[Federal Register Volume 71, Number 134 (Thursday, July 13, 2006)]
[Notices]
[Pages 39694-39696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11002]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54113 File No. SR-ISE-2006-24]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving a Proposed Rule Change and Amendment No. 1 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendments No. 2 and 3 Thereto To Permit the Listing and Trading of 
Quarterly Options Series

July 7, 2006.

I. Introduction

    On May 2, 2006, 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 initiate a one-year pilot 
program that would allow the Exchange to list and trade options series 
that expire at the close of business on the last business day of a 
calendar quarter (``Quarterly Options Series''). The Exchange filed 
Amendment No. 1 with the Commission on May 17, 2006.\3\ The amended 
proposal was published for comment in the Federal Register on June 1, 
2006.\4\ No comments were received regarding the amended proposal. The 
Exchange filed Amendments No. 2 and 3 with the Commission on July 6, 
2006, and July 7, 2006, respectively.\5\ This notice and order approves 
the proposed rule change and Amendment No. 1 thereto, solicits comment 
on Amendments No. 2 and 3, and approves Amendments No. 2 and 3 on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, a partial amendment, the Exchange made 
minor modifications to the proposed rule text.
    \4\  See Securities Exchange Act Release No. 53857 (May 24, 
2006), 71 FR 31246 (``Notice'').
    \5\ In Amendment No. 2, a partial amendment, the Exchange 
modified the provision of the proposed rule text under which the 
Exchange may list additional strike prices for Quarterly Options 
Series. In Amendment No. 3, a partial amendment, the Exchange 
modified the proposed rule text to provide that the Exchange may 
list Quarterly Options Series with strike prices that are within 
$5.00 from the closing price of the underlying security on the 
preceding trading day. See discussion in Part II, infra.
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II. Description of Proposed Rule

    ISE proposes to amend its rules to establish a pilot program to 
list and trade Quarterly Options Series, which would expire at the 
close of business on the last business day of a calendar quarter 
(``Pilot Program''). Under the proposal, the Exchange could select up 
to five approved options classes \6\ on which Quarterly Options Series 
could be opened. A series could be opened on any business day and would 
expire at the close of business on the last business day of a calendar 
quarter. The Exchange also could list and trade Quarterly Options 
Series on any options class that is selected by another exchange that 
employs a similar pilot program. For each class selected for the Pilot 
Program, the Exchange would list series that expire at the end of the 
next four consecutive calendar quarters, as well as the fourth quarter 
of the following calendar year.
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    \6\ Quarterly Options Series may be opened on indexes or on 
Exchange Traded Funds that satisfy the applicable listing criteria 
under ISE rules.
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    Quarterly Options Series listed on currently approved options 
classes would be P.M. settled and, in all other respects, would settle 
in the same manner as do the monthly expiration series in the same 
options class.
    The strike price for each series would be fixed at a price per 
share, with two strike prices above and two strike prices below the 
value of the underlying security at about the time that a Quarterly 
Options Series is opened for trading on the Exchange. The interval 
between strike prices on Quarterly Options Series would be the same as 
the interval between strike prices for series in the same options class 
that expire in accordance with the normal monthly expiration cycles. In 
Amendment No. 3,

[[Page 39695]]

the Exchange proposes rule text providing that the series listed by the 
Exchange under the Pilot Program would have strike prices that are 
within $5.00 from the closing price of the underlying security on the 
preceding trading day.
    The proposal would permit the Exchange to open for trading 
additional Quarterly Options Series of the same class when the Exchange 
deems it necessary to maintain an orderly market, to meet customer 
demand, or when the market price of the underlying security moves 
substantially from the initial exercise price or prices. In Amendment 
No. 2, the Exchange proposes rule text that provides that any 
additional series opened for trading by the Exchange would be priced 
within $5.00 of the closing price of the underlying security on the 
preceding trading day.
    ISE proposes that the Pilot Program extend one year from the date 
the Exchange first initiates trading in a Quarterly Options Series, 
which, as per the proposed rules, would be no later than July 24, 
2006.\7\
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    \7\ See ISE Proposed Rules 504, Supplementary Material .03, and 
2009, Supplementary Material .02.
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III. Discussion

    After careful review, the Commission finds that the proposal, as 
amended, is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\8\ In particular, the Commission believes that the proposal 
is consistent with the requirements of Section 6(b)(5) of the Act,\9\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that allowing the Exchange to list and 
trade Quarterly Options Series, under the terms described in the 
Exchange's proposal, should provide investors with new means of 
managing their risk exposures and carrying out their investment 
objectives. The Commission notes that the Pilot Program limits the 
series that may be opened pursuant to the Pilot Program by requiring 
them to have strike prices within $5.00 of the closing price of the 
underlying security on the preceding trading day. The Commission 
believes this restriction should allow the exchange to offer a wider 
array of investment opportunities, while minimizing the impact on 
quotation message traffic. The Commission also notes that the proposal 
requires the Exchange to closely monitor the trading and quotation 
volume associated with the additional options series created under the 
Pilot Program and the effect of these additional series on the capacity 
of the Exchange's, OPRA's, and vendors' systems.\10\
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    \10\ If the Exchange were to propose an extension, expansion, or 
permanent approval of the Pilot Program, the Exchange would be 
required to submit a report on the Pilot Program to the Commission 
at least 60 days prior to the Pilot Program expiration date. See 
Notice, supra note 4, at 31248.
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    Pursuant to Section 19(b)(2) of the Act,\11\ the Commission finds 
good cause for approving the amended proposal prior to the thirtieth 
day after the publication of Amendments No. 2 and 3 in the Federal 
Register. Amendments No. 2 and 3 modify the proposed rule text by 
placing restrictions on the series the Exchange may open for trading in 
an approved class. Any series opened for trading pursuant to the Pilot 
Program would have strike prices within $5.00 of the closing price of 
the underlying security on the preceding trading day. This restriction 
is modeled after the identical provision previously approved as part of 
the Exchange's $1 Strike Pilot Program, and thus raises no new issues 
of regulatory concern.\12\ The Commission finds good cause to 
accelerate approval of the amended proposal because it believes this 
restriction should help to minimize the Pilot Program's impact on 
quotation message traffic.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ See ISE Rule 504(g).
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IV. Solicitation of Comments Concerning Amendments No. 2 and 3

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 2 and 3, including whether it 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-2006-24 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2006-24. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2006-24 and should be submitted on or before August 
3, 2006.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, 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,\13\ that the proposed rule change (File No. SR-ISE-2006-24), as 
amended, is approved, and that Amendments No. 2 and 3 thereto are 
approved on an accelerated basis, as a pilot program for a one-year 
period commencing on the day the Exchange first initiates trading in a 
Quarterly Options Series, which, as per the proposed rules, would be no 
later than July 24, 2006.\14\
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    \13\ Id.
    \14\ See ISE Proposed Rules 504, Supplementary Material .03, and 
2009, Supplementary Material .02.


[[Page 39696]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-11002 Filed 7-12-06; 8:45 am]
BILLING CODE 8010-01-P