[Federal Register Volume 70, Number 91 (Thursday, May 12, 2005)]
[Notices]
[Page 25132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2350]
[[Page 25132]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51663; File No. SR-ISE-2004-40]
Self-Regulatory Organizations; International Securities Exchange,
Inc.; Order Granting Approval to Proposed Rule Change and Amendment
Nos. 1, 2, and 3 Thereto Relating to Procedures for the Allocation of
Options on Index-Based Products
May 6, 2005.
I. Introduction
On December 14, 2004, the International Securities Exchange, Inc.
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend ISE Rule 802 to add
criteria for allocating options based on indices and fund shares
(``Index-based Products'') to Primary Market Makers and Competitive
Market Makers. 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 proposed rule
change, as amended, was published for comment in the Federal Register
on April 5, 2005.\6\ The Commission received no comments on the
proposal, as amended. This order approves the proposed rule change, as
amended.
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\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'').
\6\ See Securities Exchange Act Release No. 51443 (March 29,
2005), 70 FR 17279.
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II. Description of the Proposal
The ISE proposes to amend ISE Rule 802 to (a) specify that the
ISE's Board or a designated committee of the Board is required to make
market maker appointments in the best interest of the Exchange to
provide competitive markets, and (b) add criteria for allocating Index-
based Products to Primary Market Makers and Competitive Market Makers.
Specifically, with respect to the criteria for Index-based Products,
the Exchange proposes to require a Primary Market Maker who seeks an
allocation of an Index-based Product to provide specific quotation
spread and size commitments for the first year of listing. These
commitments would remain in effect, unless a change is approved by the
ISE Board or a designated committee of the Board upon the request of
the Primary Market Maker. In addition, under the proposal, a Primary
Market Maker may, but would not be required to, provide commitments
regarding marketing or other support with respect to the Index-based
Product, including information regarding order flow arrangements with
order flow providers. Finally, the ISE represented that the proposed
amendments to ISE Rule 802 would apply only to allocation decisions
made after the approval of this proposal.
III. Discussion
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 \7\
and, in particular, the requirements of Section 6 of the Act \8\ and
the rules and regulations thereunder. Specifically, the Commission
finds that the proposal to require that the Board or designated
committee make market maker appointments in the best interest of the
Exchange and to add criteria for allocating Index-based Products to
Primary Market Makers is consistent with Section 6(b)(5) of the Act \9\
because it is designed to promote just and equitable principles of
trade and, in general, to protect investors and the public interest.
Specifically, the Commission believes that the proposal should assist
the Board or designated committee in making allocation decisions.
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\7\ In approving this proposed rule change, as amended, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(5).
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With regard to order flow commitments that a Primary Market Maker
may make, the Commission believes that the ISE should use this
information solely to evaluate existing order flow arrangements between
the applicant and order flow providers.\10\ The Commission notes that
ISE represented that it would not use existing order flow commitments
as an indicator of potential future order flow that an applicant may be
able to bring to the ISE. In addition, the ISE represented that a
future change to, or termination of, any order flow arrangements
considered by the ISE during the review process would not be used by
the ISE at any point in the future to terminate an allocation or to
take remedial action against a Primary Market Maker and that the ISE
would not take any remedial action solely because orders subject to any
order flow arrangements were not subsequently routed to the Exchange.
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\10\ The ISE represented that it would use such information
solely to evaluate existing order flow arrangements between the
applicant and order flow providers and would not use such
information as a basis to terminate an allocation or take remedial
action against a Primary Market Maker. See supra note 6.
The Commission notes that other exchanges made similar
representations regarding their use of order flow commitment
information, and the Commission has emphasized that order flow
commitments may be used solely to evaluate existing order flow
arrangements and may not be used as a basis for termination of an
allocation or for taking remedial action against a market maker. See
Securities Exchange Act Release Nos. 49577 (Apr. 19, 2004), 69 FR
22576 (Apr. 26, 2004) (approving File No. SR-CBOE-2004-17); and
51126 (Feb. 2, 2005), 70 FR 6915 (Feb. 9, 2005) (approving File No.
SR-Phlx-2004-90).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-ISE-2004-40), as amended,
be, and it hereby is, approved.
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\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-2350 Filed 5-11-05; 8:45 am]
BILLING CODE 8010-01-P