[Federal Register Volume 70, Number 94 (Tuesday, May 17, 2005)]
[Notices]
[Pages 28338-28345]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2463]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51682; File No. SR-ISE-2004-27]


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

May 11, 2005.

I. Introduction

    On July 23, 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 proposal to trade options on three broad-based indexes 
and one narrow-based index, whose components currently trade on the New 
York Stock Exchange, Inc. (``NYSE''). The ISE submitted Amendments No. 
1 and No.

[[Page 28339]]

2 to the proposal on January 5, 2005,\3\ and March 1, 2005,\4\ 
respectively. The proposed rule change and Amendments No. 1 and No. 2 
were published for comment in the Federal Register on March 27, 
2005.\5\ The Commission received no comment letters regarding the 
proposal. 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\ Amendment No. 1 set forth a list of the underlying 
components of the NYSE Indexes.
    \4\ Amendment No. 2 replaced the original filing in its 
entirety, proposed a 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.
    \5\ See Securities Exchange Act Release No. 51410 (March 22, 
2005), 70 FR 15962 (``March Release'').
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II. Description of the Proposal

    The ISE proposes to list and trade cash-settled, European-style, 
index options on the NYSE U.S. 100 Index, the NYSE International 100 
Index, and the NYSE World Leaders Index (the ``Broad Based NYSE 
Indexes'') and the NYSE Technology, Media, and Telecommunication Index 
(``NYSE TMT Index'') (collectively, the ``NYSE Indexes'').\6\ 
Specifically, the Exchange proposes to list options based upon (i) one-
tenth of the value of the NYSE Indexes (``Mini Index Options'') and 
(ii) one one-hundredth of the value of the NYSE Indexes (``Micro Index 
Options'').
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    \6\ A description of each of the NYSE Indexes can be found on 
the NYSE's Web site at http://www.nyseindexes.com.
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    A brief description of the proposal appears below; the March 
Release \7\ provides a more detailed description of the proposal.
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    \7\ See supra note 5.
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Index Design and Composition

    The NYSE Indexes are designed to be a comprehensive representation 
of the investable United States equity market. Each NYSE Index is a 
float-adjusted capitalization-weighted index,\8\ whose components are 
all traded on the NYSE.
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    \8\ 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 of the prices of the stocks in the index.
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NYSE U.S. 100 Index

    The NYSE U.S. 100 Index tracks the top 100 U.S. stocks trading on 
the NYSE. The companies represented have a market capitalization of 
$5.95 trillion, which covers 47% of the entire market capitalization of 
U.S. companies and over 62% of U.S. companies listed on the NYSE. This 
index is designed to assist investors looking to track the U.S. market 
across 10 industry sectors, as defined by Dow Jones & Company (``Dow 
Jones'').\9\
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    \9\ As of March 18, 2004, these sectors and their respective 
weightings were: Basic Materials (1.9%); Consumer, Cyclical (13.4%); 
Consumer, Non-Cyclical (11.4%); Energy (7.5%); Financial (23.3%); 
Healthcare (18.7%); Industrial (10.7%); Technology (5.9%); 
Telecommunication (6.7%); and Utilities (0.5%).
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    The NYSE U.S. 100 Index is calculated using a rules-based 
methodology that is fully transparent. Its original selection pool 
includes all U.S. stocks listed on the NYSE. The entire index universe 
is ranked in descending order by unadjusted market capitalization. If a 
component has multiple share classes, the most liquid issue for that 
company is included. Companies that fail a liquidity test, i.e., 
average trading volume of 100,000 shares for the preceding three 
months, are removed. The top 100 companies are then selected from the 
remaining universe, and the index is weighted by float-adjusted market 
capitalization.
    The index is reviewed quarterly, with an 80-120 buffer applied to 
limit turnover. When the universe is ranked by market capitalization, 
all stocks in the top 80 are automatically included in the index, while 
all stocks ranked below 120 are automatically excluded. The remaining 
components are selected from stocks falling between 80 and 120, 
starting with the highest ranked component. In addition to the 
scheduled quarterly review, the index is reviewed on an ongoing basis 
to accommodate extraordinary events, such as delistings, bankruptcies, 
mergers or acquisitions involving index components.

NYSE International 100 Index

    The NYSE International 100 Index is designed to assist investors 
seeking to track international markets. This index tracks the 100 
largest non-U.S. stocks trading on the NYSE. It covers 27.1% of the 
international stock market and has a total market capitalization of 
$3.8 trillion. Currently, the components of the NYSE International 100 
Index represent 18 countries.\10\
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    \10\ According to the ISE, 98 of the 100 underlying components 
in the NYSE International 100 Index meet ISE's listing criteria for 
equity options as set forth in ISE Rule 502. This represents 97.3% 
of the index by market capitalization weight and 98% by number. Two 
American Depository Receipts (``ADRs'') underlying the NYSE 
International 100 Index, Allianz AG (``AZ'') and Telefonica Moviles 
SA (``TEM''), do not meet the requirements of ISE Rule 502, because 
the NYSE does not have in place an effective surveillance sharing 
agreement with the primary exchange in the home country where AZ and 
TEM are traded. However, the U.S. market for the underlying ADRs is 
at least 50% or more of the worldwide trading volume. Telephone 
conversation between Samir Patel, Assistant General Counsel, ISE, 
and A. Michael Pierson, Attorney, Division, Commission (March 21, 
2005). The listing of options on an ADR without the existence of a 
comprehensive surveillance agreement with the foreign market where 
the underlying component trades is appropriate, as long as the U.S. 
market for the underlying ADR is at least 50% or more of the 
worldwide trading volume. See ISE Rule 502(f)(2).
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    All of the components of this index are priced on the NYSE during 
U.S. trading hours.\11\ The NYSE International 100 Index is also 
calculated using a rules-based methodology that is fully transparent. 
Its original selection pool includes all non-U.S. stocks listed on the 
NYSE. The entire index universe is ranked in descending order by 
unadjusted market capitalization. If a component has multiple share 
classes, the most liquid issue for that company is included. Companies 
that fail a liquidity test, i.e., average trading volume of 100,000 
shares for the preceding three months, are removed. The top 100 
companies are then selected from the remaining universe, and the index 
is weighted by float-adjusted market capitalization.
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    \11\ The NYSE International 100 Index components are classified 
in ten market sectors. As of March 18, 2004, these sectors and their 
respective weightings were: Basic Materials (3.1%); Consumer, 
Cyclical (11.1%); Consumer, Non-Cyclical (5.25%); Energy (17.7%); 
Financial (27.7%); Healthcare (12.0%); Industrial (1.1%); Technology 
(8.3%); Telecommunication (10.6%); and Utilities (3.2%).
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    The index is reviewed quarterly, with an 80-120 buffer applied to 
limit turnover. When the universe is ranked by market capitalization, 
all stocks in the top 80 are automatically included in the index, while 
all stocks ranked below 120 are automatically excluded. The remaining 
components are selected from stocks falling between 80 and 120, 
starting with the highest ranked component. In addition to the 
scheduled quarterly review, the index is reviewed on an ongoing basis 
to accommodate extraordinary events, such as delistings, bankruptcies, 
mergers or acquisitions involving index components.

NYSE World Leaders Index

    The NYSE World Leaders is designed to serve as a benchmark to 
track, as a single asset class, the performance of 200 world leaders 
across 10 industry sectors and all regions of the world. This index is 
constructed by combining the NYSE U.S. 100 Index and NYSE International 
100 Indexes. The components of the NYSE World Leaders Index have a 
total market capitalization of $9.7 trillion and cover 36.7% of the 
market capitalization of the world markets. It is well diversified 
across 10 industry sectors, as defined by Dow Jones, and currently 
represents 19 countries, including the United States. All of the 
components of this index are

[[Page 28340]]

priced on the NYSE during U.S. trading hours.\12\
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    \12\ The NYSE Would Leaders Index components are classified in 
ten market sectors. As of March 18, 2004, these sectors and their 
respective weightings were: Basic Materials (2.3%); Consumer, 
Cyclical (12.6%); consumer, Non-Cyclical (9.2%); Energy (11.2%); 
Financial (24.1%); Healthcare (16.3%); Industrial (7.2%); Technology 
(6.8%); Telecommunication (8.1%); and Utilities (1.5%).
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    The NYSE World Leaders Index is also calculated using a rules-based 
methodology that is fully transparent. Its original selection pool 
includes all stocks listed on the NYSE. The index universes for the 
NYSE U.S. 100 and NYSE International 100 are each ranked in descending 
order by unadjusted market capitalization. If a component has multiple 
share classes, the most liquid issue for that company is included. 
Companies that fail a liquidity test, i.e., average trading volume of 
100,000 shares for the preceding three months, are removed. The top 100 
companies are then selected from the remaining stocks in each universe, 
and the index is weighted by float-adjusted market capitalization.
    The NYSE U.S. 100 and the NYSE International 100 Indexes are 
reviewed quarterly, with an 80-120 buffer applied to limit turnover. 
When the universes are ranked by market capitalization, all stocks in 
the top 80 are automatically included in the index, while all stocks 
ranked below 120 are automatically excluded. The remaining components 
are selected from stocks falling between 80 and 120, starting with the 
highest ranked component. In addition to the scheduled quarterly 
review, the index is reviewed on an ongoing basis to accommodate 
extraordinary events, such as delistings, bankruptcies, mergers or 
acquisitions involving index components.

NYSE TMT Index

    The NYSE TMT Index is a narrow-based index. For narrow-based 
indexes that meet the standards of an exchange's rules, an SRO need 
only complete Form 19b-4(e) at least five business days after 
commencement of trading the new product. Since the listing of this 
product does not meet all of the requirements of ISE Rule 2002(b), Form 
19b-4(e) is not available for the listing of this product.
    The NYSE TMT Index is designed to track the top 100 technology, 
media and telecommunications stocks listed on the NYSE. The companies 
represented have a market capitalization of $2.3 trillion, which covers 
45.7% of the entire market capitalization of technology, media and 
telecommunication companies globally and is approximately the same size 
as the nearly 4,000 companies in the Nasdaq Composite Index. All of the 
components of this index are priced on the NYSE during U.S. trading 
hours.\13\
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    \13\ The NYSE TMT Index components are classified in 14 industry 
sub-groups within the technology, media and telecommunication 
sectors. As of March 18, 2004, the sub-groups and their respective 
weightings were: Advertising (1.9%); Broadcasting (18.9%); 
Communications Technology (11.8%); computers (13.0%); Diversified 
Technology Services (2.4%); Entertainment (0.3%); Fixed-line 
Communications (20.9%); Internet Services (0.0%); Office Equipment 
(1.2%); Publishing (6.1%); Semiconductors (10.8%); Technology, 
Software (2.8%); Wireless Communications (9.9%); and Other: Non-
Technology, Media and Telecommunication (0.0%).
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    The NYSE TMT Index is also calculated using a rules-based 
methodology that is fully transparent. Its original selection pool 
includes all technology, media and telecommunication stocks listed on 
the NYSE. The entire index universe is ranked in descending order by 
unadjusted market capitalization. If a component has multiple share 
classes, the most liquid issue for that company is included. Companies 
that fail a liquidity test, i.e., average trading volume of 100,000 
shares for the preceding three months, are removed. The top 100 
companies are then selected from the remaining universe, and the index 
is weighted by float-adjusted market capitalization.
    The index is reviewed quarterly, with an 80-120 buffer applied to 
limit turnover. When the universe is ranked by market capitalization, 
all stocks in the top 80 are automatically included in the index, while 
all stocks ranked below 120 are automatically excluded. The remaining 
components are selected from stocks falling between 80 and 120, 
starting with the highest ranked component. At the quarterly 
rebalancing, market sector weights for technology, media and 
telecommunications are capped at no more than 40% and the sub-group 
weights are capped at no more than 20%. This ensures that one sector or 
sub-group does not dominate the index. In addition to the scheduled 
quarterly review, the index is also reviewed on an ongoing basis to 
accommodate extraordinary events, such as delistings, bankruptcies, 
mergers or acquisitions involving index components.

Index Calculation and Index Maintenance

    The Mini Index Options level and the Micro Index Options level will 
each be calculated continuously, using the last sale price for each 
component stock in the NYSE Indexes, and will be disseminated every 15 
seconds throughout the trading day.\14\ The settlement value for 
purposes of settling Mini Index Options (``Mini Settlement Value'') and 
Micro Index Options (``Micro Settlement Value'') will be calculated on 
the basis of opening market prices on the business day prior to the 
expiration date of such options (``Settlement Day'').\15\ The 
Settlement Day is normally the Friday preceding ``Expiration 
Saturday.'' \16\ In the event that a component security in the Index 
does not trade on Settlement Day, the closing price from the previous 
trading day is used to calculate the Settlement Value. Accordingly, 
trading in Mini Index Options and Micro Index Options will normally 
cease on the Thursday preceding an Expiration Saturday. Dow Jones shall 
calculate, and the Exchange shall disseminate, both the Mini Settlement 
Value and the Micro Settlement Value in the same manner as the Dow 
Jones shall calculate, and the Exchange shall disseminate, the Mini 
Index Options level and the Micro Index Options level.
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    \14\ The Mini Index Options level and the Micro Index Options 
level shall each be calculated by Dow Jones on behalf of the NYSE 
and disseminated to the consolidated Quote System (``CQS''). The 
Exchange shall receive those values from CQS and disseminate them to 
its members. Each of the NYSE Indexes is published daily in real-
time on the NYSE's public Web site and through, among other places, 
major quotation vendors such as Reuters and Thomson's ILX.
    \15\ The aggregate exercise value of the option contract is 
calculated by multiplying the Index value by the Index multiplier, 
which is 100.
    \16\ For any given expiration month, options on the NYSE Indexes 
will expire on the third Saturday of the month.
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    Dow Jones will monitor and maintain each of the NYSE Indexes. 
Although the Exchange is not involved in the maintenance of the NYSE 
Indexes, the Exchange represents that it will monitor the NYSE Indexes 
on an quarterly basis,\17\ at which point the Exchange will notify the 
Commission's Division of Market Regulation (``Division''), and will 
cease trading options on the NYSE Indexes if and when: (i) The number 
of securities in each of the NYSE Indexes drops by \1/3\ or more; (ii) 
10% or more of the weight of each of the NYSE Indexes is represented by 
component securities having a market value of less than $75 million; 
(iii) less than 80% of the weight of each of the NYSE Indexes is 
represented by component securities that are eligible for options 
trading pursuant to ISE Rule 502; (iv) 10% or more of the weight of 
each of the NYSE Indexes is represented by component securities trading 
less than 20,000

[[Page 28341]]

shares per day; or (v) the largest component security accounts for more 
than 15% of the weight of each of the NYSE Indexes or the largest five 
components in the aggregate account for more than 40% of the weight of 
each of the NYSE Indexes.\18\
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    \17\ Telephone conversation between Samir Patel, Assistant 
General Counsel, ISE, and A. Michael Pierson, Attorney, Division, 
Commission (March 21, 2005).
    \18\ Telephone conversation between Samir Patel, Assistant 
General Counsel, ISE, and A. Michael Pierson, Attorney, Division, 
Commission (May 10, 2005). The Exchange understands that it may file 
a proposal pursuant to Section 19(b) of the Act and Rule 19b-4 if it 
wishes to trade options on the NYSE Indexes that would not otherwise 
meet the eligibility requirements listed above.
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    The Exchange will notify the Division immediately in the event Dow 
Jones determines to cease maintaining or calculating the NYSE Indexes. 
In the event any of the NYSE Indexes ceases to be maintained or 
calculated, the Exchange will determine not to list any additional 
series for trading or limit all transactions in such options to closing 
transactions only for the purpose of maintaining a fair and orderly 
market and protecting investors.\19\
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    \19\ Id.
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Contract Specifications

    The NYSE U.S. 100, the NYSE International 100 and the NYSE World 
Leaders Indexes are each broad-based, as defined in Exchange Rule 
2001(j).\20\ The NYSE TMT Index is a narrow-based index, as defined in 
Exchange Rule 2001(i).\21\ Options on the NYSE Indexes are European-
style and A.M. cash-settled. The Exchange's standard trading hours for 
index options (9:30 a.m. to 4:15 p.m., New York time), as set forth in 
Rule 2008(a), will apply to the NYSE Indexes. Exchange rules that are 
applicable to the trading of options on broad-based indexes will apply 
to the trading of Mini Index Options and Micro Index Options on the 
Broad-Based Indexes. Exchange rules that are applicable to the trading 
of options on narrow-based indexes will apply to the trading of Mini 
Index Options and Micro Index Options on the TMT Index.\22\ 
Specifically, the trading of Mini Index Options and Micro Index Options 
on the NYSE Indexes will be subject to, among others, Exchange rules 
governing sales practice rules, margin requirements, trading rules, and 
position and exercise limits.
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    \20\ 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.
    \21\ ISE Rule 2001(i) defines an ``industry index'' or a 
``narrow-based index'' to mean an index designed to be 
representative of a particular industry or a group of related 
industries.
    \22\ See ISE Rules 2000 through 2012.
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    For each of the Broad-Based NYSE Indexes, the Exchange proposes to 
establish aggregate position and exercise limits for Mini Index Options 
at 50,000 contracts on the same side of the market, provided no more 
than 30,000 of such contracts are in the nearest expiration month 
series. The Mini Index Options contracts shall be aggregated with Micro 
Index Options contracts, where ten (10) Micro Index Options contracts 
equal one (1) Mini Index Options contract. For the narrow-based NYSE 
TMT Index, the aggregate position and exercise limits shall be as set 
forth in ISE Rule 2005(a)(3). Currently, that rule would set position 
exercise limits for the Mini Index Options on the NYSE TMT Index at 
31,500 contracts on the same side of the market. Similar to the 
aggregation of the position and exercise limits on the Broad-Based NYSE 
Indexes, the Mini Index Options contracts on the NYSE TMT Index shall 
be aggregated with Micro Index Options contracts on the NYSE TMT Index, 
where ten (10) Micro Index Options contracts equal one (1) Mini Index 
Options contract.
    The Exchange proposes to set strike price intervals at 2\1/2\ 
points for certain near-the-money series in near-term expiration months 
when each of the NYSE Indexes is at a level below 200, and 5 point 
strike price intervals for other options series with expirations up to 
one year, and 25 to 50 point strike price intervals for longer-term 
options. Accordingly, since the current Mini Index Options level for 
each of the NYSE Indexes is 576.38, 450.57, 527.34 and 506.09, the 
Exchange shall set strike price intervals at 5 points for the Mini 
Index Options. Since the current Micro Index Options level for each of 
the NYSE Indexes is 57.64, 45.06, 52.73 and 50.61, the Exchange shall 
set strike price intervals at 2\1/2\ points for the Micro Index 
Options. The minimum tick size for series trading below $3 shall be 
0.05, and for series trading at or above $3 shall be 0.10.
    The Exchange proposes to list Mini Index Options and Micro Index 
Options in the three consecutive near-term expiration months plus up to 
three successive expiration months in the March cycle. For example, 
consecutive expirations of January, February, March, plus June, 
September, and December expirations would be listed.\23\ In addition, 
long-term option series (``LEAPS'') having up to 36 months to 
expiration may be traded.\24\ The interval between expiration months on 
the Mini Index Options or Micro Index Options shall not be less than 
six months. The trading of any LEAPS on Micro Index Options and Mini 
Index Options shall be subject to the same rules that govern the 
trading of all the Exchange's index options, including sales practice 
rules, margin requirements, trading rules, and position and exercise 
limits.
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    \23\ See ISE Rule 2009(a)(3).
    \24\ See ISE Rule 2009(b)(1). The Exchange is not listing 
reduced value LEAPS on either of the Mini Index or Micro Index 
Options. Telephone conversation between Samir Patel, Assistant 
General Counsel, ISE, and A. Michael Pierson, Attorney, Division, 
Commission (March 8, 2005).
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Surveillance and Capacity

    The ISE represents that it has an adequate surveillance program for 
options traded on the NYSE Indexes, and intends to apply to the trading 
of Mini Index or Micro Index Options the 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 ISG Agreement, dated June 20, 1994. The members of the ISG 
include all of the U.S. registered stock and options markets: the 
American Stock Exchange, the Boston Stock Exchange, the Chicago Board 
Options Exchange, the Chicago Stock Exchange, the National Stock 
Exchange, the National Association of Securities Dealers, the New York 
Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock 
Exchange. The ISG members work together to coordinate surveillance and 
investigative information sharing in the stock and options markets. In 
addition, the major futures exchanges and non-U.S. Exchanges are 
affiliated members of the ISG, which allows for the sharing of 
surveillance information for potential intermarket trading abuses. The 
ISE notes that members of the ISG work together to coordinate 
surveillance and investigative information sharing in the stock and 
options markets.
    In a confidential submission to the Commission, the Exchange 
provided an analysis supporting its representation that it has the 
system capacity to adequately handle all options series that could be 
listed pursuant to this proposal, including long-term Reduced Value 
Index Options and long-term Micro Index Options.

III. Discussion

    After careful review, 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 and, in particular, the requirements of Section 
6(b)(5) of the Act.\25\ The Commission

[[Page 28342]]

finds that the trading of options on reduced values of the NYSE Indexes 
will permit investors to participate in the price movements of the 
securities that comprise the NYSE Indexes. The Commission also believes 
that the trading of options on the NYSE Indexes will allow investors 
holding positions in some or all of the securities underlying the Index 
to hedge the risks associated with their portfolios. Accordingly, the 
Commission believes that options on the NYSE Indexes will provide 
investors with an important trading and hedging mechanism. By 
broadening the hedging and investment opportunities of investors, the 
Commission believes that the trading of options on the NYSE Indexes 
will serve to protect investors, promote the public interest, and 
contribute to the maintenance of fair and orderly markets.\26\
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    \25\ 15 U.S.C. 78f(b)(5). In approving this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \26\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new option or warrant proposal upon a 
finding that the introduction of such new derivative instrument is 
in the public interest. Such a finding would be difficult for a 
derivative instrument that served no hedging or other economic 
function, because any benefits that might be derived by market 
participants likely would be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns. In this regard, the 
Commission believes that options on the NYSE Indexes will provide 
investors with a hedging and investment vehicle that should reflect 
the overall movement of a substantial segment of the capital 
markets.
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    The trading of options on the NYSE Indexes, however, raises several 
issues, including issues related to index design, customer protection, 
surveillance, and market impact. For the reasons discussed below, the 
Commission believes that the ISE has adequately addressed these issues.

A. Index Design and Structure

    The Commission finds that it is appropriate and consistent with the 
Act to classify the NYSE U.S. 100 Index, the NYSE International 100 
Index, and the NYSE World Leaders Index as broad-based and the NYSE TMT 
Index as narrow-based for purposes of index options trading, and 
therefore appropriate to permit ISE rules applicable to the trading of 
broad-based and narrow-based index options to apply to the NYSE Index 
options, as applicable. Specifically, the Commission believes that the 
Broad Based NYSE Indexes are broad-based, because they reflect a 
substantial segment of the U.S. equity markets. The NYSE U.S. 100 Index 
is comprised of 100 component stocks, and is designed to track the U.S. 
market by including the top 100 stocks trading on the NYSE; the NYSE 
International 100 Index is comprised of 100 component stocks, and is 
designed to track the international markets by including the 100 
largest non-U.S. stocks trading on the NYSE; and the NYSE World Leaders 
Index is comprised of 200 component stocks by combining the NYSE U.S. 
100 Index and the NYSE International 100 Index. The ISE believes it is 
intended to track the performance of 200 ``world leader'' stocks 
trading on the NYSE. The NYSE World Leaders Index includes stocks 
across 10 industry sectors and all regions of the world. The TMT Index 
is narrow-based, because it is representative of a particular industry 
or a group of related industries. The NYSE TMT Index is designed to 
track the top 100 technology, media, and telecommunications stocks 
listed on the NYSE.
NYSE U.S. 100 Index
    According to the ISE, as of March 18, 2004, 100% of the components 
were options eligible.\27\ Second, as of March 18, 2004, the NYSE U.S. 
100 Index's components were classified in ten industry sectors, which 
were weighted in the Index as follows: Basic Materials (1.9%); 
Consumer, Cyclical (13.4%); Consumer, Non-Cyclical (11.4%); Energy 
(7.5%); Financial (23.3%); Healthcare (18.7%); Industrial (10.7%); 
Technology (5.9%); Telecommunication (6.7%); and Utilities (0.5%). 
Third, as of March 18, 2004, the total capitalization of the Index was 
approximately $6.166 trillion, the capitalization of the Index's 
components ranged from approximately $17.13 billion to approximately 
$310.02 billion, and the mean capitalization of the Index's components 
was approximately $61.665 billion. As of March 18, 2004, the largest 
Index component accounted for 5.03% of the weight of the Index, and the 
five highest weighted securities accounted for 22.2% of the weight of 
the Index.
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    \27\ See ISE Rule 502.
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    The Commission also believes that the general broad 
diversification, capitalizations, liquidity, and relative weighting of 
the Index's component securities minimize the potential for 
manipulation of the Index. First, the Index is comprised of 100 
components listed and actively traded on the NYSE, and no single 
security dominates the Index. Second, the capitalizations of the stocks 
in the Index are very large. As of March 18, 2004, the total Index 
capitalization was approximately $6.166 trillion, the median and mean 
capitalizations of the Index's components were approximately $40.673 
billion and $61.665 billion, respectively and the capitalizations of 
the Index's components ranged from a high of approximately $310.02 
billion for the highest-weighted component (which represented 5.03% of 
the weight of the Index) to a low of approximately $18.59 billion for 
the lowest-weighted Index component (which represented .30% of the 
weight of the Index). As of March 18, 2004, the capitalizations of the 
Index's five most heavily weighted components, which represented 22.2% 
of the weight of the Index, ranged from approximately $255 billion to 
approximately $310.02 billion. Third, as of March 18, 2004, mean and 
median six-month average daily trading volume of the Index's components 
was 5.376 million shares and 4.082 million shares, respectively, and 
100% of the Index's components had six-month average daily trading 
volume of at least 50,000 shares. Fourth, as of March 18, 2004, 
components representing over 100% of the weight of the Index were 
options eligible. Fifth, the ISE has represented that it will monitor 
the Index on a quarterly basis at which point the Exchange will notify 
the Division, and will cease trading options on the Index if and when: 
(1) The number of securities in the Index drops by \1/3\ or more; (2) 
10% or more of the weight of the Index is represented by component 
securities having a market value of less than $75 million; (3) less 
than 80% of the weight of the Index is represented by component 
securities that are eligible for options trading pursuant to ISE Rule 
502; (4) 10% or more of the weight of the 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 the Index or the largest five components in the aggregate account 
for more than 40% of the weight of the Index.\28\
---------------------------------------------------------------------------

    \28\ See supra note 18.
---------------------------------------------------------------------------

    The Commission believes that these factors minimize the potential 
for manipulation because it is unlikely that attempted manipulations of 
the prices of the Index's components would affect significantly the 
Index's value. Moreover, the surveillance procedures discussed below 
should detect as well as deter potential manipulations and other 
trading abuses.
    Finally, the Commission believes that the position and exercise 
limits for the Mini Index Options and Micro Index Options are designed 
to minimize the potential for manipulation and other market impact 
concerns. The position and exercise limits for the Mini Index Options 
and Micro Index Options are comparable to the position and exercise

[[Page 28343]]

limits approved for other index options.\29\
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    \29\ See, e.g., Securities Exchange Act Release Nos. 48884 
(December 5, 2003), 68 FR 69753 (December 15, 2003) (File No. SR-
PHLX-2003-66) (order approving the listing and trading of Nasdaq 
1000 Index options, with position limits of 50,000 contracts on 
either side of the market and no more than 30,000 contracts in 
series in the nearest expiration month); 31382 (October 30, 1992), 
57 FR 52802 (November 5, 1992) (File No. SR-CBOE-92-02) (order 
approving the listing and trading of options on the Russell 2000 
Index, with position limits of 50,000 contracts on either side of 
the market and no more than 30,000 contracts in series in the 
nearest expiration month); and 50937 (December 27, 2004), 70 FR 416 
(January 4, 2005) (File No. SR-ISE-2004-09) (order approving the 
listing and trading of options on the S&P 1000 Index).
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NYSE International 100 Index
    According to the ISE, as of March 18, 2004, 88.15% of the 
components were options eligible, as measured by weighting, and 79% of 
the components were options eligible, as measured by number.\30\ 
Second, as of March 18, 2004, the NYSE International 100 Index's 
components were classified in ten market sectors, which were weighted 
in the Index as follows: Basic Materials (3.1%); Consumer, Cyclical 
(11.1%); Consumer, Non-Cyclical (5.2%); Energy (17.7%); Financial 
(27.7%); Healthcare (12.0%); Industrial (1.1%); Technology (8.3%); 
Telecommunication (10.6%); and Utilities (3.2%). Third, as of March 18, 
2004, the total capitalization of the Index was approximately $4.308 
trillion, the capitalization of the Index's components ranged from 
approximately $4.99 billion to approximately $182.444 billion, and the 
mean capitalization of the Index's components was approximately $43.086 
billion. As of March 18, 2004, the largest Index component accounted 
for 4.23% of the weight of the Index, and the five highest weighted 
securities accounted for 16.96% of the weight of the Index.
---------------------------------------------------------------------------

    \30\ See supra note 27.
---------------------------------------------------------------------------

    The Commission also believes that the general broad 
diversification, capitalizations, liquidity, and relative weighting of 
the Index's component securities minimize the potential for 
manipulation of the Index. First, the Index is comprised of 100 
components listed and actively traded on the NYSE, and no single 
security dominates the Index. Second, the capitalizations of the stocks 
in the Index are very large. As of March 18, 2004, the total Index 
capitalization was approximately $4.308 trillion, the median and mean 
capitalizations of the Index's components were approximately $30.612 
billion and $43.086 billion, respectively, and the capitalizations of 
the Index's components ranged from a high of approximately $182.444 
billion for the highest-weighted component (which represented 4.23% of 
the weight of the Index) to a low of approximately $5.02 billion for 
the lowest-weighted Index component (which represented .05% of the 
weight of the Index). As of March 18, 2004, the capitalizations of the 
Index's five most heavily weighted components, which represented 16.96% 
of the weight of the Index, ranged from approximately $117.7 billion to 
approximately $182.444 billion. Third, as of March 18, 2004, mean and 
median six-month average daily trading volume of the Index's components 
was 1.054 million shares and 197,450 shares, respectively, and 79% of 
the Index's components had six-month average daily trading volume of at 
least 50,000 shares. Fourth, as of March 18, 2004, 88.15% of the 
components were options eligible, as measured by weighting, and 79% of 
the components were options eligible, as measured by number. Fifth, the 
ISE has represented that it will monitor the Index on a quarterly basis 
at which point the Exchange will notify the Division, and will cease 
trading options on the Index if and when: (1) The number of securities 
in the Index drops by \1/3\ or more; (2) 10% or more of the weight of 
the Index is represented by component securities having a market value 
of less than $75 million; (3) less than 80% of the weight of the Index 
is represented by component securities that are eligible for options 
trading pursuant to ISE Rule 502; (4) 10% or more of the weight of the 
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 the Index or the largest five components in 
the aggregate account for more than 40% of the weight of the Index.\31\
---------------------------------------------------------------------------

    \31\ See supra note 18.
---------------------------------------------------------------------------

    The Commission believes that these factors minimize the potential 
for manipulation because it is unlikely that attempted manipulations of 
the prices of the Index's components would affect significantly the 
Index's value. Moreover, the surveillance procedures discussed below 
should detect as well as deter potential manipulations and other 
trading abuses.
    Finally, the Commission believes that the position and exercise 
limits for the Mini Index Options and Micro Index Options are designed 
to minimize the potential for manipulation and other market impact 
concerns. The position and exercise limits for the Mini Index Options 
and Micro Index Options are comparable to the position and exercise 
limits approved for other index options.\32\
---------------------------------------------------------------------------

    \32\ See supra note 29.
---------------------------------------------------------------------------

NYSE World Leaders Index
    According to the ISE, as of March 18, 2004, 95.1% of the components 
were options eligible, as measured by weighting, and 89.5% of the 
components were options eligible, as measured by number.\33\ Second, 
the capitalizations of the stocks in the Index are very large. As of 
March 18, 2004, the NYSE World Leaders Index's components were 
classified in ten industry sectors, which were weighted in the Index as 
follows: Basic Materials (2.3%); Consumer, Cyclical (12.6%); Consumer, 
Non-Cyclical (9.2%); Energy (11.2%); Financial (24.1%); Healthcare 
(16.3%); Industrial (7.2%); Technology (6.8%); Telecommunication 
(8.1%); and Utilities (1.5%). Third, as of March 18, 2004, the total 
capitalization of the Index was approximately $9.7 trillion, the 
capitalization of the Index's components ranged from approximately 
$4.99 billion to approximately $310.02 billion, and the mean 
capitalization of the Index's components was approximately $52.668 
billion. As of March 18, 2004, the largest Index component accounted 
for 2.94% of the weight of the Index, and the five highest weighted 
securities accounted for 12.99% of the weight of the Index. Fourth, 
because the Index is a combination of two broad-based indexes, the NYSE 
U.S. 100 Index and the NYSE International 100 Index, and the selection 
and maintenance criteria for the NYSE U.S. 100 Index and the NYSE 
International 100 Index determine the components of the NYSE World 
Leaders Index, the selection and maintenance criteria for the NYSE U.S. 
100 Index and the NYSE International 100 Index should serve to ensure 
that the Index maintains its broad representative sample of stocks.
---------------------------------------------------------------------------

    \33\ See supra note 27.
---------------------------------------------------------------------------

    The Commission also believes that the general broad 
diversification, capitalizations, liquidity, and relative weighting of 
the Index's component securities minimize the potential for 
manipulation of the Index. First, the Index is comprised of 200 
components listed and actively traded on the NYSE, and no single 
security dominates the Index. Second, the capitalizations of the stocks 
in the Index are very large. As of March 18, 2004, the total Index 
capitalization was approximately $10.533 trillion, the median and mean 
capitalizations of the Index's components were approximately $37.291 
billion and $52.668 billion,

[[Page 28344]]

respectively, and the capitalizations of the Index's components ranged 
from a high of approximately $310.02 billion for the highest-weighted 
component (which represented 2.94% of the weight of the Index) to a low 
of approximately $4.99 billion for the lowest-weighted Index component 
(which represented .05% of the weight of the Index). As of March 18, 
2004, the capitalizations of the Index's five most heavily weighted 
components, which represented 12.99% of the weight of the Index, ranged 
from approximately $255.08 billion to approximately $310.02 billion. 
Third, as of March 18, 2004, mean and median six-month average daily 
trading volume of the Index's components was 3.218 million shares and 
1.73 million shares, respectively, and 89.5% of the Index's components 
had six-month average daily trading volume of at least 50,000 shares. 
Fourth, as of March 18, 2004, 95.1% of the components were options 
eligible, as measured by weighting, and 89.5% of the components were 
options eligible, as measured by number. Fifth, the ISE has represented 
that it will monitor the Index on a quarterly basis at which point the 
Exchange will notify the Division, and will cease trading options on 
the Index if and when: (1) The number of securities in the Index drops 
by \1/3\ or more; (2) 10% or more of the weight of the Index is 
represented by component securities having a market value of less than 
$75 million; (3) less than 80% of the weight of the Index is 
represented by component securities that are eligible for options 
trading pursuant to ISE Rule 502; (4) 10% or more of the weight of the 
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 the Index or the largest five components in 
the aggregate account for more than 40% of the weight of the Index.\34\
---------------------------------------------------------------------------

    \34\ See supra note 18.
---------------------------------------------------------------------------

    The Commission believes that these factors minimize the potential 
for manipulation because it is unlikely that attempted manipulations of 
the prices of the Index's components would affect significantly the 
Index's value. Moreover, the surveillance procedures discussed below 
should detect as well as deter potential manipulations and other 
trading abuses.
    Finally, the Commission believes that the position and exercise 
limits for the Mini Index Options and Micro Index Options are designed 
to minimize the potential for manipulation and other market impact 
concerns. The position and exercise limits for the Mini Index Options 
and Micro Index Options are comparable to the position and exercise 
limits approved for other index options.\35\
---------------------------------------------------------------------------

    \35\ See supra note 29.
---------------------------------------------------------------------------

NYSE TMT Index
    According to the ISE, as of March 18, 2004, 100% of the components 
were options eligible.\36\ Second, as of March 18, 2004, the NYSE TMT 
Index's components were classified in 14 industry sub-groups, which 
were weighted in the Index as follows: Advertising (1.9%); Broadcasting 
(18.9%); Communications Technology (11.8%); Computers (13.0%); 
Diversified Technology Services (2.4%); Entertainment (0.3%); Fixed-
line Communications (20.9%); Internet Services (0.0%); Office Equipment 
(1.2%); Publishing (6.1%); Semiconductors (10.8%); Technology, Software 
(2.8%); Wireless Communications (9.9%); and Other: Non-Technology, 
Media and Telecommunication (0.0%). Third, as of March 18, 2004, the 
total capitalization of the Index was approximately $2.701 trillion, 
the capitalization of the Index's components ranged from approximately 
$2.89 billion to approximately $165.12 billion, and the mean 
capitalization of the Index's components was approximately $27.01 
billion. As of March 18, 2004, the largest Index component accounted 
for 6.11% of the weight of the Index, and the five highest weighted 
securities accounted for 23.62% of the weight of the Index.
---------------------------------------------------------------------------

    \36\ See supra note 27.
---------------------------------------------------------------------------

    The Commission also believes that the large capitalizations, 
liquidity, and relative weighting of the Index's component securities 
minimize the potential for manipulation of the Index. First, the Index 
is comprised of 100 components listed and actively traded on the NYSE, 
and no single security dominates the Index. Second, the capitalizations 
of the stocks in the Index are very large. As of March 18, 2004, the 
total Index capitalization was approximately $2.701 trillion, the 
median and mean capitalizations of the Index's components were 
approximately $15.38 billion and $27.01 billion, respectively, and the 
capitalizations of the Index's components ranged from a high of 
approximately $165.12 billion for the highest-weighted component (which 
represented 6.11% of the weight of the Index) to a low of approximately 
$2.89 billion for the lowest-weighted Index component (which 
represented .11% of the weight of the Index). As of March 18, 2004, the 
capitalizations of the Index's five most heavily weighted components, 
which represented 23.62% of the weight of the Index, ranged from 
approximately $99.62 billion to approximately $165.12 billion. Third, 
as of March 18, 2004, mean and median six-month average daily trading 
volume of the Index's components was 4.138 million shares and 1.302 
million shares, respectively, and 86% of the Index's components had 
six-month average daily trading volume of at least 50,000 shares. 
Fourth, as of March 18, 2004, components representing over 100% of the 
weight of the Index were options eligible. Fifth, the ISE has 
represented that it will monitor the Index on a quarterly basis at 
which point the Exchange will notify the Division, and will cease 
trading options on the Index if and when: (1) The number of securities 
in the Index drops by \1/3\ or more; (2) 10% or more of the weight of 
the Index is represented by component securities having a market value 
of less than $75 million; (3) less than 80% of the weight of the Index 
is represented by component securities that are eligible for options 
trading pursuant to ISE Rule 502; (4) 10% or more of the weight of the 
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 the Index or the largest five components in 
the aggregate account for more than 40% of the weight of the Index.\37\
---------------------------------------------------------------------------

    \37\ See supra note 18.
---------------------------------------------------------------------------

    The Commission believes that these factors minimize the potential 
for manipulation because it is unlikely that attempted manipulations of 
the prices of the Index's components would affect significantly the 
Index's value. Moreover, the surveillance procedures discussed below 
should detect as well as deter potential manipulations and other 
trading abuses.
    Finally, the Commission believes that the position and exercise 
limits for the Mini Index Options and Micro Index Options are designed 
to minimize the potential for manipulation and other market impact 
concerns. The position and exercise limits for the Mini Index Options 
and Micro Index Options are comparable to the position and exercise 
limits approved for other index options.\38\
---------------------------------------------------------------------------

    \38\ See supra note 29.
---------------------------------------------------------------------------

B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as options on the NYSE 
Indexes, can commence on

[[Page 28345]]

a national securities exchange. The Commission notes that the trading 
of standardized, exchange-traded options occurs in an environment that 
is designed to ensure, among other things, that: (1) The special risks 
of options are disclosed to public customers; (2) only investors 
capable of evaluating and bearing the risks of options trading are 
engaged in such trading; and (3) special compliance procedures are 
applicable to options accounts. Accordingly, because options on the 
NYSE Indexes will be subject to the same regulatory regime as the other 
standardized options traded currently on the ISE, the Commission 
believes that adequate safeguards are in place to ensure the protection 
of investors in Index Options.

C. Surveillance

    The Commission generally believes that a surveillance sharing 
agreement between an exchange proposing to list a stock index 
derivative product and the market(s) trading the stocks underlying the 
derivative product is an important measure for the surveillance of the 
derivative product and the underlying securities markets. Such 
agreements ensure the availability of information necessary to detect 
and deter potential manipulations and other trading abuses, thereby 
making the stock index product less readily susceptible to 
manipulation. In this regard, the ISE and the NYSE, the NASD, and the 
Amex are members of the ISG and the ISG Agreement will apply to the 
trading of Index Options.\39\ In addition, the ISE will apply to the 
options on the NYSE Indexes the same surveillance procedures it uses 
currently for existing index options trading on the ISE.
---------------------------------------------------------------------------

    \39\ The ISG was formed on July 14, 1983, to, among other 
things, coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
All of the registered national securities exchanges and the NASD are 
members of the ISG. In addition, futures exchanges and non-U.S. 
exchanges and associations are affiliate members of ISG.
---------------------------------------------------------------------------

    The NYSE International 100 Index and the NYSE World Leaders Index 
both contain foreign component ADRs that all trade on the NYSE. As 
mentioned above, 98 out of the 100 underlying components are subject to 
effective surveillance sharing agreements as set forth in ISE Rule 502. 
The remaining two components, representing only 0.86% of the Index, 
also meet surveillance requirements in ISE Rule 502(f)(2), because 50% 
of the volume for the underlying ADRs occurs on the NYSE. Accordingly, 
the Commission expects that there will be adequate surveillance 
mechanisms to detect and deter potential manipulation when trading 
Index options on the NYSE Indexes, which contain the foreign 
components.\40\
---------------------------------------------------------------------------

    \40\ Under the maintenance standards, 80% of the Indexes would 
have to meet the standards of ISE Rule 502, which would ensure that 
the Indexes with foreign components are adequately covered by 
effective surveillance mechanisms. See also supra note 18, and 
accompanying text.
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D. Market Impact

    The Commission believes that the listing and trading of options on 
the NYSE Indexes will not adversely impact the underlying securities 
markets.\41\ First, as described above, the NYSE Indexes are highly 
capitalized and their underlying components are actively traded. 
Second, the position and exercise limits applicable to the options on 
the NYSE Indexes should serve to minimize potential manipulation and 
market impact concerns. Third, the risk to investors of contra-party 
non-performance will be minimized because the options on the NYSE 
Indexes, like other standardized options traded in the U.S., will be 
issued and guaranteed by the Options Clearing Corporation. Fourth, 
existing ISE index options rules and surveillance procedures will apply 
to the options on the NYSE Indexes.
---------------------------------------------------------------------------

    \41\ As noted above, the ISE represented in a confidential 
submission to the Commission that it has the necessary systems 
capacity to support the introduction of options on the NYSE Indexes.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-ISE-2004-27), as amended, 
be, and it hereby is, approved.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-2463 Filed 5-16-05; 8:45 am]
BILLING CODE 8010-01-P