[Federal Register Volume 70, Number 171 (Tuesday, September 6, 2005)]
[Notices]
[Pages 53035-53036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4830]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52347; File No. SR-ISE-2005-23]


Self-Regulatory Organizations; International Stock Exchange, 
Inc.; Order Approving Proposed Rule Change Establishing a De Minimis 
Exception to the 80/20 Test

August 26, 2005.

I. Introduction

    On May 13, 2005, the International Stock 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 seeking to amend ISE Rule 1904 to establish a de 
minimis exception to the 80/20 Test limiting market makers' use of 
Principal Orders \3\ under the rules

[[Page 53036]]

imposed by the Plan for the Purpose of Creating and Operating an 
Intermarket Option Linkage (``Linkage Plan'') \4\ and related rules.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange defines a Principal Order as an order for the 
principal account of a market maker (or equivalent entity on another 
Participant Exchange) and which is not a Principal Acting as Agent 
Order. See Chapter 19, Rule 1900(10)(ii) of the ISE Rules.
    \4\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage'') proposed by the American Stock 
Exchange, LLC, Chicago Board Options Exchange, Inc., and the ISE. 
See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 
48023 (August 4, 2000). Subsequently, the Philadelphia Stock 
Exchange, Inc., the Pacific Exchange, Inc. and the Boston Stock 
Exchange, Inc. joined the Linkage Plan. See Securities Exchange Act 
Release Nos. 43573 (November 16, 2000), 65 FR 70851 (November 28, 
2000); 43574 (November 16, 2000), 65 FR 70850 (November 28, 2000); 
and 49198 (February 5, 2004), 69 FR 7029 (February 12, 2004).
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    The proposed rule change was noticed for comment in the Federal 
Register on July 26, 2005.\5\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change.
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    \5\ See Securities Exchange Act Release No. 52069 (July 20, 
2005), 70 FR 43203 (July 26, 2005).
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II. Description

    The purpose of this proposed rule change is to implement proposed 
Joint Amendment No. 17 to the Linkage Plan. Joint Amendment No. 17, 
together with this proposed rule change, would establish a de minimis 
exception to the ``80/20 Test'' set forth in Section 8(b)(iii) of the 
Linkage Plan and ISE Rule 1904.
    Section 8(b)(iii) of the Linkage Plan permits market makers to 
access away markets on a limited basis for their own principal trading. 
The Linkage Plan enforces this limitation via the 80/20 Test, which 
generally requires at least 80 percent of a market maker's trading 
volume in an option class to be on its own exchange for the market 
maker to be able to use Linkage to send Principal Orders for its own 
account in that class. If a market maker ``fails'' the 80/20 Test in an 
option class during a calendar quarter, it cannot send Principal Orders 
through Linkage in that class during the next calendar quarter.
    The options exchanges have agreed to adopt a de minimis exception 
to the 80/20 Test. As proposed by the Exchange, the 80/20 Test would 
not apply to any market maker that has total volume of less than 1,000 
contracts in an option during a calendar quarter. At this low volume, 
even a small number of Principal Orders could result in the market 
maker being disqualified from Linkage in that class for a calendar 
quarter. The Exchange believes that this proposed exception would 
address such concerns.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act \7\ 
which requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, and 
to protect investors and the public interest. The Commission believes 
that the proposed rule change will increase the availability of Linkage 
to members of the Participants by limiting the applicability of the 80/
20 Test in situations where market makers have minimal trading volume 
in a particular options class.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5)
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    The Commission recognizes that the Exchange does not believe that 
it is necessary to bar market makers with limited volume from sending 
Principal Orders through the Linkage, as such trading does not raise 
concerns that a member is sending such orders as ``a primary aspect of 
their business.'' The Commission believes that the de minimis exemption 
from the 80/20 Test proposed by the Exchange for market makers that 
have a total contract volume of less than 1,000 contracts in an options 
class for a calendar quarter should ensure that members with relatively 
low volume in a particular options class can send a reasonable number 
of Principal Orders without being barred from using the Linkage by 
application of the 80/20 Test in the following calendar quarter.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-ISE-2005-23) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4830 Filed 9-2-05; 8:45 am]
BILLING CODE 8010-01-P