[Federal Register Volume 70, Number 64 (Tuesday, April 5, 2005)]
[Notices]
[Pages 17279-17280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1515]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51443; File No. SR-ISE-2004-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto by the International 
Securities Exchange, Inc. Relating to Procedures for the Allocation of 
Market Maker Appointments

March 29, 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 December 14, 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. 
On January 18, 2005, the ISE filed Amendment No. 1 to the proposed rule 
change.\3\ On March 2, 2005, the ISE filed Amendment No. 2 to the 
proposed rule change.\4\ On March 21, 2005, the ISE filed Amendment No. 
3 to the proposed rule change.\5\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4, dated January 18, 2005, which replaced the 
original filing in its entirety (``Amendment No. 1'').
    \4\ See Form 19b-4, dated March 2, 2005, which replaced 
Amendment No. 1 in its entirety (``Amendment No. 2'').
    \5\ See Form 19b-4, dated March 21, 2005, which replaced 
Amendment No. 2 in its entirety (``Amendment No. 3''). Collectively, 
Amendment Nos. 1, 2, and 3 clarified the following: (1) That ISE's 
Board or designated committee shall make appointments in the best 
interest of the exchange to provide competitive markets; (2) that 
changes to the allocation requirements for index options will be 
prospective only; and (3) that information regarding order flow 
arrangements will not be used as a basis for remedial action.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend ISE Rule 802 to (1) specify that 
allocations of market maker appointments must be made in the best 
interest of the Exchange and (2) add criteria specific to the 
allocation of market maker appointments in index options in addition to 
the criteria currently contained in the Rule.
    The text of the proposed rule change is available on the ISE's Web 
site (http://www.iseoptions.com), at the ISE's Office of the Secretary, 
and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the 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. 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
    When the Exchange lists new options classes, it allocates them to 
one of its Primary Market Makers under ISE Rule 802. Pursuant to power 
delegated by the Exchange's Board, an Allocation Committee, which 
consists of representatives of Electronic Access Members, makes 
allocation decisions according to the guidelines contained in ISE Rule 
802. ISE Rule 802 states, among other things, that the Allocation 
Committee should consider the following in making its decisions: The 
financial resources available to the Primary Market Maker, the Primary 
Market Maker's experience and expertise in market making or options 
trading, and the maintenance and enhancement of competition among 
Primary Market Makers.
    The Exchange believes that, as competition among the options 
exchanges continues to intensify, it is increasingly important for the 
Exchange to assure that products are allocated to the Primary Market 
Makers that make the best markets. While it is implied that the 
Exchange's Board and all Exchange committees always must act in the 
best interest of the Exchange to provide competitive markets, because 
allocation decisions have a direct impact on the competitiveness of the 
Exchange, the Exchange proposes to specify this obligation to act in 
the best interest of the Exchange in ISE Rule 802.
    According to the Exchange, options on index-based products can be 
among the most actively traded listed options, making them among the 
most important products to the Exchange. While the Exchange believes 
that the allocation standards contained in ISE Rule 802 work reasonably 
well with respect to the allocation of equity options, the Exchange 
believes it is appropriate for the Exchange to seek more specific 
commitments from Primary Market Makers as to the quality of the markets 
they are prepared to make in certain index-based products (i.e., 
options on indices and exchange-traded funds). Moreover, the Exchange 
believes it is appropriate to have the ability to base re-allocation 
decisions on the failure of a Primary Market Maker to comply with its 
market quality commitments. The proposed rule change would not apply to 
allocation decisions made prior to approval of this proposed rule 
change by the Commission.
    The Exchange proposes to supplement the current allocation criteria 
to require Primary Market Makers who ask for an allocation of an index-
based product to provide specific quarterly spread and size commitments 
for the first year of listing. The Allocation Committee would consider 
these commitments in making its allocation decisions in addition to the 
factors currently contained in ISE Rule

[[Page 17280]]

802. A Primary Market Maker also may, but would not be required to, 
provide commitments regarding marketing or other support (including 
order flow commitments), with respect to the index-based product.
    Under the proposal, the Primary Market Maker's size and spread 
quotation commitments for the fourth quarter following the listing of 
the index-based product would remain in effect thereafter on a quarter-
to-quarter basis unless a change in such commitment is approved upon 
the request of the Primary Market Maker. Any other commitments that a 
Primary Market Maker makes also would remain in effect until modified 
by the Board or designated committee upon the Primary Market Maker's 
request. In addition, a failure of a Primary Market Maker to meet its 
commitments would enable (but not require) the Allocation Committee to 
terminate an allocation and reallocate the product to another Primary 
Market Maker.
    The proposal also would allow, but would not require, a Primary 
Market Maker to provide information regarding order flow arrangements 
with order flow providers. The Allocation Committee would use any 
information provided by a Primary Market Maker regarding the existence 
of order flow arrangements solely to evaluate existing order flow 
arrangements between the applicant and order flow providers. A future 
change to, or termination of, any such arrangements considered by the 
Allocation Committee during the review process would not be used by the 
Committee at any point in the future to terminate an allocation or take 
remedial action against a Primary Market Maker. Furthermore, the 
Allocation Committee would not take any remedial action solely because 
orders subject to any such arrangements were not subsequently routed to 
the Exchange. Whether actual arrangements result in orders being routed 
to the Exchange would be considered by the Exchange as a separate 
matter from the criteria for which a Primary Market Maker's performance 
would be evaluated.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\6\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\7\ in particular, because 
it is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism for a free and open 
market and national market system, and, in general, to protect 
investors and the public interest. In particular, the Exchange believes 
that the proposed rule change, as amended, would help assure that the 
Exchange allocates index-based products to Primary Market Makers that 
are committed to making competitive markets, which the Exchange 
believes would benefit investors and the Exchange.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 its members or other 
interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-ISE-2004-40 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-2004-40. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
ISE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-ISE-
2004-40 and should be submitted on or before April 26, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1515 Filed 4-4-05; 8:45 am]
BILLING CODE 8010-01-P