[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Notices]
[Pages 12489-12491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4516]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57416; File No. SR-ISE-2008-20]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change, as Modified by Amendment No. 1 Thereto, To Make Permanent Two 
Pilot Programs That Increase Position and Exercise Limits on Equity 
Options

March 3, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 28, 2008, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE''), filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
the Exchange. On February 29, 2008, NYSE submitted Amendment No. 1 to 
the proposed rule change.\3\ The Exchange has designated this proposal 
as non-controversial under Section 19(b)(3)(A)(iii) of the Act \4\ and 
Rule 19b-4(f)(6) thereunder,\5\ which renders the proposed rule change 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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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 made a technical correction 
to the proposed rule text.
    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to make permanent two pilot programs that 
increase position and exercise limits for equity options. To 
permanently establish the two pilot programs, the Exchange proposes to 
amend Rule 412, Position Limits, and Rule 414, Exercise Limits. The 
text of the proposed rule change is available on the Exchange's Web 
site (http://www.ise.com), at the Exchange's principal office, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to make permanent two 
pilot programs that increase position and exercise limits for equity 
options. To permanently establish the two pilot programs, the Exchange 
proposes to amend Rule 412, Position Limits, and Rule 414, Exercise 
Limits. Rule 412 subjects equity options to one of five different 
position limits depending on the trading volume and outstanding shares 
of the underlying security. Rule 414 establishes exercise limits for 
the corresponding options at the same levels as the corresponding 
security's position limits.
    The first pilot program, the ``Rule 412 Pilot Program,'' commenced 
on March 2, 2005, and provides for an increase to the standard (or 
``non-pilot'') position and exercise limits for equity option contracts 
and for options on the PowerShares QQQ Trust (``QQQQ'').\6\ The second 
pilot program, the ``iShares Russell 2000 Index Fund (`IWM') Option 
Pilot Program,'' commenced on January 25, 2007, and increases the 
position and exercise limits for IWM options from 250,000 contracts to 
500,000 contracts.\7\
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    \6\ The Rule 412 Pilot Program was approved by the Commission on 
March 2, 2005. See Securities Exchange Act Release No. 51295 (March 
2, 2005), 70 FR 11292 (March 8, 2005) (SR-ISE-2005-14). The Rule 412 
Pilot Program has been extended five times for six month periods by 
the Commission, and expires on March 1, 2008. See Securities 
Exchange Act Release Nos. 52265 (August 15, 2005), 70 FR 48996 
(August 22, 2005) (SR-ISE-2005-39); 53345 (February 22, 2006), 71 FR 
10579 (March 1, 2006) (SR-ISE-2006-10); 54335 (August 18, 2006), 71 
FR 50954 (August 28, 2006) (SR-ISE-2006-47); 55311 (February 16, 
2007), 72 FR 8408 (February 26, 2007) (SR-ISE-2007-15); and 56263 
(August 15, 2007), 72 FR 47105 (August 22, 2007) (SR-ISE-2007-69).
    In connection with the March 21, 2007, transfer of sponsorship 
of the Nasdaq-100 Trust, the name of the trust was changed to the 
``PowerShares QQQ Trust.'' See QQQQ prospectus available at http://www.powershares.com/pdf/P-QQQ-PRO-1.pdf.
    \7\ The IWM Option Pilot Program doubles the position and 
exercise limits for IWM options under the Rule 412 Pilot Program. 
See Rule 412, Supplementary Materials .01. Absent both of these 
pilot programs, the standard position and exercise limit for IWM 
options is 75,000 option contracts.
    The proposal that established the IWM Option Pilot Program was 
effective upon filing. See Securities Exchange Act Release No. 55175 
(January 25, 2007), 72 FR 4753 (February 1, 2007) (SR-ISE-2007-07). 
The IWM Option Pilot Program has been extended twice by the 
Commission and expires on March 1, 2008. See Securities Exchange Act 
Release Nos. 56020 (July 6, 2007), 72 FR 38109 (July 12, 2007) (SR-
ISE-2007-56); and 57144 (January 14, 2008), 73 FR 3785 (January 22, 
2008) (SR-ISE-2008-03).
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    The standard position limits were last increased in 1998. Since 
that time, there has been a steady increase in the number of accounts 
that (a) approach the position limit; (b) exceed the position limits; 
and (c) are granted an exemption to the applicable position limit. The 
Exchange represents that over the course of the last year, when both 
pilot programs were in effect, the Exchange's Market Surveillance 
Department encountered only a handful of violations. The Exchange 
believes that all of these violations were deemed inadvertent and were 
due primarily to miscounting, technical problems, or a 
misinterpretation of position limit calculation methodologies. None of 
these violations were deemed to be a result of manipulative activities.
    Since the last position limit increase, there has been an 
exponential increase in the overall volume of exchange traded options. 
Part of this volume is attributable to a corresponding increase in the 
number of overall market participants. This growth in market 
participants has in turn brought about additional depth and increased 
liquidity in exchange traded options.
    Further, since the last position limit increase, and throughout the 
duration of the two pilot programs, the Exchange has not encountered 
any regulatory issues regarding the applicable position limits, and 
states that there is a lack of evidence of market manipulation schemes, 
which justifies making permanent the Rule 412 and IWM Option Pilot 
Programs.
    As the anniversary of listed options trading approaches its 35th 
year, the Exchange believes that the existing surveillance procedures 
and options reporting requirements at the ISE, at other options 
exchanges, and at the several clearing firms are capable of properly 
identifying unusual and/or illegal trading activity. The Exchange's

[[Page 12490]]

procedures include daily monitoring of market movements via automated 
surveillance techniques to identify unusual activities in both options 
and their underlying securities.
    Accordingly, the Exchange represents that its surveillance 
procedures and options reporting procedures, in conjunction with the 
financial requirements and risk management review procedures generally 
in place at the clearing firms and the Options Clearing Corporation, 
will serve to adequately address any concerns the Commission may have 
with respect to account(s) engaging in any manipulative schemes or 
assuming too high a level of risk exposure. Further, the Exchange 
believes that the current financial requirements imposed by the 
Exchange and by the Commission adequately address concerns that a 
member or its customer may try to maintain an inordinately large 
unhedged position in an equity option.
    The Exchange believes that the trading volume in equity options 
will continue to grow and that such continued growth provides investors 
an opportunity to participate in the options markets. The Exchange 
believes that the non-pilot position and exercise limits are 
restrictive, and maintaining those limits will hamper the listed 
options markets from being able to compete fairly and effectively with 
the over-the-counter markets.
    Equity option position limits have been gradually expanded from 
1,000 contracts in 1973 to the current level of 75,000 contracts for 
the largest and most actively traded equity options. To date, there 
have been no adverse affects on the markets as a result of these past 
increases in the limits for equity option contracts.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements provided under Section 6(b)(5) \8\ of the Act 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and, 
in general, to protect investors and the public interest.
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    \8\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) of Rule 19b-
4 thereunder.\10\ The Exchange notes that the proposed rule change is 
based on a similar proposal recently approved by the Commission.\11\ 
The Exchange has asked the Commission to waive the operative delay to 
permit the proposed rule change to become operative prior to the 30th 
day after filing.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has fulfilled this requirement.
    \11\ See Securities Exchange Act Release No. 57352 (February 19, 
2008), 73 FR 10076 (February 25, 2008) (order granting accelerated 
approval to SR-CBOE-2008-07).
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    The Rule 412 Pilot Program and the IWM Option Pilot Program were 
scheduled to expire on March 1, 2008. The Commission believes that 
waiving the 30-day operative delay of the Exchange's proposal is 
consistent with the protection of investors and the public interest 
because it will allow the position and exercise limits to remain at 
consistent levels during the transition from the pilot programs to 
permanent status.\12\ Therefore, the Commission designates the proposal 
to be operative upon filing.
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    \12\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 No. SR-ISE-2008-20 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2008-20. 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 Commissions 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, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. 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

[[Page 12491]]

Number SR-ISE-2008-20 and should be submitted on or before March 28, 
2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4516 Filed 3-6-08; 8:45 am]
BILLING CODE 8011-01-P