[Federal Register Volume 70, Number 65 (Wednesday, April 6, 2005)]
[Notices]
[Pages 17484-17489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-6743]



[[Page 17484]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-1447; File No. SR-ISE-2004-28]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of Proposed Rule Change and Amendments No. 1 and 
2 Relating to Trading Options on Full and Reduced Values of the ISE 250 
Index, the ISE 100 Index and the ISE 50 Index, Including Long-Term 
Options

March 30, 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 September 10, 2004, the International Securities Exchange, Inc. 
(``Exchange'' or ``ISE'') 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 on March 7, 2005, respectively.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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 ISE Indexes.
    \4\ Amendment No. 2 replaced the original filing in its 
entirely, 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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I. Self-Regulatory Organizaiton's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE is proposing to amend its rules to trade options on full 
and reduced values of three broad-based indexes, the ISE 250 Index, the 
ISE 100 Index and the ISE 50 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. The text of the proposed rule change appears below. 
Additions are italicized; deletions are bracketed.
* * * * *

Rule 2001. Definitions

Supplementary Material to Rule 2001

    01. The reporting authorities designated by the Exchange in respect 
of each index underlying an index options contract traded on the 
Exchange are as provided in the chart below.

------------------------------------------------------------------------
             Underlying index                    Reporting authority
------------------------------------------------------------------------
S&P SmallCap 600 Index....................  Standard & Poor's
Morgan Stanley Technology Index...........  American Stock Exchange
S&P MidCap 400 Index......................  Standard & Poor's
S&P 1000 Index............................  Standard & Poor's
Nasdaq 100 Index..........................  The Nasdaq Stock Market
ISE 250 Index.............................  International Securities
                                             Exchange and Standard &
                                             Poor's
ISE 100 Index.............................  International Securities
                                             Exchange and Standard &
                                             Poor's
ISE 50 Index..............................  International Securities
                                             Exchange and Standard &
                                             Poor's
------------------------------------------------------------------------

* * * * *

Rule 2004. Position Limites for Broad-Based Index Options

    (a) Rule 412 generally shall govern position limits for broad-based 
index options, as modified by this Rule 2004. There may be no position 
limit for certain Specified (as provided in Rule 2000) broad-based 
index options contracts. All other broad-based index options contracts 
shall be subject to a contract limitation fixed by the Exchange, which 
shall not be larger than the limits provided in the chart below.

------------------------------------------------------------------------
                               Standard limit  (on
   Broad-based  underlying    the same side of the      Restrictions
            index                    market)
------------------------------------------------------------------------
S&P SmallCap 600 Index......  100,000 contracts...  No more than 60,000
                                                     near term.
S&P MidCap 400 Index........  45,000 contracts....  No more than 25,000
                                                     near-term.
Reduced Value S&P 1000 Index  50,000 contracts....  No more than 30,000
                                                     near-term.
Micro S&P 1000 Index........  500,000 contracts...  No more than 300,000
                                                     near-term.
Nasdaq 100 Index............  75,000 contracts....  None.
Mini Nasdaq 100 Index.......  750,000 contracts...  None.
ISE 250 Index...............  50,000 contracts....  No more than 30,000
                                                     near-term.
Mini ISE 250 Index..........  500, contracts......  No more than 300,000
                                                     near-term.
ISE 100 Index...............  50, contracts.......  No more than 30,000
                                                     near-term.
Mini ISE 100 Index..........  500,000 contracts...  No more than 300,000
                                                     near-term.
ISE 50 Index................  50,000 contracts....  No more than 30,000
                                                     near-term.
Mini ISE 50 Index...........  500,000 contracts...  No more than 300,000
                                                     near-term.
------------------------------------------------------------------------

* * * * *

Rule 2009. Terms of Index Options Contracts

    (a) General.
    (4) ``European-Style Exercise.'' The following European-style index 
options, some of which may be A.M.-settled as provided in paragraph 
(a)(5), are approved for trading on the Exchange:
    (i) S&P SmallCap 600 Index
    (ii) Morgan Stanley Technology Index
    (iii) S&P MidCap 400 Index
    (iv) Reduced Value S&P 1000 Index
    (v) Micro S&P 1000 Index
    (vi) Full-size Nasdaq 100 Index
    (vii) Mini Nasdaq 100 Index
    (viii) ISE 250 Index
    (ix) Mini ISE 250 Index
    (x) ISE 100 Index
    (xi) Mini ISE 100 Index
    (xii) ISE 50 Index
    (xiii) Mini ISE 50 Index
    (5) A.M.-Settled Index Options. The last day of trading for A.M.-
settled index options shall be the business day preceding the last day 
of trading in the underlying securities prior to expiration. The 
current index value at the expiration of an A.M.-settled index option 
shall be determined, for all purposes under these Rules and the Rules 
of the Clearing Corporation, on the last day of trading in the 
underlying securities prior to expiration, by reference to the reported 
level of such index as derived from first reported sale (opening) 
prices of the underlying securities on such day, except that:
    (i) In the event that the primary market for an underlying security 
does not open for trading on that day, the

[[Page 17485]]

price of that security shall be determined, for the purposes of 
calculating the current index value at expiration, as set forth in Rule 
2008(g), unless the current index value at expiration is fixed in 
accordance with the Rules and By-Laws of the Clearing Corporation; and
    (ii) In the event that the primary market for an underlying 
security is open for trading on that day, but that particular security 
does not open for trading on that day, the price of that security, for 
the purposes of calculating the current index value at expiration, 
shall be the last reported sale price of the security.
    The following A.M.-settled index options are approved for trading 
on the Exchange:
    (i) S&P SmallCap 600 Index
    (ii) Morgan Stanley Technology Index
    (iii) S&P MidCap 400 Index
    (iv) Reduced Value S&P 1000 Index
    (v) Micro S&P 1000 Index
    (vi) Full-size Nasdaq 100 Index
    (vii) Mini Nasdaq 100 Index
    (viii) ISE 250 Index
    (ix) Mini ISE 250 Index
    (x) ISE 100 Index
    (xi) Mini ISE 100 Index
    (xii) ISE 50 Index
    (xiii) Mini ISE 50 Index
    (c) Procedures for Adding and Deleting Strike Prices. The 
procedures for adding and deleting strike prices for index options are 
provided in Rule 504, as amended by the following:
    (1) The interval between strike prices will be no less than $5.00; 
provided, that in the case of the following classes of index options, 
the interval between strike prices will be no less than $2.50:
    (i) S&P SmallCap 600, if the strike price is less than $200.00
    (ii) Morgan Stanley Technology Index, if the strike price is less 
than $200.00
    (iii) S&P MidCap 400 Index, if the strike price is less than 
$200.00
    (iv) Reduced Value S&P 1000 Index, if the strike price is less than 
$200.00
    (v) Micro S&P 1000 Index, if the strike price is less than $200.00
    (vi) Full-size Nasdaq 100 Index, if the strike price is less than 
$200.00
    (vii) Mini Nasdaq 100 Index, if the strike price is less than 
$200.00
    (viii) ISE 250 Index, if the strike price is less than $200.00
    (ix) Mini ISE 250 Index, if the strike price is less than $200.00
    (x) ISE 100 Index, if the strike price is less than $200.00
    (xi) Mini ISE 100 Index, if the strike price is less than $200.00
    (xii) ISE 50 Index, if the strike price is less than $200.00
    (xiii) Mini ISE 50 Index, if the strike price is less than $200.00
* * * * *

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

I. 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 full and reduced values of the ISE 250 Index, the ISE 100 
Index and the ISE 50 Index (collectively. the ``ISE Indexes'').\5\
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    \5\ A description of each of the ISE Indexes will be available 
on the Exchange's publicly available Web site at http://www.iseoptions.com.
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    Specifically, the Exchange proposes to list options based upon the 
full value of the ISE Indexes (``Full-size ISE Indexes'') as well as 
one-tenth of the value of the ISE Indexes (``Mini ISE Indexes'').
Index Design and Composition
    The ISE Indexes are designed to track the performance of the most 
highly capitalized publicly traded companies in the United States. Each 
index is a float-adjusted capitalization-weighted index,\6\ whose 
components are all headquartered in the United States and listed on 
either the New York Stock Exchange, Inc. (``NYSE''), the National 
Association of Securities Dealers, Inc. (``NASD''), Automated Quotation 
System (``NASDAQ''), or the American Stock Exchange LLC (``Amex''). All 
companies in the ISE Indexes will either be operating companies or Real 
Estate Investments Trusts. All other companies, such as Closed-end 
Funds, Exchange Traded Funds, Holding Companies, Investment Vehicles 
and Royalty Trusts are not eligible for inclusion.
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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 outstanding for each 
issue. In contrast, a price-weighted index involves taking the 
summation or the prices of the stocks in the index.
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    Companies are selected for inclusion in the ISE Indexes by the 
Exchange based on the Exchange's methodology.\7\ Companies may not 
apply, and may not be nominated, for inclusion. Companies may be added 
or removed by the Exchange based on the methodology described below. In 
order for a company to be eligible for inclusion in the ISE Indexes, it 
must satisfy certain minimum criteria. One of the requirements for 
inclusion is that a company's ratio of cumulative shares traded to 
adjusted shares outstanding must be greater than 0.30 over the past 12 
months. Another requirement that must be met by each company is the 
number of shares in its public float must constitute at least 50% of 
its total number of outstanding shares. To be eligible for inclusion in 
the ISE 100 Index, companies must meet one additional requirement: 
options on the component company's stock must be listed on the 
Exchange.
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    \7\ Rules governing component selection of the ISE Indexes will 
be available on the Exchange's publicly available Web site at http://www.iseoptions.com.
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    The ISE indexes are calculated and maintained by Standard & Poor's 
(``S&P'') pursuant to the Exchange's rules-based methodology and 
instructions.
ISE 250 Index
    The ISE 250 Index is designed to track the combined performance of 
the most highly capitalized stocks in the U.S. equity markets and 
specifically includes the top 250 stocks as ranked by market 
capitalization.
    Components of the ISE 250 Index are selected using a rules-based 
methodology that is fully transparent. Its original selection pool 
includes all common stocks listed on the NYSE, Amex and NASDAQ. The 
entire index universe is ranked in descending order by unadjusted 
market capitalization. Companies that do not meet component eligibility 
requirements are removed. If a component has multiple share classes, 
the most liquid issue for that company is included. The top 250 
companies, ranked by market capitalization, are then selected from the 
remaining universe.
    Each component's eligibility and ranking is reviewed twice 
annually, in June and December of each calendar year. Any necessary 
component changes are made after the close on the third Friday of June 
and December, and become effective at the opening on the next trading 
day. Changes to the ISE 250

[[Page 17486]]

Index will be announced on ISE's publicly available Web site five 
trading days prior to the effective date.
    In addition to the scheduled reviews, the ISE 250 Index is reviewed 
on an ongoing basis to accommodate extraordinary events and corporate 
actions, such as delisting, bankruptcies, mergers or acquisitions 
involving index components.
    As set forth in Exhibit 3 to the proposal, as of June 11, 2004, 
following are the characteristics of the ISE 250 Index: (i) The total 
capitalization of all of the components in the Index is $8.63 trillion; 
(ii) regarding component capitalization, (a) the highest capitalization 
of a component is $328.14 billion (General Electric Co.), (b) the 
lowest capitalization of a component is $5.47 billion (The Estee Lauder 
Co., Class A), (c) the mean capitalization of the components is $34.51 
billion, and (d) the median capitalization of the components is $16.85 
billion; (iii) regarding component price per share, (a) the highest 
price per share of a component is $113.71 (Wellpoint Health Networks, 
Inc.), (b) the lowest price per share of a component is $3.40 (Lucent 
Technologies, Inc.), (c) the mean price per share of the components is 
$45.73, and (d) the median price per share of the components is $42.67; 
(iv) regarding component weightings, (a) the highest weighting of a 
component is 3.8% (General Electric Co.), (b) the lowest weighting of a 
component is 0.1% (Estee Lauder Co., Class A), (c) the mean weighting 
of the component is 0.4%, (d) the median weighting of the components is 
0.2%, and (e) the total weighting of the top five highest weighted 
components is 15.9% (General Electric Co., Exxon Mobil Corp., Pfizer, 
Inc., Citigroup, Inc., Microsoft Corp.); (v) regarding component 
available shares, (a) the most available shares of a component is 10.77 
billion shares (Microsoft Corp.), (b) the least available shares of a 
component is 118.91 million shares (M&T Bank Corp.), (c) the mean 
available shares of the components is 1.01 billion shares, and (d) the 
median available shares of the components is 455.63 million shares; 
(vi) regarding the six month average daily volumes of the components, 
(a) the highest six month average daily volume of a component is 64.6 
million shares (Lucent Technologies, Inc.), (b) the lowest six month 
average daily volume of a component is 514,230 shares (William Wrigley 
Jr., Co.), (c) the mean six month average daily volume of the 
components is 5.292 million shares, (d) the median six month average 
daily volume of the components is 2.81 million shares, (e) the average 
of six month average daily volumes of the five most heavily traded 
components is 57.56 million shares (Lucent Technologies, Inc., 
Microsoft Corp., Intel Corp., Cicso Systems, Inc. & Sun Microsystems, 
Inc.), and (f) 100% of the components had a six month average daily 
volume of at least 50,000; and (vii) regarding option eligibility, (a) 
99.2% of the components are options eligible, as measured by weighting, 
and (b) 97.2% of the components are options eligible, as measured by 
number.
ISE 100 Index
    The ISE 100 Index tracks the 100 most actively traded listed 
options classes on the Exchange. Components of the ISE 100 Index are 
selected based on the average daily volume of each options class over a 
six-month period on the Exchange. Its original selection pool includes 
all equity options listed on the Exchange, ranked by average daily 
volume over the previous six month period. Companies that do not meet 
component eligibility requirements are removed. The top 100 companies, 
ranked by average daily volume, are then selected, and the index is 
weighted by float-adjusted market capitalization.
    Similar to the ISE 250 Index, each component's eligibility and 
ranking in the ISE 100 Index is reviewed twice annually, in June and 
December of each calendar year. Any necessary component changes are 
made after the close on the third Friday of June and December, and 
become effective at the opening on the next trading day. Changes to the 
ISE 100 Index will be announced on ISE's publicly available website 
five trading days prior to the effective date.
    In addition to the scheduled reviews, the ISE 100 Index is reviewed 
on an ongoing basis to accommodate extraordinary events and corporate 
actions, such as delistings, bankruptcies, mergers or acquisitions 
involving index components.
    As set forth in Exhibit 3 to the proposal, as of June 11, 2004, 
following are the characteristics of the ISE 100 Index: (i) The total 
capitalization of all of the components in the Index is $5.36 trillion; 
(ii) regarding component capitalization, (a) the highest capitalization 
of a component is 328.14 billion (General Electric Co.), (b) the lowest 
capitalization of a component is $104.44 million (Genta, Inc.), (c) the 
mean capitalization of the components is $53.65 billion, and (d) the 
median capitalization of the components is $26.09 billion; (iii) 
regarding component price per share, (a) the highest price per share of 
a component is $93.01 (Goldman, Sachs Group, Inc.), (b) the lowest 
price per share of component is $2.27 (Genta, Inc.), (c) the mean price 
per share of the components is $36.94, and (d) the median price per 
share of the components is $31.59; (iv) regarding component weightings, 
(a) the highest weighting of a component is 6.1% (General Electric Co), 
(b) the lowest weighting of a component is 0.002% (Genta, Inc.), (c) 
the mean weighting of the components is 1.0%, (d) the median weighting 
of the components is 0.5%, and (e) the total weighting of the top five 
highest weighted components is 25.6% (General Electric Co., Exxon Mobil 
Corp., Pfizer, Inc., Citigroup, Inc., Microsoft Corp.); (v) regarding 
component available shares, (a) the most available shares of a 
component is 10.77 billion shares (Microsoft Corp.), (b) the least 
available shares of a component is 39.05 million shares (Osi 
Pharmaceuticals, Inc.), (c) the mean available shares of the components 
is 1.67 billion shares, and (d) the median available shares of the 
components is 924.04 million shares; (vi) regarding the six month 
average daily volumes of the components, (a) the highest six month 
average daily volume of a component is 64.6 million shares (Lucent 
Technologies, Inc.), (b) the lowest six month average daily volume of a 
component is 981,490 shares (Reynolds American, Inc.), (c) the mean six 
month average daily volume of the components is 11.58 million shares, 
(d) the median six month average daily volume of the components is 6.84 
million shares, (e) the average of six month average daily volumes of 
the five most heavily traded components is 60.08 million shares (Lucent 
Technologies, Inc., Microsoft Corp., Intel Corp., Sirius Satellite 
Radio, Inc. & Cisco Systems, Inc.), and (f) 100% of the components had 
a six month average daily volume of at least 50,000; (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.
ISE 50 Index
    The ISE 50 Index is a subset of the ISE 250 Index, such that the 
components of the ISE 50 Index consist of the top 50 components that 
make up the ISE 250 Index, as ranked by market capitalization. Thus, 
the criteria for inclusion into the ISE 50 Index, as well as the 
maintenance of the Index, are identical to those of the ISE 250 Index.
    As set forth in Exhibit 3 to the proposed as of June 11, 2004, 
following are the characteristics of the ISE 50 Index: (i) The total 
capitalization of all of the components in the Index is $5.18 trillion; 
(ii) regarding component capitalization, (a) the highest

[[Page 17487]]

capitalization of a component is $328.14 billion (General Electric, 
Co.), (b) the lowest capitalization of a component is $24.86 billion 
(Motorola, Inc.), (c) the mean capitalization of the components is 
$103.5 billion, and (d) the median capitalization of the components is 
$73.7 billion; (iii) regarding component price per share, (a) the 
highest price per share of a component is $93.01 (Goldman, Sachs Group, 
Inc.), (b) the lowest price per share of a components is $11.71 (Oracle 
Corp.) (c) the mean price per share of the components is $47.57, and 
(d) the median price per share of the components is $45.67; (iv) 
regarding components weightings, (a) the highest weighting of a 
component is 6.3% (General Electric Co.), (b) the lowest weighting of a 
component is 0.5% (Goldman, Sachs Group, Inc.), (c) the mean weighting 
of the components is 2.0%, (d) the median weighting of the components 
is 1.4% and (e) the total weighting of the top five highest weighted 
components is 26.5% (General Electric Co., Exxon Mobil Corp., Pfizer, 
Inc., Citigroup Inc., Microsoft Corp.); (v) regarding component 
available shares, (a) the most available shares of a components is 
10.77 billion shares (Microsoft Corp.), (b) the least available shares 
of a components is 480.65 million shares (Goldman, Sachs Group, Inc.), 
(c) the mean available shares of the components is 2.74 billion shares, 
and (d) the median available shares of the components is 1.97 billion 
shares; (vi) regarding the six month average daily volumes of the 
components, (a) the highest six month average daily volume of a 
component is 62.59 million shares (Microsoft Corp.), (b) the lowest six 
month average daily volume of a component is 2.38 million shares 
(ConocoPhillips), (c) the mean six month average daily volume of the 
components is 11.63 million shares, (d) the median six month average 
daily volume of the components is 6.64 million shares, (e) the average 
of six month average daily volumes of the five most heavily traded 
components is 49.40 million shares (Microsoft Corp., Intel Corp., Cisco 
Systems, Inc., Oracle Corp. & General Electric, Co.), and (f) 100% of 
the components had a six month average daily volume of at least 50,000; 
(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
    The base index level of the ISE 250 Index, the ISE 100 Index, and 
the ISE 50 Index, as of December 31, 1998, was 250, 100 and 200, 
respectively. On January 3, 2005, the index level of the ISE 250 Index, 
the ISE 100 Index and the ISE 50 Index was 227.48, 86.32, and 156.98, 
respectively. the Exchange proposes to base trading in options on both 
full-size ISE Indexes and on fractions of Full-size ISE Indexes. In 
particular, the Exchange proposes to list options on Mini ISE Indexes 
that are based on one tenth of the value of full-size ISE Indexes. The 
Exchange believes that listing options on reduced values will attract a 
greater source of customer business than if options were based only on 
the full value of the ISE Indexes. 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 ISE Indexes. Additionally, by reducing the 
values of the ISE Indexes, investors will 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.\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-2003-4) (approving the listing and 
trading of options based on one-tenth of the value of the NYSE 
Composite Index).
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    The Full-size ISE Indexes' and the Mini ISE Indexes' level shall 
each be calculated continuously, using the last sale price for each 
component stock in the ISE Indexes, and shall be disseminated every 15 
seconds throughout the trading day.\9\ To calculate the value of the 
Full-size ISE Indexes, the sum of the market value of the stocks in 
this ISE Indexes is divided by the base period market value (divisor). 
To calculate the value of the Mini ISE Indexes, the full value of the 
ISE Indexes is divided by ten. In order to provide continuity for the 
ISE 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 ISE Index levels shall be calculated by S&P, on behalf 
of the Exchange, and disseminated to the Options Price Reporting 
Authority (``OPRA'') by the Exchange. The Exchange shall also 
disseminate these values to its members. The ISE Indexes will be 
published daily on the Exchange's publicly available website and 
through major quotation vendors, such as Reuters.
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    The settlement values for purposes of settling both Full-size ISE 
Indexes (``Full-size Settlement Value'') and Mini ISE Indexes (``Mini 
Settlement Value'') shall 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 a component 
security in the ISE Indexes does not trade on Settlement Day, the 
closing price from the previous trading day will be used to calculate 
both Full-size Settlement Value and Mini Settlement Value. Accordingly, 
trading in the ISE Indexes will normally cease on the Thursday 
preceding an Expiration Saturday. S&P shall calculate and the Exchange 
shall disseminate, both Full-size Settlement Value and Mini Settlement 
Value in the same manner as S&P shall calculate, and the Exchange shall 
disseminate, both Full-Size ISE Indexes' and Mini ISE Indexes' 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 ISE Indexes 
will expire on the third Saturday of the month.
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    S&P will monitor and maintain the ISE Indexes pursuant to ISE's 
methodology and instructions. S&P is responsible for making all 
necessary adjustments to the ISE 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. The number of common 
shares outstanding for each component stock will be reviewed every 
Friday. Share changes of less than 5% will be updated on a quarterly 
basis, becoming effective after the close on the third Friday of March, 
June, September and December of each calendar year. The index divisor 
is adjusted at that time to compensate for the share changes. Share 
changes greater than 5% will be adjusted after the close on the 
Wednesday of the following week. The index divisor change also becomes 
effective after the close on that day. Changes will be announced on the 
Exchange's publicly available website prior to the effective date. 
Unscheduled share changes due to corporate actions

[[Page 17488]]

may be processed the same day they are announced, depending on the time 
the details are received by S&P. In such cases, the index divisor 
changes may become effective that same day and immediately announced on 
the Exchange's publicly available website.
    The eligibility of each component of the ISE Indexes will be 
reviewed in June and December of each calendar year. Components that 
fail to meet the eligibility requirements are replaced with new 
component companies. Component changes may also occur between review 
periods if a specific corporate action makes an existing component 
ineligible. The Exchange maintains a Component Replacement Pool 
(``CRP'') for the ISE Indexes at all times for contingency purposes. 
The CRP contains at least ten companies that meet the eligibility 
requirements for the ISE Indexes, ranked by market capitalization for 
the ISE 250 Index and the ISE 50 Index, and six-month average trading 
volume for the ISE 100 Index. Components removed from the ISE Indexes 
are replaced with those from the CRP. Component changes are made after 
the close on the third Friday of June and December of each calendar 
year, and become effective at the opening on the next trading day. All 
such changes will be announced on the Exchange's publicly available 
website at least five trading days prior to the effective date.
    The Exchange represents that the ISE Indexes currently satisfy the 
maintenance criteria and further states that it will monitor and 
maintain the ISE Indexes on a quarterly basis, at which point the 
Exchange will notify the Market Regulation Division of the Commission 
if: (i) The number of securities in the ISE Indexes drops by \1/3\ or 
more; (ii) 10% or more of the weight of 262 the ISE Indexes is 
represented by component securities having a market value of less than 
$75 million; (iii) less than 80% of the weight of the ISE 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 the 
ISE 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 the ISE Indexes or the largest five 
components in the aggregate account for more than 40% of the weight of 
the ISE Indexes: \12\ In the event the Indexes fail at any time to 
satisfy the maintenance criteria, the ISE will not open for trading any 
additional series of options on the Indexes unless such failure is 
determined by the Exchange not to he significant and the Commission 
concurs in that determination, or unless the continued listing of 
options on each respective Index has been approved by the Commission 
under Section 19(b)(2) of the Exchange Act.\13\
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    \12\ The timeframe for monitoring the ISE Indexes was changed 
from an annual to a quarterly basis. Telephone conversation between 
Samir Patel, Assistant General Counsel, ISE, and Mia Zur, Attorney, 
Division of Market Regulation (``Division''), Commission (March 22, 
2005).
    \13\ Telephone conversation between Samir Patel, Assistant 
General Counsel, ISE, and MIA Zur, Attorney, Division, Commission 
(March 22, 2005).
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Contract Specifications
    The contract specifications for options on the ISE Indexes are set 
forth in Exhibit 3 to the proposal. The ISE Indexes are each broad-
based indexes, as defined in ISE Rule 2001(j).\14\ Options on the ISE 
indexes as 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 ISE Rule 2008(a), will apply to the ISE 
Indexes. Exchange rules that are applicable to the trading of options 
on broad-based indexes will apply to both Full-size ISE Indexes and 
Mini ISE indexes.\15\ Specifically, the trading of Full-size ISE 
Indexes and Mini ISE Indexes will be subject to, among others, Exchange 
rules governing margin requirements and trading halt procedures for 
index options.
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    \14\ 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.
    \15\ See ISE Rules 2000 through 2012.
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    For each of the Full-size ISE Indexes, the Exchange proposes to 
establish aggregate position and exercise limits 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. For position and 
exercise limit purposes, Full-size ISE Indexes contracts shall be 
aggregated with Mini ISE Indexes contracts, where ten (10) Mini ISE 
Indexes contracts equal one (1) Full-size ISE Index contract.
    The Exchange proposes to apply index margin requirements for the 
purchase and sale of options on the ISE 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 ISE Indexes is at a level below 200, and 5 point 
strike price intervals for other options series with expirations up to 
one year, and 10 point strike price intervals for longer-term options. 
The minimum tick size 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 options on the ISE Indexes 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, 
longer-term option series (``LEAPS'') having up to thirty-six (36) 
months to expiration may be traded.\17\ The interval between expiration 
months on the ISE Indexes shall not be less than six months. The 
trading of any long-term ISE Indexes 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). LEAPS will be available on the 
Full and Reduced Value ISE Indexes. However, the Exchange is not 
listing reduced value LEAPS on the Reduced Value ISE Indexes 
pursuant to ISE Rule 2009(b)(2). Telephone conversation between 
Samir Patel, Assistant General Counsel, ISE, and Mia Zur, Attorney, 
Division, Commission (March 11, 2005).
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Surveillance and Capacity
    The Exchange represents that it has an adequate surveillance 
program in place for options traded on the ISE 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 
Amex, the Boston Stock Exchange, Inc. (``BSE''), the Chicago Board 
Options Exchange (``CBOE''), the Chicago Stock Exchange, Inc. 
(``CSE''), the National Stock Exchange, Inc. (``NSE''), the NASD, the 
NYSE, the Pacific Stock Exchange, Inc. (``PSE'') and the Philadelphia 
Stock Exchange, Inc. (``PHLX''). The ISG members work together to 
coordinate surveillance and investigative

[[Page 17489]]

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 that will result from the introduction 
of both Full-size ISE Index and Mini ISE Indexes.
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 options trading in Full-size ISE Indexes and Mini ISE Indexes 
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 member 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 organizations 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 No. SR-ISE-2004-28 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-2004-28. 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 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-2004-28 and should be submitted by April 27, 2005.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 05-6743 Filed 4-5-05; 8:45 am]
BILLING CODE 8010-01-M