[Federal Register Volume 70, Number 84 (Tuesday, May 3, 2005)]
[Notices]
[Pages 22947-22952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2114]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51619; File No. SR-ISE-2005-09]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the International Securities Exchange, Inc. To 
List and Trade Options on Various Russell Indexes

April 27, 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 February 1, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. On March 18, 2005, the Exchange filed Amendment No. 1 
to the proposed rule change.\3\ On April 22, 2005, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule change, as amended, from interested persons and to approve the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 made clarifications to the Purpose section 
and included rule text that was inadvertently left out of the 
original filing.
    \4\ Amendment No. 2 made clarifications to the Purpose section.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    ISE is proposing to amend its rules to list and trade new options 
on various Russell Indexes. The text of the proposed rule change is 
available on ISE's Web site (http://www.iseoptions.com), at ISE's 
principal office, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to amend its rules to list and trade on the 
Exchange cash-settled, European-style index options on the full and 
reduced values of each of the following Russell Indexes:
     Russell 3000 Index.
     Russell 3000 Value Index.
     Russell 3000 Growth Index.
     Russell 2500 Index.
     Russell 2500 Value Index.
     Russell 2500 Growth Index.
     Russell 2000 Index.
     Russell 2000 Value Index.
     Russell 2000 Growth Index.
     Russell 1000 Index.
     Russell 1000 Value Index.
     Russell 1000 Growth Index.
     Russell Top 200 Index.
     Russell Top 200 Value Index.
     Russell Top 200 Growth Index.
     Russell MidCap Index.
     Russell MidCap Value Index.
     Russell MidCap Growth Index.
     Russell Small Cap Completeness Index.
     Russell Small Cap Completeness Value Index.
     Russell Small Cap Completeness Growth Index
    Specifically, the Exchange proposes to list options based upon (i) 
full values of the Russell Indexes (``Full Value Russell Indexes'') and 
(ii) one-tenth values of the Russell Indexes (``Reduced Value Russell 
Indexes''). Each of these Russell Indexes is a capitalization-weighted 
index containing various groups of stocks drawn from the largest 3,000 
companies incorporated in the United States. All index components are 
traded on the New York Stock Exchange (``NYSE''), the American Stock 
Exchange (``Amex''), and/or the Nasdaq Stock Market. Options on all of 
the indexes, except for the Russell 2500 Index (regular, value, and 
growth) and the Russell Small Cap Completeness Index (regular, value, 
and growth), currently trade on the Chicago Board Options Exchange 
(``CBOE'').\5\ The Exchange also is proposing to be able to list and 
trade long-term options on each of the Full Value Russell Indexes noted 
above (``Russell LEAPS'').\6\
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    \5\ See Securities Exchange Act Release No. 49388 (March 10, 
2004), 69 FR 12720 (March 17, 2004) (approving listing and trading 
on CBOE of options, including LEAPS, on the Russell Top 200 Index, 
Russell Top 200 Growth Index, and the Russell Top 200 Value Index); 
Securities Exchange Act Release No. 48591 (October 2, 2003), 68 FR 
58728 (October 10, 2003) (approving listing and trading on CBOE of 
options, including LEAPS, on the Russell 3000 Index, Russell 3000 
Value Index, Russell 3000 Growth Index, Russell 2000 Value Index, 
Russell 2000 Growth Index, Russell 1000 Index, Russell 1000 Value 
Index, Russell 1000 Growth Index, Russell MidCap Index, Russell 
MidCap Value Index, and Russell MidCap Growth Index); Securities 
Exchange Act Release No. 31382 (October 30, 1992), 57 FR 52802 
(November 5, 1992) (approving listing and trading on CBOE of 
options, including LEAPS, on the Russell 2000 Index).
    \6\ Under ISE Rule 2009(b), ``Long-Term Index Options Series,'' 
the Exchange may list long-term options that expire from 12 to 60 
months from the date of issuance.
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Index Design and Composition

    The Russell Indexes are designed to be a comprehensive 
representation of the investable U.S. equity market. These indexes are 
capitalization-weighted and include only common stocks belonging to 
corporations domiciled in the United States are traded on NYSE, Nasdaq, 
or Amex. Stocks are weighted by their ``available'' market 
capitalization, which is calculated by multiplying the primary market 
price by the ``available'' shares; that is, total shares outstanding 
less

[[Page 22948]]

corporate cross-owned shares; shares owned by Employee Stock Ownership 
Plans (``ESOPs'') and Leveraged Employee Stock Ownership Plans 
(``LESOPs'') that comprise 10% or more of shares outstanding; shares 
that are part of unlisted share classes; and shares held by an 
individual, a group of individuals acting together, or a corporation 
not in the index that owns 10% or more of the shares outstanding. Below 
is a brief description of each index:\7\
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    \7\ Additional information about the Russell Indexes can also be 
found at http://www.russell.com/us/indexes/us/definitions.asp.
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     Russell 3000 Index--Measures the performance of the 3,000 
largest U.S. companies based on total market capitalization, 
representing approximately 98% of the investable U.S. equity market.
     Russell 1000 Index--Measures the performance of the 1,000 
largest U.S. companies based on total market capitalization, 
representing approximately 92% of the investable U.S. equity market.
     Russell Top 200 Index--Measures the performance of the 200 
largest companies in the Russell 1000 Index, representing approximately 
74% of the total market capitalization of the Russell 1000 Index.
     Russell 2000 Index--Measures the performance of the 2,000 
smallest companies in the Russell 3000 Index, representing 
approximately 8% of the investable U.S. equity market.
     Russell 2500 Index--Measures the performance of the 2,500 
smallest companies in the Russell 3000 Index, representing 
approximately 16% of the investable U.S. equity market.
     Russell 3000 Value Index--Measures the performance of 
those Russell 3000 companies with lower price-to-book ratios and lower 
forecasted growth values. Each stock in this index is also a member of 
either the Russell 2500 Growth, Russell 2000 Growth, or the Russell 
1000 Growth Index.
     Russell 3000 Growth Index--Measures the performance of 
those Russell 3000 companies with higher price-to-book ratios and 
higher forecasted growth values. Each stock in this index is also a 
member of either the Russell 2500 Growth, Russell 2000 Growth, or the 
Russell 1000 Growth Index.
     Russell 2500 Value Index--Measures the performance of 
those Russell 2500 companies with lower price-to-book ratios and lower 
forecasted growth values.
     Russell 2500 Growth Index--Measures the performance of 
those Russell 2500 companies with higher price-to-book ratios and 
higher forecasted growth values.
     Russell 2000 Value Index--Measures the performance of 
those Russell 2000 companies with lower price-to-book ratios and lower 
forecasted growth values.
     Russell 2000 Growth Index--Measures the performance of 
those Russell 2000 companies with higher price-to-book ratios and 
higher forecasted growth values.
     Russell 1000 Value Index--Measures the performance of 
those Russell 1000 companies with lower price-to-book ratios and lower 
forecasted growth values.
     Russell 1000 Growth Index--Measures the performance of 
those Russell 1000 companies with higher price-to-book ratios and 
higher forecasted growth values.
     Russell Top 200 Value Index--Measures the performance of 
those Russell Top 200 companies with lower price-to-book ratios and 
lower forecasted growth values. Each stock in this index is also a 
member of the Russell 1000 Growth Index.
     Russell Top 200 Growth Index--Measures the performance of 
those Russell Top 200 companies with higher price-to-book ratios and 
higher forecasted growth values. Each stock in this index is also a 
member of the Russell 1000 Growth Index.
     Russell MidCap Index--Measures the performance of the 800 
smallest companies in the Russell 1000 Index, representing 
approximately 26% of the total market capitalization of the Russell 
1000 Index.
     Russell MidCap Value Index--Measures the performance of 
those Russell Midcap companies with lower price-to-book ratios and 
lower forecasted growth values. Each stock in this index is also a 
member of the Russell 1000 Growth Index.
     Russell MidCap Growth Index--Measures the performance of 
those Russell Midcap companies with higher price-to-book ratios and 
higher forecasted growth values. Each stock in this index is also a 
member of the Russell 1000 Growth Index.
     Russell Small Cap Completeness Index--Measures the 
performance of the companies in the Russell 3000 Index excluding the 
companies in the Standard & Poor's 500 Index.
     Russell Small Cap Completeness Value Index--Measures the 
performance of those Russell Small Cap Completeness companies with 
lower price-to-book ratios and lower forecasted growth values.
     Russell Small Cap Completeness Growth Index--Measures the 
performance of those Russell Small Cap Completeness companies with 
higher price-to-book ratios and higher forecasted growth values.
    All equity securities listed on NYSE, Amex, or Nasdaq are 
considered for inclusion in the Russell Indexes, with the following 
exceptions: (1) Stocks trading less than $1.00 per share on May 31 of 
each year, (2) stocks of non-U.S. companies, (3) preferred and 
convertible preferred stocks, (4) redeemable shares, (5) participating 
preferred stocks, (6) warrants and rights, (7) trust receipts, (8) 
royalty trusts, (9) limited liability companies, (10) Bulletin Board 
and Pink Sheet stocks, (11) closed-end investment companies, (12) 
limited partnerships, and (13) foreign stocks. The Russell 3000 Index 
is made up of the top 3,000 eligible stocks ranked by available market 
capitalization. All of these stocks are ``reported securities'' as 
defined by Rule 11Aa3-1(a)(4) under the Act.\8\
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    \8\ 17 CFR 240.11Aa3-1(a)(4).
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    All of the Russell Indexes described above are subsets of the 
Russell 3000 Index. The growth and value versions of each primary index 
(Russell 3000, Russell 2500, Russell 2000, Russell 1000, Russell Top 
200, Russell Midcap, and Russell Small Cap Completeness) may contain 
common components, but the capitalization of those components is 
apportioned so that the sum of the total capitalization of the growth 
and value indexes equals the total capitalization of the respective 
primary index.
    As of November 30, 2004, the stocks comprising the Russell 3000 
Index had an average market capitalization of $4.69 billion, ranging 
from a high of $474.20 billion (General Electric Co.) to a low of 
$40.26 million (Tripath Technology). The number of available shares 
outstanding averaged 132.56 million, ranging from a high of 10.55 
billion (General Electric Co.) to a low of 354,000 (Seaboard Corp.). 
The six-month average daily trading volume for Russell 3000 Index 
components was 955,069, ranging from a high of 67.5 million shares per 
day (Intel Corp.) to a low of 1,113 shares per day (Seaboard Corp.). 
Stocks that averaged less than 50,000 shares per day for the previous 
six months accounted for 0.98% of the index weight of the Russell 3000 
Index. Additionally, over 63% of Russell 3000 Index components have 
options listed on them, representing over 95% of the index weight.
    The Russell Indexes themselves range in capitalization from a high 
of $14 trillion (Russell 3000) to a low of

[[Page 22949]]

$895.82 billion (Russell 2000 Growth). The number of index components 
range from a high of 2985 (Russell 3000) to a low of 135 (Russell Top 
200 Value).

Index Calculation and Index Maintenance

    The value of each Russell Index is currently calculated by Reuters 
on behalf of the Frank Russell Company and is disseminated every 15 
seconds during regular ISE trading hours to market information vendors 
via the Options Price Reporting Authority (``OPRA'').
    The methodology used to calculate the value of the Russell Indexes 
is similar to the methodology used to calculate the value of other well 
known market-capitalization-weighted indexes. The level of each index 
reflects the total market value of the component stocks relative to a 
particular base period and is computed by dividing the total market 
value of the companies in each index by the respective index divisor. 
The divisor is adjusted periodically to maintain consistent measurement 
of the index. Below is a table of base dates and the respective index 
levels as of November 30, 2004:

------------------------------------------------------------------------
                                Base date/base index      November 30,
            Index                       value           2004 index value
------------------------------------------------------------------------
Russell 3000 Index..........        12/31/86 = 140.00             670.84
Russell 2500 Index..........        12/31/90 = 100.00             229.65
Russell 2000 Index..........        12/31/86 = 135.00             633.77
Russell 1000 Index..........        12/31/86 = 130.00             629.26
Russell Top 200 Index.......         3/16/00 = 400.00             285.76
Russell Midcap Index........        12/31/86 = 200.00             755.57
Russell Smallcap                   3/31/99 = 1,000.00             569.68
 Completeness Index.........
Russell 3000 Growth Index...         3/16/00 = 700.00             385.68
Russell 3000 Value Index....         3/16/00 = 700.00             838.54
Russell 2500 Growth Index...       5/31/95 = 1,000.00             217.86
Russell 2500 Value Index....       5/31/95 = 1,000.00             240.08
Russell 2000 Growth Index...         3/16/00 = 500.00             326.84
Russell 2000 Value Index....         3/16/00 = 500.00             940.02
Russell 1000 Growth Index...         8/31/92 = 200.00             475.18
Russell 1000 Value Index....         8/31/92 = 200.00             637.05
Russell Top 200 Growth Index         3/16/00 = 400.00             208.37
Russell Top 200 Value Index.         3/16/00 = 400.00             394.01
Russell Midcap Growth Index.         3/16/00 = 500.00             320.77
Russell Midcap Value Index..         3/16/00 = 500.00             836.65
Russell Smallcap                   3/31/99 = 1,000.00             544.26
 Completeness Growth Index..
Russell Smallcap                   3/31/99 = 1,000.00             595.93
 Completeness Value Index...
------------------------------------------------------------------------

    In recent years, the value of the Russell Indexes has increased 
significantly. As a result, the premium for options on the Full Value 
Russell Indexes has also increased, causing these index options to 
trade at a level that may be uncomfortably high for retail investors. 
Therefore, the Exchange also proposes to trade options on the Reduced 
Value Russell Indexes. The Exchange believes that listing options on 
the reduced-value indexes would attract a greater source of customer 
business than if options were based only on the Full Value Russell 
Indexes. The Exchange further believes that listing options on the 
reduced-value indexes would provide an opportunity for investors to 
hedge, or speculate on, the market risk associated with the stocks 
comprising the Russell Indexes and 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.\9\
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    \9\ The Exchange believes that reduced-value options on the 
Russell Indexes have generated considerable interest from investors, 
as measured by their robust trading volume on CBOE.
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    Options on the Russell Indexes would expire on the Saturday 
following the third Friday of the expiration month. Trading in options 
on the Russell Indexes would normally cease at 4:15 p.m. ET on the 
Thursday preceding an expiration Saturday. The exercise settlement 
value at expiration of each new index option would be calculated by 
Reuters on behalf of the Frank Russell Company, based on the opening 
prices of the index's component securities on the last business day 
prior to expiration (``Settlement Day'').\10\ The Settlement Day is 
normally the Friday preceding ``Expiration Saturday.'' If a component 
security in a Russell Index does not trade on Settlement Day, the last 
reported sales price in the primary market from the previous trading 
day would be used to calculate both full and reduced settlement values. 
Settlement values for the Full and Reduced Value Russell Indexes would 
be disseminated by OPRA.
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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.
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    The Russell Indexes are monitored and maintained by the Frank 
Russell Company. The Frank Russell Company is responsible for making 
all necessary adjustments to the indexes to reflect component 
deletions, share changes, stock splits, stock dividends (other than 
ordinary cash dividends), 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 an index 
and require the use of an index divisor to effect adjustments.
    The Russell Indexes are re-constituted annually on June 30, based 
on prices and available shares outstanding as of the preceding May 31. 
New index components are added only as part of the annual re-
constitution, after which, should a stock be removed from an index for 
any reason, it could not be replaced until the next re-constitution.
    The Exchange represents that, although it is not involved in the 
maintenance of any of the Russell Indexes, it would monitor each 
Russell Index on a quarterly basis and notify the Commission's Division 
of Market Regulation (``Division'') by filing a proposed rule change 
pursuant to Rule

[[Page 22950]]

19b-4 if: (i) The number of securities in any index drops by one-third 
or more; (ii) 10% or more of the weight of any index is represented by 
component securities having a market value of less than $75 million; 
(iii) less than 80% of the weight of any index is represented by 
component securities that are eligible for options trading pursuant to 
ISE Rule 502; (iv) 10% or more of the weight of any index is 
represented by component securities trading less than 20,000 shares per 
day; or (v) the largest component security in any index accounts for 
more than 15% of the weight of the index, or the largest five 
components in the aggregate account for more than 50% of the weight of 
the index.
    The Exchange also would notify the Division immediately if the 
Frank Russell Company ceases to maintain and calculate any of the 
Russell Indexes on which ISE is proposing to list and trade options, or 
if the value of any of these Russell Indexes is not disseminated every 
15 seconds by a widely available source. If a Russell Index ceases to 
be maintained or calculated, or its values are not disseminated every 
15 seconds by a widely available source, the Exchange would not list 
any additional series for trading and would limit all transactions in 
options on that index to closing transactions only for the purpose of 
maintaining a fair and orderly market and protecting investors.

Contract Specifications

    The proposed contract specifications for the options on the Russell 
Indexes are based on the contract specifications of similar options 
currently listed on CBOE.\11\ The Russell Indexes are broad-based 
indexes, as defined in ISE Rule 2001(j). Options on the Russell Indexes 
would be 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. e.s.t.), as set 
forth in ISE Rule 2008(a), would apply to options on the Russell 
Indexes. Exchange rules that apply to the trading of options on broad-
based indexes also would apply to options on both the Full and Reduced 
Value Russell Indexes.\12\ The trading of these options also would be 
subject to, among others, Exchange rules governing margin requirements 
and trading halt procedures for index options.
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    \11\ See supra note 5.
    \12\ See ISE Rules 2000 through 2012.
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    For options on the Full Value Russell Indexes, the Exchange 
proposes to establish an aggregate position limit of 50,000 contracts 
on the same side of the market, provided that no more than 30,000 of 
such contracts are in the nearest expiration month series.\13\ Full 
Value Russell Index contracts would be aggregated with Reduced Value 
Russell Index contracts, where ten Reduced Value Russell Index 
contracts would equal one Full Value Russell Index contract. These 
limits are identical to the limits applicable to options based on the 
Russell Indexes that currently trade on CBOE.\14\
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    \13\ The same limits that apply to position limits would apply 
to exercise limits for these products.
    \14\ See CBOE Rule 24.4(e).
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    However, as ISE noted in Amendment No. 2, CBOE currently does not 
list and trade options on certain Russell Indexes--the Russell 2500 
family of indexes and the Russell Small Cap Completeness family of 
indexes--on which ISE is now proposing to list and trade options. The 
Exchange believes that the proposed position and exercise limits for 
the Russell 2500 Indexes are appropriate because those indexes contain 
more components of the Russell 3000 Index than the Russell 2000 Indexes 
contain. For example, the Russell 2500 Index and the Russell 2000 Index 
are made up of the smallest 2500 components and 2000 components of the 
Russell 3000 Index, respectively. Since the Russell 2000 Indexes 
already have position and exercise limits of 50,000 contracts, with no 
more than 30,000 contracts for the near term, the Exchange believes 
that the Russell 2500 Indexes should have the same position and 
exercise limits as the Russell 2000 Indexes.
    Similarly, the Exchange believes that the proposed position and 
exercise limits for the Russell Small Cap Completeness Indexes are 
appropriate because the Russell 2500 Index and the Russell Small Cap 
Completeness Index share a similar number of components. The Russell 
2500 Index is comprised of the smallest 2500 components of the Russell 
3000 Index, and the Russell Small Cap Completeness Index is comprised 
of the Russell 3000 Index components, minus the S&P 500 Index 
components. Accordingly, the Exchange is proposing the same position 
and exercise limits for the Russell Small Cap Completeness family of 
indexes as it is for the Russell 2500 family of indexes.
    Additionally, under ISE Rule 2006, an index option hedge exemption 
for public customers may be available, which could expand the position 
limit for the proposed options up to an additional 75,000 
contracts.\15\ Furthermore, proprietary accounts of member 
organizations could receive an exemption of up to 100,000 contracts for 
the purpose of facilitating public customer orders, to the extent they 
comply with procedures and criteria listed in ISE Rule 413(c).
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    \15\ See Securities Exchange Act Release No. 51121 (February 1, 
2005), 70 FR 6476 (February 7, 2005) (approving amendment to ISE 
Rule 2006 to allow for a broad-based index option hedge exemption of 
75,000 contracts).
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    The Exchange proposes to apply broad-based index margin 
requirements for the purchase and sale of options on the Russell 
Indexes. Accordingly, purchases of put or call options with nine months 
or less until expiration would have to be paid for in full. Writers of 
uncovered put or call options would have to 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 a strike price interval of at least 
2\1/2\ points for a near-the-money series in a near-term expiration 
month when the level of a Russell Index is below 200, a 5-point strike 
price interval for any options series with an expiration up to one 
year, and at least a 10-point strike price interval for any longer-term 
option. The minimum tick size for series trading below $3 would be 
$0.05, and for series trading at or above $3 would be $0.10.
    The Exchange proposes to list options on the Full and Reduced Value 
Russell 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, long-term option series having up to 60 months to expiration 
may be traded.\17\ The trading of long-term options on the Russell 
Indexes would be subject to the same rules that govern all the 
Exchange's index options, including sales practice rules, margin 
requirements, and trading rules.
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    \16\ See ISE Rule 2009(a)(3).
    \17\ See ISE Rule 2009(b)(1). The Exchange is not proposing to 
list reduced-value LEAPS on the Russell Indexes.
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    All of the specifications and calculations for options on the 
Reduced Value Russell Indexes would be the same as those used for the 
Full Value Russell Indexes. The reduced-value options would trade 
independently of, and in addition to, the full-value options, and 
options on all the Russell Indexes would be subject to the same rules 
that presently govern all Exchange

[[Page 22951]]

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 on the Russell Indexes and intends to 
apply those same 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 national securities exchanges, plus NASD. The 
ISG members work together to coordinate surveillance and share 
information regarding 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 also represents that it has the necessary systems 
capacity to support the new options series that would result from the 
introduction of options on the Full and Reduced Value Russell Indexes, 
including LEAPS on the Full Value Russell Indexes. The Exchange has 
provided the Commission with system capacity information to support 
this representation.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \18\ in general, and with Section 6(b)(5) in 
particular,\19\ in that it would permit the trading of options on the 
Full and Reduced Value Russell Indexes pursuant to rules designed to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade.
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    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

III. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-ISE-2005-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-ISE-2005-09. 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 ISE. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ISE-2005-09 
and should be submitted on or before May 24, 2005.

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

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\20\ In particular, the Commission believes that the proposal 
is consistent with Section 6(b)(5) of the Act,\21\ which requires that 
the rules of an exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and in general 
to protect investors and the public interest.
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    \20\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that it previously has found that the listing 
and trading on CBOE of options on most of the Russell Indexes described 
above, and CBOE's position and exercise limits associated with those 
options, are consistent with the Act. ISE has proposed substantially 
the same contract specifications for these options, as well as 
identical position and exercise limits for those options. The 
Commission presently is not aware of any issue that would cause it to 
revisit those earlier findings or preclude the listing and trading of 
these options on ISE.
    ISE also has proposed to list and trade new options on the Russell 
2500 Index, Russell 2500 Value Index, Russell 2500 Growth Index, 
Russell Small Cap Completeness Index, Russell Small Cap Completeness 
Value Index, and Russell Small Cap Completeness Growth Index--options 
that have not previously been approved by the Commission for listing 
and trading on any national securities exchange. The Commission 
believes that the composition of these indexes and the characteristics 
of ISE's proposed options on these indexes will minimize the potential 
for manipulation, and that listing and trading them on ISE is 
reasonable and consistent with the Act. As noted above, the Russell 
Indexes generally, and these Russell Indexes in particular, are 
designed to represent broad segments of the U.S. equity securities 
markets. As the indexes are capitalization-weighted rather than price-
weighted, the index values should be more difficult to manipulate. 
Furthermore, ISE has represented that it would notify the Commission 
if: (1) The number of securities in any index drops by one-third or 
more; (2) 10% or more of the weight of any index is represented by 
component securities having a market value of less than $75 million; 
(3) less than 80% of the weight of any index is

[[Page 22952]]

represented by component securities that are eligible for options 
trading pursuant to ISE Rule 502; (4) 10% or more of the weight of any 
index is represented by component securities trading less than 20,000 
shares per day; or (5) the largest component security accounts for more 
than 15% of the weight of any index or the largest five components in 
the aggregate account for more than 50% of the weight of the index.
    The Commission also believes that the position and exercise limits 
for these new Russell Index options, including the index hedge 
exemption from such position limits, are reasonable and consistent with 
the Act. These limits are modeled on existing position and exercise 
limits for options on very similar Russell Indexes that previously have 
been approved by the Commission.
    In approving this proposal, the Commission has specifically relied 
on the following representations made by the Exchange:
    1. The Exchange will notify the Division immediately if the Frank 
Russell Company ceases to maintain and calculate any Russell Index on 
which an ISE option is based, or if the value of any such Russell Index 
is not disseminated every 15 seconds by a widely available source. If a 
Russell Index ceases to be maintained or calculated, or its values are 
not disseminated every 15 seconds by a widely available source, the 
Exchange will not list any additional series on that index and will 
limit all transactions in such options to closing transactions only for 
the purpose of maintaining a fair and orderly market and protecting 
investors.
    2. The Exchange has an adequate surveillance program in place for 
the proposed options on the Russell Indexes.
    3. The additional quote and message traffic that will be generated 
by listing and trading the proposed options on the Russell Indexes, 
including LEAPS on the Full Value Russell Indexes, will not exceed the 
Exchange's current message capacity allocated by the Independent System 
Capacity Advisor.
    The Commission further notes that, in approving this proposal, it 
relied on the Exchange's discussion of how the Frank Russell Company 
currently calculates the Russell Indexes. If the manner in which any 
Russell Index is calculated were to change substantially, this approval 
order, with respect to any ISE options on that index, might no longer 
be effective.
    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. Most of the proposed options on the Russell Indexes 
already have been approved for listing and trading on another exchange 
and are governed by contract specifications that are substantially the 
same as those proposed by ISE. The new options proposed by ISE will be 
governed by contract specifications that are substantially the same as 
those that govern the similar existing products. Therefore, 
accelerating approval of ISE's proposal should benefit investors by 
creating, without undue delay, additional competition in the market for 
the existing options, as well as an additional investment opportunity 
with regard to the new options.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change, as amended (SR-ISE-2005-09), is 
hereby approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2114 Filed 5-2-05; 8:45 am]
BILLING CODE 8010-01-P