[Federal Register Volume 71, Number 149 (Thursday, August 3, 2006)]
[Notices]
[Pages 44066-44067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-12526]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54228; File No. SR-ISE-2006-14]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Granting Approval of a Proposed Rule Change and Amendment 
No. 1 Thereto Relating to ISE Rule 720

July 27, 2006.

I. Introduction

    On March 22, 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 amend ISE Rule 720 (the 
``Obvious Error Rule''). On May 18, 2006, the ISE submitted Amendment 
No. 1 to the proposed rule change.\3\ The proposed rule change and 
Amendment No. 1 were published for comment in the Federal Register on 
June 14, 2006.\4\ The Commission received no comments on 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\ In Amendment No. 1, the Exchange amended proposed new 
Supplementary Material .08 to ISE Rule 720 to state that unless all 
parties to a trade agree otherwise, ISE Market Control may nullify a 
trade if all parties to a trade fail to receive a trade execution 
report due to a verifiable system outage. Amendment No. 1 also 
clarified that the proposed rule change operates under the 
assumption that a trade has taken place, but due to a system outage, 
the parties to the trade never received a trade execution report and 
thus were unaware of the trade having taken place.
    \4\ See Securities Exchange Act Release No. 53948 (June 6, 
2006), 71 FR 34407.

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[[Page 44067]]

II. Description

    The ISE proposes to amend ISE Rule 720 to provide that, unless all 
parties to a trade agree otherwise, the Exchange (through its Market 
Control Unit) may nullify a transaction if all parties to the trade do 
not receive a trade execution report \5\ due to a verifiable system 
outage. The Exchange represented that it routinely sends out trade 
execution reports to all Members that are parties to a trade.\6\
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    \5\ A trade execution report is an ISE system message sent to 
all parties to a trade to inform them that a trade has been 
consummated. Among other things, a trade execution report contains 
pertinent details such as the underlying security, the price, number 
of contracts traded, the strike price and the expiration date.
    \6\ See, Amendment No. 1, supra note 3.
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    The ISE states that it developed the Obvious Error Rule to address 
the need to handle errors in a fully electronic market where orders and 
quotes are executed automatically before an obvious error may be 
discovered and corrected by Members. The Exchange notes that in 
formulating the Obvious Error Rule, it weighed carefully the need to 
assure that one market participant is not permitted to receive a 
windfall at the expense of another market participant that made an 
obvious error, against the need to assure that market participants are 
not simply being given an opportunity to reconsider poor trading 
decisions. The Exchange believes that the proposed rule change would 
strengthen ISE's Obvious Error Rule because it would ensure that 
parties are not adversely affected by a trade whose terms were never 
fully communicated to them as a result of a system outage. As a matter 
of ``housekeeping,'' the Exchange also proposes to renumber ISE Rule 
720(e) as ISE Rule 720(d).

III. Discussion

    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 \7\ and, in 
particular, the requirements of Section 6(b) of the Act \8\ and the 
rules and regulations thereunder. Specifically, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\9\ in 
that it is designed to foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transaction in securities, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \7\ 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).
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions, the 
circumstances surrounding an execution suggest that it is unrealistic 
to expect that the parties to the trade had come to a meeting of the 
minds regarding the terms of the transaction. In the Commission's view, 
the determination of whether an ``obvious error'' has occurred should 
be based on specific and objective criteria and subject to specific and 
objective procedures. Under ISE's proposal, unless all parties to a 
trade agree otherwise, ISE Market Control may nullify a trade if all 
parties to the trade fail to receive a trade execution report due to a 
verifiable system outage. The Commission believes that ISE's proposal 
provides specific and objective criteria to be used by the Exchange to 
nullify a trade in this circumstance. Accordingly, the Commission finds 
that the Exchange's proposal is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-ISE-2006-14), as amended, is 
approved.
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    \10\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-12526 Filed 8-2-06; 8:45 am]
BILLING CODE 8010-01-P