 
components is 23.62% (Vodafone Group, International Business Machines 
Corp., NTT Docomo Inc., Verizon Communications, and Nokia Corp.); (v) 
regarding component available shares, (a) the most available shares of 
a component is 6.82 billion (Vodafone Group), (b) the least available 
shares of a component is 0.08 billion (Knight Ridder Inc.), (c) the 
mean available shares of the components is 1.37 billion, and (d) the 
median available shares of the components is 0.76 billion; (vi) 
regarding the six month average daily volumes of the components, (a) 
the highest six month average daily volume of a component is 72.058 
million (Lucent Technologies Inc.), (b) the lowest six month average 
daily volume of a component is 1.53 million (Telekom Austria Ag), (c) 
the mean six month average daily volume of the components is 4.138 
million, (d) the median six month average daily volume of the 
components is 1.302 million, (e) the average of six month average daily 
volumes of the five most heavily traded components is 33,526 million 
(Lucent Technologies Inc., Nortel Networks Corp., AT&T Wireless 
Services Inc., Time Warner Inc., and Motorola Inc.), and (f) 86% of the 
components had a six month average daily volume of at least 50,000; and 
(vii) regarding option eligibility, (a) 100% of the components are 
options eligible, as measured by weighting and (b) 100% of the 
components are options eligible, as measured by number.

Index Calculation and Index Maintenance

    On March 18, 2004, the index value for the NYSE U.S. 100, the NYSE 
International 100, the NYSE World Leaders and the NYSE TMT was 5763.80, 
4505.70, 5273.40, and 5060.90, respectively. The Exchange believes that 
these levels are too high for successful options trading. Accordingly, 
the Exchange proposes to base trading in these options on fractions of 
each of the NYSE Indexes' value. In particular, the Exchange proposes 
to list (i) Mini Index Options that are based on one-tenth of the value 
of each of the NYSE Indexes and (ii) Micro Index Options that are based 
on one one-hundredth of the value of each of the NYSE Indexes. The 
Exchange believes that listing options on reduced values will attract a 
greater source of customer business than if options were based on the 
full value of the Index. The Exchange further believes that listing 
options on reduced values will provide an opportunity for investors to 
hedge, or speculate on, the market risk associated with the stocks 
comprising the NYSE Indexes. Additionally, by reducing the values of 
the NYSE Indexes, 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.\8\
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    \8\ 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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    The Mini Index Options level and the Micro Index Options level 
shall each be calculated continuously, using the last sale price for 
each component stock in each of the NYSE Indexes, and shall be 
disseminated every 15 seconds throughout the trading day.\9\ To 
calculate the full value of the NYSE Indexes, the sum of the market 
value of

[[Page 15966]]

the stocks in each of the NYSE Indexes is divided by the base period 
market value (divisor), and the result is multiplied by 100. To 
calculate the value of the Mini Index Options level, the full value of 
each of the NYSE Indexes is divided by ten. To calculate the value of 
the Micro Index Options level, the full value of each of the NYSE 
Indexes is divided by one hundred. In order to provide continuity for 
each of the NYSE Indexes' 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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    \9\ The Mini Index Options level and the Micro Index Options 
level shall each be calculated by Dow Jones on behalf of the NYSE 
and disseminated to the Consolidated Quote System (``CQS''). The 
Exchange shall receive those values from CQS and disseminate them to 
its members. Each of the NYSE Indexes is published daily in real-
time on the NYSE's public website and through, among other places, 
major quotation vendors such as Reuters and Thomson's ILX.
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    The settlement value for purposes of settling Mini Index Options 
(``Mini Settlement Value'') and Micro Index Options (``Micro Settlement 
Value'') shall each be calculated on the basis of opening market prices 
on the business day prior to the expiration date of such options 
(``Settlement Day'').\10\ The Settlement Day is normally the Friday 
preceding ``Expiration Saturday.'' \11\ 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 Mini Index Options and Micro Index 
Options will normally cease on the Thursday preceding an Expiration 
Saturday. Dow Jones shall calculate, and the Exchange shall 
disseminate, both the Mini Settlement Value and the Micro Settlement 
Value in the same manner as the Dow Jones shall calculate, and the 
Exchange shall disseminate, the Mini Index Options level and the Micro 
Index Options level.
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    \10\ The aggregate exercise value of the option contract is 
calculated by multiplying the Index value by the Index multiplier, 
which is 100.
    \11\ For any given expiration month, options on the NYSE Indexes 
will expire on the third Saturday of the month.
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    Dow Jones will monitor and maintain each of the NYSE Indexes. Dow 
Jones is responsible for making all necessary adjustments to each of 
the NYSE Indexes 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 each of the NYSE Indexes and would require the use 
of an index divisor to effect adjustments.
    Although the Exchange is not involved in the maintenance of the 
NYSE Indexes, the Exchange represents that it will monitor the NYSE 
Indexes on an quarterly basis,\12\ at which point the Exchange will 
notify the Market Regulation Division of the Commission if: (i) The 
number of securities in each of the NYSE Indexes drops by \1/3\rd or 
more; (ii) 10% or more of the weight of each of the NYSE Indexes is 
represented by component securities having a market value of less than 
$75 million; (iii) less than 80% of the weight of each of the NYSE 
Indexes is represented by component securities that are eligible for 
options trading pursuant to ISE Rule 502; (iv) 10% or more of the 
weight of each of the NYSE Indexes 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 each of 
the NYSE Indexes or the largest five components in the aggregate 
account for more than 40% of the weight of each of the NYSE Indexes.
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    \12\ Telephone conversation between Samir Patel, Assistant 
General Counsel, ISE, and A. Michael Pierson, Attorney, Division, 
Commission (March 21, 2005).
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    The Exchange will notify the Market Regulation Division of the 
Commission immediately in the event Dow Jones determines to cease 
maintaining or calculating the NYSE Indexes. In the event any of the 
NYSE Indexes ceases to be maintained or calculated, the Exchange may 
determine not to list any additional series for trading or 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 both Mini Index Options and Micro 
Index Options for each of the NYSE Indexes are set forth in Exhibit 3 
to the proposal. The NYSE U.S. 100, the NYSE International 100 and the 
NYSE World Leaders Indexes are each broad-based, as defined in Exchange 
Rule 2001(j).\13\ The NYSE TMT Index is a narrow-based index, as 
defined in Exchange Rule 2001(i).\14\ Options on the NYSE Indexes 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 Rule 2008(a), will apply to the NYSE Indexes. Exchange rules 
that are applicable to the trading of options on both broad-based 
indexes and narrow-based indexes will apply to the trading of Mini 
Index Options and Micro Index Options.\15\ Specifically, the trading of 
Mini Index Options and Micro Index Options on the NYSE Indexes will be 
subject to, among others, Exchange rules governing sales practice 
rules, margin requirements, trading rules, and position and exercise 
limits.
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    \13\ 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.
    \14\ ISE Rule 2001(i) defines an ``industry index'' or a 
``narrow-based index'' to mean an index designed to be 
representative of a particular industry or a group of related 
industries.
    \15\ See ISE Rules 2000 through 2012.
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    For each of the broad-based NYSE Indexes, the Exchange proposes to 
establish aggregate position and exercise limits for Mini Index Options 
at 50,000 contracts on the same side of the market, provided no more 
than 30,000 of such contracts are in the nearest expiration month 
series. The Mini Index Options contracts shall be aggregated with Micro 
Index Options contracts, where ten (10) Micro Index Options contracts 
equal one (1) Mini Index Options contract. For the narrow-based index, 
the aggregate position and exercise limits shall be as set forth under 
Rule 2005(a)(3).
    The Exchange proposes to apply index margin requirements for the 
purchase and sale of options on the NYSE Indexes. Accordingly, 
purchases of put or call options with 9 months or less until expiration 
must be paid for in full. Writers of uncovered put or call 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 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 2\1/2\ 
points for certain near-the-money series in near-term expiration months 
when each of the NYSE Indexes is at a level below 200, and 5 point 
strike price intervals for other options series with expirations up to 
one year, and 25 to 50 point strike price intervals for longer-term 
options. Accordingly, since the current Mini Index Options level for 
each of the NYSE Indexes is 576.38, 450.57, 527.34 and 506.09, the 
Exchange shall set strike price intervals at 5 points for the Mini 
Index Options. Since the current Micro Index Options level for each of 
the NYSE Indexes is 57.64, 45.06, 52.73 and 50.61, the Exchange shall 
set strike price intervals at 2\1/2\ points for the Micro Index 
Options. The minimum tick size

[[Page 15967]]

for series trading below $3 shall be 0.05, and for series trading at or 
above $3 shall be 0.10.
    The Exchange proposes to list Mini Index Options and Micro Index 
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.\16\ In addition, 
long-term option series (``LEAPS'') having up to 36 months to 
expiration may be traded.\17\ The interval between expiration months on 
the Mini Index Options or Micro Index Options shall not be less than 
six months. The trading of any LEAPS on Micro Index Options and Mini 
Index Options shall be subject to the same rules that govern the 
trading of all the Exchange's index options, including sales practice 
rules, margin requirements, trading rules, and position and exercise 
limits.
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    \16\ See ISE Rule 2009(a)(3).
    \17\ See ISE Rule 2009(b)(1). The Exchange is not listing 
reduced value LEAPS on either of the Reduced Value NYSE Indexes or 
Reduced Value Micro NYSE Indexes pursuant to ISE Rule 2009(b)(2). 
Telephone conversation between Samir Patel, Assistant General 
Counsel, ISE, and A. Michael Pierson, Attorney, Division, Commission 
(March 8, 2005).
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    Except for the further reduced value given to the Micro Index 
Options, all of the specifications and calculations for the Micro Index 
Options shall be the same as those used for the Mini Index Options. The 
Micro Index Options will trade independently of and in addition to the 
Mini Index Options, and both products shall 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 options traded on the NYSE Indexes, 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, the Chicago Board 
Options Exchange, the Chicago Stock Exchange, the National Stock 
Exchange, the National Association of Securities Dealers, 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 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,\18\ in general, and furthers the 
objectives of section 6(b)(5),\19\ in particular, in that it will 
permit trading in both Mini Index Options and Micro Index 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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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE believes that the proposed rule change does not impose any 
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, 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 self-regulatory organization 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 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 No. SR-ISE-2004-27 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-2004-27. 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 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-2004-27 and should be submitted by April 19, 2005.


[[Page 15968]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1380 Filed 3-28-05; 8:45 am]
BILLING CODE 8010-01-P